Landstar System Inc (LSTR) 2008 Q4 法說會逐字稿

Good afternoon and welcome to Landstar System Inc.'s year-end 2008 earnings release conference call. (Operator Instructions). 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.

Good afternoon and welcome to the Landstar 2008 fourth quarter and year-end earnings conference call. This conference call will be limited to no more than one hour. Again, please limit your questions to no more than two questions each when the question-and-answer period begins.

But before we begin, 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 the other members of Landstar's management and may make certain statements containing forward-looking statements, such statements 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.

As I did in the 2008 fourth quarter mid quarter update call, I'm going to divide this conference call into three segments. First, a recap of the 2008 fiscal year. Secondly, some detail on what occurred in the 2008 fourth quarter. And thirdly, what we see and what we anticipate seeing in 2009.

2008 was a very volatile year to say the least. Some of what I'm going to say is somewhat repetitive of what I said on the fourth quarter mid quarter update call, but I think it is important to understand the trends.

At the beginning of 2008 the market had excess capacity. There was low freight demand, downward pressure on price, and escalating fuel prices. As a result, many small carriers and single owner operators went out of business, and many large carriers permanently reduced the size of their company iron fleet.

Demand started to improve in the second quarter, and pricing seemed to have stabilized. Fuel prices continue to escalate. In the third quarter the freight environment began to reverse itself yet again. Towards the end of the third quarter demand slowed. There was again downward pressure on price. Capacity began to loosen, and fuel prices began to dramatically decline.

Freight demand continued to decline in the 2008 fourth quarter, and was at its lowest levels of the year in December 2008. December 2008 revenue was 19% below revenue generated in the December 2007. Although I anticipated a continued decline in freight demand in December, the volume fall off was far worse than anticipated.

The year ended with excess capacity in the market, low freight demand, downward pressure on price, and lower fuel prices. Overall Landstar's revenue for fiscal 2008 was $2.6 billion, up 6% from 2007. And 2008 diluted earnings per share was $2.10 versus $1.99 in 2007.

Landstar's impressive annual results were despite a dramatic decline in all automotive related freighted hauls, which was down 20% year-over-year, and an overall decline in the fourth quarter revenue.

Landstar finished the year with 484 agents who generated over $1 million in Landstar revenue versus 495 in 2007. The decline of 11 agents, who did in excess of $1 million in Landstar revenue, was largely due to the automotive and fourth quarter revenue decline. It should be noted, however, in that in 2008 there were 92 agent locations who generated between $750,000 and $999,000 in Landstar revenue versus 61 in 2007.

Overall Landstar had [1,073] agent locations open in both 2007 and 2008. Revenue at these locations increased approximately 5% year-over-year.

In the 2008 fourth quarter we saw a continued decline in demand, which resulted in a 6% decline in consolidated revenue. In the fourth quarter automotive related revenue and substitute line haul revenue declined quarter over quarter by 14% and 21%, respectively.

Revenue hauled by BCOs was down 7%. Revenue hauled by broker carriers was down 3%. And revenue hauled through rail intermodal carriers was down 30%. The intermodal revenue decline was largely due to the shortfall in substitute line haul service revenue previously mentioned.

From a macroperspective, the ISM Index fell in every month of the fourth quarter, with December at the lowest level since June of 1980. Housing trends continued its downward trend and unemployment continued to rise. It is not a pretty picture, and it is the worst freight environment I have seen.

Despite all of this, Landstar's fourth quarter diluted earnings per share was $0.47 per share, and within our December mid quarter update revised earnings guidance.

As demonstrated from these results, our P&L is somewhat insulated from the effects of the recession due to variable cost business model. Let me highlight a view operating statistics of the quarter.

Our agent locations base was up by 25 locations from the end of the 2008 third quarter. Trucks supplied by BCOs increased 90 from the end of the third quarter. And our approved broker carrier capacity increased by [651] carriers from the end of the third quarter.

As others struggle to survive, Landstar views the current environment as opportunity. It is a time when Landstar should increase its productive agent base and third-party capacity base. As an example, 18 of the new agents added in the fourth quarter alone have an annual revenue runrate of approximately $1 million or more each.

We continue to have a robust agent pipeline, and it is as strong as I have ever seen it. I expect Landstar to continue to add productive agents throughout 2009.

Although the current operating environment over the next number of months might be uncertain, Landstar will be creating the foundation for future growth by adding new agents.

From a profit and loss standpoint, it is all about our business model. In order to supplement our variable cost operating model in these recessionary times, Landstar has instituted a salaried employee headcount freeze. In addition we have also made certain other 2009 cost cuts in non personnel areas.

Let me talk about our balance sheet for a moment. Our balance sheet and cash flow remains strong. We ended the year with $122 million in cash and marketable securities, an increase of $19 million from the end of the 2008 third quarter.

