Landstar System Inc (LSTR) 2010 Q4 法說會逐字稿

Good afternoon and welcome to the Landstar System, Inc.'s year-end 2010 earnings release conference call. All lines will be in a listen-only mode until the formal question-and-answer session. Today's call is being recorded. If you have any objections, you may disconnect at this time.

Joining us today from Landstar are Henry Gerkens, Chairman, President and CEO; Jim Gattoni, Vice President and Chief Financial Officer; Pat O'Malley, Chief Operating Officer; 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, Terry. Good afternoon, and welcome to the Landstar 2010 fourth-quarter and year-end earnings conference call. This conference call will be limited to no more than one hour. Please limit your questions to no more than two questions each when asked.

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 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.

In 2010, Landstar rebounded from the recession-ridden 2009 year as revenue for the 2009 full-year increased 19% over 2009 to $2.4 billion. Operating income for the 2010 full-year increased 23% over 2009 to $140 million, and earnings per diluted share increased 29% over 2009 to $1.77 from $1.37 in 2009. It was a very strong year.

Let me review the 2010 fourth-quarter results before I comment on what I believe is a very exciting and promising 2011.

As you recall, I indicated on our 2010 fourth-quarter mid-quarter update call that revenue, inclusive of an approximate $44 million estimated decline in revenue from the low gross profit margin substitute linehaul business, would finish in the lower end of the previous range of revenue guidance of $580 million to $620 million. I also stated that fourth-quarter earnings per diluted share would be in a range of $0.45 to $0.50 per share.

Overall, 2010 fourth-quarter revenue was approximately $588 million, an increase of 7% over the 2009 fourth quarter. The low-margin substitute linehaul revenue declined approximately 67%, and about 10% more than I had anticipated on our mid-quarter update conference call. However, all other truckload revenue in the 2010 fourth quarter increased a healthy 20% over the 2009 fourth quarter. Overall, truckload volumes and revenue per load, other than from the substitute linehaul business, increased about 8% and 12%, respectively. Total truck brokerage revenue, other than substitute linehaul revenue, increased an impressive 48% in the 2010 fourth quarter versus the 2009 fourth quarter.

BCO revenue for the 2010 fourth quarter versus the 2009 fourth quarter increased 8%. Rail, air and ocean revenue for the 2010 fourth quarter versus the 2009 fourth quarter collectively increased 5%. It should be noted that for the month of December 2010, revenue generated in the rail, air and ocean modes collectively increased 40% over December 2009. Revenue from new customers, in addition to increased account penetration by existing agents, all added to the December increase and is a good sign, as we move forward into 2011.

Revenue generated with a fixed gross profit margin represented 70% of total consolidated 2010 fourth-quarter revenue versus 78% in the 2009 fourth quarter, primarily as a result of the reduction in the low fixed gross profit margin substitute linehaul business. As a side note, this revenue represented 4% of total consolidated revenue in the 2010 fourth quarter versus 13% in the 2009 fourth quarter.

Revenue generated with a variable gross profit margin represented 30% of the 2010 fourth quarter revenue versus 22% in the 2009 fourth quarter, primarily as a result of the strong growth in non-substitute linehaul brokerage revenue. Gross profit dollars in the 2010 fourth quarter increased approximately 8% over the 2009 fourth quarter.

Total operating income for the 2010 fourth quarter was approximately $36 million and increased approximately 30% over 2009 fourth-quarter operating income. Earnings per diluted share for the 2010 fourth quarter was $0.50 per diluted share, and increased 35% over the 2009 fourth quarter. It was a very solid quarter. Landstar finished the year with 468 agents who generated over $1 million in Landstar revenue versus 405 in 2009. In addition, there was 73 agents who generated between $750,000 and $1 million versus 89 agents in 2009. Revenue from agencies open for the entire 2010 and 2009 years increased approximately 18%.

Overall, for the 2010 full year, new revenue from 2009 and 2010 agent additions amounted to over $128 million. I am very pleased with our recruiting efforts in 2010, as our strategy of focusing on quality, productive agents rather than agent count alone has generated improved revenue results.

During the 2010 fourth quarter, we purchased approximately 1.3 million shares of our common stock at a cost of approximately $48.1 million. For the entire 2010 year, approximately 2.7 million shares were purchased at a cost of approximately $102.7 million. During January of this year, Landstar purchased the remaining 25% interest from A3i from Lorne Darnell, who remains a consultant to the Company. The purchase, coupled with the buyout of the NLM earnout in the 2010 third quarter, allows Landstar's supply chain solutions to move forward with unified leadership and approach.

I'll now turn it over to Jim for his financial review.

Thanks, Henry. Henry has already discussed revenue for the quarter; I'll cover various other financial information [that's been] included in the release.

Gross profit representing revenue, less the cost of purchased transportation and commissions to agents was $98.5 million or 16.8% of revenue in the 2010 quarter compared to $91.6 million or 16.7% of revenue in the 2009 quarter. Purchased transportation as a percent of revenue in the 2010 quarter decreased 170 basis points compared to the 2009 quarter. The decrease in the cost of purchased transportation as a percent of revenue was partly offset by a 130 basis point increase in commissions to agents as a percent of revenue compared to the 2009 quarter.

