Landstar System Inc (LSTR) 2008 Q3 法說會逐字稿

Good afternoon and welcome to Landstar Systems Inc. third-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 Terry. Good afternoon and welcome to the Landstar 2008 third-quarter earnings conference call. As with the recent quarterly earnings conference calls, today's call will be limited to no more than one hour and I would appreciate it if you would limit your questions to no more than two questions each when the question-and-answer period begins.

Let me read the following statement. The following is a Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. 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.

During our 2008 second quarter earnings conference call, I stated that I anticipated that revenue would increase in the third quarter of 2008 over the third quarter of 2007 in a high-single digit to low-double digit range and that diluted earnings per share for the third quarter of 2008 would be in a range of $0.54 to $0.60 per share. In our mid-quarter update call, I tightened that revenue guidance to a 10 to 13% range and reiterated the diluted earnings per share guidance.

Total Landstar revenue was $733 million in the 2008 third quarter, an increase 15% over the 2007 third quarter. It was the highest third quarter revenue in Landstar history. Excluding the revenue generated from bus evacuation services for the 2008 hurricanes, revenue increased 11% quarter over quarter. Diluted earnings per share was $0.62 per share and $0.59 per share excluding the net income from the revenue generated from the bus evacuation services.

Landstar once again had a very, very good quarter in this ever-changing freight environment. Let me review what has occurred in the marketplace.

As I stated before 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 exited the marketplace causing somewhat a reversible in capacity and the pricing environment.

Capacity tightened in the second quarter of 2008 as demand increased and carriers had increased pricing power. Landstar experienced the same trend through the month of July.

July 2008 revenue increased 13% over July 2007 revenues. However, during the month of August, we experienced a slower rate of growth as August 2008 revenue increased 9% over August 2007. September freight demand in the final weeks of the month was weaker than we anticipated and available capacity appeared to have increased primarily in the van arena.

In addition, fuel prices came down rather rapidly towards the end of the third quarter and into the fourth quarter. I will talk more about what I see in the fourth quarter a bit later.

From an earnings standpoint, diluted earnings per share in the 2008 third quarter increased 15% over the 2007 third quarter. Again, it is important to recognize that the 2007 diluted earnings per share number for the third quarter included no accrual for bonus payments.

With a bonus accrual in the 2008 third quarter amounted to approximately $0.03 per diluted share. Additionally, the third quarter of 2008 included income of approximately $0.03 per diluted share from the bus evacuation services.

Again, we had a very successful third quarter and we overcame 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. Increased revenue per load, new revenue from agent additions and increased account penetration were all contributing factors to our successful third quarter results.

Our account base remains highly diversified. Revenue generated from business with transportation and/or logistics companies increased approximately 17% quarter over quarter primarily due to increased substitute line haul revenue with certain carriers. However, we saw a decrease in such business towards the end of the quarter as the general economy weakened.

Automotive related revenue including revenue generated through three PLs decreased 23% quarter over quarter and represented less than 6% of our total business. Our largest commodity segment continues to be machinery and equipment which represented approximately 20% of our total business in the 2008 third quarter.

Quarter over quarter it was up 33%. The primary reason for this increase is the increase in power generation business. We anticipate that this business will remain strong into 2009 and beyond. Again, overall revenue increased approximately 15% quarter over quarter.

Revenue hauled by BCOs represented 51% of total consolidated revenue in the 2008 third quarter versus 55% in the 2007 third quarter. Revenue hauled by BCO's increased 6% quarter over quarter as a 2% decrease in the number of loads hauled was offset by an 8% increase in the average revenue per load.

This increase in revenue per load amount was primarily due to a change in revenue mix or as we call it, freight quality, caused mostly by the increase in heavy haul platform revenue and not by a pure price increase. There was no fuel component to the BCO revenue per load amount.

Truck brokerage revenue represented approximately 38% of consolidated revenue in the 2008 third quarter versus 35% in the 2007 third quarter. Revenue hauled by truck brokerage carriers increased 22% quarter over quarter as the number of loads hauled by truck brokerage carriers declined 4% and revenue per load increased 27% quarter over quarter. Approximately 30% of the revenue per load increased for truck brokerage revenue was due to fuel.

The decline in the total number of loads hauled by BCOs and truck brokerage carriers was entirely caused by the reduction in automotive load volume and load volume in one other account. Revenue generated through rail, ocean and air cargo carriers represented 7% of consolidated revenue in the 2008 third quarter and the 2007 third quarter.

Revenue hauled by rail intermodal carriers increased 3% quarter over quarter and revenue generated by ocean cargo carriers increased 55% quarter over quarter and more than offset a decline of $2 million in revenue hauled by air cargo carriers. Now I will turn it over to Jim for his financial review.

Thanks Henry. Henry has already covered revenue. I will cover various other financial information included in the third quarter release.

Investment income was $817,000 in the 2008 quarter compared to $1.1 million in the 2007 period. The $289,000 decrease in investment income was attributable to a lower rate of return on investments held by the insurance segment in the 2008 quarter.