In addition, we reduced long-term debt, including current maturities, by approximately $21 million from the end of the 2008 third quarter. We also purchased $23 million of our stock in the fourth quarter. In short, Landstar's financial position remains very, very strong.

Let me spend a few moments on 2009. As we move into 2009, I see more capacity exiting the marketplace. Although there might have been a temporary lull in capacity exiting the marketplace because of lower fuel prices, eventually the lack of demand will overtake the benefit of lower fuel prices and force additional capacity out of the marketplace.

The overall month over month volume declines experienced in December of 2008 versus December of 2007 have continued through the first several weeks of January 2009 over January 2008, and we're not projecting any change in business levels in the short term.

However, as new agents are assimilated into our system, and as new customers look for a financially sound partner, we should be able to offset some of the volume shortfalls in existing accounts with new revenue. Visibility, however, is very clouded. As such, I will not provide any 2009 revenue and earnings guidance at this time.

However, as an example of how Landstar's variable cost business model would react under certain negative assumptions, I will offer the following. Given a range of breakeven revenue to a decline of 20% in annual revenue, Landstar's diluted earnings per share for the year should be in a range of $1.65 to $2.12.

This in no way should be interpreted as guidance or a prediction. But what it demonstrates is how the Landstar business model would perform under various levels of revenue shortfalls. More importantly, it demonstrates how our earnings are somewhat insulated from the effects of the recession. The takeaway here is that no one is recession proof, but Landstar's business model is very self-protecting.

In summary, as a result of Landstar's variable cost business model and its strong financial position, Landstar should emerge from this very weak freight environment in a much better position than its competitors, with more agents, more market share, and more capacity.

With that, I'm going to turn it over to Jim for his financial review.

Henry has already discussed revenue for the 2008 fourth quarter. I will cover various other financial information included in our fourth quarter release.

Investment income was approximately $653,000 in the 2008 quarter compared to $1.2 million in the 2007 period. The $600,000 decrease in investment income was attributable to a lower rate of return due to lower interest rates on investments held by the Insurance segment during the 2008 fourth quarter.

Purchased transportation was 76.2% of revenue in the 2008 fourth quarter compared to 76.1% in the 2007 fourth quarter. The increase in purchased transportation as a percentage of revenue was due to increased ocean revenue, which has a higher cost of purchased transportation.

Commissions to agents were 8.1% of revenue in both the 2008 and 2007 periods. Other operating costs were 1.2% of revenue in both the 2008 and 2007 periods.

Insurance and claims costs were 1.5% of revenue in the 2008 fourth quarter compared to 1.7% in the 2007 quarter. The decrease in insurance and claims as a percent of revenue was primarily attributable to decreased frequency and severity of accidents in the 2008 fourth quarter compared to the 2007 fourth quarter.

Selling, general and administrative costs were 5.3% of revenue in the 2008 quarter compared to 4.7% of revenue in the 2007 quarter. The increase in selling, general and administrative costs as a percent of revenue was attributable to the effect of lower revenue in the 2008 fourth quarter, an increased provision for customer bad debts, and an increased provision for bonuses under the Company's management incentive program.

Depreciation and amortization was 0.9% of revenue in the 2008 quarter compared to 0.8% in the 2007 quarter. This increase was primarily due to increased appreciation for Company provided trailer equipment.

Interest and debt expense was approximately $1.7 million in the 2008 quarter compared to $2.2 million in the 2007 quarter. The decrease in interest expense was primarily attributable to a decrease in interest rates on borrowings outstanding under the Company's senior credit facility.

The overall effective income tax rate was 37.3% in the 2008 quarter compared to 37.5% in the 2007 quarter. Operating margin for the 2008 fourth quarter was 6.8% compared with 7.6% in the 2007 fourth quarter. The decrease in operating margin was primarily attributable to the effect of lower revenue and an increase in selling, general and administrative costs, as previously discussed.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $122 million and long-term debt, including current maturities, of $136 million.

During the fourth quarter we purchased approximately 724,000 shares of common stock at a cost of $23.1 million, bringing the total number of common shares purchased in 2008 to approximately 1.3 million shares at a total cost of $51.6 million.

Landstar's Board of Directors authorized the purchase of an additional 1,569,000 shares of its common stock. The Company is currently authorized to purchase up to an additional 3 million shares of common stock under its was recently authorized share purchase program.

Shareholders equity represents 65% of total capitalization at the end of 2008. 2008 return on equity remains high at 48%. Back to you.

Sherry, what we will do is we will open it up for our questions at this time.

(Operator Instructions). Jon Langenfeld, Robert W. Baird.