The cost of purchased transportation was 75.3% of revenue in the 2010 fourth quarter compared to 75.5% in the 2009 fourth quarter. This decrease was primarily due to the significant decrease in the Company's less-than-truckload substitute linehaul revenue, which has a higher rate of purchased transportation. Excluding the revenue and purchased transportation costs of the substitute linehaul freight, the percent of revenue paid for purchased transportation to truck brokerage carriers increased 150 basis points in the 2010 quarter over the 2009 quarter. However, the 150 basis point increase experienced in the 2010 fourth quarter over the 2009 fourth quarter was significantly lower than the 280 basis point increase experienced in the 2010 third quarter over the 2009 third quarter.

On a sequential quarter basis, the percent of revenue paid to truck brokerage carriers, excluding the revenue and purchased transportation costs from substitute linehaul freight, decreased 50 basis points from the 2010 third quarter to the 2010 fourth quarter. Commissions to agents was 8% of revenue in the 2010 fourth quarter compared to 7.8% in the 2009 quarter. This increase was due to the significant decrease in the Company's less-than-truckload substitute linehaul revenue, which has a lower rate of agent commission.

Other operating costs were 7% of gross profit in the 2010 quarter compared to 8.1% in the 2009 quarter. This decrease was attributable to a decreased provision for contractor bad debt and the effect of increased gross profit, partially offset by increased maintenance costs on company-owned trailer equipment.

Insurance and claim costs were 11.9% of gross profit in the 2010 quarter compared to 18.4% in the 2009 quarter. The decreases in insurance and claims as a percent of gross profit was primarily attributable to adverse developments of insurance claims in the 2009 fourth quarter, and favorable development of insurance claims in the 2010 fourth quarter, net of the effect of a previously-mentioned significant accident in the 2010 fourth quarter.

Selling, General and Administrative costs were 38.8% of gross profit in the 2010 fourth quarter and 37% of gross profit in the 2009 fourth quarter. Included in Selling, General and Administrative costs in the [2010] fourth quarter was a $4.9 million provision for incentive compensation, whereas no such provision was included in the 2009 fourth quarter.

Depreciation and amortization was 6.5% of gross profit in the 2010 fourth quarter compared to 6.7% in the 2009 fourth quarter. This decrease was primarily due to the effect of increased gross profit. Investment income was $489,000 in the 2010 quarter compared to $314,000 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 31.5% in the 2010 quarter compared to 31.1% in the 2009 quarter. The effective income tax rate in both periods was favorably impacted by reductions in the provision for uncertain tax positions.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $68 million. 2010 cash flow from operations was $109 million. Cash capital expenditures during 2010 was $27.5 million. Trailing 12-month return on average shareholders equity was 32% and trailing 12-month return on invested capital, representing net income divided by the sum of average equity plus average debt was 22%. At December 25, 2010, shareholders equity represented 67% of total capitalization.

Back to you, Henry.

Thanks, Jim. I am very optimistic as we enter 2011. Overall, revenue trends experienced in January are positive. Truck transportation load trends, other than the anticipated decline in substitute linehaul volume and the impact of some inclement weather, have been positive. Truck transportation revenue per load trends remain positive but have moderated to some degree.

Rail, air and ocean revenue trends are all positive. Supply chain solution fee revenue trends are positive. Our pipeline of prospective agents remains as strong as ever, and our pipeline of potential new supply chain customers continues to increase.

As it relates to 2011 market conditions, I believe the economy will gradually improve in 2011, and that overall industry truck capacity could tighten to some degree as a result of the implementation of various regulatory initiatives. If capacity does tighten as we move throughout the year, I would anticipate a corresponding increase in pricing power.

From Landstar's perspective, I don't anticipate any major impact to our BCO count as a result of any new regulations. I would anticipate, however, maybe a 10% reduction in Landstar's list of approved broker carriers as we redefine our qualification standards. This reduction should have little or no impact on Landstar operations.

I anticipate that the low-margin substitute linehaul revenue will decline approximately 70% to 80% in 2011 compared to 2010, with the bulk of the decline occurring in the first three quarters of 2011. Despite that headwind, and absent any unforeseen change in the economy or current operating trends, I believe that the decline will be more than offset by an estimated low double-digit increase in all other transportation services offered by Landstar.

From a gross profit margin perspective in 2011, I believe Landstar's gross profit margin will likely improve on a current year-over-prior-year quarterly basis in conjunction with the anticipated decline in the substitute linehaul business, and revenue increases in other transportation services, including supply chain fee revenue.

I would anticipate operating margin for the entire 2011 year to be in a 40% range, up from approximately 35% in 2010 and approximately 33% in 2009. Please keep in mind that due to the seasonal nature of Landstar's first quarter and certain costs that are unique to every first quarter, Landstar's operating margin for the 2011 first quarter is anticipated to be in the 35% range. However, much stronger than the 31% in the 2010 first quarter.

The increase in the 2011 anticipated operating margin over 2010 operating margin is primarily as a result of increased gross profit and lower SG&A costs. It should be noted that Landstar's operating margin should be favorably impacted, due to anticipated lower incentive compensation accruals in conjunction with the higher 2011 targets.

As it relates to Landstar's future operating margin, our objective over the next three years is to drive that margin up to 45%. I'm currently comfortable with the range of analysts' earnings estimates as reported by first call of $0.38 to $0.45 per diluted share for the 2011 first quarter, and $1.95 to $2.29 for the full 2011 fiscal year.

