Landstar System Inc (LSTR) 2010 Q3 法說會逐字稿

Good afternoon and welcome to Landstar System Inc. third-quarter 2010 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, Chairman, President and CEO; Jim Gattoni, Vice President and Chief Financial Officer; Pat O'Malley, co-Chief Operating Officer; Jim Handoush, co-Chief Operating Officer; and Joe Beacom, Chief Security, Safety and Compliance Officer.

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

Thanks. Good afternoon and welcome to the Landstar 2010 third-quarter earnings conference call. I'm going to strictly enforce two rules on this conference call -- a two question limit per caller and the call will last no more than one hour. My opening comments, again, will be limited so we can get to all questions, but before I start, 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 team 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 2009 fiscal year described in the section Risk Factors and other SEC filings from time to time. These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking statements, and Landstar undertakes no obligation to publicly update or revise any forward-looking statements.

During our 2010 third-quarter mid-quarter update conference call, I stated that I anticipated the following results for the 2010 third quarter. One, 2010 third-quarter revenue over 2009 third-quarter revenue would increase in a range of 25% to 30%. Two, 2010 third-quarter net revenue would increase in a range of 10% to 13%. Three, 2010 third-quarter operating income over 2009 third-quarter operating income would increase in a range of 18% to 24%. And four, diluted earnings per share for the 2010 third quarter would be in a range of $0.47 to $0.50 per diluted share or said differently an increase over 2009 diluted earnings per share in a range of 21% to 28%.

Before I review our actual 2010 third-quarter results, it is important to make reference to our buyout of the NLM contingent payment obligations. Pursuant to the July 2009 purchase agreement, Landstar agreed to pay the former owner of NLM additional consideration upon achievement by NLM of certain earnings levels each year through 2014. In a recent agreement, Landstar and the former owner of NLM agreed to eliminate all potential future payment obligations for all years for $3.8 million, which actually represented two years full payment. The $3.8 million charge is reflected in the third-quarter results as selling, general and administrative expense and had the effect of reducing the third-quarter diluted earnings per share amount by $0.05 per share.

Landstar put together another solid quarter despite the much anticipated decline in substitute line haul revenue. Overall 2010 third-quarter revenue increased a little over 24% compared to the 2009 third quarter, just slightly below the lower end of our range of revenue guidance. Our substitute line haul revenue increased approximately 15% in the 2010 third quarter versus the 2009 third quarter but decreased 26% from the 2010 second quarter and more than we anticipated.

Sequentially revenue in this service offering has decreased as follows -- approximately 24% in July 2010 versus June 2010, only 6% in August 2010 versus July 2010, and approximately 30% in September 2010 versus August 2010. We have been anticipating for some time now that this business would decline. Just as it increased more than we had anticipated in the 2010 second quarter, it declined more than we had anticipated in the 2010 third quarter, causing us to fall slightly below our range of revenue guidance.

In the 2010 third quarter, revenue haul by BCOs increased approximately 15% versus the 2009 third quarter and represented 54% of total consolidated revenue in the 2010 third quarter versus 58% in the 2009 third quarter. Truck brokerage revenue in the 2010 third quarter increased approximately 44% versus the 2009 third quarter and represented 38% of consolidated revenue in the 2010 third quarter versus 33% in the 2009 third quarter. Revenue generated through rail, ocean and air cargo carriers in the 2010 third quarter increased approximately 17% versus the 2009 third quarter and represented 6% of consolidated revenue in both the 2010 and 2009 third quarters.

Freight under management fee revenue generated from NLM, which was acquired by Landstar at the beginning of the 2009 third quarter, contributed $4.3 million in the 2010 third quarter versus $3.7 million in the 2009 third quarter. 2010 over 2009 quarterly revenue increases were experienced in a wide array of accounts and sectors. Other than the rapid deceleration in substitute line haul load volumes from a sequential month over month basis, load volume increases versus the prior year generally moderated. Pricing has stabilized but remains strong.

Landstar continued to sign on productive new agents in the 2010 third quarter. Our agent location count at the end of the 2010 third quarter was 1341 versus 1343 at the end of the 2010 second quarter. Same agent location revenue growth in the 2010 third quarter accounted for 91% of the total revenue growth in the Landstar Transportation Services division, and new agent location revenue growth, net of revenue generated from agent location terminations, accounted for 9% of the total revenue growth in that division. We continue to concentrate on recruiting quality revenue producing agents. During the 2010 third quarter, we added another eight agents who had a prior revenue run-rate of approximately $1 million. Our pipeline of prospective new agents remains very strong.