(inaudible) cost actions you are taking and talk about how you're approaching them. And are there certain tiers you're looking at that if things don't develop, you will intensify the cost actions, or are these cost actions thought to be pretty defined out here for the next several months?

We have taken some pretty defined cost actions. Obviously, we issued -- instituted a salaried employee headcount freeze. We have taken a look at various things that Landstar does as it relates to employees, agents, BCOs, third-party capacity, and we have scaled that back. We think we're in pretty good position as we move into 2009. That is not to say if there's something that gets worse, if you will, there are other actions obviously we can take.

But you are essentially saying that you think you can grow, or you think you can moderate your expenses with some revenue levels, and essentially held margins roughly flat. That kind of what you are implying by your stated range of outcomes.

That is correct. I think it is very difficult under this environment to predict what is going to happen; and therefore, we're not going to provide any revenue guidance. But what -- if you look at Landstar from a macroperspective, considering our variable cost model and certain other things that we can do, given that set of assumptions of a flat revenue year to minus 20%, those are the ranges of EPS numbers you would be looking at. And I think the takeaway there is we're pretty well insulated from a lot of different things that occur.

What is the magnitude of the cost actions that have been taken?

Around $2.5 million, $3 million at this point in time.

Would the bonus -- the bonus accrual you had this year was like $5 million in total?

Jim?

No, it was slightly higher. It was approximately $7 million.

Where did that fall in terms of cost initiatives? Is there a bonus paid out if you don't grow earnings next year?

At a $2.10 level there would be a slight payment, but most of it would be not paid.

Justin Yagerman, Wachovia.

I wanted to get a sense on a few different things. On the pricing side, if you guys could go into a bit more detail on what you saw during the quarter, how that progressed on a month-to-month basis, and what it is feeling like in January.

Then I wanted to get into a little bit of what you are expecting from any kind of bid packages that are out there that you are participating in?

Let me give you a general comment as far as what we saw. The pricing, if you will -- and I will talk to the Carrier Group side -- if you went month-to-month there was a gradual decline in the increase. So the rate of increase decelerated, using your terms. And Jim, do you have -- is that --?

Yes, for example, if you look on a rate per mile on our typical truckload business, for the quarter we were up 6% over prior year's fourth quarter. But in December it was down to 1% growth. So there was a little softening in pricing coming into -- as we ended the year.

But it stayed positive throughout the quarter, even on a monthly basis?

Yes. As I said, December was 1%.

And coming into January, Jim, do you have what that number looks like right now?

I think it has weakened a little bit more. And I think more so on the demand side than the flatbed side.

Then as you are participating in these bid packages, do you have a sense of whether or not you're going to be able to hold rates positive year-over-year as we move through the first-half here?

Pat, you want to take a stab at that?

There has been a dramatic increase in bid activity. And obviously that bid activity isn't complete yet. Clearly we are attacking the marketplace in pricing to try and get the business, sensitive of course to our model. But there's a lot of bid activity out there.

Henry, you mentioned that things are holding up a little bit better in flatbed. That has been a bright spot for you guys throughout this whole economic downturn. Can you talk a little bit about what you're seeing in that market in the heavy haul business? And has that moderated just at a slower pace, or is that still moving along pretty robustly, and what your expectations are there?

My expectations on that, it is like everything else, it is moderated. If you take a look at GE, for example, they have cut back some things. And I would expect cut backs in a lot of other areas. I think you're going to see moderation from that also.

Got it.

Justin, we have got to go to the next question, because last time we had somebody who -- a couple who got cut off.

No worries. Thanks for the time guys. I appreciate it. I will catch up with you off-line.

It is in the Q.

Chris Ceraso, Credit Suisse.

I'm having a tough time assimilating this level of variability in earnings, having looked at companies with a lot more operating leverage than this. Is there any differences in the mix of business, so if the composition of that 20% revenue decline is one type of business versus another, do you still have that same level of stability in earnings?

Yes, again, you need to be careful. That was not meant to be any sort of indication of any outcome of the year. It was an indication to try to show how our model works.

And when you think about our business model, you've got about 55% of our revenue is generated through BCOs. That is a straight variable cost type operation. If I don't have $1 of revenue, I don't have like 83% of the cost.

From a brokerage standpoint, obviously with loose capacity, and Jim can talk about that, we gained margin in the quarter from brokerage. Brokerage actually declined less than our BCO revenue.

And I guess what I'm saying, is given a relatively stable environment, where the same percentages are generated, it is just a matter of what revenue level do you want to pick, that is what is our earnings would be. I think considering the recessionary environment, it is just trying to show the variability of our model and how it works, and that fact that we generate that type of earnings under the most -- like a large decline like 20%, for example.

Is that just as true in the short run, say over a quarter, as it is over the space of a year?

Well, a quarter generally would be the same. Yes, I would say that would be accurate. Correct.

