Landstar System Inc (LSTR) 2011 Q3 法說會逐字稿

Good afternoon, and welcome to Landstar System's third-quarter 2011 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, Vice President and Chief Commercial and Marketing Officer; Joe Beacom, Vice President and Chief Safety and Operations Officer. Now, I would like to turn the call over to Mr. Henry Gerkens. Sir, you may begin.

Thanks, Terri, and good afternoon and welcome to the Landstar 2011 third-quarter earnings conference call. This call will be limited to 1 hour. In addition, please limit your questions to no more than 2 questions each when the question-and-answer period begins.

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 call, I and other members of Landstar's management may make certain statements containing forward-looking statements, such as statements which relate to Landstar's business objectives, plans, strategies, and expectations. Such statements are by nature subject to uncertainties and risks including, but not limited to, the operational, financial, and legal risks detailed in Landstar's Form 10-K for the 2010 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.

The 2011 third quarter was another outstanding quarter for Landstar, as earnings per share increased a remarkable 45% over the 2010 third quarter and 31% if one were to exclude, from the 2010 third quarter, the charge for the buyout of the contingent payment obligation in connection with the 2009 acquisition of NLM. It was the seventh consecutive quarter of impressive results. Tracking back to the first quarter of 2010, Landstar has now increased its earnings per share on a quarter-over-prior-year-quarter basis in the range of 26% to 40%, excluding the 1-time buyout charge recorded in the 2010 third quarter. Quite a performance over the 7 quarters by any measure, but more importantly, Landstar's future outlook continues to be 1 of strong performance.

Back to the current quarter. In our 2011 third quarter mid-quarter update call, I stated that I expected 2011 third-quarter Landstar results to be pretty much in line with the consensus of analyst estimates as reported by First Call. Actual third quarter 2011 earnings per share was $0.64 per share compared to $0.44 per share in the 2010 third quarter, and $0.02 above the consensus of analysts' estimates, and it was the second consecutive quarter of record quarterly earnings per share. Actual third quarter 2011 operating margin was 44.7%, up from 35.6% in the 2010 third quarter, and up from 39.4% in the 2010 third quarter, if you exclude the previously mentioned buyout charge recorded in the 2010 third quarter. It was also up from the 2011 second quarter operating margin of 43.6%.

As I have said many times before, Landstar's operating leverage comes from its ability to grow revenue and gross profit dollars from its safety performance and its ability to control costs. We continue to drive our model and we have yet to leverage and take full advantage of our supply chain technology. Over the next several years, I anticipate Landstar would create even more operating leverage as additional revenue is added over our cost structure. Consolidated revenue in the 2011 third quarter was approximately $684 million, up approximately 10% from the revenue generated in the 2010 third quarter. This increase was net of a $31 million, or 65% decline in revenue, from our low margin substitute line haul service offering. The decline in substitute line haul revenue has been factored into all of our prior guidance.

Substitute line haul revenue represented only 2.5% of consolidated revenue in the 2011 third quarter versus 7.8% in the 2010 third quarter. Excluding substitute line haul revenue from both the 2011 and 2010 quarters, all other revenue increased a healthy 16%. Total truck transportation revenue represented approximately 91% of consolidated revenue in the 2011 third quarter versus 92% in the 2010 third quarter. Revenue hauled by BCOs represented 51% of total revenue in the 2011 third quarter and 54% in the 2010 third quarter, while total brokerage revenue was 40% of consolidated revenue in the 2011 third quarter versus 38% of consolidated revenue in the 2010 third quarter. Excluding substitute line haul revenue from both periods, revenue generated through all broker carriers increased approximately 35% and revenue generated through BCOs increased approximately 5%.

From a load volume standpoint, total truck transportation loads hauled, excluding loads hauled in our substitute line haul service offering, increased approximately 6% from 2010 third quarter. In our 2011 third quarter mid-quarter update call, I indicated that total truck transportation loads hauled, ex-substitute line haul load volume, increased approximately 5% in the first 8 weeks of the 2011 quarter over the prior year eight week period. The fiscal 2011 September truckload volume, again, ex-substitute line haul volume, increased 9% over the fiscal 2010 September truckload volume.

Revenue per load, again excluding the revenue per load associated with our substitute line haul service offering, increased approximately 9% in the 2011 third quarter compared to the 2010 third quarter and was very consistent on a month-over-month basis within the quarter. In the 2011 third quarter versus the 2010 third quarter, total van revenue, excluding substitute line haul revenue, increased 10% with about more than one-half of that increase due to increased load volume. Total platform revenue increased approximately 25% with about one-third of the increase due to increased load volume and the balance due to increased revenue per load. The increase in the revenue per load continued to be very reflective of a very, very tight flatbed capacity market, and I don't see that changing any time in the near future.