Purchase transportation was 77.8% of revenue in the 2008 third quarter compared to 75.9% (technical difficulty) third quarter. The increase in purchase transportation as a percent of revenue was primarily due to bus capacity provided for evacuation assistance related to the storms that impacted the Gulf Coast which had a higher cost of purchase transportation, increased less-than-truckload line haul revenue hauled by truck brokerage carriers which also tends to have a higher cost of purchase transportation and increased rates for purchased transportation paid to third party truck brokerage carriers which was partly attributable to the increased cost of fuel in the 2008 third quarter.

Commissions to agents were 7.4% of revenue in the 2008 quarter compared to 8.1% in the 2007 quarter. Excluding the revenue related to bus capacity provided in connection with evacuation assistance, commissions to agents were 7.7% of the revenue in the 2008 third quarter.

The decrease in commissions to agents as a percent of revenue excluding the revenue related to the evacuation assistance was primarily due to increased less-than-truckload line haul revenue which has a lower commission rate resulting from a lower gross profit representing the revenue less the cost of purchase transportation and lower gross profit on revenue hauled by third party truck brokerage carriers. Other operating costs were 0.9% of revenue in the 2008 quarter compared to 1.3% in the 2007 quarter.

This decrease was primarily due to higher trailing equipment rentals in the 2007 third quarter primarily from disaster relief services provided under the former contract with the FAA and the effect of increased revenue, particularly truck brokerage which tends to incur lower other operating costs as compared to revenue hauled by BCO independent contractors. Insurance and claim costs were 1.1% of revenue in the 2008 quarter compared to 1.5% in the 2007 quarter.

This decrease was primarily attributable to favorable development of prior claims in the 2008 quarter. Selling, general and administrative costs were 4.7% of revenue in the 2008 quarter compared to 4.9% of revenue in the 2007 quarter. This decrease was attributable to the effective increased revenue, partially offset by an increased provision for bonuses under the Company's incentive compensation plans in the 2008 quarter.

Depreciation and amortization was 0.7% of revenue in the 2008 quarter compared to 0.8% in the 2007 quarter primarily due to the effect of increased revenue. Interest and debt expense was $1.8 million in both the 2008 and 2007 third quarters.

The effective income tax rate was 38% in the 2008 quarter compared to 38.7% in the 2007 quarter. The effective income tax rate in the 2008 39-week period was 38.4%, equal to the effective income tax rate for the full year of 2007.

Operating margin for the 2008 third quarter was 7.5% compared with 7.8% in the 2007 third quarter. The operating margin in the 2008 third quarter reflects a provision for bonuses under the Company's incentive compensation plan whereas no such provision was reported in the 2007 third quarter.

Net income in the 2008 third quarter was $32.8 million or $0.62 per diluted share compared to $29.3 million or $0.54 per diluted share in the 2007 quarter. Included in net income and diluted earnings per share in the 2008 quarter was net income of $1.7 million or $0.03 per diluted share from revenue derived for evacuation assistance for the storms that impacted the Gulf Coast.

In addition, diluted earnings per share was impacted by $0.03 from the net income effect of the provision for bonuses reported in the 2008 third quarter compared to the 2007 quarter in which no provision for bonuses was reported. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $103 million. Cash flow from operations was $50 million during the 2008 39-week period.

During the 2008 third quarter, Landstar purchased approximately 580,000 shares of its common stock at a total cost of $28.5 million. As of September 27, 2008 there were approximate 2,155,000 shares of the Company's common stock available for purchase under Landstar's authorized share purchase program.

At September 27, 2008 shareholders equity represented 62% of total capitalization. 2008 trailing 12-month return on average shareholders equity remains high at 53%. Back to you, Henry.

I anticipate a fourth-quarter freight environment with weak demand, lower fuel prices and increased capacity. In this environment, I would anticipate yields from a brokerage standpoint to expand for those brokerage arrangements on a margin split.

Should the weak environment continue, eventually I would anticipate additional capacity to exit the marketplace later in the fourth quarter and into 2009. Although the general economic outlook might be bleak, this is the time when Landstar's operating model should outperform its competitors.

I see opportunities from both an agent and BCO recruiting standpoint. Our agent pipeline remains full and I would anticipate more productive agent locations joining our system over the coming months.

I would anticipate a continued decline in our automotive business and certain other accounts. I also anticipate a decline in business with other transportation companies as their business declines. However, I believe we will offset these declines with new business from increased account penetration, new productive agent locations and continued strength in the heavy haul business.

Considering the economic uncertainty, I would anticipate a lower rate of revenue growth in the 2008 fourth quarter over the 2007 fourth quarter versus what we have experienced through the first nine months of 2008 over the first nine months of 2007. I also would anticipate our 2008 fourth quarter diluted earnings per share to be similar to that of the 2007 fourth quarter. With that I will open it up for questions.

(Operator Instructions) Justin Yagerman, Wachovia Securities.

The first question I guess is pertaining to the guidance. Henry (technical difficulty) is all the disaster relief work that you guys are doing over with and does that guidance include any revenue under those disaster relief contracts that you guys have?