Can you just quantify the fuel impact on the top line and on the operating profit line?

Fuel, as I recall, had a $3 million revenue shortfall on the top line and from a P&L standpoint, Jim? It was not material, was it?

No.

It wasn't material.

Tom Wadewitz, JPMorgan.

I don't know if you went through this already, but did you -- you talked a little bit about pricing through the quarter. Did you talk about the load progression through the quarter by month?

The load volume obviously decreased also. I think the biggest declines I mentioned -- when you look at automotive, and you look at the substitute line haul. As you recall, all of 2008 what you had was around about 20% decline in automotive volume each quarter over quarter. But you really had that offset to a large degree by some substitute line haul stuff.

Well, the substitute line haul business basically dried up in the fourth quarter. And so now you had those declines both hitting in the fourth quarter, and that is really what drove the volume decline.

Now you've got to remember on the substitute line haul business, where we lose some revenue, because it is such a very low margin business, that we actually gain margin back.

But did -- what I meant was if you look at October, November, December, can you give us total load numbers year-over-year what they looked like, or if you wanted to look at BCO and give us those numbers?

Just total loads was primarily a truckload business. You were running -- December was about 15% off compared to prior year. If you were to look at October it was leading negative. Maybe you are talking about 2% to 3%.

But you probably went 2% to 3% October to 6%, 7% November. And its [fighting] a 15% in the last four weeks of December on load volumes. That is primarily your truckload business. I mean, rail was off -- and the other stuff was off, and that is really the guts of it.

I guess the second one, just fourth quarter you showed some, I guess, some operating leverage. Obviously revenue were up, whatever 6%, and the operating income was off harder. I think it sounds like that is primarily the increased bonus accrual. But are there -- is that something that you put it off in 2009 and you don't pay it, and so then you can show better cost control?

But then you come back in 2010, and that will be another headwind that will hurt you. So you have margin compression again in 2010. How should we look about how the margins might work the next two years on what you do on the cost side?

Two things. This Company has always operated on the fact that you perform, you get paid some bonuses. It is not like these things are entitlements. So the budget was put together. You hit the budget, or the predetermined targets, and you get a bonus payment. If you don't, you don't get that payment. That ties to the long-standing variable cost business model that Landstar operates.

As far as the bonus piece, I don't -- that is in and out, and you can call it headwinds in 2010 if there is no payment, or what not, but I call the way to manage the business. Because you could get paid for rewarding people.

And recognizing it is a difficult environment, we have taken appropriate actions we think that will stabilize those margins. We have taken out some hard costs, if you will. And there's other things we can take. I think if you look at what occurred in the quarter, as Jim mentioned, you had an increase provision for doubtful accounts. Obviously in this environment you have got to look at that a little bit more careful.

And we are -- the model is going to perform, as I said before, very well in this environment. I don't have fixed cost to carry, and that is really the issue that other people have.

Are some of the other costs that you're taking out, perhaps those don't come back as readily in 2010?

I think -- I tell you, as you go through any cycle and things are operating very well, you start to maybe add some costs here and add some costs here. It is times like this that you reevaluate do you really need to do this. And those are the things that we have taken out. So I would suspect they would not come back.

Todd Fowler, KeyBanc Capital Markets.

Henry, can you talk about some of the other end markets where you have some exposure? I think that earlier in the year some of the wind movements, alternative energy were doing well. Can you talk about what happened to those markets during the fourth quarter?

And then also, one of my favorite terms recently has been all these shovel ready projects. Understanding that there is a lot of stimulus coming into the economy, your freight -- or your equipment profile certainly lends itself to doing some business in that area. Is there anything you guys are doing internally to position the Company or position your agents to have a leg up on some of the activity that is coming through?

Let me answer your first question, and then, Pat, if you want to take a shot at the second question.

That was all one question.

I'm sorry what?

That was all one question. I'm saving one more (multiple speakers).

The wind generation, power generation business slowed throughout the quarter. December was extremely slow. I expect that to continue to be slow. I don't think there is as much emphasis currently on that type of stuff. I think the current administration, when they start focusing on alternative energy and what not, I think that focus will be back. When that comes back, I don't know.

You mentioned the stimulus package. I think -- and Pat can answer that -- but I think we're ready and prepared to assist in that. We think we will participate to some degree. At what point in time, even does the general economy get jump started based on whatever -- what this administration is going to do -- I don't know, Pat, do you want to --?

Kind of going back to what Justin had mentioned, about bid activity, we have seen bid activity in the first part of 2009 up considerably. When you -- conversely, if you look at the fourth quarter in 2008, we historically through the year have been running significantly ahead of 2007 in terms of bid activity. This is for heavy haul specific business.