One final point -- on last year's year-end conference call, I said I was happy to say goodbye to 2009 and welcome in the new year. Well, 2010 was truly a bounce-back year for Landstar. I am looking forward to 2011, as I believe 2011 could be a breakout year for Landstar.

With that, I'll open it up for questions.

(Operator Instructions). Justin Yagerman, Deutsche Bank.

Was wondering -- the commentary on substitution linehaul business obviously has been a headwind to revenue for the last couple of quarters. Has anything changed where now you see the rest of it going away throughout this year, relative to what you saw in the back half of last year? Is this an acceleration of this going away?

And I guess, the other piece is, are there any other customers in the LTL space that are coming in to supplant some of this business that's leaving, I'm assuming from one large customer?

Yes, well, as it relates to -- no, I think what I stated in my prepared comments is that we anticipate through the first three quarters there will be that headwind. And it will stabilize at a certain level, but we expect that to decrease about 70% to 80%, primarily in the first -- probably 2.5 quarters. But -- and I don't see anything on the horizon that's going to replace any of that gross revenue.

Okay. And if you could talk a little bit -- you talked about trends here in January, but I'd be curious to hear about the load and pricing trends as you went through the months in Q4. Did you see things accelerate or decelerate through the quarter? And obviously, they've gotten a little bit better here in January, it sounds like.

Yes, I think when we looked at -- let me talk about January a little bit, and I don't want to get into specifics, but if I had to categorize between truck load pricing, what we've seen in January, I would say that the flatbed, heavy-haul pricing is strong. What's moderated to a large degree is the van pricing, probably due to, I guess, some seasonality to begin with.

And I guess, Pat, I mean, do you want to add anything to that?

No, I think you're right on the money, Henry. The platform business remains fairly robust relative to pricing and demand, and the van side moderating.

As it relates to the three months of October, November, and December, Jim, I don't have those exact numbers in front of me, but I think -- I didn't recall much movement. In fact, I think it was relatively consistent.

Alright. Well, hopefully, new orders sound pretty positive in the environment. Maybe that will get things moving a bit.

ISM index is positive. I think we've got a lot of things lined up right for 2011. But thanks for your questions, Justin.

Thanks, guys.

Tom Wadewitz, JPMorgan.

Wanted to ask you a little bit on pricing. It's -- just your view on what you think truckload rates will end up doing on a full-year basis. Do you think mid-single digits? Or more or less optimistic than that?

Well, a couple of things. One, it really depends on, I think, capacity demand, as you well know. I think you've probably seen a little bit more capacity, I think, from the van side than we've -- in the fourth quarter, and I think that's put some -- I don't want to say downward pressure on price, but the increase has not been as great and it sort of moderated, as I said.

On the other hand, I do anticipate that flatbed pricing and flatbed equipment will remain scarce, so pricing, I think, is going to be very positive.

Pat, do you want to again comment on any of that?

Just to agree wholeheartedly, Henry, with that analysis.

Okay. And in terms of the incentive comp, you said, I guess, in absolute terms, you think it's down a little bit in 2011 versus 2010, based on the targets you have? Or how big of a magnitude going back to a full-year incentive comp that was accrued in 2010? And then just a little bit around magnitude of how we should think about the change in that in 2011.

Let's go back to some basis. I think it's important to understand that, because -- and without talking about these specific targets, but if you go back to a year of 2008, for example, when our year was pretty well and we finished that x level; when we set our targets, the targets are set at x-plus some factor that creates some stretch in numbers.

When we did not hit that in 2009 due to the recession, you've got to remember, now you're doing in your budget cycle in 2009, trying to predict 2010, coming off a slow year in 2009 and projected to be in 2010, not knowing where that was going to be -- we're at $1.37, for example, I think we finished in 2009. So what happens is you stop start building plans based on where you think you're going to be. And I don't think anybody projected a huge rebound. So what happened in 2010, we were able to outperform those targets and resulted in, as our bonus program has been set for years and years and years, it paid a little bit more.

Now you're going into 2011 and you finish at $1.77, for example, and you put a factor on that. And, for example, bonuses that are here from the executive staff here, don't start to actually accrue until you make those numbers. So from a magnitude standpoint, I would say that approximately for a one-time type incentive accrual for next year is about a $6 million to $7 million charge.

Jim, I'm looking at you. Is that about accurate? Versus what I'm going to say was probably about a $14 million to $15 million accrual this year. So you're looking at going into next year with a $7 million to $8 million pickup to start. Does that make sense to you?

Yes, okay, so $14 million to $15 million for full-year 2010 and that was a headwind because you had kind of $0 in 2009. And you think you're kind of falling off that level of about $6 million to $7 million in 2011.

That's correct.

Okay. Great. Thank you for the time.

Jason Seidl, Dahlman Rose.

I want to get back to pricing. You talked a little bit about revenue per load on the van side moderating some. Is that total revenue per load including fuel or excluding fuel?

Fuel is included in that, Jason.

Okay. So then the pricing is going to be off a little bit more than that because I'm assuming fuel is going to have a positive impact on that number?

You know, if you look at the quarter, in the fourth quarter, fuel this year compared to last year was pretty comparable and it didn't have that much of an effect on a comparable price quarter-over-quarter. Now recently, with it up over a little bit higher, it might be having it, but really, it wasn't much of an impact quarter-over-quarter. Our fuel surcharges on the brokerage are about the same impact on the rate.