The only contracts we had was with one contract with the State for evacuation services which there is no more revenue to be had under that. There is some sporadic FEMA stuff, but nothing material.

That was just the buses and now that's over and you wouldn't expect much in Q4?

That's correct.

Okay. Then I guess just a second question, when I think about what you said in the third quarter, you obviously put up some pretty impressive numbers in the machinery segment. A lot of that feels like it's been attributable to exports at least from our standpoint. I don't know if you would agree or disagree.

But how is that faring? And I guess could you talk about what you're seeing in October in terms of the other verticals and maybe what those customers are saying or what you're hearing out there in terms of why the economy is taking this next leg down or whatever it feels like it is doing right now?

First of all, as it relates to our business mix, as you well know it's very diversified and it's all about our revenue growth and it's all about product mix. And when you look at our flatbed or heavy haul business, it really is generated through customers that -- some of it is export but a lot of it is not.

Is the pricing still strong on that business?

I'm sorry, what?

Is the pricing still strong on that business?

The pricing is strong because again, it's not -- it has nothing to do -- and I know there's been a lot of discussion on flatbed pricing and how it's going to go down. Again our flatbed pricing is based on this particular type of move that we're doing, the heavy haul move just commands a higher price and I don't anticipate the power generation business to slow down at all.

So I would anticipate that pricing overall would maintain at a level. Now when you talk about steel which we don't do a lot of steel to begin with, I would think yes; you've got some excess capacity. But that's not our niche. We don't do a lot of that.

You said it before but what percent of your revenue is that right now?

It's about 20% is total (multiple speakers) machinery, yes. And that includes the turbines and all that stuff.

Got it. Do you know where most of that stuff is going? Is it mostly export?

Justin, I can tell you that about 15%, about 12 to 17% of what we're hauling ends up going to a port destination in the United States. Whether it's leaving that port or rebuilding that port, I cannot answer that question. The rest of the stuff isn't heading to a port city. It's somewhere within the US.

No, that's helpful. I appreciate it. Thanks guys.

Jon Langenfeld, Robert W. Baird.

Henry, the guidance and kind of what you saw in September and October, not a big surprise given everything we have seen out there. But can you just kind of explain you know how dramatic the drop-off was for you as you saw it happening the end of September?

And then did the deterioration continue and has it continued to date? And how does that play out in terms of guidance? Are you assuming that deterioration continues or that it levels out somewhere?

No, well I've got to make sure I answer your question properly. We are anticipating that there will be no pickup at all in the fourth quarter. I am anticipating a continued decline in the automotive business. I am anticipating a decline in business we do with other third party companies, transportation companies because I believe that their business is going to beat weak.

But offsetting that, I think we have got other niches that we operate in that are I think unique to Landstar that I believe will offset those. Obviously one of the key factors is bringing in some agents and I think the heavy haul business continues which therefore as I said before, I think your pricing from the flatbed side or the unsided side will remain fairly consistent.

So we have seen that continuation through October. But that is what I would see into the month and as I said in my comments, we do believe that we will grow our revenue. It's just that the environment is so unpredictable, we're being a little bit cautious.

That's fair. Talk to me a little bit about the bonus, how that would work. Let's assume next year you have flat earnings. Do bonuses get reset or the expectation, the target for bonuses get reset based on the environment or is it based on the goal of growing the business every year?

Well the goal is always to grow the business every year and when we put together our budget, obviously we have to take into consideration the current environment and that does factor into the budget and therefore as you roll into that budget, your bonus targets or bogeys are set. So coming off a fourth quarter and a weakening economy, you're obviously going to take all of that into consideration.

But we would never put together a plan that we're not growing, number one. Therefore it would always be based on that. As I've said in other conference calls, some of senior executives do not get paid a penny unless you exceed those goals, not only meet those goals but exceed those goals.

Good, good to hear. I didn't catch the cash flow from operations number.

$50 million.

50? 5-0?

Yes, that's for the 39 weeks.

Tom Wadewitz, JPMorgan.

You know if I look away from the screen, I am doing all right. It's depressing to look at the market today. Anyways, what -- I don't know if you were asked this question or not in terms of the breakdown of some of the weakness that you're seeing and the fall-off in September, is there -- you commented on automotive and I guess transport providers but are there other areas where geographically or customer-wise you have seen the fall-off?

Yes, there are certain other customers, I mean housing remains weak. One of our accounts that happens to be a flatbed account was down. The substitute line haul was weak towards the end of the quarter. Don't anticipate any pickup in that in the fourth quarter.

Automotive continued to be down and as I said, it was less than 6% of the quarter. That one account that we always talk about, we still have Jim how many loads in the fourth quarter that (multiple speakers) you've get about 2000 loads in the first quarter that -- versus about 8000 in the third quarter.

So that headwind sort of starts to go away as you turn into 2009. I said this before, I mean how far does the automotive business shrink? But at some point in time, that headwind becomes less for us also.

Those are the major -- I mean it's really the same type of accounts that we've seen all year long. I think the biggest change is the change in business that we're doing with other third party transportation companies and that is just a reflection on how weak their business is.