And then in December was the first month that we actually did fewer bids than we did in the previous year. So you saw some significant drop-off in bid activity in December of 2008. And now as we enter 2009, the bid activity is up again over 2008 number.

You don't know is that is people looking for price, or people's anticipation of the spring thaw and construction projects, or if it has anything to do with the stimulus package that is kind of working its way through Washington. But that is some of the ways that we look at the prospects on the heavy haul business.

Good. That is actually very helpful. Just for the follow-up here, Henry, I think you talked about you are bringing on agents here. I think you said during the fourth quarter there were 18 agents that came on. Each is selling kind of book of business that they were going to be 1 million agents. Did I understand that correctly?

What should we expect from those -- or along those same sort of lines, as we get into the first quarter do you have -- is the pipeline with agents that strong where you have agents that can jump on, and these agents are built out and they're going to be revenue producers day one when they sign up?

Yes, and that is what is exciting about what we see currently. Those 18 agents have, as I said, an annual runrate of $1 million at the get go. It is really just a matter of -- I mean, these people have been signed on when they assimilate into the Landstar System, and it gets to the pipeline, the pipeline is pretty robust, as I said in my comments. That is important part. We've got discussions on agents coming on board just about every day.

It is the environment that is right for Landstar to grow its small-business. And if you go back to Landstar's roots, it is a small-business Company. And small businesses are having problems. We're bringing on more capacity, and we're bringing on more agents.

Now the automotive industry is tough. Those loads are going to be -- continue to go down. I talked last year about automotive going down 20% to 25% a quarter, how low could it go? Well, probably going to go a little bit lower, all right. But that is okay because what we're going to do is we're offsetting that with additional agents.

So we are excited about the fact that we've got great business opportunity. Obviously we can't control the economy. The economy is going to do what the economy is going to do. But we need to continue to be focused on bringing in opportunity. And that is what we're doing.

Those agents, their book of business was $1 million, or those are going to be $1 million agents for the Company?

The book of business coming on was $1 million or more for each one of those. And we would anticipate those to be our new $1 million agents. Talk about the $1 million agents, even though we had that decline -- I hope everybody caught that -- we had a very big number of agents that was just below the threshold -- 31 more than were below the threshold last year. And really where they got knocked out of the box was in the fourth quarter.

David Campbell, Thompson Davis & Co.

Henry, this is David Campbell. I wanted to ask you about the new agents. I mean, you added significant numbers of new agents during the course of 2008, but by the end of the year it wasn't enough to offset the economic problems. That could happen again in 2009, I assume.

I think anything is possible. I think if you looked at our agent heads through the first nine months, I think what you saw in the fourth quarter was a big ramp up, and big ramp up of productive agents. So they have yet to be assimilated.

I can't predict where the economy is going to go. And therefore I don't know where that interplay going to go. So that is hard to say. We know we have a lot of agents that are in the pipeline. We have assimilated a bunch now. The fourth quarter was very good. And then the time for us to bring those on is right now.

The second question is, do you think brokerage revenues would perform better than the BCOs in 2009 -- that is, the decrease would be less if that would continue?.

Hard to say. Most people have the opinion that brokers' revenue would decline more, but as you saw in the fourth quarter, it was the BCO revenue that declined more.

It is like anything else, I want to make sure we satisfy the customer. And certain customers want BCOs only. So I don't have any preference. I could say that, yes, the BCOs would decline at a lower rate, but the fourth quarter proves exactly the opposite of that. Again, as long as I am satisfying the customer, that is hard to predict.

John Larkin, Stifel Nicolaus.

A lot of companies have put their share repurchase program on hold, given the instability in the credit markets, the uncertainty about the economy, etc. What is your philosophy on that?

We have been pretty -- in the fourth quarter we were, I like to say, we used a scalpel approach, and were a little bit more surgical as far as when we bought stock back.

On the other hand, we have generated a bunch of cash. We have a bunch of cash sitting on the balance sheet. I'm confident in our ability to generate cash. We have a new credit facility, as you might -- I think you know -- that we entered into just before a lot of the stuff occurred back in May, so we have got a lot of liquidity. We're in very good financial shape. We're not afraid to buy the stock back. And at the right time, I think we can be very aggressive.

Then I guess my second question is, you talked a lot about about new agents and the 18 guys that have $1 million book of business coming on stream. But isn't the real leverage in getting some of the more comfortable older agents that are selling maybe just one line of owner-operator flatbed type business to branch out and sell the broad range of products? How much progress are you making there?

Absolutely correct, and that is a major impetus. As I look at our revenue strategy is clearly to bring on new agents, and basically go to our existing account base and try to get further penetration of bringing on other types of revenue that we didn't ask for in the past.

We're fully staffed in these businesses -- you know, specialists. Jim, maybe you want to talk a little bit about progress that is being made in those business unit specialists, which I think really is what John is after.

