Landstar System Inc (LSTR) 2009 Q2 法說會逐字稿

Good afternoon, and welcome to Landstar System Inc.'s second quarter 2009 earnings release conference call. All lines will be in 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 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 2009 second quarter earnings conference call. This call will be limited no more than one hour, so please limit your questions to no more than two questions each when the question and answer period begins. We will keep our prepared remarks brief to allow ample time for questions.

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 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 2008 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.

Let me first talk about our second quarter revenue performance. The 2009 second quarter operating environment remained very challenging. I knew going into the 2009 second quarter that the revenue comparisons to the prior year quarter would be difficult, despite the stable sequential week-over-week volume trends we had been experiencing.

As anticipated in the 2009 second quarter, substitute line haul revenue, all automotive related revenue, and fuel surcharges on brokerage, rail, ocean, and air revenue, were all substantially lower than the prior year, and were the main drivers of the quarter-over-quarter revenue decline. Specifically, substitute line haul revenue declined approximately 50% quarter-over-quarter. All automotive related revenue declined approximately 31% quarter-over-quarter, and fuel surcharges on brokerage, rail, ocean, and air revenue declined approximately 79% quarter-over-quarter, or approximately $39 million.

As I have stated before, these major headwinds begin to dissipate in the back half of the year. Additionally, revenue generated from the United States Department of Defense, and from customers servicing the alternative energy sector was also very weak. I believe year-over-year revenue comparisons, excluding any revenue from disaster relief services in either year, should become somewhat easier as we move towards the end of the September timeframe.

Irrespective of the quarter-over-quarter revenue decline, Landstar's net margin increased to 17.2%, from 15.3% in the prior year. SG&A expenses excluding the one-time acquisition costs and bad debt expense associated with trade Accounts Receivable were approximately 12% lower than the prior year, and consistent with what I had previously stated on a prior conference call.

Operating profit margin was 6.1%, and 6.5% excluding one-time costs incurred with the acquisitions, and diluted earnings per share was $0.35 per share, and excluding the $0.02 per share related to the one-time acquisition costs, it was $0.37 per share. Despite the very difficult economic conditions and a very challenging freight environment, Landstar continued to move forward and strengthen it's operating base. On July 2nd, Landstar announced the acquisition of two technology based companies. Premier Logistics based in Detroit, Michigan, and A3 Integration LLC, based in Ann Arbor, Michigan.

I am very excited about the opportunities that these two acquisitions create. In Premier Logistics, Landstar obtains a company with proven technology, that includes web-based bidding, scheduling, shipping, tracking and reporting, allowing customers complete realtime visibility, to follow their inbound and outbound shipments from pick-up to destination. In A3i, Landstar will now be able to provide it's customers with state-of-the-art web-based transportation and supply chain management technologies, to optimize the complete order to cash process.

With these acquisitions, Landstar now possesses the tools to become a significant player in the freight under management environment, as well as offering it's customers complete integrated supply Chain solutions. Although we don't anticipate any significant impact in the near term, strategically, these acquisitions are a win/win for Landstar, it's agents and it's third-party capacity, and will provide the platform for future growth. Landstar also continued to see much opportunity to attract new agents to our system in the 2009 second quarter.

Our agent location count at the end of the 2009 second quarter was 1,436, compared to 1,409 at the end of the 2008 second quarter. Agents added in 2008 and 2009 contributed approximately $19 million in new revenue in the 2009 second quarter.

Additionally, during the 2009 second quarter we added another 10 agents who had a prior revenue run rate of at least $1 million. Since the beginning of the 2008 fourth quarter, we have now added 38 of such new agents. Our #1 strategy in this environment continues to be to add quality productive agents. Our pipeline of prospective new agents remains very strong. In addition, we continue to make good progress on our universal agent and business unit specialists initiatives.

Our balance sheet remains strong. We ended the quarter with approximately $116 million in cash and marketable securities. In addition, we have reduced long term debt including current maturities, by approximately $73 million from the end of the 2008 fourth quarter. In short, Landstar's financial position continues to remain very, very strong.

On that note I am going to turn it over to Jim for his financial review.

Thanks, Henry. Henry has already discussed the revenue for the 2009 second quarter. I will cover various other financial information included in our second quarter release. Investment income was $250,000 in the 2009 quarter, compared to $773,000 in the 2008 period.

The $523,000 decrease in investment income, was due to a lower rate of return on investments held by insurance segment in the 2009 second quarter. Purchased transportation was 74.6% of revenue in the 2009 second quarter, compared to 77.2% in the 2008 second quarter. The decrease in purchased transportation as a percent of revenue was primarily attributable to decreased rates of purchased transportation paid to third-party truck brokerage carriers, which was due to excess truck capacity and lower fuel prices, and decreased less in truck load substitute line haul revenue hauled by truck brokerage carriers, which tend to have a higher cost of purchased transportation.