Right, okay.That makes sense. So when you look out to 2009, I know it's kind of hard to have visibility perhaps (inaudible) fourth quarter. But if you look to 2009, you know what do you think is necessary to I guess to get back into a mode where you're growing earnings or is it a function of it's just weak demand trends make it tough to see earnings up much similar to what you're looking at in fourth quarter?

Well I think you have got some interesting things there. Obviously what I said in my comments, I am not forecasting any pickup in demand in the fourth quarter and I actually see demand being weak going into 2009.

Is there a pickup historically every time we have this type of environment? Well in the back half of 2009 we pick up. It's kind of tough to make those forecasts considering where we are. I think one of the advantages again that we have is the variable cost operating model and some of the businesses that we are in and this is really Landstar specific. I just don't see some of those things going away.

So I think Landstar is going to fare very well. I also think that -- and (inaudible) the first time we've seen in a long time, probably in the last nine months or so you have seen a little pickup in the BCO count. And that is important as I would've thought when things got weak and I've always said this that we should increase that BCO count; didn't see that at the beginning of the year and I was a little bit surprised at that but we're starting to see that in the back half of that year.

So I think that's also something that will help us next year. From a brokerage standpoint, again I think right now we have got 50% of our business is BCO and 38% was brokerage. We're getting a nice balance there. I think in a weak environment, with fuel prices coming down and we might be able -- we should be able to expand margins on our business that is not on that 8812 deal that I always talk about but purely on a margin split basis. We should be able to gain some margin split there.

So I think Landstar's party well-positioned to face the economic crisis. And the key going forward is we've just got to continue to focus on bringing in new business because new business will offset some of declines we might see in other areas.

Right, okay. That makes sense. Your model does well than a lot of models in terms of a period (inaudible). A couple of questions, I think some things you mentioned earlier on the call, I didn't catch the detail. You said through the quarter I think you talked about revenue growth by month. I didn't catch the number in September. I think you said like 13 in July, nine in August and what was the September number ex the bus business?

About 8% -- it was about 8% but we saw a fall-off again toward the back half of that month.

And what does the trend look like in October so far?

It's just a continuation of a trend that we've seen, falling demand on -- we're forecasting additional fall-off from third party providers which is really the biggest change.

You're up year-over-year a couple percent but it's not up as much as (multiple speakers)

Remember my guidance, although not as specific as I usually would give, I am forecasting growth in the fourth quarter. I think as far as the pinpoint, what that would be because we are in I think uncharted waters here and we are entering I think a recessionary environment so we're trying to be a little bit cautious. But again, based on what we currently know, we should have revenue pickup in the quarter.

One last one for you. You spent a little bit of time talking about the revenue per load and why that was up in both with the BCO business and why it was up so significantly with the brokerage business. Can you run through that again? I just didn't catch all the detail on those comments.

The revenue per load for the BCO piece really has to do with revenue mix, not so much change, not so much a pure price increase. There is no fuel component in the BCO piece. When I say revenue mix, it really has the -- it's the heavy haul component which is just a higher revenue per load number.

When I switch to the brokerage piece, the brokerage revenue per load increased. 30% of that was really due to fuel. The balance is really due to a change in mix. You have got more of the heavy haul stuff, if you will, being hauled by brokerage carriers than you had in the prior year so therefore what you had was a little bit more of an increase in that particular arena but those are the two pieces.

But if you -- on the brokerage, if you parsed out the fuel and the mix component, it didn't appear that the base rate you were paying to the carrier was changing much year-over-year.

Jim?

I would expect we're playing slightly more but it's mostly what Henry was talking about, the fuel and (multiple speakers)

My guess is we were paying more in the first part of the quarter you know as flatbed capacity I would say I think has been relatively stable. I think from a van standpoint, I think things might have changed a little bit where towards the back end of the quarter when capacity became a little bit looser, if I could use that term, we probably paid a little bit less.

Great, appreciate the time and the details. Thank you.

Ed Wolfe, Wolfe Research.

Just a follow-up on Tom's question. The 7.6% yield improvement for the BCOs, you said that is mostly mix and there's no fuel in there. How did the mix change so much from second-quarter when it was up half of that?

What was the big change there? And do you think that 7.6 continues or even gets bigger in the fourth quarter if the mix change is less auto and more something?

What was it the second quarter, Jim?

3.9 is what we have year-over-year in the second.

And that was the revenue per load increase, 3.9?

Yes, for BCO's it was (multiple speakers)

When you look at what was hauled, the BCOs in the second and third quarter, my assumption and Jim is looking that up, would be that they hauled more of the heavy haul stuff because the fuel surcharges you well know from the BCO stuff is passed dollar for dollar back to the BCO. So, my assumption is that they hauled more of the heavy haul stuff.

Would you think that assumption would continue? It sounds like you would think that 7.6 will be even higher in the fourth quarter because you'll do -- the heavy haul holds up and the LTL stuff doesn't.

I would hope that the 7.6% holds. It should hold assuming there's no change in mix, all right? And I don't expect that volume to go down so that would be correct. As those volumes go up, you might even see that go even higher.

