Landstar System Inc (LSTR) 2008 Q2 法說會逐字稿

Good afternoon, and welcome to Landstar System, Inc. second quarter 2008 earnings release conference call. All lines will be in a listen-only mode until the formal question-and-answer session. Today's call is being recorded. If you have any objections, you may disconnect at this time.

Joining us today from Landstar are Henry Gerkens, President and Chief Executive Officer; Jim Gattoni, Vice President and Chief Financial Officer; Pat O'Malley, President, Landstar Carrier Group; Jim Handoush, President, Landstar Global Logistics.

Now, I would like to turn the call over to Mr. Henry Gerkens. Sir, you may begin.

Thanks, and good afternoon and good evening, and welcome to the Landstar 2008 second quarter earnings conference call.

As we did with the first quarter earnings conference call, today's call will be limited to no more than one hour, and I would appreciate it if each of you would limit your questions to no more than two questions each when the question-and-answer period begins.

Before we start, let me read the following statement. The following is a Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The statements made during this conference call that are not based on historical facts are forward-looking statements. During this conference call, I and other members of Landstar's management may make certain statements containing forward-looking statements, such as statements which relate to Landstar's business objectives, plans, strategies and expectations. Such statements are, by nature, subject to uncertainties and risks, including but not limited to, the operational, financial and legal risks detailed in Landstar's Form 10-K for the 2007 fiscal year described in the section Risk Factors and other SEC filings from time to time.

These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking statements, and Landstar undertakes no obligation to publicly update or revise any forward-looking statements.

In 2007 and early 2008, we were dealing with a market that had excess capacity, which resulted in downward pressure on price. Due to increased fuel prices and low freight demand, certain large carriers permanently reduced the size of their company iron fleets, and many small carriers and single-owner operators have exited the marketplace, causing somewhat of a reversal in the capacity and pricing environment.

Capacity tightened in the second quarter and created pricing power -- more about that later. I think, however, the most important takeaway from the ever-changing unpredictable freight environment is that Landstar is a consistent and predictable proven performer in any environment.

During our 2008 first quarter earnings conference call, I stated that I anticipated that revenue would increase in the second quarter of 2008 over the second quarter of 2007 in a mid-single digit to high-single digit range, and that diluted earnings per share for the second quarter of 2008 would be in a range of $0.51 to $0.57 per share. I reiterated this guidance on our second quarter 2008 mid-quarter update call. Actual revenue for the 2008 second quarter was slightly above the upper end of the range of revenue guidance, and increased approximately 10% over the second quarter of 2007. Earnings per diluted share finished at $0.56, an increase of approximately 6% over the 2007 second quarter diluted earnings per share. It was in the upper end of our range of EPS guidance.

Again, it is important to recognize that the 2007 diluted earnings per share for the second quarter included no accrual for bonus payments; whereas the bonus accrual in 2008, second quarter, amounted to approximately $0.03 per diluted share. Excluding this $0.03 per diluted share swing, diluted earnings per share increased 11% quarter-over-quarter on an apples-to-apples basis.

We had a very successful second quarter, as we were able to overcome the continued weakness in some of the same sectors that had been weak for some time now -- namely, the automotive sector and housing-related accounts. Landstar not only had record second quarter revenue, but also generated record second quarter operating income and record diluted earnings per share. Increased revenue per load, new revenue from Asian additions, and increased account penetration were all contributing factors to our successful second quarter.

Revenue generated by our top 25 accounts represented 35% of total consolidated revenue in 2008 versus 31% in 2007. Revenue generated by our top 100 accounts represented 51% of consolidated 2008 second quarter revenue versus 48% in 2007. Revenue generated by those top 100 accounts in 2008 was approximately 19% greater than the revenue generated by these same accounts in 2007. Revenue generated from business with transportation and/or other logistics companies increased approximately 18% quarter-over-quarter, primarily due to increased substitute line haul revenue with certain carriers.

Automotive-related revenue, including revenue generated through [three PL's], decreased 22% quarter-over-quarter. Overall, as I said before, revenue increased approximately 10% quarter-over-quarter. Revenue generated by BCO's represented 54% of total consolidated revenue in the 2008 second quarter versus 58% in the 2007 second quarter. Revenue haul by BCO's increased 3% quarter-over-quarter, as a slight decrease in the number of loads hauled was offset by a 4% increase in the average revenue per load.

Truck brokerage revenue represented 38% of consolidated revenue in the 2008 second quarter versus 34% in the 2007 second quarter. Revenue hauled by a truck brokerage carriers increased 21% quarter-over-quarter, as the number of loads hauled by truck brokerage carriers declined 3%, and the revenue per load increased 24% quarter-over-quarter.

One point before I continue -- the slight decline in the total number of loads hauled by BCO's and truck brokerage carriers was entirely caused by the reduction of automotive load volume and load volume in one other account. This decrease in load volume was almost entirely offset by increased load volume at other accounts.

Revenue generated through rail, ocean and air cargo carriers represented 7% of consolidated revenue in the 2008 second quarter, and also 7% in the 2007 second quarter. Revenue hauled by rail intermodal carriers increased 23% quarter-over-quarter, and revenue generated by ocean cargo carriers increased 75% quarter-over-quarter, and more than offset a decline of $2.3 million in revenue hauled by air cargo carriers.