Okay. That's fair enough. And Henry, you sound a little less positive about capacity tightening than some of the other, I guess, more pure truckload-type carriers. Is there a reason for this? Or are you just being cautious about capacity tightening in the industry?

Yes, just being cautious. I mean, look, I think it's more of a stabilization at this point in time. I don't know -- I personally don't think as CSA 2010 comes into being and a few of the other rules that they're talking about, whether it be hours of service, the recently announced electronic onboard recorder requirement, the fitness stuff, [APNEA] stuff, a whole bunch of regulations that are being talked about -- I'm just not sure that that is going to have a pretty big impact as far as taking carriers out this year. It might in 2012; but I think it's going to take some time to actually get that whole compliance stuff up to speed.

I mean, I do think it's going to have an affect; I'm just not as confident that it's going to be this year. It could but I don't know -- Joe, do you have any comment on that?

The only thing I'll add is if you think back to when CSA was being talked about so heavily, they've kind of tempered that tone a little bit. A couple of the basics that were going to be shown are no longer going to be shown. Some of the intervention talk that was originally out there isn't out there quite as strongly. So I do think -- now we have -- there was a great deal of uncertainty about onboard recorders and now we see this week that it's going to be a multi-year implementation.

So I think all those things play a role in whether capacity tightens and how quickly. So I just think there was some uncertainty, that it's a little bit more clear. It isn't quite perhaps as doom and gloom as was once thought.

Okay. That's great commentary, guys. I appreciate the time as always.

Jon Langenfeld, Baird.

Agent locations -- did I miss that number? Or could you provide that for the fourth quarter?

No, we did not provide that. I mean, it's -- and we think the more relevant number is the number of million dollar agents. I mean, the location count is down slightly but that's not as relevant as the number of $1 million agents that grew pretty dramatically. And I actually gave in my commentary the $750,000 to $1 million, because I wanted to show that when you take a look at those agents that are in that level, which are your future $1 million agents, hopefully, the number gets to be quite high. Because we did have a pretty good recruiting season over the last two years. As I've been emphasizing on a lot of conference calls, vis-a-vis the million dollar agent type guy that we're going after.

And I'll kind of hearken back to the agent locations, simply because they got the data back for 10 years or so, but how do we think about that, relative to an environment where '09 was down, '10 looks like it might have been down modestly -- is your strategy of attracting and going after agents more defined today than it has been in the past? So you're able to find these bigger agents? I mean, what's -- talk to me a little bit about what's changed there so that this pure number of agent locations doesn't make as much sense.

I will turn it over to Pat because I think it's really Pat's strategy and I think he's been very successful. Go ahead.

You know, Jon, if we think about the past conference calls, we've talked about the quality of agent that we're bringing on, and it's not necessarily the number of agents, because you can bring on a number of people that want to be affiliated with Landstar, but it's bringing on the right agent that has a base of business that they can convert over right away.

I will tell you that the tough economic times of 2008 and the better economic times of 2010 have really helped us recruit a quality agent, because it's difficult for them to fund their growth. And so we are the beneficiaries of tighter credit markets and the beneficiaries of entrepreneurs wanting to grow their business. And they find Landstar to be a great place for that.

So I think our strategy of bringing on high quality agents with an existing book of business is what's really making the difference as opposed to just bringing on agents so that we increase the agent count.

Okay. And then the follow-up question just as it relates to the capacity side of the recruiting, the business capacity owners -- if I look at some of the metrics on efficiencies for the business capacity owner, they had a pretty good year, very good on a revenue basis, but even on a load count basis, I think you're at one of your better years, in terms of loads per BCO; but how do we think about recruiting there? It's a tough environment for all these truckers. But are we going to be able to grow that count over the next three to five years? Or would your expectation be more of one of maintenance over that time frame?

I'd say, Jon, I think we'll definitely want to try to grow that. You know that our standards are pretty high. And the expectations when they get here are a little different than they might be in other places, but we're absolutely trying to find the right candidates to grow that count, and it has not grown year-over-year, so -- but it's not from lack of effort. We seem to have a very stable group of high-quality BCOs, but we are always looking to add to that. You just haven't seen the growth there because of the selection criteria that we've got around it. We're pretty selective.

Jon, I also think that the changing regulatory environment plays right into Landstar's hands. Our culture of safety transcends just the latest CSA activity. It's what we've really been about for years. And so, as operators want to be in systems where they're not targeted by the enforcement community, where they can thrive in a system that supports their safety initiatives, we think that we provide a better solution for those capacity providers. And we think we'll be attractive.

So we think that change in regulations is actually going to be beneficial from a BCO recruiting standpoint.

Got it. Thank you.

Alex Brand, SunTrust Robinson Humphrey.

Let me start with a housekeeping question. Jim, 31.5% tax rate in the fourth quarter, what's the right rate to use for 2011?

Anywhere from 38% to 38.5%. That's really our rate.

Okay, great. Henry, you talked a lot about how if we strip out the substitute linehaul, you're really happy with the high single-digit volume growth. I guess I have a kind of a two-part question there. The first part is -- when I'm looking at BCO and broker loads both down year-over-year, where -- buried in that, where is the up-8% volume?

