Oct 20, 2009
Executives
Angie Freeman - Vice President of Investor Relations & Public Affairs John Wiehoff - President and Chief Executive Officer Chad Lindbloom - Chief Financial Officer
Analysts
Analyst for Matthew Troy - Citigroup Justin Yagerman - Deutsche Bank Securities Alexander Brand - Stephens Inc. Christopher Ceraso - Credit Suisse Adam Longson - Morgan Stanley Ed Wolf with Michael Baer – Wolfe Research Thomas Wadewitz – JP Morgan Ken Hoexter – BAS-ML Christopher Ceraso - Credit Suisse Nathan Brochmann - William Blair & Company
Operator
Welcome to the C. H.
Robinson third quarter 2009 conference call. At this time, all participants are in a listen only mode.
Following today’s presentation instructions will be given for the question and answer session. (Operator Instructions) As a reminder, this conference is being recorded Tuesday, October 20, 2009.
I would now like to turn the conference over to Angie Freeman, C. H.
Robinson Vice President of Investor Relations.
Angie Freeman
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 third 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 will 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
Thanks to everybody taking time to listen to our third quarter conference call. About an hour ago we issued a press release sharing the third quarter results for 2009 and I am going to start by highlighting just a few of the key financial metrics on that release.
For the third quarter ended September 30, 2009, our total revenues declined 15.6% to $1.95 billion. Our net revenues increased less than 1% to $352.0 million.
Our income from operations increased 4.2% to $154.8 million. Our net income increased 2% to $95.5 million and our fully diluted EPS increased 5.6% to $0.57 per share.
Same metrics for the year-to-date results. For the third quarter ended September 30, 2009, total revenues declined 15.9% to $5.6 billion.
Our net revenues increased 1.2% to $1.043 billion. Income from operations increased 3% to $442.0 million.
Net income increased 1% to $273.0 million and fully diluted EPS increased 3.2% to $1.61 per share. In addition to the overall financial results, our press release gives more detailed growth percentages by our various service offerings.
Consistent with the past calls, we are going to share some prepared comments and then open up the lines for questions. Our results for the third quarter of 2009 reflect many of the trends that we've discussed the past couple of quarters.
The changes in the key financial metrics that I just read off are all relatively similar for the third quarter and year-to-date 2009 changes. Total revenues continued to decline for the third quarter of 2009.
Transportation revenues declined by 20%, harbor sourcing revenues grew by 8.4%, and information services revenues declined by 8.5%. The 20% decline in transportation revenues resulted from generally lower prices in all modes of transportation.
The lower prices were driven by declines in fuel prices and related fuel surcharges but also due to the lower rates exclusive of fuel due to soft demand and over-capacity situations in all modes driven by the recession. We also had volume declines in intermodal and international air and ocean.
Our sourcing division results continued their positive momentum in the third quarter with 9% net revenue growth. Similar to last quarter, the revenue growth was driven by volume, primarily with current customers.
The relative stability of produce activity compared to other commodities, along with good execution from our sourcing division, resulted in the continued growth. Information services revenue from T-Chek decreased 8.5% driven by declines in transactions process and average lower fuel prices resulting in lower fees.
We have discussed in the past quarter this year that one primary way that we've responded to the recession and the challenging environment is to remain very focused on sales and try and grow our market share. We feel like our business model and strong foundation is something that we could leverage in this environment.
Some assessments of our progress would be that we feel positive about our truckload volumes being roughly flat for the quarter. We feel positive about our volume growth in LTL transactions and we also feel positive about our sourcing growth.
Transaction volumes for intermodal, international forwarding, and information services are generally closer to what we understand the overall industry activity to be. There are a variety of reasons for our relative growth or strength in each of the modes and service offerings but we continue to invest in expanding all of our capabilities, as well as our technology and account management processes to integrate these services across all modes and geographies.
That continues to be our growth strategy. Our net revenue for the quarter was essentially flat.
A significant amount of the decline in total revenues was driven by declines in the price of fuel. We believe that most changes in fuel prices function similar to a pass-through cost in our total revenues.
Our gross margins and net revenue growth also fluctuate based upon the supply and demand relationship by each mode. It is worth noting that our largest revenue category, truckload services, did benefit again this quarter from margin expansion, even after factoring out the estimated impacts of fuel.
Our truckload net revenues increased a couple of percent this quarter on roughly flat truckload volumes. Consistent with past economic cycles, as we have been able to increase our volume activity, we benefit less from margin expansion.
Our estimated amount of net revenue growth due to truckload margin expansion decreased throughout the third quarter and was negative in the month of September. This trend has continued into the first few weeks of October where we have had truckload volume increases but an overall net revenue decline due to margin contraction.