We ended the 2008 second quarter with 1,409 agent locations as compared to 1,381 at the end of the 2007 second quarter. There were 243 agent locations added in 2007 and 2008, that generated approximately $27 million of new revenue in the 2008 second quarter. In the 2007 second quarter, 266 agent locations were added in 2007 and 2006, that generated $25 million in new revenue in the 2007 second quarter. As I have stated before, we are focused on adding productive agent locations; not the absolute agent count. There were 1,166 agent locations open in both the 2007 and 2008 second quarters. Revenue at these agencies increased 9% quarter-over-quarter.

I will now turn it over to Jim for his financial review. Jim?

Thank you, Henry. Revenue increased over 10% in the second quarter of 2008 [technical difficulties] compared to $633 million in the 2007 second quarter. 2008 second quarter revenue was the fourth highest quarterly revenue in Landstar's history, and if one were to exclude the revenue derived for disaster relief services provided under the former contract between Landstar Express America and the US Federal Aviation Administration, it was the highest quarterly revenue in Landstar history.

Investment income was $773,000 in the 2008 quarter compared to $1.3 million in the 2007 period. The $484,000 decrease in investment income was attributable to a lower rate of return on investments held by the insurance segment in the 2008 second quarter.

Purchased transportation was 77.2% of revenue in the 2008 second quarter compared to 75.6% in the 2007 second quarter. The increase in purchased transportation as a percent of revenue was primarily attributable to increased rates for purchased transportation paid to third party truck brokerage carriers, rail carriers, and air and ocean cargo carriers, and increased less-than-truckload substitute line haul revenue hauled by truck brokerage carriers, and increased revenue hauled by rail and ocean carriers, which tend to have a higher cost of purchased transportation.

Commissions to agents were 7.6% of revenue in the 2008 quarter compared to 8% in the 2007 quarter. This decrease was primarily attributable to increased less-than-truckload substitute line haul revenue, and increased revenue hauled by rail and ocean carriers, all of which have a lower commission rate resulting from a lower gross profit, representing revenue less the cost of purchased transportation.

Other operating costs were 1.1% of revenue in the 2008 quarter compared to 1.2% of revenue in the 2007 quarter. This decrease was primarily attributable to the effect of increased revenue, particularly truck brokerage, rail and ocean revenue, which tend to incur lower other operating costs as compared to revenue hauled by BCO Independent Contractors.

Insurance and claims costs were 1.4% of revenue in the 2008 quarter compared to 1.9% in the 2007 quarter. This decrease was primarily attributable to a lower cost of cargo planes in the 2008 second quarter. In addition, the decreases in shorts and claims as a percent of revenue was partially attributable to increased revenue hauled by truck brokerage carriers, rail intermodal and ocean cargo carriers, all of which tend to have a lower claims risk profile.

Selling, general and administrative costs were 5% of revenue in the 2008 quarter compared to 4.9% of revenue in the 2007 quarter. This increase was primarily attributable to an increased provision for bonuses under the Company's incentive compensation plans in the 2008 second quarter, and the recovery of legal fees in the 2007 second quarter, partially offset by the effect of increased revenue.

Depreciation and amortization was 0.7% of revenue in both the 2008 and 2007 second quarters. Interest and debt expense was approximately $1.7 million in the 2008 quarter compared to $1.1 million in the 2007 quarter. The increase in interest expense was primarily attributable to increased borrowings on the Company's -- under the Company's senior credit facility, partially offset by lower borrowing rates on the senior credit facility.

The effective income tax rate was 38.6% in the 2008 quarter compared to 38.7% in the 2007 quarter. The decrease in the effective income tax rate was primarily attributable to lower state taxes relating to a shift in income apportionments amongst the states in which the Company does business.

Operating margin for the 2008 second quarter was 7.2% compared with 7.8% in the 2007 second quarter. The 2007 second quarter margin reflects a provision for bonuses under the Company's incentive compensation plan, whereas no such provision was reported in the 2007 second quarter. The provision for bonuses in the 2008 second quarter negatively impacted operating margin by 30 basis points. It should be noted that the 2008 second quarter operating income was the highest quarterly operating income in Landstar's history, if one were to exclude the operating income derived from disaster relief revenue under the FA contract from any previous quarter in Landstar's history.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $103 million. During the 2008 first quarter, Landstar reduced long-term debt by $24 million. Cash flow from operations was $35 million during the 2008 first half.

The Company's Board of Directors recently authorized a purchase of up to an additional 2 million shares of its common stock. Including the 734,400 common shares available for purchase under a previously authorized share purchase program, the Company is currently authorized to purchase 2,734,400 shares of common stock under its authorized share purchase programs. At June 20, 2008, shareholders equity represented 64% of total capitalization. 2008 trailing 12-month return on equity remains high at 52%. And back to you, Henry.