Landstar's net revenue percentage or yield as defined as revenue less purchase transportation and agents commissions was 16.2% in the 2010 third quarter. Moreover, the net margin percentage improved throughout the quarter from a low of 15.6% in July to 16% in August to 16.8% in September. Two general factors contributed to this sequential improvement -- the monthly sequential decline in the low-margin substitute line haul business and the gradual improvement in overall pricing and stabilization of purchase transportation throughout the quarter.

Overall net revenue for the 2010 third quarter increased 13.5% versus the 2009 third quarter. Operating income as a percent of net revenue, excluding the $3.8 million buyout, was 39.4%, a nice improvement from the 38.2% in the 2010 second quarter.

Also, included in operating income for the 2010 third quarter is approximately $3.8 million related to an incentive compensation accrual. There is no such accrual in the 2009 third-quarter operating income amount. Looking at operating income as a percent of net revenue on an apples-to-apples basis with the 2009 third quarter, meaning excluding both this accrual and the buyout, operating income as a percent of net revenue for the 2010 third quarter was 43.1% and compares very favorably to the 36.8% in the 2009 third quarter. Excluding the one-time charge for the buyout, 2010 third-quarter operating income increased approximately 21% over 2009 operating income, again in line with our expectations.

Diluted earnings per share, excluding the $0.05 charge for the buyout, was at the upper end of our EPS guidance at $0.49 per share and increased 26% over the 2009 third quarter. During the 2010 third quarter, we completed one share buyback program through the purchase of 745,000 shares of common stock at a total cost of approximately $29.6 million, and the Landstar Board of Directors approved another program authorizing the purchase of up to 2 million shares.

Now I'm going to turn it over to Jim to take you through the P&L and balance sheet. Jim?

Thanks, Henry. Henry has already discussed revenue for the 2010 third quarter. I will cover various other financial information included in the release.

Net revenue representing revenue less the cost of purchase transportation and commissions to agents increased 13.5% to $100.8 million or 16.2% of revenue in the 2010 quarter compared to $88.9 million or 17.7% of revenue in the 2009 quarter. Purchase transportation as a percent of revenue in the 2010 quarter increased 180 basis points compared to the 2009 quarter. The increase in the cost of purchased transportation as a percent of revenue was partly offset by a 30 basis point decrease in commissions to agents as a percent of revenue compared to the 2009 quarter. The cost of purchased transportation was 76.2% of revenue in the 2010 third quarter compared to 74.4% in the 2009 third quarter. This increase was primarily due to a 160 basis point increase in the percentage of revenue paid to truck brokerage carriers for purchased transportation and the change in mix.

However, the 160 basis point increase experienced in the 2010 third quarter over the 2009 third quarter was significantly lower than the 350 basis point increase in the percentage of revenue paid to truck brokerage carriers in the 2010 second quarter over the 2009 second quarter. Commissions to agents was 77.6% of revenue in the 2010 third quarter compared to 7.9% in the 2009 third quarter. This decrease was primarily due to decreased gross profit representing revenues less the cost of purchased transportation on the Company's revenue under margin split arrangements and a change in mix.

Other operating costs were 1% of revenue in the 2010 quarter compared to 1.4% in the 2009 quarter. This decrease was primarily due to the effective increased revenue.

Insurance and claims costs were 1.8% of revenue in the 2010 quarter compared to 2% in the 2009 quarter. The decrease in insurance and claims as a percent of revenue was primarily due to increased truck brokerage volume as a percent of total volume, and the truck brokers had a significantly lower claims risk profile than the Company's freight followed by BCO independent contractors. Also, the Company experienced decreased severity of commercial trucking accidents during the 2010 third quarter compared to the 2009 third quarter, which was partly offset by favorable development of prior year claims reported in the 2009 third quarter.

Selling, general and administrative costs were 6.6% of revenue in both the 2010 and 2009 third quarters. Included in selling, general and administrative costs in the 2010 third quarter were $3.8 million related to a one-time charge to buy out an earnout provision that was available to the prior owner of one of the companies acquired by Landstar in 2009. Excluding the $3.8 million charge, selling, general and administrative costs were 6% of revenue in the 2010 third quarter.

In addition, selling, general and administrative costs in the 2010 third quarter include a $3.8 million provision for incentive compensation, whereas no provision was included in the 2009 third quarter. Depreciation and amortization was 1% of revenue in the 2010 third quarter compared to 1.2% in the 2009 third quarter. This decrease is primarily due to the effect of increased revenue.