Collectively, revenue generated from all other sources increased approximately 18% in the 2011 quarter versus the 2010 third quarter. From a new agent revenue standpoint, revenue generated from all new agent locations added over the past year amounted to approximately $28 million in the 2011 third quarter as we continue to add quality productive revenue-producing agents. Landstar again increased its available capacity providers. Landstar's total available truck capacity providers was 35,288 at the end of the 2011 third quarter, up 512 capacity providers from the end of the 2010 third quarter and up 897 capacity providers from the end of the 2011 second quarter. I might also add that our BCO count at the end of the 2011 third quarter increased by 87 BCOs since the end of the 2011 second quarter and continues to increase in the fourth quarter.

1 final note before I turn it over to Jim for his financial review. In the 2011 third quarter, Landstar purchased approximately 817,000 shares of its common stock under its authorized share buyback programs. Jim?

Thanks, Henry. Henry has already discussed certain information regarding the 2011 third quarter. I will cover various other financial information included in our third-quarter release. Gross profit representing revenue, less the cost of purchased transportation and commissions to agents in the 2011 third quarter was $110.7 million, or 16.2% of revenue, compared to $100.8 million, or 16.2% of revenue, in the 2010 quarter. During the 2011 and 2010 third quarters, revenue hauled under contracts that generate a fixed profit margin contributed 65% and 72%, respectively, of total revenue. Overall, the cost of purchased transportation was 75.8% of revenue in the 2011 third quarter compared to 76.2% in the 2010 third quarter. The decrease in purchased transportation, as a percent of revenue, was primarily due to a change in revenue mix.

Less-than-truckload substitute line haul revenue which is primarily included in truck brokerage revenue was 2.5% and 7.8% of revenue in the 2011 and 2010 third quarters. Revenue hauled by truck brokerage carriers excluding less-than-truckload substitute line haul revenue was 38% and 31% of revenue in the 2011 and 2010 third quarters. The decrease in the cost of purchased transportation as a percent of revenue was primarily due to the significant decrease in less-than-truckload substitute line haul revenue, which has the highest rate of purchased transportation, partly offset by increased truck brokerage revenue as a percent of revenue excluding less-than-truckload substitute line haul revenue, which has a higher rate of purchased transportation compared to revenue generated through BCOs. In addition, the rate of purchased transportation on truck brokerage revenue, excluding substitute line haul revenue, in the 2011 third quarter was 50 basis points lower when compared to the 2010 third quarter.

Commissions to agents was 8% of revenue in the 2011 third quarter compared to 7.6% in the 2010 quarter. This increase was primarily due to the significant decrease in the Company's less-than-truckload substitute line haul revenue, which has a lower rate of agent commissions and increased net revenue representing revenue less the cost of purchased transportation on truck brokerage revenue excluding less-than-truckload substitute line haul revenue. Other operating costs were 5.8% of gross profit in the 2011 quarter compared to 6.4% in the 2010 quarter. This decrease was primarily attributable to increased gross profit. Insurance and claims costs were 8.5% of gross profit in the 2011 quarter compared to 11.4% in the 2010 quarter. The decrease in insurance and claims as a percent of gross profit was primarily due to an increase in the percent of total gross profit contributed by revenue hauled by third-party truck brokerage carriers, which has a lower claims risk profile and favorable development of prior-year claims in the 2011 quarter and unfavorable development of prior claims in the 2010 quarter, partially offset by an increased cost of cargo claims in the 2011 third quarter.

Selling, general and administrative costs were 35.4% of gross profit in 2011 quarter and 40.7% of gross profit in the 2010 quarter. The decrease in selling, general and administrative costs as a percent of gross profit was primarily attributable to increased gross profit in the 2011 quarter and cost of $3.8 million reported in the 2010 third quarter related to the buyout of the Company's remaining contingent purchase obligation from an acquisition made in 2009. Depreciation and amortization was 5.9% of gross profit in the 2011 quarter compared to 6.4% in the 2010 quarter. This decrease was due to the effective increased gross profit. Investment income was $373,000 in 2011 quarter compared to $495,000 in the 2010 period. The decrease in investment income was primarily due to a decrease in the amount of investments held by the insurance segment during the 2011 quarter. The effective income tax rate was 38.2% in both the 2011 and 2010 third quarters.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $98 million and borrowings of $90 million on the Company's senior credit facility. 2011 year-to-date cash flow from operations was $84 million. [Cash] capital expenditures was $3.5 million in the year-to-date period ended September 24, 2011. Trailing 12-month return on average shareholders' equity was 39%, and trailing 12-month return on invested capital representing net income divided by the sum of average equity plus average debt was 27%.