Commissions to agents were 8.1% of revenue in the 2009 quarter, compared to 7.6% in the 2008 quarter. This increase was primarily due to increased gross profit representing revenue less the cost of purchased transportation, on revenue hauled by truck brokerage carriers. Other operating costs were 1.5% of revenue in the 2009 quarter, compared to 1.1% in the 2008 quarter. This increase was primarily attributable to the effect of decreased revenue.

Although the Company reduced trailer rental costs by $1 million in the 2009 second quarter, this was offset by an increase in the provision for contractor bad debts in the 2009 second quarter. Insurance and claims costs were 2% of revenue in the 2009 quarter, compared to 1.4% in the 2008 quarter. This increase was attributable to the increased severity of commercial trucking accidents, and an increase in the cost per claim for occupational accident claims under the company's third-party programs in the 2009 second quarter.

Selling, General and Administrative costs were 6.6% of revenue to 2009 quarter, compared to 5% of revenue in the 2008 quarter. This increase was attributable to the effective decreased revenue. There was no provision for bonuses included in the 2009 second quarter, as management does not currently anticipate achieving bonus targets. Included in the 2009 second quarter was 2 million of costs, related to the acquisitions completed in the first week of the Company's third quarter.

Depreciation and Amortization was 1.2% of revenue in the 2009 second quarter, compared to 0.7% in the 2008 quarter. This increase was primarily due to the effect of decreased revenue. Interest and debt expense was $973,000 in the 2009 quarter, compared to $1.7 million in the 2008 quarter. The decrease in interest expense was attributable to lower interest rates, and lower borrowings under the Company's senior Credit Facility.

The effective income tax rate was 38% in the 2009 quarter, compared to 38.6% in the 2008 quarter. The decrease in the effective income tax rate was primarily attributable to lower state taxes due to state income tax planning strategies implemented in the back half of 2008.

Looking at our balance sheet we ended the quarter with cash and short-term investments of $116 million. During the 2009 first half Landstar reduced long term debt by $73 million. Cash flow from operations was $106.3 million during the 2009 first half. At June 27, 2009, shareholders equity represented 81% of total capitalization. 2009 trailing 12-month return on equity remained high at 35%.

Back to you, Henry.

Thanks, Jim. As I look to the back half of 2009, I see little reason to believe there will be a significant change in current economic conditions. I see a very slow recovery, however, I do believe the worst is over. From Landstar's perspective, we have taken advantage of the opportunities the marketplace has presented us, and we will continue to do so.

The 2009 third quarter over the 2008 third quarter revenue comparison will continue to be difficult, however, I believe it should be slightly easier than the 2009 second quarter over the 2008 second quarter. Recent sequential load volumes have improved slightly, however there still remains some pressure on price. I remain hesitant about giving specific revenue or earnings guidance for the 2009 third quarter at this time, as I believe there still remains a degree of market uncertainty, despite some of the stabilizing trends we have experienced.

Over the past two quarters, Landstar's actual results have demonstrated how Landstar's variable cost business model reacts, given various revenue levels. All anyone has to do is look at the 2009 versus 2008 second quarter revenue comparisons, to get an idea how our earnings per share reacts. It is the beauty of our variable cost model. Remember, Landstar's variable cost business model has automatic cost reduction triggers.

Additionally, excluding SG&A expense of the recently acquired companies, and any change in the provision for doubtful trade Accounts Receivable, I anticipate SG&A expenses to be approximately 12 to 15% lower in the 2009 third quarter versus the 2008 third quarter. Given what should be easing revenue comparisons starting towards the very end of the 2009 third quarter in the substitute line haul business, the automotive business, and fuel surcharges, which are included in revenue, coupled with the incremental business added from new agent additions, and from our two new acquisitions, plus a slowly improving economy, I see only good trends as Landstar moves into the back half of 2009 and into 2010.

And with that, I will open it up for questions.

Thank you, very much, sir. (Operator Instructions). Our first question comes from Edward Wolfe of Wolfe Research. Sir, go ahead.

Hi, how you doing, guys?

Is that Ed Wolfe?

That would be me, whatever it takes.

All right.

Henry, I thought I heard you say that substitute line haul was down 50% quarter-over-quarter. Did you mean year-over-year?

Quarter-over-quarter.

So second quarter is down 50 relative to first quarter?

Well, quarter-over-quarter, when I refer to quarter-over-quarter that is not sequential. That is '08 to '09.

So second quarter '09 over second quarter '08?

'09 over '08 first quarter as I recall was down 43%.

Okay so it is down 50, so there is not one big line haul customer that capitulated between second quarter and first quarter in other words?

We knew that it was going to be slow. We had a very good second quarter in '08 vis-a-vis substitute line haul, and the difference is bigger.

Yes. When you say the worst is over, you think, are you talking in terms of demand, pricing, or both?

I think from a demand standpoint, we have started to see clear stabilization. In fact we have seen a slight increase in load volumes. There is still some fluctuation and some uncertainty in the pricing environment, and I am hesitant to say that that has bottomed, but clearly, there is an element of stabilization and pricing, and when it relates to Landstar as I move towards the end of the third quarter, I know my comps become a lot easier.