The broker has got the substitute linehaul and so if you take that out, there's not a lot of -- BCO is kind of clean; there isn't a lot of substitute linehaul in there, but you take the substitute linehaul out of brokerage, that's where it's coming from.

Right. Well, that -- okay. So that part I understood. I guess what I was saying is -- if BCO loads were down and that's a clean number but you still feel really good about the growth going into 2011, is it -- should we expect BCO to continue to be flattish, stable, down a little bit, and the growth (multiple speakers) --?

No, I would expect BCO load growth to grow. I mean, when you look at the fourth quarter, I mean, in December in particular I think there was -- you've got to remember, our total revenue, excluding the brokerage side, let's talk about that. I mean, brokerage revenue was up -- I think it was 48% when I looked at it last time -- we had robust growth in brokerage.

The BCOs have worked pretty hard all year. Alright. You're coming into the holiday season, my guess is that they were not hauling as much. There was a lot more stuff available to broker carriers. But when -- and again, you've got to look at this thing -- because I've talked about the substitute linehaul for several quarters now, as far as that going away, when you strip that out, I mean, the numbers, the volume per truck -- the total revenue was 20% increase in total truck transportation, which I think is pretty strong. And as it relates to BCO versus broker carrier, the brokerage revenue was up 48% x-substitute linehaul. And that's very strong. And again, it's all a matter of, I think, things that we're doing positive.

As far as BCOs, I just think that's a December issue. They worked hard for 11 months and there was some weather issues. So I mean, that's -- I mean, and you guys can comment on that.

No, we had a couple, three weeks of pretty rough weather in December. I think that probably played a little bit of a factor as well.

I just want to make sure here because you've talked in the past very clearly about how brokerage would be where you would get your capacity and drive your growth. But it looks like it's maybe going to be a little bit more stable, and BCO actually is going to be a bit of a driver in 2011. Is that a fair statement?

No, I think it's just the opposite. I think -- look, I think both will grow. I mean, again, yes, you've got a couple of things here. I'm going to talk x the substitute linehaul piece, alright? I think brokerage is going to grow. Alright. I think we've got a lot more loads in the system. I think, as Joe described, we're going to try to add more BCOs, but they're going to have to qualify into our qualification standards.

The BCOs revenues should grow, as will brokerage. But if you're asking me again, x of substitute linehaul, I would anticipate brokerage to grow at a much faster pace.

Great. Thanks for the time, guys.

Todd Fowler, KeyBanc Capital Markets.

Henry, or I guess maybe Jim, can you go back over on the insurance here in the quarter? Did you say that the $11.7 million that you reported, did that include the hit from the severe accident during the quarter?

Yes.

That did, and I think that's an important point to make. I mean, we had a very good safety quarter, absent that particular accident. We had some favorable development also. And when you look at that accident, as far as what we recorded and people are looking at the tax item, yes, and we had some, I guess, recognizing of some uncertain tax benefits became certain. But the two did not totally offset each other, but you've got the one charge and you've got the one credit, basically.

So, I guess, just to follow-up on that, how much was the severe accident in that 11.7 and then going forward should that (multiple speakers) --?

What's interesting about that question, obviously, that's going to go to litigation. I'm not going to put that out -- I mean -- and let's just leave it at that.

Okay. And then should we still use about 2% of gross revenues of run rate for that line item?

Yes.

Okay. And then just as a follow-up, Henry, could you talk about the transportation management fee revenue? I mean, it looks like it ended the year around $20 million and it was kind of consistent throughout the year. When should we start to see that revenue line item start to grow? I mean, is that going to be something that we'll see in 2011? What are your plans for that going forward?

You will see that start to grow. We, in the fourth quarter, implemented two specific customers as it relates to the A3i piece. I think the fact that what we've done with supply chain, we've moved now with the acquisition -- full acquisition of A3i, the purchase of the NLM earnout. Scott Taylor has been named President of Supply Chain Solutions. Greg Humes, Chief Operating Officer, all under one roof in a nice -- they'll all be in a nice little location up in Southfield, Detroit.

We are extremely pleased as far as how we're going to progress with that. You'll start to see, I think, some better results from that probably towards the end of the year, but we were successful in our two launches and we've got a couple more that we're working on.

So, near-term, is it best just to think about that kind of in that $4 million to $5 million range on a quarterly basis?

Yes, I -- again, I think when you get further out, you'll have a much bigger impact. I think right now with the structuring and the one-team approach that we've created, I think you're going to see some really good results.

Okay. Thanks a lot for the time.

Nate Brochmann, William Blair and Company.

Wanted to touch -- Henry, you talked about 2011 potentially being a big breakout year. And we talked about some of the components that are definitely moving in your favor. But when you sum it up, when you look at potential for a breakout year, how much of that is based on some of your internal efforts, the agent additions over the last couple of years versus just the macro improving?

Oh, boy, we've done a lot of things internally as far as to make things happen here. I mean, you know, our drive, as I said before, is, over the next three years, is to get that margin back up to that 45% level. We think we do that by increasing revenue and everything that we've done internally as far as creating a one-team approach, Pat's approach as far as bringing in new agents, the emphasis on safety, the acquisitions, are all going to drive increased gross profit and maintaining our SG&A. Therefore, that's how you're going to get a leverage and drive that back up to 45%.

