CH Robinson Worldwide (CHRW)

Q2 2010 Earnings Call

July 27, 2010 5:00 pm ET

Executives

Angela Freeman - Director of Investor Relations

Chad Lindbloom - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

John Wiehoff - Chairman, Chief Executive Officer and President

Analysts

Thomas Albrecht - BB&T Capital Markets

Anthony Gallo - Wells Fargo

Justin Yagerman - Deutsche Bank AG

Ken Hoexter - BofA Merrill Lynch

Thomas Wadewitz - JP Morgan Chase & Co

David Campbell - Thompson Davis & Co

Jon Langenfeld - Robert W. Baird & Co. Incorporated

Edward Wolfe - Bear Stearns

Varun Gokarn

Chris Wetherbee - FBR Capital Markets & Co.

Nathan Brochmann - William Blair & Company L.L.C.

Scott Flower - Macquarie Research

Matthew Brooklier - Piper Jaffray Companies

Alexander Brand - Stephens Inc.

Adam Longson - Morgan Stanley

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson's Second Quarter 2010 Conference Call. [Operator Instructions] I would now like to turn the conference over to Angie Freeman, C.H. Robinson Vice President of Investor Relations. Please go ahead, Ms. Freeman.

Angela Freeman

Thank you. On our call today will be John Wiehoff, CEO; and Chad Lindbloom, Senior Vice President and CFO. John and Chad will provide some prepared comments on the highlights of our second quarter performance, and we will follow that with a question-and-answer session.

I would like to remind you that comments made by John, Chad or others representing C.H. Robinson, may contain forward-looking statements which are subject to risk and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations.

With that, I'll turn it over to John.

John Wiehoff

Thank you, Angie, and thanks to everybody who's listening in on the call. I'm going to start similar to past calls, by just highlighting a few of the key financial results and metrics that we think are more important. For the second quarter ended June 30, 2010, our total revenues increased 27.4% to $2.5 billion. Net revenues increased to 3.7% to $365 million.

Our income from operations increased 4.4% to $156 million and net income increased 5.4% to $97 million. Fully diluted EPS increased 9.3% to $0.59 a share.

The same numbers year-to-date results for the period ended June 30, 2009, total revenues increased 25.3% to $4.5 billion. Net revenues increased 1% to $697 million. Income from operations increased 1.8% to $292 million and net income increased 2% to $181 million. Year-to-date, fully diluted EPS increased 4.8% to $1.09 per share.

In addition to those overall financial results, the press release gives more detailed growth percentages by each of the various service offerings.

So our results for the second quarter of 2010 reflected the continuation of most of the business trends that we discussed in our first quarter conference call. We continued to experience strong overall gross revenue growth, driven primarily by significant volume increases in most all of our service offerings.

Gross margin compression compared to a year ago resulted in net revenue growth for the quarter that was much more modest. As a result, for the second quarter of 2010, while we had a 27% increase in total revenues, our net income for the quarter increased 5%.

Our Transportation revenue increase of over 32% was primarily driven by transaction volume increases in services compared to last year. Fuel and price increases also contributed to the overall revenue growth.

While our growth in transactions compared to last year was helped by the overall improvement in industry demand compared to last year's low points from the recession, we do believe that we were able to continue to take market share in most all of our service offerings, and we felt good about our sales and execution during the quarter.

With regards to gross margins, total Transportation gross margins for the second quarter of 2010 were 15.8%. Total Transportation gross margins for the second quarter last year were 20.6%. Over the past 10 years, second quarter gross margins for Transportation have ranged from a low of 15.4% to a high of 20.6%, which was last year. Our total Transportation gross margin compression of almost five percentage points resulted in net revenue and earnings growth that was much less than our total revenue growth.

As we've discussed many times over the past couple of years, we know there are many factors that contribute to the gross margin fluctuations but the primary driver of our margin fluctuations is the timing difference of price adjustments across our customers and capacity providers. The demand for Transportation services increased significantly compared to the previous year. Our total cost of purchased Transportation generally increases faster than our pricing to our customers when demand is increasing and the overall market relationship is becoming much tighter.

Gross margin fluctuations the past couple of years have had a significant impact on our results. We've tried to emphasize in our past comments, that based upon our approach to the marketplace and how we buy, sell and contract for services, that we understand and manage these margin fluctuations as part of our business model. While the margin compression this quarter compared to last year was pretty meaningful, we think our approach is consistent and that it continues to help us build and grow long-term relationships with both customers and capacity providers.

While we know that we'll continue to have challenging gross margin comparisons going into the third quarter, we do believe that our approach to pricing is working and adjusting to the market very similar to past economic cycles, with the magnitude of some fluctuations increasing due to uniquely large variations in freight demand and volatility in fuel prices.

Moving on to our Sourcing business. Sourcing business revenues grew 11.5%, primarily from the acquisition of Rosemont Farms. Sourcing gross margins expanded compared to a year ago, primarily due to the mix of products sold.

T-Chek, our Information Services business were our primary source of revenues driven by refueling transactions, showed strong revenue growth of 22% again this quarter. The increased level of shipment activity in the market drove more transactions for the T-Chek's customers. T-Chek's revenue growth was driven by increased transactions and an increase in the average transaction fee. Many transaction fees are based in part upon the price of fuel which increased compared to last year.

Read the rest of this transcript for free on seekingalpha.com