Last question, and I will let someone else have it. Can you talk in terms of the revenue per load, if you have it net of fuel, but if not gross of fuel, how it went through the quarter April, May, June, into July?

That Jim might have, but do you have that in front of you, Jim?

Yes, Ed, from the brokerage standpoint because obviously it is not in the BCO, so if you look at rate per load from the brokerage truck brokerage piece, the rates April, May, June were off 21, 24, and 26%, and without fuel, if you take fuel out of that, 13, 15, and 18%.

Any sign in July yet?

No.

Okay. Can you just do the same for BCOs gross, or however you have it?

I only have it between vans and class, I didn't combine them. I will take vans, or whatever you have got. I have 656 for Vans.

And flat?

13, 14, 21.

And the flats and the reason you got the big variance there, Ed, is you have got to take a look at the heavy haul stuff, because that was very big in the June quarter, and it is really a mix issue when you talk that.

Understood. Thank you so much. I appreciate the time.

Our next question comes from the line of Jon Langenfeld, Robert W. Baird.

Hi, Jon.

Hi, guys. Henry, at the beginning of the year you kind of talked about the variations of revenue versus earnings, and kind of being able to align that, like you did here in the second quarter. Is there a point to which you stretch too much internally on your cost side? I think the range you gave at the beginning of the year was 0 to 20, and here we are at 30, and yet you are still able to gear those earnings to that extent. I mean, how badly are you stretching internally to try to make these earnings?

When you say I am badly stretching?

Well I shouldn't say badly, but how difficult, how difficult is it internally on the people, really looking at that SG&A line, you continue to do a good job there. I'm just wondering--?

You got to remember what we did, a couple of things. Our bonus program is variable, so everybody is aware of that. What we have done is we have instituted, and we did this at the beginning of the year, a hiring freeze, so if a person were to leave, we weren't replacing them, we have literally got a wage freeze if you will in effect, and we also took actions at the beginning of the year, which I tried to explain in a couple of conference calls, that actually affect individual quarters, moreso than like the first quarter for example, and we have got action plans that we took in the very beginning of the year that resulted, for example a 12% differential in the second quarter, and it will be as high as 15% in the third quarter.

When you go to the fourth quarter that is going to drop down a little bit because you have the effect of the bonus plans that we didn't accrue in the fourth quarter last year, so we thought we had a pretty good handle on what we could do with the cost element, and as far as I don't see see any, I am looking at Jim, there is really no pressure, obviously we are looking to save every penny we can in this environment, without sacrificing strategically revenue opportunities.

Okay. Fair enough. When you talk about SG&A and you talk about being down 12, is that your SG&A line, or what is included all in that?

It is the SG&A line in the Income Statement exclusive of any of the change in the allowance for doubtful trade Accounts Receivable, customer bad debt, and as you recall what I explained, I think in the mid quarter conference call or first quarter, or one of my presentations, is that we would anticipate a 12% change or decline in the second quarter, 15% in the third quarter, and about a 7% in the fourth quarter, and again it is reflective of a variable cost model, plus the additional actions we took actually at the very beginning of the year.

But you said the bad debt was in the other operating cost?

No. The account for bad debt is in SG&A. Other operating has the bad debt from our BCO and independent contractors, we may loan them money for tire purchases and then they disappear on us, so contractor bad debt is in Other operating, and customer bad debt is in SG&A.

Got it. So on the other operating costs, there was also expense in there associated with the bad debt side?

Yes, contractor bad debts. That was up in the quarter in the Other operating line.

So it is another headwind you faced in the quarter. Okay last question, what was the thought process behind paying down the debt, versus share buyback, and how do you think about managing that over the next--?

A couple of things. I mean as it relates to the share buyback, in the process of doing these acquisitions, we felt it was prudent to not really go in the marketplace, understanding what we were doing with the acquisitions, so we really stayed away from that, and then the result is to use the cash to pay down the debt.

Got it. And then the amount of expense on the acquisitions, how much does that total?

That is $2 million approximately.

Okay. Thanks.

Thanks, Jon.

Our next question comes from the line of Chris Ceraso, Credit Suisse.

Thanks. Good afternoon.

How are you?

Good. A couple of things, I noticed both of these acquisitions are Michigan based. Do they have automotive customer exposure?

A couple of things, and I will let actually let Jim Handoush say a few words on the acquisitions. The Premier acquisition when you look at it's customer base was primarily automotive based. The A3i acquisition is really a start-up venture, that has some very unique technology that we both acquisitions we believe has interplay to other industries, that I think will be of great use to our agents, and Jim maybe you want to add a little bit of color to that?

Yes, one of the main things we looked at in actually reviewing these companies, is not only how they complimented each other, but also how they compliment our base business, but at the same time we looked at their core business and the technology they were delivering, to assure that we can deliver that to a broader customer base.