Thanks, Jim. I remain excited about the back half of 2008. Our ability to execute on our existing revenue opportunities should enable us to continue to generate increased revenue. Our agent pipeline remains full, and our core revenue growth strategy remain the same. And they are -- to add new, productive agents; to add new customers; and to further penetrate our existing customer base by offering our full array of transportation logistics services.

As we enter the 2008 third quarter, I believe that tight capacity trends will generally continue and result in a higher cost of purchased transportation for brokerage capacity. However, it will also result in generally a stronger pricing environment. I anticipate the weakness experienced in the automotive sector and in certain other accounts to continue into the back half of the year. However, that weakness should be offset totally by strength in other accounts. Assuming these current trends continue, all in all, I would anticipate revenue growth for the third quarter of 2008 over the third quarter of 2007 to be in a 7% to 12% range, and earnings per diluted share to be in a range of $0.54 to $0.60 per diluted share. Again, for comparative purposes, it should be noted that in the 2008 EPS guidance, there is approximately $0.02 per diluted share of costs related to bonus accruals not in the 2007 third quarter.

With that, we'll turn it open for questions.

(OPERATOR INSTRUCTIONS). Justin Yagerman, Wachovia.

I guess my first question is just kind of looking at the quarter as a whole, I'd be very curious to find out how much of the quarter was done in June. Our sense from our channel checks has been that June was an exceptionally strong month and that that's really when the capacity started to tighten; spot pricing got a bit tighter. I'd be curious to get a sense from you how that moved through the quarter and I guess how that's progressing now that we're in July.

Well, let me start with the back end. July, historically, first couple of weeks is very slow. So I really can't take much out of what occurs in the first two weeks. You've obviously got the plant shutdowns and things going on. So I wouldn't -- it's hard to make any value judgment from what happened in the first two weeks in July, because I think that's pretty consistent with what we've seen in other July's.

But as we worked through the second quarter, I think we saw a gradual build starting in May. But June clearly was a very strong month. As I've said at the mid-quarter update, flatbed capacity has been tight all along. And van capacity started to get tight in June. So, in general, as far as the progression of the quarter, I think that's what occurred. I think if historically you look back as far as how the quarters went, again, it's starting in mid-May and closing up in June, historically is strong. And I think people are thinking it was stronger than normal because we've been so used to the weaker environment. But, yes, it was strong.

Okay. That's helpful. And then guess I -- focusing on the broker division, when you look, you know, obviously purchased transportation when up, when you're looking at just the broker division. How would you compare the margin, the gross margin, in that division to how you would have expected it to react? And you know, I mean, from a capacity standpoint, is it taking you longer to cover loads in the broker division? And I guess how are you doing at sourcing the capacity that you need on that end of the business?

Yes, well, clearly it's more expensive to -- or it had been more expensive in June and May to get a truck. Trucks weren't -- unless the pricing was right, they didn't want to haul. So, the gross margin, we -- was higher because we're paying more for the truck. On the other hand, we were able to basically get price increases. And you can see from the revenue per load numbers, I mean, pricing was pretty strong.

If I looked at what I would consider our net margin, which would be revenue less PT and commissions, because the way we work on the truck brokerage carriers, if we pay more for the truck, that's taking less from the broker. Over all, we were down about one-tenth. Where we got really hurt, if you will -- if you want to use that term -- on the net margin piece, was in the ocean carriers. That was -- in the quarter last year, was 8.8; it was down to 6.1 this particular quarter.

So, I mean, you had a mixture. We clearly paid more for purchased transportation. I think we did a pretty good job getting pricing up there. Clearly in the brokerage piece you had a little bit of a fuel surcharge, which was hard for us to break out. At least 3% we think was attributable to the fuel surcharge in the brokerage piece. Probably more, because some of that just gets built in, and then again, I don't know how much of that I got back when I -- if I actually made any money on that when we bought the purchased transportation.

It's an interesting environment in the fact that capacity was tight, and it presented some pricing opportunities. I think we took advantage of that.

Do you have that net margin number for the truck division?

If I looked at the brokerage carrier, that was 7.3 down to 7.2, and that's a net margin -- against revenue less PT and commissions. If I looked at the ocean cargo carriers, that was down -- that was 8.8 down to 6.1. And if I looked at BCO's, that was 20.9 in '07 down to 20.3. And you need to understand with the BCO piece, you've got, on the flatbed heavy haul stuff, you've got a lot of accessorials that pay 90%; although the revenue was up, it's going to have a negative impact on your net margin.

Got it. That's really helpful. Thanks, Henry.

Thanks, Justin.

Does that conclude all your questions, sir?

Yes. Thank you, Operator.

Tom Wadewitz, JPMC.

Can you give us some further perspective on the big move up in revenue per load in, I guess, both brokerage and some other areas? And it sounds like a bit of that is fuel surcharge, but what else is driving that? And looking forward, do you think that trend is likely to continue?

Well, you've got a couple things. I mean, you know, your mix starts to change when you're dealing with flatbed and heavy haul. That's just a higher pricing environment. It's -- from a brokerage side, it was taking more dollars to buy that truck. And that's just what it was.