So let me get it right. Now of that stuff that's moving with the BCOs and that 7.6, you have got the heavy haul which is about one-third of it and then (multiple speakers)

BCo revenue, heavy haul one-third? I don't know if I can make that assumption. Do you have that breakdown?

The question was a third of the (multiple speakers)

For the BCO. It's a third of the flatbed, right?

Overall -- of our overall business, flatbed is about one-third.

Of that one-third, about one-third of that is heavy haul, right?

That's correct (multiple speakers)

So the rest of that business that's not heavy haul, the other two-thirds [of] flatbed is steel and other things?

Well it could be other things. We don't do a lot of steel.

Those other things directionally, are they -- they're becoming a smaller part of the mix it sounds like and they have a lower yield. Is that the (multiple speakers)

No, that's not necessarily true because you get other accounts if you to a -- Jim, go to a flatbed. You've got other accounts that are not -- that are flatbed related that's new revenue for us when I look at some of the accounts that we have brought on. And that's the key to everything is new accounts that you bring on and that has grown overall -- what was the increase on those flat accounts (multiple speakers)

23% on the accounts (multiple speakers) these accounts that we have listed.

Top 100 accounts, it was up 23%?

Yes. The flatbed business was up about 23%.

You have got to look at the diversity of what we're doing, Ed. The problem is to us remember it's a flatbed load. We don't necessarily look to see if it's -- just because it's machinery and equipment doesn't mean it's a BCO. That's also hauled by broker carriers and if I were to run you a list of my customers that are my flatbed customers, for everybody who has had a change in excess of $250,000 third-quarter 2008 to third quarter 2007, you're looking at like 250 customers.

It's very diversified. And it's mixed between whether a BCO hauls it or a broker hauls it but the pricing is relatively similar within those. The only difference is if it's on a BCO the fuel is not in there.

Okay, fair enough. I think we have beat this to a dead horse. I think that will be what it will be. Just shifting gears, Henry, you said a couple times that third party providers, the transport providers business feels pretty dead right now. Is that LTL or is it other things also?

It's other things. I didn't say it was dead. I said it was declining and that is the feeling we get. That is correct.

Can you give us a sense of what makes up when you talk about third party transport providers (multiple speakers)

It could be LTL carriers. It could be truckload carriers, it could be [3PLs].

You gave revenue guidance of something better than zero and less than where it has been the three quarters to date which is 10%. Is the body language right? It's closer to zero than 10 at this point?

Since you can't see me, you don't know my body language and what I was saying was that I think we're trying to be little bit cautious because of the uncertainty as we move into this, what I'm seeing as a recessionary environment. On the other hand, I do think because of what we've got going, there will be revenue increases.

Okay, fair enough. On the hurricane side of things, besides the $0.03 for the buses, another carrier reported recently and said they saw a lot of business to help bring stuff there whether it's for the Red Cross or Home Depot or for FEMA, but not on a contract. Is there a business that was it -- somehow helped you in the brokerage business related to hurricanes but not specifically government kind of stuff?

Less than 1%.

Does that continue on?

We don't see that continuing on.

All right, last question. Any bonus accruals in fourth quarter? What should we expect?

That depends on where we come out.

So in your guidance of 50 -- of flat with year-over-year, is there accruals?

It's going to depend on where the overall year comes out and how that plays out.

By assuming it comes out at $0.54, would there be accruals in it?

Potentially.

David Campbell, Thompson Davis & Co.

I wondered if you could give me the truckload -- the truck brokerage surcharge revenues year-to-year in the third quarter roughly.

I can give you a percentage I think is what we gave you as far as in the revenue per load number, 30% of the increase was the fuel surcharge.

The increase in revenue per load?

That's correct which is really what you're getting at.

The Company seems to have had a decrease in intermodal -- rail intermodal revenues sequentially from the second quarter and I just wondered if -- is that fuel surcharge revenues going down or what is that -- what's the principal reason for that?

Really as I recall the numbers, the actual volumes were down, pricing was up. Volumes were down really to some customer takebacks of certain lines that we were doing again dealing with some of the substitute line haul stuff actually, (inaudible) that we do and one other customer as far as declining volumes. The actual revenue per load I believe was up.

Right, on a seasonal basis, does that intermodal business usually go up from the third to the fourth or does is that usually go down?

It actually usually goes up and that is again what Henry was saying. There's really two main factors. One, we usually see some sort of peak season even though last year it actually (technical difficulty) out a bit. This year we're not seeing one at all as most of the market indicators show.

So traditionally right now we would be scurrying looking for equipment coming off the West Coast. But instead, equipment is very plentiful. So again, we traditionally would have started to see most of our shippers showing strong growth in the third quarter and the other factor again as Henry described is on our substitute line haul.

Some of that moves intermodally and when their business softens up, they start to take away schedules that they don't have to run and the first place those are taken away is on the intermodal side.

Okay, thank you very much.

John Barnes, BB&T Capital Markets.

A couple of things, I jumped on a couple of minutes late. On your guidance, I have heard you say a couple of times that you're expecting some revenue growth. But in the press release, you said you expect fourth quarter earnings to mirror that of fourth quarter a year ago.