And so as we went through the analysis we saw that we could, and then again, it complimented our core business and our core drivers of our business, our agent family BCOs and third-party capacity, and at the same time, gets us into a market our customers are driving us towards, and that is the reason we do everything we do, and so we feel very, very good about these acquisitions and how they fit into the Company, and one of the other things we looked at, that you have to look at any acquisition is the actual fit of the people, and the culture, and that is a great fit for us as well, so we are very excited about the acquisition.

Elsewhere in your business where you do have automotive exposure, have you started to see any signs yet that the build rates, or whatever it is you are carrying for auto companies is starting to improve a little bit?

No, I think it is too early to tell in July, but I feel actually as I said before, I think that from our perspective we feel that sort of bottomed, and actually we think in the back half of the year, that actually might even present an opportunity.

Okay. Last question--

That might sound, but--

Can you highlight any particular area of your business where the price pressure is the most pronounced, whether it is a different mode, or a different customer, or region?

I think Jim described in his van numbers pretty consistent. I wouldn't say that it's, and maybe someone else can answer that, as far as region base, but clearly from the flatbed side on the revenue per load basis, clearly the biggest impact has to do with the slowdown in some of the power generation heavy haul business, because that really impacts that dramatically, and other than that, I think you really see some stabilization to a certain degree, but it is the lack of that heavy haul business, which just has a large revenue per load, which is basically causing those bigger decreases.

Okay, thank you very much.

Thanks, Chris.

Our next question comes from the line of Tom Wadewitz, JPMorgan.

Hi, Tom, how are you?

Good, how you doing, Henry?

Good.

Let's see. So I wanted to see if you could give some of the monthly numbers on the volume side, similar to what you did on price?

Okay. Total volumes being load count was up 18% in April, 14% in May, and 16% in June.

18, 14, & 16?

Yes.

And that is including both brokerage and BCO?

That is total load count.

And that is compared to the prior year too, so you need to keep those in mind, because sequentially we started to see numbers that have been improving, and that is the bright light in all of this, is that you are starting to see sequential improvement. The prior year comparisons, and as I think you well know, we had a pretty good second quarter, and June.

And a real good June.

Yes, you had a good June. Okay. Is there anything you can provide in terms of comments about where the improvement is? I mean you have talked a little bit about where, but is power generation, you mentioned that was a pretty big drag in the second quarter. Does that look like that is picking up a bit in the second half?

We haven't seen that yet, and we think it will pick up based on some comments we have heard. We haven't really seen any effects, and I will turn it to Pat on this, with the Stimulus as of yet. Reports are that obviously it is being slowly released, which we could attest to that, but Pat you got any comments?

Yes, Tom, I think that we have gotten some commitments on the back half of the year on some of the wind energy business, but then again, as Henry mentioned earlier, mix comes into play, whether it is length of haul, or size and scope of the transport, that is going to have some impact on the total revenue that is generated, so although the shipments are going to go up, the demand will increase slightly, we have yet to see where that falls out on the pricing.

Okay, and then just one last one, and I will pass it along to someone else. You are electing to not give us the guidance, or the kind of non-guidance I think as you did last quarter, but what do you think about seasonality for third quarter earnings versus second? It seems that you typically would see a stronger third quarter than second quarter from an earnings basis. Is that reasonable to expect that seasonality to be true this year, or do you kind of throw seasonality out, given the way the economy is working?

Well, a couple of things. The reason we didn't provide the non-guidance is because exactly the way you interpret it, non-guidance. It was really meant to be sensitivity analysis, and I think what I am trying to show now is that a revenue assumption, and I think I said we think the numbers, it is an easier comparison, and typically the third quarter is strong, September is strong. Look, June typically is a strong month, and it was strong last year, very strong, and it picked up a little this year, but in fact it wasn't as great as what it was last year, so you have a bigger discrepancy if you will.

Now in September, things start to change a little bit because September usually is a big month. As you will recall in late September, fuel started to come down a little bit. I know I have got favorable comps in the back half of September also on the substitute line haul, so it is kind of tough for me to figure out. I do expect September to be better than the July/August timeframes, but how good that is going to be, again I think it is a very slow recovery.

I feel positive that we have come out of the worst, but it is kind of tough for me to couch exactly where that number is going to be. Typically September, and the third quarter is seasonally a very good year, but it is hard, this year has been so unpredictable that I don't think it would be prudent to try to state that. I mean if it tracks the prior year, it is typically a seasonally pretty good quarter.

Right. So it is reasonable to think that it is up, but it is kind of hard to have a lot of visibility beyond that, if you look at versus the 37 in second?

Yes. The only thing we have a little visibility, but just from a comparability standpoint, fourth quarter clearly in my opinion is where things start to change a little bit, because our comparisons become a lot easier. A lot easier.

Great. I appreciate it. Thank you for the time.

Our next question comes from the line of John Barnes, RBC Capital Markets.

Good afternoon, guys.

You have a new home. Congratulations.