There's been a lot of progress made ever since we launched this in the middle of the third quarter. We are seeing more and more interest as our field organization and our agent family get more comfortable in our strategy to sell a broad base of services to our existing client base.

And we are seeing more and more of the agents on the Carrier Group side of the house starting to participate mostly on the intermodal side, but more and more on the international side. And it is something that we are strongly emphasizing throughout the entire organization. As we start giving some overall traction there, you'll see that start to accelerate as we move forward.

And it actually helps us as well from an agent recruiting standpoint, because that is one of the sales that we bring to the new agent coming on is the fact better ability to diversify their business. And it has helped from a recruiting standpoint.

Especially in this market, as you talked about, from an agent recruiting standpoint, you are saying not only other agency-based networks that are saying to falter so those agents are looking for new homes, but also stand-alone businesses on the sub-broker side -- the intermodal side and the forwarding side all look for ways to accelerate their business growth and also diversify their business. And we give them a home to be able to do that.

Ed Wolfe, Wolfe Research.

This is [Michael Buraski] in for Ed. I apologize for that a little earlier. A quick question. Just the improved profitability on the Insurance segment. I think you may have touched on that, but can you go over that once more?

Jim?

It is all tied to claim frequency and severity. It is just related to the accident frequency that happens at the Transportation and Logistics segment. And it is all tied into the business model. We had -- I think (inaudible) was frequency and severity, lower this year than last year.

So notwithstanding the reduced kind of volume environment, it was all. Okay, got you. Then on the mix impact, just changing your business, talk about the variable costs model. Is there any mix impact as you start growing out some of the air and ocean operations with respect to the variable cost model?

Really not. I mean because, again, that is all a matter if I don't have revenue, I don't have cost. You've got different margins in each of those businesses, so as they become more impactful, they become a little bit -- they play in that. But I don't see any major impact on that mix, unless you guys got any comments on that.

No.

Then just real quick, the pace of the share repurchases, I think you touched upon it. You may be able to get a little bit more aggressive throughout the year. But in this kind of environment, this kind of credit environment, did your outlook change or any expectations for '09?

No, as I said before, I personally -- we were cautious in the fourth quarter. I think we have demonstrated that we generate cash. We're comfortable with our liquidity. We've got a lot of cash on the balance sheet. I would think we could be very aggressive.

Justin Yagerman, Wachovia.

I wanted to get a sense, if there was any -- is there any FAA revenue in the quarter, or was there anything left over from any of the hurricane activity or cleanup that you guys were doing?

No.

Has there been any indication -- I know you touched upon it -- with all the infrastructure stuff that is talked about, are there government bids out there that you guys feel like you have an inside track on? You have involved in those kind of things before in the past. Is any of that stimulus or infrastructure legislation or spend manifesting yet, or are you still waiting to hear about any of that stuff?

This is Pat. There is no specific government bids out on the stimulus package. As I mentioned when I was answering Todd's question, one of the things that you can kind of look to with the heavy haul business is the number of quotes that you were doing. How many people are calling in and saying you want to quote on business. And that can be -- I mentioned the fourth quarter, specifically December, where it was down for the first time year-over-year.

In January we have seen bids up in a year-over-year comparison. We don't know if that is price shopping, if that is -- with the spring coming there is going to be building, or if it is in anticipation of some of this stimulus money coming out of Washington. I really couldn't tell you. But there is no specific government contract that we're bidding on directly related to the stimulus package.

Jim, you mentioned the provisions for doubtful accounts. Where do you feel like we are in that cycle right now? Do you think that you guys have taken accruals in fourth quarter and that that is kind of the runrate of where we are going to be? Do you anticipate needing to hike that up as we go through 2009 potentially? And where does that show up in the P&L? Is that a --?

We don't anticipate having to hike it up. But the runrate is probably consistent with where we were in the fourth quarter.

And that is in SG&A or --?

That is in SG&A.

John Larkin, Stifel Nicolaus.

Thinking about your line haul substitution business, I had a couple of questions, which hopefully will only count for one. If in fact the largest of the LTL carriers were to run into some severe problems, and either downsized dramatically or ceased to operate, it would seem to me that, given that they have 20% to 25% market share that that could create tremendous opportunities. Are you all developing contingency plans to help out with that if that possibility were to become reality?

That is a good observation. And obviously many of the LTL companies that we're working with are developing their own contingency plans in case the advent that were to happen. If that were to happen they would obviously see an increase in tonnage, which would increase the number of line hauls scheduled. And I think we would obviously benefit from that.

The second part of question number one is the UPS volume. Traditionally there was a big surge of holiday shopping related package volume. Is Landstar still participating in that?

Yes.

How did that shape up versus past years?

Is that your second question?