It is also relevant to note that our truckload shipments per day so far this October are comparable to those of this September but represent an increase over the previous year volumes. It's not certain if this trend will continue throughout the fourth quarter of 2009 but we do know that truckload volumes declined and our gross margins expanded throughout the fourth quarter of 2008 as the recession began to impact freight volumes.
As we have stated many times before, the supply and demand relationships can change rather quickly and it's very difficult to predict them. The fourth quarter of last year highlighted how fast the market can change.
While we have the uncertainty of gross margin fluctuations, we do plan to continue to pursue market share growth and expansion of our customer relationships as we believe that is the foundation of our long-term growth goals. Our operating expenses for the third quarter of 2009 were down 2.6% as both personnel and SG&A expenses declined for the quarter.
We have continued to manage our costs aggressively and execute with a variable cost approach. Our compensation plans generally keep most shorter-term incentives consistent with consistent levels of earnings, while our longer-term incentive costs are driven by growth rates and have decreased as a percentage of net revenue as our growth rate has slowed.
We continue to believe these incentive plans do a great job of aligning our management team with our shareholders and create the right balance for us to create value over the long term while managing shorter-term profitability. We were able to complete a couple of acquisitions during the third quarter.
In addition to the acquisition of International Trade and Commerce, ITC, on July 9, which we previously announced and discussed in our second quarter call, this September we announced the acquisition of Rosemont Farms and Quality Logistics, two related entities that provide produce and logistic services. We are excited about the addition of these teams to the Robinson network and would like to formally welcome them.
We have continued to invest in our network this year with these acquisitions and investments in our technology and training that we think are going to continue to benefit us for the long term. Those are my prepared comments and with that I will turn it over to Chad.
Chad Lindbloom
I am going to give some comments on our cash flows and our balance sheet. Our net cash provided by operating activities was $156.0 million for the quarter.
Our investment in working capital decreased during the quarter, due primarily to decreased revenue compared to the second quarter and in improvement in our days of sales outstanding. Our net cash use for investing activities was $51.2 million for the quarter.
Our net capital expenditures were $9.0 million, which included $3.7 million related to our data center. We believe that all material capital expenditures related to the data center have been completed.
We began moving into the new data center and we expect to be completely transitioned into by the end of this year. We had approximately $250,000 of depreciation for the data center during the quarter and we expect that to be about $2.3 million on an annual basis.
We also spent $31.1 million of cash on the acquisitions that John talked about. Both of these acquisitions also have earn-outs based on growth and earnings.
Our net cash used for financing activities was $86.2 million for the quarter, resulting primarily from share repurchases and dividends. We repurchased 900,000 shares this quarter at an average price of $55.65.
Our balance sheet remains strong with cash and investments of approximately $388.0 million. We continue to focus on principal preservation rather than maximizing yield.
Our current interest-bearing cash and investments are split primarily between municipal money markets, municipal bonds, and Treasury money markets. Our investment income is down significantly compared to last year, due primarily to the changes in the overall market yields for high quality investments.
Our largest asset continues to be our accounts receivable, which ended the quarter at $885.0 million. We are continuing to closely monitor and manage our accounts receivable risks and will continue to react to changes in our customer base.
Our total provision for the quarter was $3.7 million compared to $4.3 million for the third quarter of last year. It is very difficult for us to predict what accounts will have issues in the future but we do feel comfortable with our current level of reserves.
With that, we will turn it over for the question and answer portion of the call.
Operator
(Operator Instructions) Your first question comes from Analyst for Matthew Troy – Citigroup.
Analyst for Matthew Troy - Citigroup
You talked a little bit about sequential narrowing in the margin contribution, to your net revenue line during the quarter, with that recently turning negative. Can you talk a little more to that as to how that looks into an upturn and is this mostly a function of tougher comps or is it tougher pricing from the carrier or is a little bit of both?
John Wiehoff
We have talked a lot this year about kind of how our model typically works and I think what we saw during the third quarter was what we would expect as volumes start to improve a little bit, that our cost of hire increased or started to compare a little bit more aggressively sequentially as it increased, while our prices to the customers were staying fairly flat for the last five or six months. So it's not uncommon for us that when volumes start to improve that we will start to see some margin compression on a per-transaction basis.
So as volume improved and was flat for the third quarter and actually has increased for the first couple of weeks of October, we do see some margin compression, which again, for us that would be a normal expectation for this part of the cycle. What's difficult to tell is if that increase in volume is short term or a longer term trend or what will happen in the rest of October or the rest of the fourth quarter, but we do know that there is also, from a comparability standpoint, last fourth quarter volumes dropped each month and margins expanded as demand really softened.