Yes. Thanks so much. I appreciate it. As you look at the first half of the year, and the sharp decline in auto, the sharp decline in the substitute line haul, how do you factor that in, in terms of your strategy going forward? Are you looking to diversify a way, and is that part of your agent recruitment process, is maybe move away from just a pure substitute line haul kind of agent, into something that has got something you are not exposed to? How do you balance that out?

John, it is pretty interesting, because when you look at things quarter to quarter, and things like that, those types of issues come up, but any business we get, as long as I make money and generate cash over it, I am going to try to go after, and I think all of that business is good, and at some point in time that is going to come back, and to me what is king is cash, and I think, look, I think in a perfect world, we should be totally diversified, and quite frankly we are a pretty diversified company, but substitute line haul happened to be down, automotive happened to be down. I believe what goes up, goes down comes back up, and I do believe those things will change at some point in time, so I would never walk away from any business. We clearly from Landstar's perspective want to be as diverse as possible, but that is not to say I would ever walk away from anything.

Okay, very good. In terms of I think last quarter on the call you talked a little bit about gross margins, BCO versus brokerage, historically kind of 19 to 20% on the BCO side, maybe 9 to 11% on the brokerage. Do those percentages do they still hold kind of true the upper end on brokerage, just give us how loose capacity is, did that hold true in the second quarter, and did you see something similar on the BCO side, or was there some pressure on either one?

Typically no pressure from the BCO, because those were all fixed rates, but the brokerage piece continued to pick up margin, but remember, all of the margin improvement we pick up from the carriers is shared with the agents, so if I tell you we picked up 250 basis points on brokerage in the quarter, you kind of share half of that with the agent family, and that is how that net revenue, part of why the net revenue went from 15.3 to 17.2, you saw the same thing in the first quarter. Our net revenue went from 15.9 in the first quarter of '08 to 17.1 in the first quarter of '09, so you are seeing consistent trends in that way the brokerage margins are working.

And Henry, just last question. On the pricing stability that you have talked about, I am curious as to, it looks like less capacity is coming out of the market than you would think would, given kind of the circumstances, the tough economy, and the like, or do you think enough has come out that there is a bit of equilibrium, or do you think pricing is beginning to stabilize, because the carriers just can't do it for any cheaper?

I think that is a very good point, and I think you started to see a slight pick-up in demand. I think carriers are at the bare bone at this point in time, and I think you have almost reached that equilibrium, and that is not to say you can't have a dip down. What I have said I am a little bit, it is too early to say anything like that. I believe that demand has clearly stabilized, because we have seen a pick-up in sequential load demand, so I think that is a good trend, and that sort of dovetails a little bit as far as why you are starting to see stabilization in the price, but I think it is a little bit too early to say it has total bottomed. I am not sure I can make that statement yet.

Thanks for your time guys, I appreciate it.

Our next question comes from the line of Todd Fowler, KeyBanc Capital Markets.

Hey, Todd how are you?

Not too bad guys. How you doing this afternoon?

Pretty good.

Henry, talking about the business trends and thinking about it a little differently, we have talked about the year-over-year comparisons throughout the quarter, can you talk about what volumes did sequentially, so how was May relative to April, and how was June relative to May, and then any sort of commentary on July you see in the first couple weeks would be helpful as well.

Jim, do you have those?

I am going to need a minute.

Let him get his, he has got a book of information he is looking through, so if you have another one.

I have got another one, it might be for Jim, so I will come up with another one, Henry. Thinking about areas of strength, obviously we know that substitute line haul, auto was week, any areas in particular that have shown that have firmed up more than what you would have expected, or are a little bit stronger right now than where they were, at the beginning of the year over the past couple of months?

I think a lot of the stuff from, that is a sequential question as far as market segment and the only thing I can tell you is that from quarter-over-quarter, month-over-month type thing from last year compared to this year, the bigger changes were as I said, the substitute line haul for example, 50% down this quarter, versus 43% down that quarter, so you had an increase, I think US DOD business was worse in the second quarter than it was in the first quarter, just not a lot of activity there, and I would probably expect that to continue for a little bit, but the others, those are the ones that come to mind. Automotive actually stabilized to a degree and that is a positive, so it is not getting any worse, and I think I would say other than that, and I guess the power generation business, everything else is, they are down but it is better.

Okay, that helps.

Is that fair Pat?

Yes, I think one of the things we look at too, Todd, is where are we spotting van trailers. that is kind of an indicator, and although the number of customers that we are spotting trailers at has increased in the second quarter 2009 over 2008, the number of trailers we are spotting in those locations is significantly less, so as we bring on new agents that have a new book of business, we are filling those spot requests, and as our sales efforts bring on new customers, we are filling those spot requests, yet the volumes out of those locations are down significantly year-over-year.

Jim did you come up with anything?

The problem is that you are looking for a week to week analysis, and we do four weeks, four weeks, five weeks, April, May, and June. If you look at what happened during the quarter, April, May and June on a load count, we were up about 5% in load count April to May, which each had four weeks, on a weekly basis, and then June relatively flat to where May was, it kind of leveled off, but I have got to factor in Memorial Day and I haven't done that, so there is a whole bunch of other factors that affect your weekly analysis.