Investment income was $495,000 in the 2010 third quarter compared to $279,000 in the 2009 period. The increase in investment income was primarily due to an increased rate of return on investments held by the insurance segment.

The effective income tax rate was 38.2% in the 2010 quarter compared to the 37.4% in the 2009 quarter. The increase in the effective income tax rate was due to a reduction in the provision for uncertain tax positions in the 2009 third quarter due to those tax positions reaching the statute of limitations in the 2009 third quarter.

I would like to touch a little bit more on operating income, and I know Henry has touched a little bit on it, I will just say a few more words. Operating income was 5.8% of revenue in the 2010 third quarter compared to 6.5% in the 2009 third quarter. Excluding the effect of the $3.8 million one-time charge, operating income was 6.4% of revenue in the 2010 third quarter.

However, looking at operating income as a percent of net revenue, operating margin was 35.6% of net revenue in the 2010 third quarter compared to 36.8% in the 2009 third quarter. Excluding the $3.8 million one-time charge, operating income as a percent of net revenue was 39.4% in the 2010 third quarter, a 260 basis point improvement over the 2009 third quarter. Also impacting the operating margin was the $3.8 million provision for incentive compensation reported in the 2010 third quarter, whereas no such provision was reported in the 2009 third quarter.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $79 million. Year-to-date cash flow from operations was $68 million. During the 2010 third quarter, the Company purchased 745,000 shares of its common stock at a total cost of $30 million, bringing total 2010 year-to-date stock purchases to 1,375,000 shares at a total cost of $55 million. Trailing 12-month return on average shareholders equity was 29%, and trailing 12-month return on invested capital representing net income divided by the sum of average equity plus average debt was 21%.

On September 25, 2010, shareholders equity represented 69% of total capitalization.

Back to you, Henry.

Thanks, Jim. Our 2010 fourth-quarter over 2009 fourth-quarter revenue comparisons will be a little more difficult due to the anticipated decline in our substitute line haul business. Substitute line haul revenue represented approximately 14% of revenue in the 2010 first quarter, approximately 11% of the total revenue in the 2010 second quarter, and approximately 8% of the total revenue in the 2010 third quarter. I currently anticipate that substitute line haul revenue will decline approximately $40 million in the 2010 fourth quarter versus 2009 fourth quarter and will represent approximately 5% of total 2010 fourth-quarter revenue compared to 13% in the 2009 fourth quarter.

Unless there is a reappearance of a peak shipping season, which I do not subscribe to, I believe the overall 2010 fourth quarter will look very similar to what we saw in September and into the first weeks of October. Ex substitute line haul volumes I see moderately increased load volumes versus the prior year and a strong pricing environment due to a tight capacity market.

All that being said, I would anticipate revenue to be in the range of approximately $580 million to $620 million after factoring in the decline in our substitute line haul revenue. Based upon the above revenue assumptions, I would anticipate that earnings per diluted share for the 2010 fourth quarter to be in a range of $0.45 to $0.50 per share, which would represent an increase over the 2009 fourth quarter in a range of 22% to 35%. So far everything we have seen in the 2010 fourth quarter looks pretty promising. However, my experience over the past five years or so has been that the fourth quarter has been the most difficult quarter of all to anticipate and forecast.

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

(Operator Instructions). Chris Ceraso, Credit Suisse.

What are you seeing so far in Q4 on air and ocean rates? Are things starting to slow there?

From an ocean rate standpoint, over the last couple of quarters, we have continued to see rates increase on a sequential basis from second to third quarter and third to fourth quarter. There have been -- because the base of revenue is small both in the air and the ocean side, we do get impacted from a revenue per shipment standpoint with some of the project cargo that we haul. But, on an overall basis, we have seen price increase on a sequential basis over the quarters, and we anticipate that continuing here into the fourth quarter. We have seen a shift in ocean freight moving back to the air. We had it shifted back here at the beginning of the year from air to ocean as shippers were looking to reduce their costs, so over the last couple of weeks unless we have seen a shift back from some of the ocean cargo back to ocean cargo.

Chris, that was Jim Handoush.

Okay. Thank you and then just a follow-up. Can you just repeat what you said was the sequential operating margin in Q3 versus Q2? And then in that context, did you see an improvement because of the reduced amount of substitute line haul, which had been depressing your margin?

Just repeat that one -- the sequential --?

What was -- I just wanted you to repeat -- you rattled it off pretty fast, and I did not think it matched my numbers, but what was your Q3 operating margin whether it is as a percent of gross or net revenue, whatever you like, and how did that compare to Q2? And I wanted you to talk about that in the context of the percent of your business in substitute line haul, which in prior calls you said was putting some pressure on your margin.