Fuel surcharge, as you well know, is, from a BCO standpoint, which is 54% of our revenue, is excluded from the revenues, had no impact whatsoever. 54% of our revenue on the 38% that was generated through brokerage carriers, as I said, we can measure approximately 3% was fuel surcharge. But the other stuff was not broken out, so it's hard for us to tell how much was fuel surcharge versus just fuel price increase. But we've been very successful as far as going back to the customer and getting price increases and improving our freight quality, if you will, because again, that's what it's taking to get the truck on the brokerage side.

Okay. So do you think that -- clearly things tightened a bit in June and I guess, perhaps starting in May, is I think the way you characterized it. If you look forward, do you think that it's going to tighten a lot further in third quarter/fourth quarter? Or do you think you've kind of seen that tightening and then you kind of work with that?

And I guess in terms of that, is there risks that the margin on the brokerage side would come under meaningfully more pressure in the second half or -- and how would we look at that?

Well, a couple things. My personal belief is I think you'll probably see some loosening, if you will, in July, but I think that would be normal. I think, in general, the same economics exists out there. You've got fluctuating fuel prices. And I think that has driven a bunch of capacity out of the marketplace. So I think as you move into the more heavier times -- September, late August -- I think you'll see -- our feel is you'll see the same type of phenomena.

We continue to have good pricing with heavy haul and some other accounts. So, we really believe that the third quarter is going to be very similar to what we've experienced in the second quarter.

Now, should that not happen -- which I think is your question -- and is there going to be more pressure on margins if capacity is not as tight, I could tell you, I'd probably pay less for the truck, in which case my margins might expand to some degree. So, again, it's back to my comment about it. I think our model adapts very well to the changing environment.

Tom, you wanted a follow-up there?

No, I just -- I think I meant it the other way, in terms of if capacity got meaningfully tighter, would that (multiple speakers) [hurt you] on the margin side?

Well, yes, I mean, if capacity gets tighter and then, you're absolutely correct, that means we're going to basically be paying more for capacity. What we have to do is go back out to our customer base and say, if you want this truck, it's going to cost you more. And that's what we did in the quarter. And it depends on our mix of revenue as far as where that all occurs.

We had more brokerage than we had in the last year's second quarter. If you follow the comments also, we had a very big increase in the substitute line haul business. By its nature, that's a very small margin business. But again, when you look at the margins, factoring in the bonus accrual at 7.2 and 30 basis points dealing with the bonus accrual, pretty impressive margin considering the environment we're dealing with. And you've got to remember what I've always said -- over a continuum of time, we anticipate that we're going to grow our margins by a full percentage point.

So, we're actually extremely happy with our margin performance. As a matter of fact, as Jim alluded to, if you pull out FAA from any quarter Landstar ever had, it's the most operating income we've ever generated. And as long as we're putting the money to the bottom line, that's what we want to do.

That sounds good. Thank you for the time.

Edward Wolfe, Wolfe Research.

Just a follow-up on Tom's question. I mean, are you really happy with the margins here? You've had now six quarters in a row of accelerating revenue every quarter, but the margin has gotten worse for four quarters in a row. And operating income is flattish for the fourth year in a row now. When do you start to really leverage that revenue? When should we think about that?

Well, again, I think you need to look at it -- I've said many times and you've heard me say, I'm not going to predict which quarter and I can't predict which quarter that we're going to basically generate that full percentage point gain. But that's over a five-year continuum. And again, if you go back in our timeframe and our history, you'll see that.

The fact that we generated record operating income I think is very important. You've got to look at the mix of the revenue. When you have a lot of substitute line haul business that you put in that basically replaced some of the automotive business that went away, if you will, and I don't expect that to come back; that had a slight squeeze on the margin. So again, I'll repeat, over a continuum of time, I mean, you're going to see that margin increase. I mean -- 7.5% I think is, if you added back the -- on an apples-to-apples basis, is a pretty good margin. Considering the environment we're operating in. I mean, you've got to consider the environment you're operating in.

But it felt like you had a pretty good June, it sounded like from everything, and certainly the yields were up.

We had a good quarter, quite frankly.

Then if comps continue or is that a one-quarter kind of event?

Do what? Say that again?

The $0.03 for the incentives comp --

As I said, we're looking at, we think, $0.02 in the third quarter. Obviously, it is our objective to meet our goals and therefore those accruals hopefully continue.

So as I look at the guidance calls for very similar to what you did in the second quarter, kind of [10] (multiple speakers) --?

Yes, exactly right. In fact, in the second quarter, I said that the guidance included $0.02 and the number came out to be $0.03. The guidance going in the third quarter is also includes an approximate $0.02 of charges related to the bonus accrual.

Okay. Is there any benefit from all the flood stuff that's going on in the Midwest? Is there any need for capacity right now and the fact that FEMA was just awarded a big grant that Congress passed? Does that give any opportunity in the second half?

Well, it gives opportunity. Again, there's no -- first of all, the floods in the Midwest, we did very little business. We did some business through FEMA, but really nothing even to make mention of. We did a couple of loads, as I recall, through a water distributor that had contracted through FEMA and we hauled that. But [fully] is nothing like anything that occurred in Katrina and in any of those hurricanes. Now, what happens now that we're in hurricane season and what happens with that, there's always opportunity.