Analyst for Matthew Troy - Citigroup
So as far as the volume trends in the quarter, can you give a little better color on that for us as well?
Chad Lindbloom
During the quarter, July, August, and September, they were on a per-business-day basis. Our truckload volumes were down a little bit in July and roughly flat in August and September, compared to 2008's same months.
Analyst for Matthew Troy - Citigroup
And into the first few weeks of October?
John Wiehoff
It's hard to tell into October because we look at per business day and there's one less business day, but kind of low- to mid-single digits. It jumps around each day.
It's too early in the month to tell what it will project to.
Analyst for Matthew Troy - Citigroup
As we move into the upturn, how long do you anticipate it taking for some of the pricing pass-through to be able to pass through to your customers as the costs begin to flex up? Or is that something that's going to depend on how volumes trend?
John Wiehoff
It definitely depends upon the overall market condition but it also depends upon the relationship with each of our customers. Some of the business is transactional and will reprice fairly aggressively when the market allows it to each day.
Other customer relationships are priced out for as much as a year and can take a longer time to reprice. They don't necessarily wait the entire year but if there is an aggressive correction there may be repricing sooner, but if it's a modest correction it would generally ride out the year.
So it depends upon the unique expectation and commitments of each of the 30,000 plus customer relationships and it depends upon how radical the changes are in the market conditions.
Chad Lindbloom
And the second half of last year as well as this year, so far we have been at the high end of the range. Our current margins, when you look at dollars per load, or current profit per load, are still well within the range of what's normal.
Operator
Your next question comes from Justin Yagerman - Deutsche Bank Securities.
Justin Yagerman - Deutsche Bank Securities
I just wanted to ask a little bit about the trends that you were seeing and maybe some commentary on the general environment. You talked about truckload volumes being stable year-over-year, volumes up year-over-year on the LTL market.
And you called that out as market share. I was wondering whether or not some of that was inventory replenishment in the quarter and what you were seeing from your customers and if you could break it down, how much of that do you really think was market share in the truckload and in the LTL market and what percentage was maybe what we've been from some carriers, which is things are getting a little bit better and that would kind of echo with your statements on the margin side.
John Wiehoff
We don't get great visibility to the total demand of our shippers and kind of what they may or may not be doing in terms of inventory adjustments, so that piece is kind of hard for us to quantify. The things that we get the best visibility to is kind of the supply and demand relationships and how the availability of trucks compares to kind of the current demand.
And we have, over the last couple of months, seen a little bit of tightening, which to us would mean that the supply and demand relationship is coming closer to alignment, where for the better part of the last year there has been a pretty significant excess of capacity. So that could be a combination of further corrections of capacity or further strengthening of demand.
Likely, at least some element of both. We don't obviously have the firm data on exactly what the market would be, but our sense would be that, in both the truckload and less than truckload industries, that year-over-year there were still some degree of volume declines and that being flat or increasing our volumes represented some sort of market share movement.
So that's where our comments would come from.
Justin Yagerman - Deutsche Bank Securities
Yes, would you say that the truckload market was tighter than the LTL? I mean, that just seems to be the general consensus.
I was curious what you saw.
John Wiehoff
Probably would have moved more during the quarter and we would get a greater sense of that. You know, with the LTL capacity it's not so much of a transactional day-to-day movement because of the fixed networks of the capacity, so you don't see the shorter-term corrections or the tightening in the capacity like you do on the daily truckload piece.
So yes, we would have seen more movement or tightening of the supply and demand relationship on the truckload side than the LTL during the quarter.
Justin Yagerman - Deutsche Bank Securities
When you think about the model, and obviously you have been transitioning fairly well, I mean especially relative to most other companies in general, not just transport companies. With net revenues being down and EPS remaining up, the cost side has been a nice lever for you to be able to pull.
I guess two pieces to the question. Is this probably the worst that we see?
Do you think that with margins crunching you are going to be able to offset that as maybe some volume comes back gradually, as long as we don't see a major spike in the economy? And then how fast do you need to bring people back on to deal with any of that volume that comes on alongside of any kind of reemergence of seasonality that we see?
John Wiehoff
While everything that we've seen so far this year would be what we would consider normal, or not normal but expected given that part of the cycle or that part of the environment, it gets really difficult to know how fast the market is going to continue to correct. So if capacity continues to tighten gradually over a longer period of time, we would have to manage a little bit differently and obviously add people slower or maybe not add that many going into next year.