So it's a combination of a lot of things. Obviously, the economic environment plays a lot into that. I mean, if you would come back with another 2009 year, I mean, obviously, all bets are off. But right now I think all things seem to be positive. Manufacturing, industrial production, all that stuff seems to be good. It plays into our hands. We are a very big flatbed carrier. We've got a lot of things going for us right now. We're just pretty positive at this point.

And kind of right along with that point, Henry, with the ISM index and industrial production, and you guys being a little more tied to that, could you remind us like what percentage of your business currently comes from flatbed or from the more manufacturing side of it?

It's about one-third. Jim, about one-third?

Yes. It's about one-third of the business.

Great. Thank you very much, guys.

Chris Ceraso, Credit Suisse.

Just a couple of items. With the opportunity for the truckload market to get even tighter with regulation and so forth, do you think you've got some room to really grow more meaningfully into intermodal?

Yes, as a matter of fact, what's very interesting about that is we're starting to cycle out of the agents that were lost. And we did see a pretty nice -- we think we're going to see some pretty nice movement when we go into 2011. And clearly, I think our agents are starting to get that.

But Pat, do you want to answer that?

Yes, I also think, Chris, it's important that we're bringing on agents that have intermodal business, whether they were smaller IMCs. And again, the same things that hamper agents on the truckload side hamper agents on the intermodal side from a growth perspective. They don't have the funds to do that. And so they look to a company like Landstar to help them do that.

And then in addition to introducing them to our intermodal product or allowing them to continue with that, we introduce them to the truckload, air, ocean and other services that we offer. So we've had some good fortune in bringing on agents that specialize in intermodal business.

If you look out five years, Henry, could intermodal be 15%, 20%, 30% of your business? What's the runway for you?

I'm not going to make any prediction on that.

Okay. Just one housekeeping item then on the share count. You bought back shares in the quarter. What was the ending count as of 12/31?

47,860,000.

47,860,000? Okay. Thank you.

Matt Brooklier, Piper Jaffray.

Henry, I just want to circle back to something you said regarding your brokerage capacity or available brokerage capacity this year. I think you quoted a 10% potential number with respect to reductions there.

And understanding regulations coming into the market that that's going to make things a little bit tighter, what -- I guess my first question is, how do you guys come to that 10% reduction number? Is it just looking at your base of approved carriers at this point in time and realizing you're going to have to get rid of some?

And then, secondly, how would a 10%-type reduction impact, I guess, your ability to grow truck brokerage from a volume perspective? And also, on the pricing side, how would that impact you on your yields, potentially?

Is that a three-part question, Matt?

Yes, I said two; now I guess it's three.

(laughter) Okay. First, obviously with CSA 2010, and with the rules there and things being published, what we did is we went through and looked at our carrier base. And Joe Beacom here, who is in charge of compliance, we're going to set certain criteria, basically -- that will basically -- we won't load these carriers and we will move them off our list -- from a safety perspective, from a customer standpoint. And I think that's the prudent thing to do -- not to do anything, I think, is incorrect.

And as far as impacting Landstar's ability to load, no, and I think I said it'd be probably very little impact, if not zero. Because again, you're dealing with 27,000 different carriers. And when you look at the trucks that are associated with that 10% reduction, you're only talking about maybe 1% of the total trucks that we might even use -- 1%, 2%, 3% of the trucks.

So I'm not -- that doesn't bother me at all. Again, this is all consistent with our safety culture. And I think part C of your question, was that a pricing piece?

Yes, just, I mean, a 10% reduction in terms of available carriers -- how does that impact you on the pricing (multiple speakers) [side]?

It really depends on what the available carriers are, I think, total, from a marketplace perspective. I mean, I'm not going to have any problem, or at least I don't foresee having any problem fulfilling any brokerage arrangement with the 25,000 that we might have left. The pricing is really going to come from if capacity actually exits the marketplace due to some of these rules. So our self-imposed reduction, if I could use that, is not going to have an impact on pricing.

Okay. There's -- that 10% number seemed pretty large, but it sounds more like Landstar-specific. You guys are a little bit safer, have better criteria, so.

Exactly right. I think I said that, Landstar-specific. This is a self-imposed -- sort of like our self-imposed guidelines on BCOs. We just want to try to have the safest carriers out there.

Joe, do you want to add anything to that?

The only thing I would add back to the capacity component of that. When we did our analysis, just about half the carriers that we were going to discontinue having on our approved list hadn't hauled a load for us in 90 days. So it's not like these are guys that are out there actively supporting big pieces of business and all of a sudden we're going to turn off the spigot. That's not the case at all.

It is just a quality of care that we think we should do better and we think our customers want better. And we want to be able to be sure -- because there's a lot of customer inquiry around how we do this. They want to know what processes we have. They want to make sure that we're safeguarding their interests when we utilize brokerage to move their business. And this is just the way we see the right way to do it. And so far, it's worked out real well.

Okay. And second question, CapEx for '11, do you guys have a sense in terms of what that could be?

Cash CapEx is typically between $5 million or $10 million. And then we have [probably] capital leases with maybe $25 million to $30 million for just to replace some bad equipment.

Thanks, Matt.

Yes, thank you.

John Barnes, RBC Capital Markets.

Just back to your early comment about just the pipeline of agents remaining as strong as ever. With things starting to get a little bit better, does the recruitment process get more difficult in a better environment than it was in a weaker environment for the agents?