Okay but certainly, a build throughout the quarter sequentially, and June may be stable relative to where May was then?

That is fair.

Okay. And then Jim, actually one other question if I could. With the insurance and claims here during the quarter, what is the best way to think about the run rate going forward, roughly around 10 million just on the expense in the P&L here during the quarter, is that going to be about the same? I guess I was a little bit surprised, given the fact that volumes were down, it moved up sequentially from the first quarter, what is the expectation for the third and fourth quarter for a run rate on the insurance and claims line?

We had some unfavorable experience in this quarter on our occupational accident program and our third-party programs, which was higher than usual. In this kind of environment, I think that is kind of expected, but it was even higher than what was expected. I would expect to hold where you are, but it really has to do with the severity of accidents. We are exposed up to 5 million per occurrence, I don't want to hold myself to any given number, but if we are running these kind of volumes, and we are safe, and frequency and severity stays the same, you would expect the number you are looking at right now in the quarter.

Okay, so somewhere like the second quarter run rate is a good place holder going forward?

One thing you have got to remember too, is it is highly attributable to what happens with the BCO revenue, not total revenue. Our accident claims are almost 100% attributable to BCO, so it is really what happens to that business. And you have got to look at it as a volume thing, not as a revenue thing. That revenue is off 14%, so what you are saying is you would expect to see your claims go down by 14%, and unfortunately we didn't. Our trucking was a little more severe on the accident side, and the occupational accident drove a little higher also, but I would tend to think you would hold 1.5 to 2% of where your revenue is, excluding any significant event.

Okay. Good. Thanks a lot.

Our next question comes from the line of David Campbell, Thompson Davis & Company.

Yes, Henry, hi. This is David Campbell. I am asking about the acquisition costs, you said there will be no impact in the third and fourth quarters, but didn't you acquire some revenues with one of those businesses?

The businesses we acquired are basically a fee based business, and on an annual run rate you are looking at 10 million to $15 million of fees. It is not the margin based business we run. The plan is that this will drive more margin based business through our system, that would be the revenue we would anticipate on an annual run rate currently.

So there will be a like amount of expenses on a quarterly basis somewhere in the P&L, right?

Not a like amount, I mean we anticipate making money on that. I mean--

Yes, I know.

The $2 million that I spoke about that were recorded in the second quarter are expenses related to the actual acquisition of the company, which are legal fees and accounting fees, and things like that, under the revised purchase accounting rules and guidelines under GAAP, those have to be expensed. If you went back several years, those used to be capitalized as part of the cost of the acquisition, no longer are they allowed to be capitalized.

Okay. Thanks, and second question is what is the insurance operating income in the quarter?

Give me a second. We don't look at it as operating income. The real way to look at the insurance is an expense, because it is a cost, and that is the reason we don't disclose that, but Jim will come up with a number for you.

I am almost there. 8,000,004.

Okay, thank you.

Thanks David.

Our next question comes from the line of Nate Brochmann, William Blair & Company.

Nate, how are you?

I am well, gentlemen, how are you guys?

Good.

Great. Quick question, Henry, going back to John's diversity question a little bit. Clearly in this environment I am sure a lot of the agents are picking up more on the cross-selling opportunities. Can you talk a little bit more about how that is going, and granted it is down year-over-year, because of fuel surcharges and what not, but how some of the other modes are doing?

Pat or Jim, either one can answer that as far as the questions on our business unit specialist, so either one can chime in.

I think the activity level is extremely well. We have got over 120 new agents that are participating in various modes of transportation, mostly on the ocean and the air side, and some on the intermodal side, and we continue to push that within our field organization, and within our agent family, and every opportunity that we can, and there are a lot of success stories around that. Those tend to feed off each other, actually causing more agents to want to get involved, so we see the activity level continue to grow.

Pat, do you have anything?

Nate, if you think about it from an agent's perspective if our revenue is down their revenue is down, and in order to generate additional revenue opportunities they have gone back into their existing customers and started selling the multiple services that Landstar has, so in a bizarre twist, the negative revenue environment that we are currently operating in, has helped us push that initiative out.

And do you think that one of the old things like you pointed out, was maybe back a couple of years ago, not every agent was receptive to that, because they were happy with their current breadth of business, but now that is down, do you feel like every agent is picking up on that, or is it still just 20% that really do care about driving better revenue for themselves?

Well I think it has accelerated the acceptance of that initiative, and then as more agents have success, you get sort of a 'me too' mentality, so whether it is 20%, 30%, 50%, I don't think it will ever be 100% of our agents that explore all of the opportunities that we have, but we are pleased with where it is at, and it is going, the acceptance rate is greater, it is faster than I anticipated and really I attribute it to this.

And do you think that having that accelerated helps win share in other areas of the business too, in terms of being able to provide those multimodal solutions?