If the market tightens quicker and demand really accelerates over the next couple of months, we feel very confident about the ability to add people. That would certainly trigger opportunities or situations where we would need to reprice quicker, and who knows how successful we would be on that.
And it would be customer-by-customer. So as demand comes back and as the market tightens out, we would be adjusting in our staffing approach.
We would be adjusting in our pricing, but it really depends upon exactly how steep or aggressive those corrections come.
Justin Yagerman - Deutsche Bank Securities
Switching focus a little bit, on the ocean shipping side, we've been hearing about pickups and exports out of Asia and some tightening in the pricing in those markets there. Your net revenues were down significantly and obviously a pretty weak market for most of the quarter.
But as we move through the end of September and maybe if you have some comments on early October, any thoughts on what you are seeing trending there in the ocean shipping space?
John Wiehoff
I do not have any more current data than the end of the quarter but I know that throughout the quarter in the ocean mode there was some strengthening of the pricing, or the cost of the capacity, but it was coming off of such extremely low pricing and severe over-capacity that it was really hard to tell. Percentages really didn't mean very much.
yes, a little bit of sequential improvement as the quarter wears on, but our view of the global forwarding market is that those volumes were probably impacted as severely as any of the parts of transportation that we're a part of. And since our network is less mature and has less density in a lot of the lanes, the opportunities to consolidate or really kind of leverage purchase volumes, we're probably the most vulnerable there to being hit by the industry declines in volumes.
Justin Yagerman - Deutsche Bank Securities
Chad, can you tell us where the share count ended for the quarter?
Chad Lindbloom
Where it ended for the quarter?
Justin Yagerman - Deutsche Bank Securities
Yes. We have the average number but you bought back shares in the quarter.
I was just curious where it ended.
Chad Lindbloom
It would be about 450,000 lower than the average, give or take. I don't have the ending number with me.
Operator
Your next question comes from Alexander Brand - Stephens Inc.
Alexander Brand - Stephens Inc.
Help me understand this, because on the one hand I hear you saying that volumes were simply flat in September and now they're up a little. And yet it's enough tighter that you're starting to get squeezed a little bit.
I guess it seems like there is a lot of capacity out there. I'm not sure how it could be that much tighter.
Or is just that the West Coast is tighter and that drives a lot of your volume and so that explains it. Can you help me understand?
John Wiehoff
First off, volumes were sequentially flat. So September and into October our volumes and our pricing is remaining relatively stable.
The squeeze is really in the comparison to the previous year where last year margins comparing to this year's margins. So that's where we're seeing margin compression relative to a year ago.
In the supply and demand relationship, we would still characterize even the current environment as over-supply. There are plenty of trucks.
Where it's just comparing differently to a year ago.
Alexander Brand - Stephens Inc.
And in terms of as you get into this and repricing, can you quantify what percentage of the business is transactional versus a contract that would take longer to work towards repricing?
John Wiehoff
We have tried to guess at that in the past and it's probably most useful to just share some specific data points. We know that we have roughly a third of our business in our top couple of hundred of customers where there is like some sort of longer-term pricing agreement or commitment.
There's probably in the past we've estimated at least half of the business where there is some level of prepriced rates or some indication of commitment out there. What gets hard to quantify about it is that depending upon the relationship that we have with each of those shippers, sometimes they will tender us more or less than the anticipated volumes that those contracts arranged for.
So there can be transactional or spot market relationships, along with the longer-term pricing ones. So it really does become a customer-by-customer, relationship-by-relationship thing as to how, on what percentage of the volume prepriced rates are honored and for what period of time.
But again, like I said earlier, if and when you choose to reprice an account depends significantly upon how drastic the market conditions are moving.
Alexander Brand - Stephens Inc.
On the cost side, I was surprised that you had that much sequential decline in personnel costs and the G&A, to be honest about that. Is there anything that's driving that or is this sort of a sustainable level and it will just come back up as soon as the business comes back?
John Wiehoff
I think we had some personnel reductions throughout the first and second quarter that we weren't necessarily seeing the full benefit for until we got into the third quarter, and then we have the reduction of our longer-term variable costs that are accruing at a lesser rate because of a slower rate of earning. That's obviously helped us all year long, but again in the third quarter.
So if you look at year-over-year, we actually had a bigger percentage decline in the average number of employees than we did in the personnel reductions. So no, I don't think there is anything unusual in terms of what you're seeing in the base amount of costs for third quarter.
Chad Lindbloom
And then the SG&A expenses, the biggest portion is bad debt or provision for doubtful accounts being down. I mentioned it was $6.1 million in the second quarter of 2009 and $3.7 million this quarter.