John, I think that historically, you would have thought that way; but as I'd mentioned earlier, one of the barriers to growth for these small independent brokers is the access to capital. And they want to grow their business; they're turning back a number of opportunities. And so they view Landstar as an excellent solution to that problem.

So, no. As a matter of fact, the better the environment, frankly, the higher-quality candidate that we've seen coming to Landstar. So I know that seems somewhat counterintuitive, but it's what we've experienced here.

Okay. And is there a focus in 2011 on -- I guess this goes to the question earlier about intermodal and the opportunity there -- but is there a focus, as you look at 2011 going forward, on maybe looking for fewer agents with maybe the core trucking type exposure? And maybe looking for a larger number of agents with other modal exposure in order to diversify a little bit, given some of the issues in the trucking space? Or is it still going to be pretty balanced between the core business and the modes that you'd like to grow more aggressively?

Yes, John, I would tell you that the type of agent that we're recruiting is the same kind of agent that we've always recruited. And that is, do they have a base of business that they can bring to Landstar that will be additive to both parties? I will tell you that when we acquired these supply chain solution companies, that brought then another type of agent to us.

Because if you look at the capacity sourcing tools inherent in those systems and the traffic management solutions that are inherent in those systems, that is an extremely attractive proposal to an agent who's accustomed to sort of wanting to get into that traffic management business. And as capacity becomes tighter, our unique capacity sourcing tools become yet another selling tool to those prospects to join Landstar.

So, in a roundabout way, I hope I answered your question, that we're looking at all candidates, not just in the truckload space, but across all modes.

Okay. That makes sense. I mean, just one quick question on BCOs. And Henry, you guys have had a long history of being pretty selective as to who you would take on as a BCO -- some pretty stringent guidelines. And I'm curious, you indicated 10% of your broker network maybe no longer qualifies to haul for you. Is that a similar percentage that maybe impacts your BCOs? Or is the percentage on the BCO count much, much less as a result of how stringent your guidelines have been over time?

We don't anticipate any impact on the BCO count. We've been working on CSA 2010 now for a real long time, as far as proposed rules and whatnot. Our fleet is as good as anybody's and probably better.

Okay. Very good. Thanks for your time, guys.

Anthony Gallo, Wells Fargo Securities.

I want to go back to the agent productivity question. When you bring in an agent, roughly how long does it take for them to be acclimated to the system? And then once they are, what kind of growth do you see in their core business? If they start at $100, does it go to $105 within six months? Or just directionally help us think that through.

Pat?

Well, Anthony, from an agent productivity standpoint, when we bring on a new agent, we're looking at their base of business. And based upon that base of business, how much of it can we convert over to -- do we extend credit to their customers? Is there -- their customer base, is it going to work within the Landstar System?

And typically, if you think about it from an entrepreneur standpoint, they hit the ground running. They're producing revenue shortly after they join Landstar or they're not going to be in business very long. So the time from when they qualify and become a Landstar agent to producing revenue is days, if not hours.

Now, in terms of the growth piece, I can't really -- I don't have any (multiple speakers) --

(multiple speakers) Well, I imagine it's tough to measure, but --

Well, let me give you -- I want to give you an example, I mean. And this is just raw numbers. I mean, all new agents that were brought on in 2009 accounted for about $24 million. Those same agents in 2010 accounted for $80 million. So you can see that the type of progression year-after-year. And obviously, these agents were brought on at different times.

So -- but that's the type of progression you get. And then there's a third year that kicks in a little bit higher. But those are the two numbers I have here for the agents that were brought in in 2009 -- $24 million in 2009. Those same agents, $79 million or $80 million in 2010. (multiple speakers) Gives you an idea of how that builds.

Yes, that's very helpful. So to jump around a little bit, flatbed dynamics, the rails have been kind of vocal about going after some of the traditional flatbed business. Can you just remind us, within your business, how much of it would you say is the really specialized stuff? How much of it is fairly random, that's not really conducive to that market that the rail industry is going after? Thank you.

Anthony, I would say that the overwhelming majority of our platform business requires special handling and/or specialized equipment. The -- what I'll refer to as like the steel mill-type of business, where they're picking up the mill and they're delivering it to a specific customer, where they've got some platform business now running on the rails, we don't do much of that. It's kind of the irregular route, much-needed, specialized transportation. I don't think it's conducive to converting to the rail.

Fantastic. Thank you.

David Campbell, Thomson Davis & Company.

Thanks for a good report. I just wanted to ask you one question, some of mine have been answered. But I'm trying to figure out what the -- how the 35% operating margin, what's that -- how's that calculated, that you reported last year?

It's operating income over gross profit.

Operating income as a percentage of gross profit?

Right. And gross profit is defined as revenue less purchased transportation and agents' commissions.

And commissions. Okay. That's what I didn't know. Okay. Thank you. Thanks a lot.

Thank you, David. Next question.

John Larkin, Stifel Nicolaus.

Just to go back to this 45% target on the operating margin as a percentage of gross profit, do you have a timetable in mind, Henry, for how that's going to be -- over which it's going to be accomplished?

And then could you maybe talk a little bit in more granular fashion about how you're going to achieve that? Is that fixed cost leverage? Is it cost reduction on top of additional cost reduction you've done already? Is it focusing on more profitable businesses? What's really driving that margin expansion?

A couple of things. But from a timetable standpoint, I mean, the goal is set out for three years. And I think -- well, I gave out -- I actually stated what our objective is for the current year, which is around 40%. So we expect to get to that 45% within years after that.