You know, is there some cost element that I'm missing there that you're not going to get the flowthrough from revenue down to the bottom line especially -- I also heard your comment about capacity kind of loosening up a little bit. Is there something there I'm missing?

As we have gone through the first three quarters, we have had a change in mix, if you will. I would anticipate some of that mix change to continue so therefore I think from a margin standpoint, you will probably come about the same type of margin differential as from the prior year, if you will. And again, I think my whole guidance for the fourth quarter because of the uncertainty of the environment and the economy, I think we're better of being cautious than anything else.

That's fine. Your comments about being a very attractive recruitment environment on agents and owner-operators, can you give us an idea -- I mean as you go through '09, do you have a targeted number of agent recruitment that you all are shooting for?

It's not so much the number. We have a list but it's really the productivity of a given agent. For example, if I looked at all of my adds in the carrier group this year versus the adds we had last year, although the number of additions are down, the productivity of an agent add in the carrier group for example on revenue per week is double. So that's the type of thing we're trying to put a concentrated effort on is to bring in agents that have an existing book business that have an immediate impact.

All right and as you've gone through that list, your focus has been kind of that million dollar plus agent. Have you culled it down to that point or are there enough of those out there to continue to recruit or are you having to reach a little deeper?

I think there are a lot of agents that are -- we can recruit. I think as you go into an environment that as things becomes weak, people are looking to try to strengthen their business, grow their business and looking for better alternatives. And I think Landstar offers a home to that and we -- our inquiries as far coming into the Landstar system have increased.

It's a lot to get used to at Landstar. But you know I think we're closer to making some moves as I said in the next several months to bring on some agents that I think have some meaningful impact.

Okay, all right. And then lastly on the brokerage side, I think you said earlier capacity had gotten -- you felt like it had gotten a little bit more plentiful. Can you talk a little bit about magnitude? You know, obviously I would imagine it had some positive impact on net revenue margin within the brokerage side. Can you just elaborate on that a little bit, you know what kind of benefit you saw there?

Well I think as I alluded to before, I think one thing you need to structure from -- take away from the Landstar business is when we talk about brokerage and let's talk from the carrier group side, 50% of our brokerage business is on this 8812 split and therefore whatever I pay that carrier, you really don't get the margin benefit. It's on the other 50% that you would get that benefit.

So when you factor that into the whole scheme of Landstar, we pick up some margin points but not to the degree if you were a 100% brokerage. But what we've seen is from the van side especially that it just appears from what we have seen from the brokerage standpoint that there is more capacity out there. I think you're going to see some eventually as I said more carriers exit the marketplace.

O'Malley came up and dropped me off something from Transport Topics that Gainey Corporation filed for bankruptcy, a carrier that does about $400 million and I guess was ranked about 64 (inaudible) Transport Topics. I think you're going to start to see more of that happen as the environment weakens.

And I just again, Landstar has a very strong financial base. I think when carriers and individuals get weaker, I think they're going to look for a home. And they want a home where you've got a strong financial backing and I think that's where Landstar tends to I think grow our business from both agent additions, BCO editions, capacity additions from the brokerage side. In addition to that, as bigger carriers potentially have financial difficulties, I think you just pick up more customers also.

Chris Ceraso, Credit Suisse.

Just two quick ones, then to just to follow up on the last question, do you have a measure on an industry level of how much capacity you saw come back into the market in the van market? Was it up 1, 2, 3%? How would you measure that?

It is just a matter of the trucks that we saw in our own systems that were available, if you will. Pat, do you want to take a stab at that?

We also look at the number of hits to our website that are searching for available loads and that has gone up increasingly. So that I think speaks to the market and demand for capacity and [then] the available capacity that's out there.

I don't know so much if it's capacity coming back onto the market place as it is a decrease in demand and therefore -- I mean you had quite a bit of capacity exit the marketplace in 2007 and early 2008. And then capacity got tight because demand was sort of balanced and things were working very well. But I think you had a fall-off of demand and now I think you have got again a situation where you potentially have some excess capacity that eventually is going to force some more carriers out.

Kind of a similar question -- have you seen any issues with any of your independent contractors with them having difficulty getting credit to buy trucks?

Not aware of any. Our guys again -- I'm not aware of any. Pat, has anything come to you?

No.

No, no.

John Larkin, Stifel Nicolaus.

When I attended the agent convention down in South Beach, I guess that was what, six months ago or so? (multiple speakers) It seemed like your big strategic priority was to try and convince the agents who are in the system currently who seem comfortable selling let's say conventional truckload flatbed to sell the broader product line?

Correct.

I just was wondering if you've made any progress in that regard and if you could talk about some of the initiatives that you have in place to get these folks to be a little more aggressive.

What we have created internally in August of this year, something that we call business unit specialists which are groups of individuals within logistics and the carrier group that specialize in a given mode -- rail, international, warehousing, expedited, and heavy haul. And we have actually had heavy haul for a while. And what we have done is start to roll that out to first our field sales force, our employee sales force where we had meetings in-house here where presentations were given.