I think when this thing turns, we are going to be very well-positioned.

Great. Thanks a lot.

Our next question comes from the line of David Mack, Decade Capital.

Hi guys, how are you?

Hi, David, how are you?

All right. Just a few questions. The first, I just wanted to make sure I heard it right, on the revenue trends that you are seeing, or that you expect to see in the third quarter, is that excluding the 27-odd million that you had last year from the bus business?

I think you have to exclude that.

Okay. My other question has to do with the balance sheet. I just noticed that this is when I go back about 10 years this is the first second quarter that you have run with a positive cash balance, net cash balance, of I have about 51 million. What I am wondering is why the cash balance is so high, is there something unseasonal this year, and if this is a trend for the rest of the year, how do we think about what you are going to do with this cash, do you want to have a higher level of cash due to the uncertainty, or can we look forward to other cash deployments through acquisitions, or buybacks, or dividends?

David, in this environment that we are in, when we have such a significant slowdown that we had that started in December, we really collect a ton of receivables, and we are not paying out as much in purchased transportation, so for about three to six months after the significant downturn the cash pours in, and that is just where we are, and we didn't get in the market door in the second quarter, because we were cognizant of the acquisitions we were working on, and didn't want to imply that we knew something that no one else knew, so the cash piled up, but it was really just, I don't know if that trend continues, because right now we are back in balance.

I am billing like I am paying so you may see a little bit of a slowdown. If you look at your operating cash flow, this year's first half of 106 million compared to 35 million last year, and that is really driven due to the slowdown in the economy, and the collection of receivables without the offset going out to the carriers.

So when I think about when we head to the end of the year, should I think about that cash balance running down to normal levels, and then building up at the beginning of the year the way it normally does, or can you hold on to some of that?

Well, it depends. Look, if the economy goes gangbusters, which I don't anticipate, you will start to see more money being shelled out in advance as we do. I don't believe that is going to happen. I do think you have got an incremental and slow improvement in what is going to happen. In addition to that, we didn't buy, or very little stock in the second quarter. So the acquisitions are out, and what we do with the cash in the third quarter is a different issue.

So maybe one last thing on the buy back. I understand you had some acquisitions you were doing, and that is why you weren't buying, but Jim and I have talked about this, over the last few years, the buyback pace has slowed a lot from what you had done I guess in the earlier part of the decade. And what I would like to know Henry, is do you have a change of philosophy, relative to the pace and level of buy backs, or has it just been a timing thing, and you have just been waiting for the right time, can you talk to us a little bit about your philosophy.

I have no change in my philosophy on buying back stock, I think it is part of the Landstar business model, we started doing this in 1997, when I first recommended we do it, and it has become part of the business model, and I think it is prudent in the second quarter with the acquisitions.

Now as far as the slowdown, I think Jim has got numbers, and I think other than probably the big buy back that we had a result of all of the cash we collected from the FAA stuff, I think has actually been pretty consistent, but I will leave that for Jim. That answers it. If you compare '06 and '07, we generated a ton of cash from the FAA, and those were unnaturally spiked, if you look at prior to that, we bought 400,000 shares in the first quarter, excluding the second quarter, that would be a 1.2 million run rate, you would find us in that range, not every year, but in most years on the number of shares and the dollar spend that we do. But there is no change in my philosophy David, to get to the real point of your question.

Okay, great. See you soon, thanks a lot.

(Operator Instructions). Our next question comes from Alex Brand of Stephens Inc.

Hey, thanks guys.

Alex, how are you?

Good, thanks. With respect to your flatbed business, it looks the steel mills are finally over 50% of capacity and their production, are you seeing that yet, is that potentially an offset to some of the weaker parts of your flatbed business?

Alex, I would not say that we are seeing any significant pick-up at the steel mills themselves.

Okay, and sort of a longer term, or potentially a more general question about this recovery, which is maybe unusual, in terms of the broker capacity, do you think there is enough excess capacity right now, that even as you start to see sequential demand improvement, that we potentially, the broker, the typical broker squeeze doesn't happen right away, right now, that truck pricing stays relatively stable, even as demand starts to pick up?

No, I don't think we are going to see that, if I understand your question correctly.

I guess the question is normally, we would have had a lot more capacity exit the market by now, sort of like John was asking, since we have had an unnatural maybe because the banks didn't want to put guys out of business or whatever, and take the assets, can we have some recovery now, without the truck pricing having to go up?

Look, I think that it is a very good question, and I think what we are starting to see and you think about what my opening comments were, we are starting to see a slow pick-up in demand, and we are actually starting to see some level of stabilization in prices, so I think that dovetails exactly to what you are saying, so yes, I think you can have that. You are not going to have a spike in demand, and it is going to be a slow, slow recovery. I mean, I would think that that is possible.

Now I still believe quite frankly, that you will have some excess capacity, because banks are keeping certain people alive, but quite frankly, when you don't generate any cash, and you have got more cash going out than you have got coming in, that has got to be a problem, and at some point in time, plugs will be pulled. At least that is my feeling.