As far as how we get there, Landstar's model really hasn't really changed all that often. It's really the same type of model and it's relatively fixed SG&A, and basically creating an environment where we bring in agents, create new revenue, and then leveraging that SG&A. I don't foresee -- you know, you've got some variable pieces within the SG&A number as it relates to bonuses, for example. It's -- I'm not being safe. And it's about being successful in our supply chain solutions strategy.

So I think you've got three component parts there. But clearly, it's about driving home revenue. Obviously, a lot of things were masked over the last year with the substitute linehaul and people got, I think, a little bit -- lost sight of how Landstar operates. But I think when you look at that 45% margin as a goal, I think we hit that back in probably 2008, that's our goal to get back there. Not going to happen overnight, but we will get there.

So by 2013? With the full-year goal for 2013 (multiple speakers) would be --?

(multiple speakers) Yes, [we'll be there by] 2013. That is my -- we hope to be there. How's that? Otherwise -- that is our objective.

It's a good objective. And then, secondly, over the last few years, there have been an awful lot of folks that have been growing similar businesses, asset-light, not asset-intensive; some brokerage-based businesses; some more the employee model. Given all that growth and some of the startup operations that the asset-based carriers have put out into the marketplace, has the competitive dynamic changed much in your core business?

No, I think Landstar, from the way we operate, I mean, there's a lot of people that are trying to basically emulate Landstar and be like Landstar. I think the scale is really what separates us from everybody. So I'm not worried about any of the -- competition is part of the game. But we think we have a hold on this space.

Alrighty. Thanks very much.

Peter Nesvold, Jefferies.

Just a specific question on the linehaul business. And really just what I want to try to understand better is how to look year-over-year x-linehaul with the organic growth. Is there any way that you can tell me what the -- what was the total linehaul revenue in 2010? Ideally -- so that it's not going to be there in 2011 -- ideally, if you had it by quarter, that would be even more helpful because we could kind of look at things x the linehaul each quarter year-over-year.

Well, we're not going to -- we're running out of time right now. Jim's not going to run down and get those numbers. As I said (multiple speakers) --

I think we did give the percentages of revenue for each quarter during the quarter call, so I think I can tell you those and --

We can follow-up off-line. That's completely --

Yes, if we talk later -- I'm pretty sure we gave it out. Like, it was 4% this quarter. So I could give you the percentages by quarter for each quarter of 2010; I just -- I don't have it handy to give it in two seconds. But if you give me a buzz, I'll give you those percentages.

Great. My other questions have been answered. Thank you.

Okay, thanks. We're going to take one more, I think.

Thank you. Your last question will come from Ed Wolfe, Wolfe Trahan and Company.

Hey, Henry. Two things. One, just a little bit more color around the substitute linehaul that's going away. I think you said that you had thought it was going to be originally $44 million and then it came out to be a little bit more. How much revenue was lost in the fourth quarter?

Have you got there, Jim? (multiple speakers) [69] to $23 million.

Okay. And as we go out, when did that start? When did you first lose it? In the third quarter?

We started to see that -- yes, it was in the third -- I want to say -- I don't know exactly when in the third quarter, Ed, but it was sort of like mid-third quarter. Pat -- I'm looking at Pat -- is that correct?

Yes.

Yes. Mid-third quarter is when we started to see that decline. You know, as I said many times before, we knew it was coming. In fact, it was told it was going to be not as -- it got strong in the first quarter; and the second quarter, we were told it wasn't going to get strong, but we were going to take it, but --.

I'm just trying to figure out how to model it out. So in third quarter, if it was [45] in fourth quarter, was it half of that in third quarter?

Ed, if you have to know, give me a buzz. I can give you the percentages for 2010 so you'll have exactly -- I'll give you the exact numbers.

Okay. And then other question is the SG&A at $38.2 million this quarter on an absolute number, what's in there driving that? Is that incentive comp? What else is driving that there?

That's a big piece.

The $4.9 million of incentive comp in the fourth quarter.

And normally what percentage of your incentive comp occurs in fourth quarter for the year?

Usually, depending on how the fourth quarter compares to the other quarters, it should just necessarily be a straight line in the perfect world.

Okay. (multiple speakers)

[Rate them] what we think what the quarters do.

Okay. CapEx for 2010, where did it come in and what were the leases beyond that?

It was 27.5 on cash CapEx (multiple speakers) -- I don't have that cap lease with me, it's -- I'm going to have to let you know. If you give me a buzz on that substitute linehaul, I'll give you the capital leases.

Okay, we'll catch you offline. Thank you.

Alright, thanks, Ed. I think that's it. I know there's -- if there's anybody who didn't get to ask a question, give Jim a call or myself a call. (multiple speakers) Jim, you got anything you want to say to close it off?

No, just -- for me, I'm very optimistic coming into this year. I feel pretty good about how things are looking. I mean, we no longer -- in 2010, we're coming with a headwind of having bonuses we didn't have in '09 and that hit us all year. Expect that to be settled up in 2011. I think we're -- everything's going on strong and supply chain solution opportunities are looking good. So I'm looking forward to 2011.

Pat?

No, Henry.

Joe?

No.

Alright. Well, I appreciate everybody dialing in and we look forward to talking to you in the near future. Thanks.

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