Okay, I'll get back in line. Thank you.

Tom Albrecht, Stephens, Inc.

A couple of questions. Do you have your rate per mile for the dry and flatbed divisions? I think you gave that last quarter verbally.

Do you have that, Jim? I don't --

Just one second, Tom.

Okay.

Hold on one second. On the rate per mile, on the flat side --

Yes, I've got it, Jim. I've got -- and tell me if this is -- I've got $1, flat side I've got $2.66 versus $2.36 and on the van side, I've got $1.85 versus $1.83.

And those are -- that flat is x-fuel, right? That's --

Not necessarily. There's a component of brokerage in there that would have fuel in it.

And just conceptually on what goes on in brokerage, when you're having trouble getting coverage for a load, I realize there's a small period where you may sort of eat it out of your gross profit. But how quickly can you convince the shipper than, hey, listen, we need more in these loads if you expect us to continue to move these on a timely basis. Can you talk about that process a little bit?

Yes. Go ahead, Pat.

Tom, I think that what's important is that our agents are close to the marketplace. They recognize when capacity starts getting tight. And they can recognize also when the demands from the customer are changing. Maybe they'll hear from a customer that they haven't heard from for quite a while. And that's the timing in the marketplace that we have to get better at or improve on, and it kind of goes all the way back to Tom's question -- we have to offset costs of the purchased transportation with rate increases. And we do that with great regularity in some locations and in some locations, we need to improve.

So it's dynamic but there's no silver bullet answer, per se. And did I hear you correctly? Henry, you thought that of the 24% revenue per load increase at brokerage that maybe 3% was just higher fuel surcharges and the rest was all the other things -- the rate, the mix issues, et cetera?

The 3% he was referring to was our overall revenue increase was 10%. We estimate based on stuff we know at about -- at least 3% out of that 10% was broker fuel surcharge hung up on the broker's line. On the 24% increase in the rate per load at brokerage, it looked about 10% to 12% of that increase is fuel.

Okay. That makes a lot more sense. Okay. And then I guess I was a little surprised -- I know you mentioned the declining load volumes within automotive and that, but given sort of your unique brokerage offerings that you have, focused on flatbed and industrial, I was still surprised that the low growth was down almost 3%. I would think that you would compete in a less crowded space compared to maybe C.H. Robinson's of the world, where so much of that is food and brokerage.

Well, I think I think the one issue that we had was -- and I'm not going to mention accounts -- but automotive load volume was down about 22%. And that's large. That is very, very large. And then there was one other account that -- you got the exact load count that that was down? Without giving the name of the account? (multiple speakers) And one other account was down 10,000 loads. I don't have the account. All right?

So, when you couple that in -- that's why I'm saying, it was really caused by those two things. Otherwise, I mean, I don't like picking and choosing because we've got to replace things and to get back to where we were, I think was pretty impressive.

Okay. And then last question. Automotive, either as a percentage of the total or brokerage, however you want to share with us, what's the latest percentage, roughly, that you've got there?

I think we're down to about 7% right now.

That's what I thought, so. Okay, guys. Thanks very much.

David Ross, Stifel Nicolaus.

A question on the cash. It seems to be you're up in the share repurchase program, increasing dividend. Any look at acquisitions? I know the logistics and supply chain side is one you've been looking to grow. Any non-asset based logistics, acquisitions out there you might be looking at? Or is that an area you're thinking of growing?

Not -- I mean, we would be -- we would consider that. There's nothing that we're looking at right now.

Okay. And then the FAA contract status. I think in your comments you said a former contract with the FAA. Is that still kind of tied up, operating under the old contract? Any new word there?

No, again, there's not a new contract that I'm aware of that has been put out for bid. Our indication is that the contract will be sublet by or let out by FEMA as opposed to the FAA, but I think right now with a potential change in the administration, I think they're just going to wait to see what occurs with that whole thing.

Great. Thank you very much.

Matt Troy, Citigroup.

A question on the rail and ocean side. I think it accounts for something close to 6% or 7% of your revenues, but if I look at your release through the first half of the year, it's accounting for roughly 20% of your revenue growth on absolute dollars. Just wondering if you'd talk about what's driving some of that growth? Since most of the focus so far has been on the trucking side, and what kind of investments you're making there, and is that growth rate sustainable?

Maybe you could talk about the ocean side. We'll get back to the number piece of that but just talk about what we're doing from the international side.

On the international side, (technical difficulty) an important part of our growth as we've looked to add agents into our network over the last five to eight years that have international experience, both on the air and the ocean side of the business. So we've expanded bad agent count. And with that has brought obviously revenue opportunities and revenue growth in that market. And we've also looked to obviously expand [them all] from an offshore perspective. We mentioned here in the first quarter that we added our first agent offshore from an international perspective.

And we're also again talking to our existing agents who have account basis that obviously have international traffic. So we're expanding their sell, which is helping with growth in that marketplace.

Okay. And on the international side, I mean, is it possible to break out directionally how much of that growth is coming from the net adds on the sale side? Those relationships that they bring versus your ability to cross-sell or sell in with your existing agents that are primarily domestic-focused?

Yes, I don't have those numbers in front of me.