Operator
Your next question comes from Christopher Ceraso - Credit Suisse.
Christopher Ceraso - Credit Suisse
There have been a few questions on the relationship between revenue and volume on the one side and your margin on the other. Is there a rule of thumb or a rough ballpark number that you can give us in terms of what kind of volume growth would you need to see in order for the improvement on the top line to outweigh any pressure that pricing would put on your margin?
Where is the break-even, so to speak?
John Wiehoff
There really is no rule of thumb and it's, as I said a couple of times, it's difficult to say because it really depends upon customer by customer and what the expectations and the commitments are. And on top of all of that, every year, in November and December the demand softens just seasonally.
You know, some of this could just be more of an October volume peak than there has been the last couple of years. So the cost of capacity on a transactional basis will soften seasonally in November and December, like it does every year, I would assume.
So it gets very hard to anticipate the precise relationship between the supply and demand and how that would work. But I would just say that basically our business model is premised upon balancing those two forces.
That as the market tightens up we know that we have to manage that margin and manage the pricing. But exactly how tight it gets and how much margin pressure there is and how and when you reprice is a day-by-day decision and an account-by-account decision with no real rule of thumb or preset relationship on how the two would work.
Christopher Ceraso - Credit Suisse
Can you give us some details on the acquisition that you made recently, in terms of the revenues associated with the new business, the level of gross profit, how fast you think it grows, and what are the size of the earn-outs?
Chad Lindbloom
As far the size of the acquisition, we talked about it, it was about $150.0 million gross revenue for Rosemont Farms with a little bit of that being transportation but predominantly produce, which has margins similar to our produce business. The earnings should be—it's really hard to say.
It's not going to be all that accretive in the first year. Maybe $0.02 to $0.03.
And as far as the earn-outs go, there is a total of potential earn-outs of approximately $20.0 million for the two acquisitions combined, ITC and Rosemont Farms.
Christopher Ceraso - Credit Suisse
And that extends over how long?
Chad Lindbloom
Three years.
Christopher Ceraso - Credit Suisse
Has there been any change in the complexion of your base because of the downturn, in terms of the number of large shippers versus smaller shippers?
John Wiehoff
No.
Operator
Your next question comes from Adam Longson - Morgan Stanley.
Adam Longson - Morgan Stanley
When you looked at your contractual business, and I know you said it's hard to measure, do you have a sense of how many contracts are out there above market rates and how much of the gross margin expansion you are seeing is simply a product of those customers?
John Wiehoff
Well, we talked earlier in the year, there was a lot of repricing and bidding activity that happened in the first quarter or early part of the second quarter and really from a customer pricing standpoint, those rates have stayed fairly constant for the rest of this year, thus far. What's really changing is the fact that as the market tightens a little bit that cost of hire will start to creep up where the daily or transactional rate for hiring the truck will tighten a little bit.
So because the overall market is still probably what most people would characterize as an over-supply situation, I wouldn't say we have very many of any customer relationships where the rates really aren't at market. It's more just the supply and demand relationship.
Now, what will happen if the market softens and the cost of capacity starts to fall in the next few months, or soften again, then our margins could expand or compare similar to what they were a year ago. If the market continues to tighten, depending on how aggressively it does, we may see some more margin compression due to the cost of higher increasing.
And then when or if it's every appropriate to talk about a rate increase or a reprice on the customer side, usually it happens after at least some period of sustained type capacity where the market is giving a clear signal that prices should start to move up. And we're not near that today but it will be a kind of week-by-week, month-by-month thing, depending upon on what the market does.
Adam Longson - Morgan Stanley
There has also been a lot of talk on broker failures in the last couple of quarters, under the weight of customers not paying and then higher working capital balances. Do you see that as a big opportunity for Robinson and do you see any opportunity to use your larger working capital balances or better payment terms to either drive more volume or maybe support your gross margins?
John Wiehoff
We have always felt that part of our market share gains in the past and part of the opportunity in the future is to consolidate a very fragmented brokerage marketplace by bringing higher caliber service, better technology, better people, more reliability and stability, so yes, we would continue to look for any weakness in competition or any market failures as an opportunity to go in and be aggressive and continue to take market share. I don't know that we would do anything differently because we feel like we've been trying to do that for quite some period of time.
But I would say, in a lot of respects, we feel good about the landscape, the competitive landscape, the market conditions and our ability to grow, and all that is just being offset by overall contraction in the market over the last year. So we'll see as we move forward what the overall demand in the marketplace looks like, but we're as I said in my prepared comments, we're absolutely going to continue to sell aggressively and look to take market share and take that market share from other third-party brokers as well as converting market share to the third-party model that we feel we can add value to that where a shipper may be dealing directly with the carrier community today.