Yes, it clearly was, and the reason why -- you know, when that starts to decline, that pressure gets relieved a little bit, which is what I was alluding to when I made my comments. And I'm going back through my notes. My comments were to net margin as far as --

Chris, I think he was talking about net margin, which is just basically your gross profit percentage, and I believe it was 15.6% in July, 16% in August and it jumped to 15.8% in September. And I think if you see what is going on, you continue not to -- substitute line haul is a big piece of that as it declined through the quarter. But you also got some favorable impact from reduced purchased transportation as a percent of revenue going through the quarter, too. So you're getting a little bit of release of the pressure that has been coming through in the second quarter.

Alex Brand, Stephens Inc.

Can you -- as the business slowed in the quarter -- and Henry, you sound like you're pretty sure that the peak already came and went -- can you talk -- give us a little color if you could about like by industry sector, the verticals, what did you see slowing and maybe some comparison of kind of flat trend versus dries in the quarter?

Yes, I will actually turn that over to Pat, but let me -- generally and if you go back to even what we said in the mid-quarter conference call, I anticipated that low volumes would moderate when you looked at it compared to the prior year. And I think it is pretty much in conjunction with what we have seen. I mean it has actually tracked pretty much what we predicted. The only thing that did not track what we predicted, we have clearly more of the substitute line haul decline. It was quicker than we had anticipated. But Pat can go through the actual differential between vans and flats as far as sequentially and compared to the prior year.

Pat, why don't you start with the prior year first?

If you look at the prior year, on the platform side, loads were up 5% in the quarter. On the van side, loads were up 15.6% in the quarter. Pricing on the platform side up nearly 17% in the quarter -- this is year over year now -- on the pricing side van about 13%. Now looking at it sequentially, if you take a look at the van business sequentially, pricing up 3%, loadings down 6.5%, platform pricing up 8%, loadings down 4.3%.

Okay. So every vertical basically got weaker throughout the quarter. Can you pinpoint auto or something that held out versus other segments?

Well, if you look at quarterly, you have got some plant shutdowns in auto, so there is always historically a quarter-over-quarter decline. Okay? A sequential decline in loadings on the automotive side. But I cannot pinpoint for you any of the other verticals or any other product lines, if you will, that have slowed down.

Okay. Fair enough. I appreciate the color, guys.

Todd Fowler, KeyBanc Capital Markets.

Just to go back to Chris's earlier question, can you talk a little bit about what happened to brokerage net revenue margins excluding substitute line haul? Maybe it would be helpful to talk about it sequentially here in the third quarter from the second quarter and then maybe a little bit of color on a year-over-year basis in the third quarter.

Sure. Jim?

Do you want that ex substitute line hauls is what you're looking for? Because I gave the truck brokerage with substitute line haul.

Jim, if you have it ex substitute line haul, I think that that would be helpful.

Give me one second. Ex substitute line haul, truck brokerage 180 basis -- 280 over last year.

280 basis points improvement over last year?

No, you're still getting pressure on that.

Got it. Okay (multiple speakers)

In the second quarter.

Okay. So it was in line with where it was in the second quarter and still 280 basis points unfavorable year-over-year?

Yes, hold on. The second quarter, though, it is a little favorable to the second quarter if you take the substitute line haul out and just give me a second. It was 360 in the second quarter. Second quarter over second quarter prior year was 360, and whatever I said, 280? (multiple speakers) -- improvements sequentially quarter on quarter.

Got it. And then sequentially throughout the quarter that it was also improvement. So if you looked at it month by month, you started to see some relief from the purchase transportation costs sequentially during the third quarter.

We did. Yes.

Okay, great. And then as my follow-up, Henry, can you talk a little bit about the balance sheet? It feels like debt has moved up a little bit. It feels like you guys have been aggressive out in buying back the stock. You still have a pretty significant amount authorized. What is your view and what should we expect for the cadence of repurchases at this point given where the balance sheet is and what you have done year-to-date with the repurchases?

Well, look, a couple of things. One, any sign that Landstar starts to grow its revenue, and when you look at our revenue growth sequentially quarter over quarter, it has been pretty good. I think -- and, therefore, what happens is we will basically pay our contractors and the agents actually before we get that money in, so you have got a buildup in the revolver. In addition to that, what you have seen is a completion of one share purchase program. And obviously where we feel with the price of the stock where it is, I would imagine we would be pretty aggressive.

Michael Fountaine, RBC Capital Markets.