And then now the next phase of this whole thing is to roll it out on a more robust basis to individual regional meetings with agents. We have created what I'm going to call a three-tiered pricing structure where for example, if it's an international sell and if we do the operational component in-house, the agent would get one split. If he uses one of our agents that has that capability already, he will split a higher commission rate with that agent who does that operational piece and if he does the operational piece on his own and eventually that's what we want to push to, he gets the full commission split because we're going to try to push this out to everybody.

It really it is getting the agent comfortable in asking for all the different pieces of business. So those are the more recent actions that we have taken on. We have gotten a number of inquiries currently for our carrier group agents from as far as from the intermodal buses we call it. So we will see that develop over the next year.

You think that will have a positive impact on revenue growth rates in 2009 and beyond?

Yes, that's one of our key revenue growth strategies.

And then just one question on the presidential election which looks like it's sort of leaning one way rather than the other currently.

You want to tell me which way that is?

Gee, I will let you guess, Henry. But in any event, it seems to me that there could be some programs that perhaps come out of that election that could benefit you one of which might be the winding down of operations in the Middle East, military operations. Can you talk a little bit about that?

Also maybe an infrastructure rebuilding program, that has been discussed by the Obama campaign and then maybe a real thrust into alternative energy. It seems like perhaps you are more well-positioned than any other carrier to benefit from an Obama presidency. Am I getting that correct?

My political views -- I don't know how to respond that. I think everything you have touched upon is accurate and things that we have talked about. At one point in time, we were not sure what was going to be left over in Iraq or not. And at one point we were going to leave all the stuff there. The latest is that we are going to bring it back.

So, yes. That would clearly I think bring some additional business Landstar's way. I have often talked about rebuilding the infrastructure in the United States. And if in fact that is going to take place, clearly Landstar would play a major part in that from a transportation aspect.

And clearly I think the power generation alternative energy play, quite frankly whoever is President despite the decline in fuel, I just hope we don't lose sight of that. That is an extremely important thing that we do but, yes; guess we would be playing in that too. So yes, we should benefit from all of those things.

Okay, I promise not to call you the Obama carrier, Henry.

Thank you.

Tom Albrecht, Stephens Incorporated.

I wanted to go back to the transport partners because you mentioned I believe that the quarterly revenue growth was about 17% kind of from beginning to end. How much was the change when it was real red hot, the more recent cooling?

I'm not sure I follow the question. Repeat the question, Tom?

I thought I heard a figure of your revenue growth from transportation partners was 17%. (multiple speakers)

Are you talking brokerage?

Well I'm not sure. I thought I heard you describe that your revenue growth was in the transportation partners segment?

I've got you. Third party transportation providers. Yes, that was up 17% quarter over quarter, yes.

But you've also indicated that is where you have seen some real slowing. 17% is a good number so I'm wondering what it was maybe early in the quarter and where it has been more recently because that is still a healthy number.

The breakdown on that particular number in front of me as far as what was in July and August, but I will tell you -- I mean if you look at June and July, that was a pretty healthy number and we grew July 13%. We sort of tailed off a little bit in September on that number and I just -- when I listen to and see what other people are saying, it is logic to me that their need to go to a third party provider i.e. Landstar to provide capacity probably will diminish. Obviously if that doesn't happen, obviously my assumption is wrong.

Okay, well refresh my memory then. Do you have what the second quarter revenue growth was with your transportation partners?

Yes I do. I do but I have to look it up. Just hold on one second.

Let me go ahead with my other question. Maybe Jim wants to take a stab while you are looking at it. One of the great things that happened to you guys last downturn was how you unleashed the power of your brokerage business. It's sort of been this little side business that you're really focused on and so you had tremendous revenue growth through last downturn that continued for several years.

That doesn't seem to be the case anymore. I'm wondering if that is in your opinion because so many carriers and other companies have started brokerage operations if your ability to really grow through a downturn in the brokerage arena has been impacted by the population of the number of brokers.

Clearly the fact that you have got more people in the brokerage arena is going to impact that. That's logical. And by the way the other number was what, 19% in the second quarter? (multiple speakers) second quarter over second quarter (inaudible) was 19% on your previous question, Tom.

Okay, thanks.

But getting back to your other question, yes. I think it's logical that as more providers come in using brokerage, there should be -- they're all competing for the same carrier. One of the advantages I think that we have had is that because we also have BCO's and we also provide capacity to those people who are looking for carriers.

So in essence it has the effect of increasing our business. And that is what we have seen if you will, through the first couple of months this year. As more of these companies get into brokerage, we're one of the providers that they utilize and that is how we have been able to grow some of that stuff. Pat, you want to add anything to that?

I don't know. I think you ran out of money.

Does that answer your question, Tom?

Yes, it does. I mean I'm thinking about a lot of things related to that. But last question is just a number question. Normally you have a rate per mile that you give verbally. Do you have that? And if so, do you have it broken out between dry and flatbed?

You have got that don't you?

I do. The rate per mile on the flats is up 19%. The rate per mile on van is up 6%.