So if I think about growing that business, though, should I think about primary investment being just in headcount?

Well, obviously our model is always by adding agents. And we're going to continue to do that. And at the same time, as Henry kind of outlined in his strategy, it's about expanding our business with the existing account base. So I think you see the revenue stream come from both avenues.

Okay. And then I guess a similar question on the rail side -- I mean, the railroads are talking about the potential for modal shift from truck to rail. They've been talking about it for five or ten years, but there certainly seems to be more traction on that front more recently. Are you seeing that in your business? And just looking at your rail growth, what would you attribute that to? And what's the opportunity there? Thanks.

It's really the same on the rail side. I mean, we've done a real good job over the last three years, adding intermodal agents to the network. Some of those come out of other intermodal systems, some have been agents in other intermodal networks and some have been running their own intermodal marketing companies and haven't seen any growth. So they come over to us and we obviously have been able to expand the business with them.

Also to answer your question about modal shift, I mean, yes, that's something that has been talked about for the last ten years. I mean, right now you're talking about because of the high fuel costs. We're seeing some of that but our growth is really coming from really the addition of new agents and an expansions of our existing agent family into the intermodal service line.

Okay. And last question, it's dovetailing there -- would you say that you're happy with your ability to add those agents on the international and the rail side? Or do you find that you're constrained, that that talent is hard to come by these days?

No. No, I mean, we have a strong pipeline in all modes of transportation.

Great. Thank you.

John Barnes, BB&T Capital Markets.

Nice quarter. A couple things. One, have you seen any meaningful churn among your carrier base on the brokerage side? And can you just talk a little bit about successes and/or failures on carrier retention or recruitments?

Yes, I'll talk a little bit about that. From the brokerage side, it's kind of hard to determine it. Our counts been around 25,000 over the last several quarters and as insurance renewals come in -- I mean, we replaced carriers and new carriers come in. So it's been fairly static. So there's really no change there.

From the BCO side, we've had less recruits this year than we had last year. We've had less deletes, but when you add those two together, that accounts for the decline in the business capacity owner numbers. It's just harder to get, in our opinion, qualified -- good qualified BCO's into our system at this point in time. And I think, quite frankly, with things very difficult, I think people are actually a little more reluctant to look for -- and make a move at this point in time. Because they're either going out of business or they're going to stay put. But we'll see where that takes us.

All right. Well, that kind of segueways into my next question. I'm kind of curious as to -- you've been very successful in recent quarters at the agent recruitment. Have you seen anything there change in terms of competition -- for agents, recruitment or your competitors looking for those same agents being more aggressive about terms or something like that? And do you think the growth of your agent network is sustainable, say, for the next one to two years?

That's a good question, John, because we've always -- we have -- we've had competition for a number of years as far as recruiting agents. And a lot of the people who we recruit against offer some pretty substantial packages. I think what we've been able to demonstrate to be affiliated with the name Landstar and being part of that network, because the network is very key, and it's our scale and allows that individual to actually grow that business.

So as I said, the agent pipeline is full. We're concentrating on the bigger agents and we've been pretty successful. And I think you'll see continued success, especially as we -- as Jim was talking about. And then one other question we had before was -- taking out and looking for just different types of agents, whether it be international agents, whether it be intermodal agents. And then obviously looking and expanding our existing agent base just to couple them with all the modes of our transportation and increased count penetration. But as far as the agent count, we're not -- we think we have a sustainable growth pattern with that.

Okay. And then last question. On the share repurchase activity, on the -- and the increase in authorization, any change there in terms of how you anticipate financing adverses the way you've done it historically? I mean, do you see a higher than normal debt level to attack it? Or will it be still kind of a mostly free cash flow and debt from time to time? Is it going to be kind of the normal use of cash, I guess?

I don't think you'll see any. There's no change in philosophy there. I think it's a normal use of our free cash and occasionally dipping into our revolver. There's been no change in our philosophy going forward.

All right. Good. Very good. Again, Henry, nice quarter. Thanks for your time.

Todd Fowler, KeyBanc Capital Markets.

I want to be clear on the fuel issue and maybe how it's impacting some of the comparisons. Within your gross revenue, there's no fuel recorded from the BCO's and it's about 55% of the revenue. But the other 45% that comes from the broker carriers and the rail and everything else, there is fuel that is going to show up in the gross revenue there, is that correct?

That's correct.

And so -- and it's also going to come through in the purchased transportation line. And basically major net revenue margins maybe look a little bit depressed because it's coming through at a lower margin. The same thing on basically the operating margin line as well, right?

That's correct.

Okay. No, that's helpful. I just wanted to make sure I was thinking about that correctly. And then, Henry, with the automotive situation here in the second quarter, were the strikes -- when you lay out the guidance, maybe a little today, and go longer than you anticipated? Was it in line with your expectations? And the same things you think about kind of the rest of the year and what we've seen recently, what we've heard recently from the automotive market. Any change in your thinking with the exposure or at least the presence that you have in the intermodal business?

The intermodal business?

I'm sorry, the automotive business.

I was gearing up the answer with automotive and then I heard --

I threw you for a curveball there.