My question is on following up the contingent payment you did for NLM, what is the -- do you guys have one for A3i out there as well? What would the timing of that be?

A3i is a different situation altogether. It is a minority ownership. The owner owns 25%. There is a put and call option at the end of four years. I believe it as a call option at the end of four years and is a put option I think on his part at the end of six years or thereabouts, so it's a different structure.

Okay. That makes sense. And then as a follow-up to that, how does the seasonality to the supply chain business work? It looks like the revenue came down a little bit from the second quarter to the third, but I think you said on the second-quarter call that you had just signed a new contract. So can you just help me think about that a little bit?

There's a couple of things. One, as it relates to -- right now if I look at this, we have three contracts that we have basically signed. We are currently running as we speak parallel on the one contract I have referred to for probably a number of quarters right now, and that is anticipated that we would go live at the end of this month. The other one is -- there is one smaller one that is live, and there is another one that we plan to go parallel with towards the end of the month.

As far as the seasonality, I'm not sure there is much seasonality. I think there is a couple of things that occur -- I think what you're referring to is, if you looked at our fees from freight under management, they were actually up about $600,000 quarter over quarter. There was a small piece of business at NLM that we ran for a little bit last year that we got out of, which caused I think what you are looking at as the overall decrease in that.

Okay. Thanks so much.

There was a kitting business that NLM was involved in for probably the first eight to 12 months after we bought them, and that kitting business went away. There is about $1.1 million in prior year's number. That business has faded, and we knew it was going to go away.

Okay, that helps.

Justin Yagerman, Deutsche Bank.

I just wanted to ask a couple of questions here. On the substitution line haul, when you figure what is driving the decrease, I mean is that what we are hearing from some of these LTL carriers?

I think it is -- our -- well, I'm not -- our substitute line haul business primarily is with one vendor. I mean we have other pieces. And really what that issue is it is a planned absorption, if you will, of some of that business by themselves. And what has happened is, again, as you go through 2009 into 2010, I think with the pickup in the economy and some pricing that was done to basically try to take more business, we got more lanes. So they sort of delayed their implementation of taking this all in-house.

So this is the manifestation of them calling out some of that --

That is correct, and that is the only (multiple speakers) thing I can really comment on. It is not that we did not anticipate it. We sort of anticipated it earlier. It did not happen. It sort of shifted it out a little bit, and it has occurred quite heavily in September. And, as you see by our numbers, we anticipated that it would level off at about where our substitute line haul business would be running at about 5% of total revenue, which is what we figure it.

Yes, when you look at actually our guesstimates out there as far as what we are looking at as far as our revenue stuff, if you actually pull that substitute line haul decline out, I mean you are still looking at overall we are projecting pretty strong growth overall in revenue quarter over quarter. I think that is the key takeaway. I hope people get that from this.

I know, absolutely. How do we think about the relative profitability of that business versus you know -- (multiple speakers)

It is a 2% margin business. And what that has for those people that like the optics, that is going to basically improve that operating income over net revenue figure or your yield if you want to look at it as far as net revenue over revenue. It has that positive impact.

Yes, that is what I thought. All right. Thanks on that. I wanted to get a sense -- your intermodal volumes have been -- (multiple speakers)

I have got to cut you off. I said I would do two questions. If you get back in the queue, I will come back to you.

Nate Brochmann, William Blair & Co.

Just to follow up on Justin's question a little bit, I think one of the senses that I think a lot of people are missing here as we talk about the slower growth and even coupled with your comments about peak season, but I think what you were just getting at, along with Justin's question there, was that the level of activity still remains fairly strong. And I think that is driving your optimism for the business in general. I just wonder if you could comment a little bit on that?

I could not have said it better. I mean you are absolutely right on target. Sometimes it is mind-boggling as far as we have been signaling and talking about substitute line haul for probably 15 months now as far as when we thought this was going to decline and it went up. And trying to basically within and without, if you pull out the substitute line haul business for the fourth-quarter numbers altogether out of both years -- and I don't -- and I did that a few times and I don't like doing that, but really to understand what is going on in the business, you really need to do that. And you are really looking at midteen growth in the fourth quarter, and really it is driven more by price than it is by volume, although volume increases over the fourth quarter are going to be there. It is very consistent with what we said in the past.

So yes, we are pretty -- yes. I remain a little bit cautious on the fourth quarter because if you really go back to the last five years in Landstar's history or generally in the transportation market, the fourth quarter has been a very difficult quarter to predict. And we see things pretty good right now, but I'm a little bit on the cautious side because fourth quarter has been just a quarter that we just have not been able to call right.