Do you have the actual number? I just kind of have miscellaneous stats in my model.

Yes, I have got it. I've got -- pardon me Jim if this is wrong. I have got 23.07 for platform -- this is revenue, you want the rate per mile.

Yes.

293 versus 242 for platform and van was 196 versus 183.

So that 293 -- that's a huge increase. That is the base rate ex fuel?

No, that has a component of brokerage in it. That rate is (multiple speakers)

That's right. Okay, guys. Thanks. I appreciate the numbers and the discussion.

Todd Fowler, KeyBanc Capital Markets.

Henry, if you could, can you talk a little bit about the share buyback program? It looks like you were a little bit more aggressive in buying backstock in September and I know or at least I think I know how you feel about the balance sheet and leverage. But it looks like you took on a little bit of leverage to do that. So with the stock at these levels and with the balance sheet capacity that you have, can you talk a little bit about what the Board's opinion or the Board's thoughts are in executing the share buybacks with the stock where it is?

I don't want to answer that question. I think we have been aggressive in the past and opportunistic in the past when the stock is at certain levels. And I would see no reason why we wouldn't be the same. We obviously have the financial wherewithal to do all of that. So I think that answers your question.

Yes, I mean I guess is there any kind of balance sheet point that you look at as far as how much leverage you would be willing to take on? Or is it more balanced by the share price?

I know it's a different environment and we would look at where we are from a financial condition standpoint. But I'm never worried about that. We can clearly handle a lot more leverage but we will take a look at that.

Okay, good. That does answer the question, I appreciate that. And then not to spend too much time on some of the statistics now that we have, but if you're looking at the load count in the carrier groups, looking at BCO loads versus broker loads, it looks like BCO loads were down about 2% and then carrier loads were down about 4% just on a year-over-year basis in the third quarter.

Is there anything to read into that? I mean why -- the year-over-year change with brokers would be down more than what the BCOs are. Is it the BCO freight is more stable and the carrier freight is more spot and so when the environment is softer, those are going to be the first loads that you don't see in the system? Or is there anything to think about with those sorts of statistics or am I reading too much into some numbers that we have now?

No, you're reading too much into it because (multiple speakers) I'm being honest with you. The real -- the only -- you've got ups and downs in a lot of different things. But if I had to make a general comment, the reason both are down is the large decline in the number of loads from the automotive sector and the one other account which the automotive sector load decline was 15,000 loads in the third quarter versus the third quarter of this year and then the one account that we always talk about, that was another 8500 loads.

So you're talking 23,000 loads between just one sector as far as a decline and that was spread between both BCO and brokerage and if it's 4% brokerage, it probably was more geared towards that. Those were the big areas where we had declines.

And then just to understand, the one customer that you're no longer doing business with, you anniversary that in the fourth quarter so that headwind will subside. And when do you really think or when do you really start to see -- I mean I think if I remember correctly, at the beginning of the year automotive was 8 or 9%. So as we get into next year, do the load count comparisons start to anniversary some of the softness in the automotive and a loss of this one customer?

Yes, I mean if you look at what we did this year -- if you look at '07, just run some numbers out, you had 48,000 loads in '07 in the first quarter, you had about 52,000 in the second quarter (multiple speakers)

These are all automotive loads?

These are all automotive. 45,000 in the third quarter of '07, 47,000 in '07 fourth quarter. In '08 it was 43,000, then 40,000 then 30,000 and I would expect a similar decline in the fourth quarter and you know at certain points in time, I would think things get to level off. And when you think about what I said before, automotive is now -- in the third quarter was less than 6% of our total revenue. Again, people who are familiar with Landstar are going back in our history, way back as much as 15% at one point in time. So again, not all bad as far as getting a little bit more diversified from that segment.

That's good color and that is helpful. And I have heard you say that hey, the lowest it can go I guess is zero. So with -- and this is just a follow-up on Tom's question how much was or what percentage of revenue was other transportation companies, third party transportation companies in the quarter?

Approximately 20%.

What do you think it was maybe in the year-ago quarter and in the second quarter?

I do have that (inaudible) it was about the same in all three.

Okay, good. Thanks a lot for the time guys. We will talk to you soon.

Thank you. Due to time restraint, I will now turn it back over to you sir for closing comments.

Thanks Terry. Jim, you got any closing thing (inaudible) closing comments?

Obviously the economy the way it is and the financial and the availability of credit and the current environment we're dealing with is causing difficulties for a lot of companies out there. But with all that, looking forward I still think that Landstar is well-positioned and always has been in this kind of environment.

The fundamentals hold together and the model protects itself in environments like this. I'm always excited to move forward and I think we had a great quarter.

Pat, do have anything you want to say?

No thank you Henry.

All right, well look. I just want to thank everybody for dialing in. I'll leave you with one thought that I think Jim has already reiterated. As we move into the fourth quarter albeit uncertain and being a little bit cautious, we are pretty positive as far as how Landstar performs in any economic environment and we will have an update for you on December 5 on our 2008 fourth quarter mid-quarter update call. So thank you. Have a good afternoon and good evening.

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