Adam Longson - Morgan Stanley
If you look back historically, the transport gross margins used to bounce around between kind of 16% to 17%, prior to 2006. And they've sort of risen steadily since then.
Putting fuel aside, is there anything sort of mix-related or structural that you think has driven them higher over the past several years, or is it realistic to think we may see those margins again? I guess, what is your view on what a sustainable gross margin might be in a normalized freight environment at this point.
Chad Lindbloom
There definitely has been a mix shift going on, when you look at the different categories of transportation net revenues. Things like miscellaneous, which has become a bigger percentage, is close to 100% margin.
Most of that is fee-based business. As well as LTL has a much higher margin than full truck load.
And air does as well. So there's definitely a mix shift that's driven part of the margin expansion.
Exactly what is sustainable is really difficult to predict but in the upper teens, I think, based on the current revenue mix, is sustainable, absent large fuel increases again. Or we could go right back where we were last year if fuel prices spike way up.
But that is basically a dollar-for-dollar pass-through.
Operator
Your next question comes from Ed Wolf with Michael Baer – Wolfe Research.
Ed Wolf with Michael Baer – Wolfe Research
The LTL volume growth in the quarter was what?
Chad Lindbloom
It was right around 30%.
Ed Wolf with Michael Baer – Wolfe Research
Year-over-year?
Chad Lindbloom
Year-over-year. The margins were roughly flat and the gross billings per transaction was down quite a bit, both because of price of fuel, underlying rates, and the weight per shipment.
Ed Wolf with Michael Baer – Wolfe Research
How much was weight per shipment then?
Chad Lindbloom
Somewhere in the low double digits, around 12%.
Ed Wolf with Michael Baer – Wolfe Research
And what was that like in second quarter year-over-year?
Chad Lindbloom
About the same, if I remember right.
Ed Wolf with Michael Baer – Wolfe Research
Do you know what that doubtful account number was for fourth quarter 2008, for the current quarter's comp?
Chad Lindbloom
$4.3 million.
Ed Wolf with Michael Baer – Wolfe Research
John, I just want to see if I'm thinking about this right. If truckload volume growth was flat in third quarter on a positive 9 comp a year ago, all else being, give or take, the same, last year's comp in fourth quarter of minus 4—just making the comps the same assuming demand is at the same level—would imply year-over-year of positive 13% kind of volumish.
Am I thinking about that right, assuming no major change in demand?
John Wiehoff
I think so. I don't have last year's fourth quarter volume numbers in front of me but I know that they dropped off quite a bit sequentially during the fourth quarter of last year.
So if you sort of assume that demand stays constant, each month is going to taper off a little bit, but if you assume that we have continued strengthening in demand, like the first two weeks of October, you could see an volume increase in that range.
Ed Wolf with Michael Baer – Wolfe Research
And in terms of the net operating margin at 56.1, you talked about the year-over-year there's a little bit of improvement on the bad debt. Is there anything else that—is this is as good as it can get or can you keep growing the business faster than the employees or reducing the employees faster than the volume is going away or however you want to look at that.
But it's pretty amazing. I'm guessing this is a record margin in a quarter.
John Wiehoff
It's near the best if it's not. It's pretty good.
Now if you look back over the last ten years, it's been gradually improving and I think our message for the last year or two has been that we are not anywhere near out of productivity initiatives or trying to leverage the scale on size of the network, but the math just gets harder and harder to move the needle a lot on that percentage. So we do feel like it's sustainable.
We do have lots of goals to try to improve it, but the magnitude of improvement going forward is not likely to be like the lasts ten years have been.
Chad Lindbloom
We look at the inverse number at 43.9% operating income to net revenue. I don't know that it will stay exactly that high but it should stay about 40% we believe.
Operator
Your next question comes from Thomas Wadewitz – JP Morgan.
Thomas Wadewitz – JP Morgan
I wanted to ask you about how you think incentive comp might affect you next year? I think you may have two programs that would be in place, or have been in place this year and would affect next year and I'm wondering if you can give us a directional sense if you do see a material pick up in volumes and you maintain, you build some momentum in the net revenue, will you see a pretty significant headwind from some of the incentive programs kicking in to a greater extent?
Chad Lindbloom
It depends how much earnings grow, really, so it's not really just driven on volumes or net revenue. If earnings started to grow significantly, yes it could add a percent, or even more, of net revenue in personnel expense.
Thomas Wadewitz – JP Morgan
Will you have two vesting programs in place next year?