No, that is the second part of the first question.

I have got UPS stuff flat is what I got.

Year-over-year? okay. And then just lastly, the new agents and the new incremental BCOs, there are quite a few that have been added sequentially from the third quarter into the fourth quarter. Where as a general rule are they coming from? Are they independent agents; are they former salesmen; are they people who are affiliated with another organization? (multiple speakers). Actually it is a two-pronged question. Where are the agents coming from, and then where are the BCOs coming from?

The BCOs are basically owner-operators that have been paid a mileage basis -- more than likely with some company -- iron company that is just struggling, so therefore they're looking to Landstar. And that is in general -- a general comment, because we get them from all over.

From an agent standpoint, boy I tell you, we're getting -- I don't want to mention company specific, but we're getting inquiries from a lot of different companies that people are agents for, which is a high volume. That is why when I talk about runrates, that is what is happening. And I don't want to mention names.

Are these domestic truckload-based companies or are they also people that have say intermodal books of business or LTL books of business or even ocean and airfreight forwarding businesses?

I think all of the above.

Very interesting. Thanks very much.

Jon Langenfeld, Robert W. Baird.

A couple of cleanup questions for you. What would be your average revenue for a typical new agent? Trying to put it in context, you talk about these 18 being over $1 million, but what would be a typical number for an agent being added?

Pat, you want to take a stab at that?

I think there is two ways to look at it. We have the agent that Henry has referred to consistently throughout the call today, the agent that comes in with a solid book of business, a loyal customer following, probably deeply penetrating several accounts. And that agent, as Henry has mentioned, they are at $1 million runrate when they come on.

There is the other agent who has probably not got that depth of experience, nor that depth of coverage with his accounts. If you take a look at -- I think it was in the second quarter Henry talked about the average revenue per agent per week -- new agent per revenue per week, and we compare that to 2007 and 2008. And if you take a look at the fourth quarter, that agent population -- now we're going to take talk about that agent population that doesn't have that dramatic book of business or that deep penetration -- the average revenue per agent in that population in 2008 fourth quarter was $3,661 compared to $2,272 in 2007. So about a 42% increase. And we have done some things internally to provide greater support to that type of agent.

So bottom line then, when you think about adding $1 million agents in a quarter, is it unusual to add 18 in a quarter?

Yes, very.

One or two, would that be considered a good quarter for agent addition?

Agents that have the kind of depth and customer following that the ones that we have talked to in the fourth quarter, that's correct.

Then just moving on to a couple of wrap up questions. Cash flow from ops and cash CapEx, either for the year or the quarter?

The year, it is $120 million on the cash from ops, and $8 million on the cash purchases. Those are both annual numbers.

Then lastly, Henry, talk about what your disposition on acquisitions, what you're thinking about there?

I think as -- that is a very good question. As we're getting a lot of opportunities from agents from existing companies, there are other things that are out there that at these depressed levels become very attractive that we might be able to integrate in rather quickly.

My major focus is still bringing in one agent at a time. However, I would not rule out a freight forwarding company, for example, that made sense, or something that would fit very nicely into our operations. But the focus clearly is on bringing in and closing on a lot of these agents that we have in our pipeline currently.

Donald Broughton, Avondale.

A little housekeeping. Allowance for doubtful accounts in the quarter, Jim, what did you end up setting aside?

What do I have on my balance sheet or what kind of P&L charge did I put up?

How much did you add?

$1.6 million.

$1.6 million. And can you give me a little bit of color? I'm looking at that what looks like rather extraordinary gains, whether it is year-over-year or even sequentially on the revenue per load in ocean, which is somewhat counter -- I am sure you are well aware that pricing in ocean has been week. How was that achieved? Is it a customer mix, length of haul, what happened?

Jim?

It is a customer mix. We do a tremendous amount of business [that has] been referred to as the bulk side or the heavy haul side to the construction equipment and that type of thing. That softened a little bit, but we're still seeing some strong activity.

Obviously it is a growing sector of our business, so when you look at the percentage of growth they are obviously off a small base. But that is a big part of our business.

Is it safe to assume that if you were going to move equipment back from Iraq that might be one of the areas where I would see it?

No, on the ocean side we traditionally haven't -- we really haven't done anything with regards to any kind of government work like that, or anything in or out of Iraq. Most of our heavy trade lanes are in the Asian trade lane and the European trade lane.

Fair enough. I will let someone else ask a question.

Donald?

Yes.

You could have another question if you like, you were cut off last quarter.

I appreciate that. Well, I want to delve into something we have danced around and touched on then. You only bought 724,000 shares back. Henry, a long time ago when you were the CFO, you taught me that the way you looked at the pretax accretion of it, and we're way past what historically served as the acid test of when you guys become -- go from being interested to just downright aggressive. So I was little bit surprised.