That is very helpful. And what gives you the confidence in terms of that pricing, particularly on the contractual pricing side going forward, that that holds up even if you think some of the peak season demand slips a little bit?

Well, a couple of things. I don't -- if anything, as we move forward, whether it be into 2011 or what not, I just see capacity getting tight. Right now I think it is tight. I don't see anything -- I don't see anybody adding capacity. I think the economy is going to go along at a nice space, and I think you're going to see the same type of stuff we are seeing now, so capacity remains tight. I think when you go into 2011, I think you might have a different feel for this. If the economy does pick up, I mean capacity is tight. Customers recognize that right now. They are fearful of capacity constraints, and you're able to get some pretty nice pricing. And so I just see that actually moving forward as a huge opportunity for us.

I don't know, Pat, do you want to make any comments on that?

It is exactly what Henry said. If you think about it in the past, the admission into this business was pretty easy. You go to the bank, you borrow money, you buy a truck, you are in business. The banks are not loaning money anymore. The credit markets are extremely tight. The cost of a new Class 8 vehicle, there is a 30% premium just on the EPA emissions add-on. So the barriers to entry are far greater than they have ever been. So even if there is not an exodus of capacity, which I think there is still going to be some of that, you're not going to have new capacity coming into the market.

And those comments hold for both the flatbed and the dry?

Correct.

Tom Albrecht, BB&T.

A couple of questions here. I don't know if I heard this exactly, Jim, but brokerage purchase transportation as a percentage of brokerage revenues, it has been over 80%. What was that exact number in the third quarter, and what was the brokerage net margin?

I did not give the broker's PT rate; I just gave the change.

Okay.

From basically what I said was that, in the third quarter over third quarter, 280 basis points higher this year than it was last year.

Unfortunately I don't have last year's number either.

Well -- in the third quarter -- in the second quarter, I said it was 360 bps. But I am not giving out the exact percentages any longer.

So if I backed into that, though, just what little I have got, you improved ex the LTL about 80 basis points off that 84.6?

Yes.

Okay. All right. And are you giving brokerage net margin? You gave that for the first couple of quarters for the year, 9.1 and 8.3.

I will tell you that it is now -- second quarter over second quarter was 140 basis points lower.

Right.

And third quarter over third quarter was 120 basis points lower.

So is there a reason why you're not giving that? Because it seems like that is one of the keys for folks to understand that you got one business that has been squeezing your margins, but that is not going to last forever. So if we have visibility with that, we can think about the earnings stream a little bit differently.

Tom, let me respond to that. I think there is a couple of things. I think you talk to the most -- the Company that has probably the most transparency out there, and we give a lot of information. And you are absolutely right. As I said in my comments, you are seeing an improved environment on the PT side, and you are starting to see those yields expand, and I think that should be sufficient.

Okay. And then what is your average interest rate right now?

About 1.5 -- 1.3 -- but that is on the revolver.

John Larkin, Stifel Nicolaus.

I could not help but notice that your BCO count dropped a little bit at 177 BCOs. How much does that worry you if at all? Is it as hard or harder to find incremental BCOs than it has ever been?

You are comping to prior year or sequential quarters because I think we are up?

We are up in sequential.

I'm sorry, okay -- I read the table. So you're up 177, and any comments on where those folks are coming from and what your plans are in the future? Are you pushing hard to add additional people, or are you satisfied with the current BCO count as it stands today?

Well, John, I think the thing about what we said, I mean as long as we are satisfying the customer that works for me. I mean we're always trying to basically push for more BCOs and more brokerage capacity. So we have an equal -- I want to bring on both. I think when you look at load volumes sequentially, one might think that it looks like there have been less loads hauled quarter to quarter sequentially by BCOs. And the only reason is because typically it actually is a seasonal phenomenon in the third quarter as people take vacations and whatnot, so you have a little bit less loadings. But we want to bring on both types of capacity, and Joe, if you want to make any comments.

Yes, before you get too much further into that, that I re-looked at the press release here to make sure that I was not smoking rope or something, and it does, in fact, look as if there was a drop from 8070 as of September 26, 2009, to 7893 as of September 25, 2010.

Yes, that is quarter over quarter. Yes, again, I was talking sequentially.

Okay. I'm sorry.

You have clearly seen that phenomenon all through -- starting in 2009 when things were really tough. I mean it is like anybody else. You did lose some capacity. And what is happening now, as those comps cycle out, I mean sequentially we have actually added. So, if you go back to the second-quarter press release, and I don't have a number but I'm pretty sure it is up.