No. I don't expect -- I think I said, I don't expect any pickup and I'm not looking for any pickup. If things were to pick up, that would be gravy to our estimates. If there's a change in that, in what happens with GM, what happens with the other two members of the big three, I think that would be all a plus for Landstar. But we're not looking for a lot from the automotive sector and it's factored into our revenue guidance of that 7% to 12%.

Okay. That's helpful. And then one other question -- it looks like there were a few more agent additions sequentially here in the second quarter. Is there any sort of additional ramping time with costs, where as you bring some agents on, you might have a little bit more incremental costs before they start producing revenue? Or is that pretty minuscule?

I think the cost to bring on an agent is pretty minuscule. I mean, it takes some time for them to ramp up. As I said, our pipeline is full. I think you'll see some good agent additions as we move forward into the third quarter. And that obviously sets the groundwork for future revenue. I mean, you don't -- it takes awhile for them to convert all that revenue over. But we, as I said before, we think we're -- our agent pipeline is full and I'd be looking for some pretty nice agent additions in the third quarter.

Okay. No, that's helpful. And then just my last one. I'm not sure if you mentioned this, I might have missed it but it doesn't look like there were any share buybacks in the current quarter. And is there a timing on the authorization that you have out there? What would be your anticipation for working through the share buybacks that you have authorized at this point?

Our philosophy -- two things -- correct, we have not executed on a share buyback in the first half of the year. Our philosophy has been that we try to be optimistic buy/win the stocks that settles in sort of a trading range. We asked the Board to increase our authorization from the current amount, which was about $700,000, for an additional 2 million shares, so we have 2.7 million shares of dry powder in our pocket. And if you go back in our history, as I've said many times before, we are a proven executor of our share buyback program. And there's no reason to think that we wouldn't continue on that execution.

Okay, good. Thanks a lot for the time.

Davis Campbell, Thompson Davis & Company.

Good to hear from you again and appreciate the good results. You've talked about the flood business and the fact that you didn't do very much of it in the recovery in the Midwest, but what about the opportunity for revenues there in June and July, given the fact that there were all kinds of disruptions in Company supply change-up. I figured you might be getting some additional business from shippers looking for new ways of getting things around.

Pat, Jim, do you want to --?

Well, clearly, David, when there's disruptions in the supply chain, they're going to call upon carriers like Landstar to help fill that gap. And we saw some of that as it related to the floods and different bridges being out from the railroads. So we did see some of that.

Was it anything of a net benefit or was it pretty much offset by the additional costs you had to bear?

Well, I mean, there were additional revenue opportunities because of it.

(inaudible) was costing more for the capacity. Capacity was expensive no matter how you cut it in the second quarter, specifically more expensive in June.

When you think about it, David, it's the post-flood business with the infrastructure rebuild that we believe from a platform perspective we're well positioned to take advantage of.

Right. Okay, thanks. That's my only -- all of my other questions have been asked.

Jon Langenfeld, Robert W. Baird.

Henry, can you talk a little bit about on the agent side, it's a pretty dynamic market out there. Things are changing pretty quickly. How does corporate help to kind of disseminate the information of the changing market? Or do they not need to? Are the agents good enough that they can basically interpret that on their own?

As Pat said before, our agents are in-market. And for them to be a successful businessmen, I mean, they better understand the market that they're in. And I think they have their pulse on what's going on. From our standpoint, I mean, we have a pricing department; we can help verify certain things for them. But generally, these guys are the entrepreneurs and if they're successful, they know what's going on in that market.

Pat, you want --?

Jon, we also have some -- the technology that allows our agent family to send shipments out across the network and determine, based upon feedback from operators, whether or not that stuff is priced right. So -- and as Henry mentioned earlier, the agent when, they're on a commission split as well, so to the extent they can get price increases, that helps offset the higher cost of PT, if you will. And so they're loathe to do so.

Got it. Got it. Yes, it makes sense. And then, Henry, I think I know the answer to this, but I guess people have been asking this in various different ways, but -- a tightening capacity environment, would you view that as a positive or a negative for Landstar? I mean, basically meaning the scarcity of the assets, the increase in the pricing on the positive side, does that more than offset the gross margin contraction in the brokerage business specifically?

I've always said that -- what problem do you want to? Do you want to have capacity with no freight to put on it? Or would you rather have the freight demand -- and I use those terms -- and try to find the capacity? I guess what I'm saying, I'd rather have the latter problem. It's tougher, but the problem I want to have is I've got freight, let me go get the capacity. And suppose I have the capacity, I don't have the freight.

Yes. And assuming -- I mean, from a broader industry perspective, assuming you're good at acquiring capacity, you'd rather have a scarce asset out there.

Exactly right.

Very good. All right. Thanks a lot.

Nate Brochmann, William Blair & Company.

Congratulations on a great quarter. Just to kind of follow up on Jon's question a little bit there -- and we've been talking a lot about the capacity and pricing side, but when we look at the volume and if we exclude the auto business and the lost revenue from one customer in particular, can you talk about some of the other end markets that are performing very well, in terms of either way you're gaining some shares, some additional business, or at least being able to maintain where you're at?