Right. Understood. I appreciate the color. Thanks for the time guys.

Okay.

Our next question comes from the line of Edward Wolfe, Wolfe Research.

Hi guys again. Around the dial I guess.

Okay.

Can you, Jim, go over what the incentive comp looks in third quarter '08 and fourth quarter '08, the comps that are coming up, and then what your expectations, if no change right now, what they would look like?

You are talking about the bonuses, the provision?

Yes.

I would anticipate the run rate we are currently at now, there wouldn't be any third or fourth quarter provision provided in those numbers.

And the comp?

2.9 million in Q3.

Very little in Q4.

600,000 to 700,000 in Q4.

Okay, and I am sorry, in second quarter '08 what was it?

2.3.

And was there nothing in Q2 '09?

Nothing.

Okay, thanks a lot guys.

Thanks.

Our next question comes from the line of Jon Langenfeld, Robert W. Baird.

Jim, do you have the volume trends and the months for the third quarter of last year?

Jon, I don't have that with me.

I don't have the specific numbers, Jim doesn't have them with him, but I can tell you that based on my recollection, there was some dramatic fall-off in September, from a revenue standpoint, partially due to, I am looking at Jim, substitute line haul started to decline in September, Automotive came down a little bit more.

And I know from a revenue standpoint, you started to see some change in the fuel surcharge, because prices started to come down rather dramatically, so volumes, if I were to guess, and it is kind of tough to say, because August typically is slow anyway, but as you relate to the prior year, which now would be '08 to '07, there was more of a less favorable comp in September of '08 to September of '07, versus '08/'07 July and August, because the trend was down, if that makes any sense to you.

Yes it does, it strikes me that the bulk of it, because your volume trends second to third quarter last year were not that dramatic, I mean it was down minus 1, then minus 3 in the third, so I guess my recollection was that you had an okay September, not a great September, and okay September, but you didn't really start to feel the heat of the market contraction until October?

As I recall, yes correct. Overall I think, and Jim correct me if I am wrong, but as I recall, the fourth quarter '08 in October we were plus 5%, we were minus 2% in November, and then we were down about minus 20-odd percent in December. So you had a dramatic fall-off, and a lot of that, as I said, was due to the substitute line haul fall down, and when you are down 50% as we were in the second quarter, when that starts to stabilize in the back half of the year, your levels start to equalize, and again, that is just the facts.

Last question, what was your cash cutback in the quarter?

I can give you the year again, Jon.

That is fine.

[2,000,047].

Okay, great. Have a good evening.

Thanks Jon.

Our next question comes from David Campbell, Thompson, Davis and Company.

Yes, just a question about the agents you mentioned how the pipeline is so big, but the agents were down from the, agent locations were down from the end of the first quarter. Is that just a calendar thing?

No, and I would have to check it first, calendar, but clearly in the second quarter, there were some smaller locations that were just terminated by Landstar, because they weren't generating anything. Remember the key to the agent location, although the count sounds very good, it is those productive agent locations that really makes the difference, and the key metric there is that 10 that we added in the third quarter, which ties to the 9 we added in the first quarter, and the 18 in the fourth quarter, that have a substantial book of business, if you will. But the reason the number was down first quarter to second quarter was really the, I don't want to call it a purge, but basically some smaller people that were let go.

The only problem is in this economy, a lot of agents got smaller, it doesn't mean they are not as good, does it?

Well, if they are generating zero of $10,000 of revenue, and we have seen that for a period of 18 months or a year, he is obviously doing something different. And we are not talking people that had a substantial run rate to begin with. Remember we are going to try to bring in as many people as we can, and we will bring in anywhere from 300 agents, but we can delete up to 280 at any given year also, because it is just the way we work our agent base, we will bring them in, but if they are not going to be productive within a period of time, they will leave.

Okay, thank you.

Thanks, David.

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

Thanks. Jim, do you have anything you would like to say?

No. Just regardless of the current environment, I think the Company's variable cost business model performed as expected, despite a higher than expected, 30% decline in revenue, we managed to get diluted EPS only to decrease 33%, and that is kind of the whole concept of the model, and that is what we live by. The acquisitions we have recently done, I am excited about those, and the opportunities it will provide to the agents and the capacity, and hopefully increase loading opportunities in the future.

Pat, Jim, anything you would like to add? No? No.

Look, I want to thank everybody for being on the call, I can only tell you that I do think the worst is over, I think you have got in the third quarter, I think David Mack mentioned, or somebody mentioned, that the 27 million to $28 million of revenue comparisons to the evacuation services, but generally the comps really start to improve in the back half of September.

We also feel that demand has started to pick-up, albeit slow, and we do believe that the worst is over. And we look forward to with the acquisitions and what we have done, going into the back half of 2009 and 2010.

And with that, I bid you adieu, and our mid-quarter update for the third quarter is scheduled for August 26th. And we look forward to talking to you all at that time. Thanks again.

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