It is up. And we have been adding more BCO trucks than deleting since May month over month and no sign that that is going to change. We are still working as hard as we ever have to bring on BCOs as we can qualify them. The standards have not changed, and they are appropriately high. But we continue to see a lot of interest, and adds continue to come through.

Okay. And then maybe as a follow-up, with the CSA 2010 program about to be fully implemented here, does that create any unique problems for Landstar given your owner/operator model? And then any additional comments on the hours of service change that may be forthcoming and perhaps any comments on mandatory across-the-board onboard trip recorders?

Is that like a three-part question?

More or less.

That is a mouthful, John. Joe Beacom here. The CSA, as it rolls out, does it present Landstar with any unique problems given our model? I would say no. I would say that our safety and compliance culture that we have built over the years is actually going to serve us pretty well as that gets rolled out. Not that we don't see some challenges because it is a different program, and the measurements are quite a bit different than they have been historically. But I don't see any unique problems to Landstar as it relates to BCOs or our model.

On the hours of service front, you probably heard there is supposed to be a change in both the restart as well as the driving hours. And I don't see that -- that has not affected us negatively historically when they have made those changes. We've got a pretty good network and a pretty good system for moving that information out to our agent family, our BCOs and our customers. So I don't expect that to present us any significant problems.

And then, on the third part of that question around the onboard recorders, we are just simply watching that pretty closely because it does seem to be getting additional interest, and as we always have watched that pretty closely, we are looking at some vendors as to what we might do should we come to that point. We think it is eventually going to happen, and we're in the process of doing our due diligence and positioning ourselves to make that move when and if we need to make that move.

Anthony Gallo, Wells Fargo.

Thank you for getting to all these questions. The first one, Jim, could you give the monthly load volumes?

Truck transportation?

Yes, please.

Do you have another question while he is doing that?

Yes, thank you. You mentioned that there was some net margin relief in the brokerage business, excluding line haul, and you also mentioned that pricing was firm and capacity tight. So am I correct to assume that that is because your agents, in fact, have been able to go out and re-price business, and that is where the relief is coming from?

I think it is a combination of, as I said before, if you track back to what I said, I do believe you're going to gradually get some price increase. And you have seen pricing actually increase pretty nicely. So it is platform price, and I think there is a general stabilization as volumes have generally not sequentially sort of leveled off if you will to slightly lower but again better than the prior year. I want to make sure everybody understands that. Yes, you got some room there, so it all ties together. Yes, and our agents, therefore, have been able to get better pricing from the customer.

Good. Just less froth? Okay.

Volumes on -- this is total truck transportation, which is what you see on the line items BCO and Truck in our press release -- in Truck Brokerage, I'm sorry. 108,000 loads in July, 112,000 in August, 132,000 in September.

Great. (multiple speakers). Thank you, guys.

Matt Brooklier, Piper Jaffray.

If I look at your BCO and your brokerage volumes, can you guys provide on a year-over-year basis what load volumes look like? And I know it is early, but thus far in October and also how should think about load volumes for the fourth quarter given the fact that we have seen some moderation in terms of demand, plus you guys are stripping out the substitute line haul or a bigger portion of substitute line haul out of the brokerage operations?

Well, I think it is premature to comment on any specific numbers for October since we have only been a couple of weeks into October. So I sort of shy away from that. Generally what we have seen is sort of like what we have seen in September. I think the July and August numbers from loadings from whether it be BCO or brokerage versus brokerage is a little bit skewed more towards brokerage because in July and August you have got some automotive shutdowns, you have got BCOs just going on vacation. I think you get more skewed back towards an increase in the BCO piece. All that being said, I anticipate overall loadings to be up from the prior year, and therefore, I would expect both to be increased over the prior year. But I don't know if I can be much more specific than that.

Okay. So both BCO and your truck brokerage even ex the substitute line haul coming out from a year-over-year volume perspective in the fourth quarter, you would expect those volumes to be up?

That is correct, quarter over quarter.

Okay, second question. I think, if I heard you correctly, you guys had $3.8 million in bonus accruals during the third quarter. What are your expectations for bonus accruals during fourth quarter?

Similar.

David Campbell, Thompson Davis.

I just wanted to ask are the sub line haul revenues in the truck brokerage carrier line or a combination of that and business capacity owners?

It is primarily in the brokerage.

Primarily brokerage? Okay. And what percentage of fourth-quarter '09 revenues were in sub line haul?

Fourth-quarter '09? I believe it was 13%. 13%.

Okay. And the last question is, are their agent commissions paid on the sub line haul?