Yes, again, as I said, I think the biggest -- in the substitute line haul business, for example, recognize the margins are thin but we've had some great successes in there. And that is a volume game.

In the flatbed platform arena, the heavy haul operation, I mean that has been a consistent performer. In fact, if I look down our list of commodities and I would say that appliances are up; automotive is way down; building products surprisingly is flat, got a new customer or two there. Chemicals is up a little bit. If I move down -- government is about flat. Machinery, general commodity; I mean it's up pretty big -- big time.

And is that part due to export, do you think?

I'm sorry, what?

Is that part due to the increasing export activity out of the US?

Yes, I think partly that's true.

Okay. And what's kind of your -- I mean it sounds like your outlook on the volumes side is pretty stable just like we're hearing from a lot of other companies and our other channel checks too is that for sure on the volume side, it's not getting any weaker. And if you're a company like Landstar and can provide a multimodal solution, you're probably gaining some share on that as well.

Yes. Look, I don't like to talk about the fact that automotive is down so much and we had that one account, but we grew 10% in automotive was down, which actually was a pretty high margin business for us. We're able to I think perform pretty admirably in a market that I think people found very difficult. But there are clearly opportunities out there, through increased account penetration, through bringing on new agents. And things are going very well.

Great. And kind of just one additional question with that, as you've mentioned before on some of the past calls in terms of the warehouse business kind of improving -- and on one hand that's nice, but the bigger part is driving more revenue through the truckload business. Are you still seeing that? And how are those trends going?

Yes, I mean, if I looked at -- if I look at our warehouse -- and these are very small numbers, I mean -- (multiple speakers) business, when I look at a net revenue number of approximately, round figures, 100,000 compared to 25,000 last year in the quarter, but what that brought with it is about $6 million in additional transportation revenue versus $3.7 million last year, which is an increase of about 62% in transportation revenue that we got because we sold the warehouse end of that. And that actually is I think going to start to pick up very soon. So we're very pleased with the progress on that at this point in time. It could be a little bit faster, but we're doing a nice job right now.

Great. Thank you very much.

Currently at this time we have approximately four minutes left to the conference. (OPERATOR INSTRUCTIONS). Tom Wadewitz, JPMC.

Yes, Henry, I just had one follow-up for you. You've mentioned a number of times this customer where you lost 10,000 loads. Did you actually lose the customer? Or was the customer's business down sharply? And is it the type of thing that two quarters from now you're going to say, hey, that customer we talked about is back and there's a nice (multiple speakers) increase in volume?

We lost that customer.

And it's not the type of thing that could readily come back?

And it's not the type of thing I want back.

Okay.

All right? I'll just leave it at that.

Fair enough. Thank you.

I think [Cheryl], we'll probably bring this to an end. But I'll take -- if anybody else has got one more question, we'll take that.

Okay, we do have one further question. Edward Wolfe, Wolfe Research.

I was waiting for you to get back on it, because I know you were getting back on the loop.

I appreciate your consideration, Henry. I'm just trying to get my handle -- it seems like the revenue and the volume, certainly the pricing and to a lesser degree, the volume, is not really the issue. I'm just trying to understand what's going on in the marketplace. And you talked a couple times about saying you're starting to see small guys go out, pricing is firming. You felt that in June particularly.

When I look at your report, though, it shows that overall truck capacity was up 4% in terms of the number of suppliers to you. And that on the truck brokerage side, it was up [6 and] change, which is pretty much where it's been the last two years. So it didn't feel like you felt that reduction.

No, again, I think from the brokerage side, it's hard to tell that. There are people -- when I don't get that insurance renewal and they go off of our system, we do not follow up on that unless it's a real major carrier that we use.

Pat, do you want to --?

Well, Ed, that could be an approved carrier that has at one time 500 trucks and today has 100 trucks. So they remain an approved carrier, but their capacity and size has diminished significantly.

Did you have trouble at some points during the quarter in finding capacity?

I think it was a challenge throughout the quarter to find capacity.

And in July, is it still a challenge to find capacity?

No, well, you know, not -- it's hard -- as I said before, you can't go by the first two weeks of July, which is historically very, very slow. I mean, you hit that June crunch that last week and then after that, I mean, things slow down dramatically. And so I can't make any judgment on capacities now all of a sudden have gotten looser. That just, to me, is intuitive because of the type of -- where you are in the year.

I understand you can't -- it's a tricky month, but on flatbed, is it tighter in July?

Flatbed is still tight.

Yes. Okay.

Flatbed is still tight.

Okay. Thank you.

Okay, thanks, Ed. And with that, we'll wrap up the call. Jim?

Thanks for all of your questions and thanks for being on the call, and I just look forward to the next six months and watching how this year is going to finish out. This will be an exciting year.

Yes, I agree with that. And let me just close by saying something I said before, and that's -- I think Landstar continues to be a consistent, proven, predictable performer in most any freight environment. And I look forward to talking to everybody again on August 25 for our 2008 third quarter mid-quarter update call. And thanks and have a good afternoon and good evening. Thank you.

Thank you for joining the conference call today. Have a good afternoon. Please disconnect your lines at this time.