Chad Lindbloom
There are two sets of three-year grants currently outstanding that would continue to vest through next year, yes.
John Wiehoff
And we actually have more restricted stock that's vesting and outstanding this year than we did the previous year, than we did in 2008, it's just that our growth rate has been so much slower this year that the overall expense is down.
Thomas Wadewitz – JP Morgan
With two programs vesting, would that make the, I guess the way it would play in next year different from what it would have been in prior upturns, or is that not particularly something to focus on in terms of two programs instead of one.
Chad Lindbloom
Well, the last time there was a big upturn in 2004 there were not two different grants vesting.
John Wiehoff
So I think that would mean is that if we had significant income growth, 15+%, I think you would see a slightly higher percentage increase in our personnel expense increases than you would have seen, like Chad said earlier, maybe as much as 1% of net revenue, that you would see it growing faster than maybe you would have had in previous cycles where our earnings were increasing. But as Chad said earlier, that phenomena only occurs when we're growing our earnings because divesting is based on the growth.
So if our earnings are flat, you won't see that uptick in personnel expense.
Thomas Wadewitz – JP Morgan
What are your thoughts about, again, if you see a material pickup in demand next year, would you expect to ratchet up the SG&A spending considerably or are you comfortable with a modest increase versus the current level?
Chad Lindbloom
There would be some increase to the current level obviously. People are doing a lot less discretionary travel right now and some other expenses, but I don't think it's going to go up significantly faster than net revenues.
Obviously credit and finance or bad debt expense has been a big variable this year, or over the last two years.
Thomas Wadewitz – JP Morgan
So you would likely see some operating leverage where that might go down as a percent of revenue, SG&A?
Chad Lindbloom
I don't know that it would go down much. I'm saying I don't think it would grow faster by a significant amount.
Operator
Your next question comes from Ken Hoexter – BAS-ML.
Ken Hoexter – BAS-ML
Can you talk a bit on the truck side, what percent of the business is truckload and LTL at this point?
Chad Lindbloom
It's somewhere around 12% or 13% of net revenues is LTL, I believe.
Ken Hoexter – BAS-ML
And when you think about the potential of disruption within the LTL universe, can you talk a bit about what that would mean for your network and your ability to distribute those volumes?
John Wiehoff
Well, today, because the marketplace still has a fair amount of excess capacity, I don't think we would be too concerned about the ability to redistribute freight with any kind of reduction of capacity that might happen in the marketplace. As demand strengthens, if demand strengthens, and the supply and demand relationship comes closer into line, then obviously it would become more of an issue, but I guess the way we would think about it is if that demand continues to improve it's probably going to drive some meaningful improvement in the network density and profitability of the carriers as well, too.
So the likelihood of a failure decreases as the volumes increase. So one of the value propositions that we bring to the marketplace is our network of providers and our automated relationships that we believe give flexibility to a shipper.
So we feel like we're benefiting in the marketplace today from the standpoint that our value proposition we think has a lot of relevance. And we feel pretty prepared to react and help our customers, regardless of kind of what the marketplace throws at us.
And at the same time we're working hard to try to be a better provider or shipper to the carriers that we're working with because it's very important that they get the right kind of freights tendered to their network to optimize their profitability as well.
Ken Hoexter – BAS-ML
And on the truckload side, as you get a market that starts to turn, and I wonder those truckload companies, we just went through a very aggressive bid season, those that might have bid maybe a little low on some rates, and if we start to get a bit of tightening, do they tend to still show up to those customers or do they tend to kind of be the first ones to run to the spot rate, and then do you see those customers then start to chase, or need the demand and access to a broker, such as yourself?
John Wiehoff
That's the interesting part of the marketplace is I think you're going to see all of the above, depending upon how aggressive people were in their bidding and depending upon exactly what their profitability and sustainability is, you'll see a wide range of behavior on the capacity side when the market starts to tighten. So I'm certain there are providers out there that will move the moment the market provides them the opportunity to and there are lots of other providers out there who have long-term committed relationships that they will continue to honor.
And 40,000 or 50,000 relationships in between that we try to sort out and manage and do the right thing on both sides.
Ken Hoexter – BAS-ML
You are very decentralized on your hiring. Have you started to see any of the offices—if you are seeing volumes start to firm up—have you started to see any of the regional offices increase hiring yet?
John Wiehoff
There are some of the offices that are posting positions. I think somewhere around 30 or 40 of the offices might have an opening on our site.
There's always a blend of kind of natural turnover and replacement of positions. That doesn't necessarily mean that many locations are actually adding to staff.