Yes, yes.

Okay. Thank you.

It is a margin split. Remember, that business, it is a cost plus contracting, and you split the margin with the agent. Okay. Thanks.

Ed Wolfe, Wolfe Trahan.

So when you gather what you are seeing out there, what do you expect for truckload pricing in 2011 give or take?

Right now I have got to be honest with you, if -- I expect it to be strong. Right now we are running -- for a revenue per load, we are running 1600 hours plus, and that is still improving sequentially a little bit. And I've got to tell you it just depends on where I think the economy goes. I think if you get any pickup at all -- and it really depends on your view as far as where business -- is business going to spend money, or are they going to just hoard the cash, and therefore, we are just going to muddle along? I don't see any double dip. I see -- but I tell you, if something happens where people get more -- a little bit more confident and some uncertainties are removed and CEOs decide to do some things, I don't see anything increasing in the capacity. I only see it getting tighter. So -- and that gives me my optimism as far as the whole trucking transportation business, quite frankly.

So if I just take 1600 and assume you have got nothing new from here, you are up 2% or 3% next year, and your sense is it is getting tighter so you get more than that? Is that what you are saying basically?

Yes, I think that is probably correct.

Okay. Most everything else has been answered. Can I just get some cash flow things, Jim? Do you have -- I think you said cash from operations, and can you give me CapEx?

$68 million cash from ops. That is year-to-date. I think we were at $26 million in the second quarter. So year-to-date $68 million and cash CapEx for the year-to-date is $25.5 million.

Chaz Jones, Morgan Keegan.

One quick question. All of the other ones have been asked. Maybe just to follow up on Ed's pricing question. The 14% in the third quarter, did you guys break that out on a monthly basis for revenue per load?

Just give me a second. It corresponds to the loadings I gave. That was truck transportation.

Correct.

On a revenue per load related to those load counts that I gave?

Right.

It was 1669 in July, 1619 in August, 1610 in September, but typically we see the jump in July like that. That is nothing unusual for it to jump and then drop off in August. There is nothing implied in there. I mean you will see that every year where July has got a higher rate per load. As automotive slowed down, some of the other businesses kind of help increase that rate. That is more of a mix issue than a pricing issue.

Jim, do you have the percentage change, what that would equate to?

15% in July, 14% in August, and 14% in September.

Justin Yagerman, Deutsche Bank.

I wanted to get a sense -- you spoke a little bit about share repurchases before, but maybe if you guys have a comfort range around where you could see debt to cap going if you wanted to get aggressive on buying back stock. You guys are in the 30s; you have been in the 50s. How do you think about what your comfort level is on a leverage front?

Look, I mean I think my general attitude, I think most people on there know me. I'm more debt adverse, but as I said, I mean can Landstar handle a lot more debt? Absolutely. Our cash flow is pretty dynamic, and we generate a lot of cash. So I'm comfortable at a lot of different levels. Jim?

No, I'm kind of with Henry on that. Obviously we could put a lot more debt on the books here if we wanted to.

Okay. And Jim, when I think about insurance as a percent of revenues down year over year and sequentially modestly, but you guys have been down closer to 1% in the past. How do I think about timing for some of these accruals on insurance? And, as we get into next year, assuming things start to ease up on whatever has been driving insurance higher for the last few quarters, what are your thoughts on where that should stabilize as we look out over the next several quarters?

It is 1.5% to 3%, and I generally consider it 2%. We have had some unfortunate situations the last couple of quarters, but I would still just go in the middle of that range.

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

Well, thanks. I want to basically thank everybody for joining us this afternoon, but before I give any closing comments, Jim, do you have anything else that you would like to --?

I think we are feeling pretty good about what the Company has done in the last nine months and clearly see that our revenue guidance, if you take out substitute line haul which seems to be muddying up everything from an appearance standpoint, I think we continue to see -- if you look at our guidance, which can be calculated from the press release, we are still looking for a mid-teen to low 20% range revenue growth. You know, it tends to feel like people think we are slowing down, but it is really substitute line haul driving most of it. So I'm still feeling pretty good.

And Jim is feeling pretty good. That is pretty good.

Yes, I am typically a pessimist.

Anyway, our mid-quarter update call is scheduled for November 29th. We should have just about two months completed of the fourth quarter. I will remind everybody that the fourth quarter is a difficult quarter to predict, and typically December is a very difficult month to predict. But, as I said, everything is looking pretty good right now, and with that, I look forward to seeing everybody on -- or hearing -- talking to everybody on November 29th.

Thanks, again, and have a good afternoon.

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