Have you changed the percentage of pretax accretion that you begin to look at, or is it just a sign of the current times that will pass quickly, and you're still looking at anything above 8% as being very interesting?

You are absolutely correct. I think -- and when you go back to (technical difficulty) times, the times were different. I said we purchased our stock in the fourth quarter, not knowing really what was happening. And the market was squirrelly. You had issues out there with a lot of different things. What we're trying to is just be a little bit more careful, and we weren't as aggressive. I think I addressed that before.

I think what you're going to see, and with the cash -- amount of cash we have on our balance sheet, with the liquidity we have, there is no reason why we can't be aggressive at these levels.

I wouldn't fault you. I'm getting the average cost per share you paid was $31.91. You damn near bottom [ticked it] throughout the quarter. So if Landstar thing doesn't work out for you, I believe we've got a job for you on our trading desk.

Thanks.

David Campbell, Thompson Davis & Co.

One last question. That is as -- have any of the agents disclosed any kind of credit problems with their customers -- the customers are having trouble getting credit so that they can't ship because of that, and maintain between delivery -- between shipment and delivery getting credit? Was there any discussion of that?

We have discussion all the time. The issue -- you've got to remember how we operate here is that credit is approved here at Landstar. So we have those discussions with agents all the time, as far as weather this customers is credit worthy or not. So before anything is shipped, the agent has got some sort of an approval here. And that is the way it works. Jim, do you want to add to that? That is --.

We take all the credit risk. It is really not up to the agent to determine whether that customer is credit worthy or not. As for whether that customer is credit worthy, you know what is going on in the US economy, so there is a little bit of pressure on all the manufacturers out there to be able to access credit. But from our standpoint it is not up to the agents, it is up to the Company to provide the credit.

I was thinking in terms of the manufacturers being unwilling to manufacture something because they are trying to minimize applications for credit or something.

I think that is what is going on in the economy. If there's companies out there that don't have the financial wherewithal stability or the flexibility to borrow from banks, yes, they are having trouble.

Todd Fowler, KeyBanc Capital Markets.

Everybody else was doing it.

As long as I've got everybody to answer the question, I just don't want to leave anybody out, that is it.

I was just -- actually I do have a serious follow-up. The rate per mile statistics that you gave earlier, the up 6% earlier in the quarter and the up 1% during December, was that including or excluding fuel?

It was including fuel for the brokers, but not the BCOs. That was a combined number. But fuel shouldn't haven't much of an impact. Like Henry said, it was only a $3 million difference from '07 (technical difficulty). Fuel shouldn't have much of an impact on the rate on the comparable quarters. And that percent was for the entire quarter, not at the beginning of the quarter.

So the up 6%, I am sorry, was for the entire quarter -- the rate per mile?

Yes.

And that does have fuel in it. But it is a blended rate between the BCO and --?

And the affect of the fuel shouldn't have much of an impact on the rate because we collected the same amount of fuel surcharge pretty much in the '08 quarter and the '07 quarter.

Obviously the question -- using those percentages, or those amounts, that is directionally not what is happening with base rates or capacity, what you're paying for capacity in the marketplace, excluding fuel?

What we're paying for capacity? That was our revenue per mile. And what we're paying for capacity -- we picked up about 20 basis points off our broker carriers in the quarter.

[Anak Waller], [Buoyant Advisors].

A quick question on -- in terms of you mentioned before that you were quite surgical in terms of doing the buybacks. I was just wondering, was it -- did you guys do a buyback after the mid quarter update or prior to that?

We did it prior to. Did we do anything after that? Okay. I would have to look. Jim says it was all prior to.

I must almost sure it was prior to the mid quarter.

The other question was in terms of your sensitivity -- UPS sensitivity for FY '09 just $1.65 to $2.12, does that includes future share buyback?

We factored in about 1 million shares.

At this time I show no further questions. I would now like to turn the call back over to you sir for closing comments.

Thank you. And Jim?

Just to wrap up, it is an environment such as the one we are currently experiencing that really shows the strength of the Landstar model. Landstar's variable cost non-asset-based business model continued to generate significant free cash flow, and maintained financial stability and flexibility throughout this weaker environment. For example, free cash flow in the 2008 fourth quarter was $65 million compared to $25 million in the 2007 fourth quarter.

As a final comment, in times when all the transportation companies struggle to cut costs and manage cash, the Company's strong financial position provides increased opportunities in recruiting agents and capacity, and the ability to attract new customers to the Landstar System.

I would just like to thank everybody to for participating today. And I will pass it back to Henry for his comment.

Jim, I think what you said says it all. We look forward to seeing everybody on our first quarter or mid quarter update call, which is scheduled for March 2. Have a great evening and good afternoon. Thanks.

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