And even though we corrected some staffing levels and adjusted to our metrics fairly aggressive in the first part of the year, most of our locations still carried a little bit of extra staffing and we've got a lot of different productivity initiatives out there, so our hope is that we've got a lot of capability and a lot of room for growth at today's staffing levels, but we also know that we've got a good process in place and a good training model and we will add to the team very quickly if that becomes appropriate.
Operator
Your next question is a follow-up from Christopher Ceraso - Credit Suisse.
Christopher Ceraso - Credit Suisse
Just one quick follow-up. You mentioned that the provision for bad accounts went down sequentially.
Is that a result of you seeing improvements in delinquencies or what gives you the confidence to be taking the provision down?
Chad Lindbloom
Our aging is in really good shape but it has been all along. It's really just been less customer specific issues happened this quarter than last quarter.
Last quarter we had a couple big customers that we made provisions for. This quarter we did not have any significant accounts that we felt we needed to specifically reserve for.
Christopher Ceraso - Credit Suisse
And you said it was also down versus a year ago. Is that the same issue?
Chad Lindbloom
Yes. The big variability is driven by customer-specific problems.
And we just had fewer. No significant ones this quarter.
Operator
Your next question comes from Nathan Brochmann - William Blair & Company.
Nathan Brochmann - William Blair & Company
I wanted to follow-up a little bit on the market share gains in terms of whether that's coming a little bit more from newer customers that you haven't had relationships with, and if so, what some of those strategies might be to have been going after those for, whether that's coming from more of a penetration strategy within your top accounts.
John Wiehoff
I would say it's both, that we are emphasizing account management and cross selling of all modes and services as aggressively as ever, so I do believe that a lot of our LTL growth is coming from historic truckload customers where we're being more aggressive about pursuing different opportunities and services from them. But in addition, we have tried to remain very aggressive in the marketplace and while we are being cautious with credit limits, we also feel like we're being prudent in terms of taking some risks with new relationships and making certain that we're active and out there in the marketplace.
If you look at our business model and the fact that we train our people generally on the broader transportation cycle and both the customer and capacity side, one of the opportunities that a over-supply or a loose capacity market provides to us is that we do have more opportunity to spend more time looking for freight and looking for customer relationships and making sales calls because we're not required to spend quite as much time looking for capacity. So in the ebb and flow of how we manage our business, it's an emphasis on getting out in the marketplace, both with current accounts and cross selling and trying to penetrate, as well as looking for new opportunities.
Nathan Brochmann - William Blair & Company
And do you feel like the mix of those new opportunities that are coming on are ones that you can build long-term relationships with or are some of them just looking for some short-term cost savings or the flexibility that you provide in terms of what might stick going forward?
John Wiehoff
There is always some of both. We have lots of relationships that come and go.
One of our general strategies is to try to take those transactional relationships and educate them from our point of view with information and scenarios to help them understand how we can help them more with a committed relationship and a longer-term arrangement with more integration and more automation and more data. So yes, we see lots of both types of opportunities, where people want to make more holistic supply chain or logistic changes and they are working with us to do analytics and implement some of the freight programs in a much more integrated, automated way.
And then we get thousands of transactional customers who use us when the market provides the right opportunity and may go away from us when the market changes. But that can work both ways with the capacity side as well, too.
There are lots of people who come to us when they need us, when the market conditions warrant us. And we are okay with that.
And one element. We just need to make sure that we sort it out and treat everybody fairly depending upon the type of relationship that we have with them.
Nathan Brochmann - William Blair & Company
Chad, just one quick question on the cost side. Were pretty much all the costs with the new facility and DNA pretty much in there for the entire third quarter?
Chad Lindbloom
No, they weren't. I gave the numbers of the DNA that was in there, which was $250,000 for the quarter.
Because it really ramped up—part of it started in August and then the rest in September. There will be more like $2.3 million of depreciation on an annualized basis.
Nathan Brochmann - William Blair & Company
Were there any kind of one-time operational expenses that were kind of embedded within the move that might dissipate a little bit?
Chad Lindbloom
Nothing significant. All significant costs are capitalized in a project like that.
Operator
There are no further questions in the queue.
Angie Freeman
Thanks, everybody, for participating in our third quarter 2009 conference call. I would like to remind you that this call will be available for replay in the investor relations section of our Web site at chrobinson.com.
It will also be available by dialing 800-406-7325 and entering the pass code 4164763#. The replay will be available at approximately 7:00 pm ET today.
If you have any additional questions, please feel free to call me, Angie Freeman, at 952-937-7847.
Operator
Operator
This concludes today’s conference call.