During the 2011 quarter, the Company purchased 870,000 shares of its common stock of total cost of $32.7 million, bringing the total number of shares purchased during the 2011 period to 1,014,000 shares. The Company currently has 709,000 shares available for purchase under its authorized share purchase program. On September 24, 2011, shareholders' equity represented 69% of total capitalization. Back to you, Henry.

Thanks, Jim. As the talk of an economic slowdown continues to intensify, Landstar continues to outperform. The load volume increase in the first several weeks of the 2011 fiscal fourth quarter over the same period in 2010 has been similar to the load volume increase in the 2011 fiscal month of September over the prior-year September. Additionally, pricing is still strong and capacity remains tight. All that being said, the fourth quarter of any fiscal year over the past several years has been the most difficult quarter to forecast and all too fresh in everyone's memory is the fourth quarter of 2008. I believe, however, the current environment is very different than 2008 and, as such, I am very confident. Assuming trends experienced in the 2011 third quarter and the first several weeks of the 2011 fourth quarter continue, I would anticipate earnings per diluted share for the 2011 fourth quarter to be in a range of $0.62 to $0.67 per diluted share. Terri, I think we can open it up for questions.

Thank you very much, sir. (Operator Instructions) Jason Seidl of Dahlman Rose.

Can I focus a little bit on the platform segment? Obviously, it's been strong here for a while and you said you anticipate that pricing was going to continue to be strong for the near future here. Could you talk a little bit about what's driving that strength in some of the end markets because I guess, just traditionally, you wouldn't think that it would be strong at this point in the economy.

Well, I think there's a couple of things. GE, there's a couple customers that I think have been very strong. GE -- if you listen to the Caterpillar report this morning, again, very strong, predicted to be strong. Going forward from GE, that's the type of stuff, that's the heavy machinery-type stuff but Pat, do you want to add anything to that?

Yes, Jason, I think if you look at whether it's commodities in mining and farming and you look at all of the alternative energy or energy production, we're really seeing some strength along those markets. If you couple that with the fact that the capacity in that platform arena remains very tight and the barriers to entry I believe are significant, not the least of which is the capital at costs to get engaged in the business and the operator. You can't back in and deliver a load of groceries today and pick up a windmill blade tomorrow, so the skill level is fundamentally different for the operator in that segment. And so we believe that the capacity is going to remain tight.

Pat, is there any way to break out what percentage that you guys are hauling for unconventional drilling now versus prior year?

I couldn't do that for you, Jason. You're talking about the Marcellus Shale and all of the fracking business?

Yes.

Yes, I couldn't break that out for you.

Okay, and the follow-up question, Henry, you mentioned that your current network, can hold a lot more revenues, was really adding a lot of incremental cost. When you look out over the next call at 3 to 5 years, where do you think some of these layered on revenues are really going to come from? What are your fastest growing segments likely going to be?

Well, look, I think it's going to be typical of how Landstar is growing its business before. It's agent upon agent but what I think the big thing is we move forward into the future is going to be the leverage we're going to get off of putting in these systems for customers that's going to generate more revenue, i.e., our supply chain management, freight under management type of work. That is going to create more hauling opportunities for Landstar, and that clearly, over the next 3 to 5 years, is where we're going to start to leverage our current cost structure. And as you've seen back in 2005 when we had the hurricane stuff, I didn't have to add a lot of people to basically haul more revenue. There will be some additional expenditure from the technology side but as far as actually the hauling of the freight, I mean, clearly, we have the ability to take more revenue over our existing cost structure.

Thanks, guys. I appreciate the time as always.

Justin Yagerman, Deutsche Bank.

Hi, good morning guys. It's Rob Salmon on for Justin.

Okay, how are you?

Pretty good. When we were at the ATA last week, we had heard a lot from traditional truckers talking about shippers who are making contingency plans ahead of the peak season. Have you been hearing this from your customers on both drive-in and flatbed standpoint and could you give us a sense if you are seeing that, what the delta is you guys are talking to on pricing as well, as what percentage of your business are looking for that?

Well, I can tell you that -- this is Pat. I can tell you that I think the customers have been concerned about the capacity for the entirety of 2011. Frankly, the fourth quarter of 2010 through 2011. We're getting a number of questions from customers about what can they expect in terms of our platform capacity? Can they lock in on some of that platform capacity, less so on the van side. I think there's still some belief that there might be some slack in the van side of the business but, clearly, the capacity -- excuse me, the customers are concerned about the capacity and particularly on the platform side.

Is there a rate you guys are quoting relative to your contracted rate for some of the bigger customers on the platform side right now?

It's largely spot market pricing.

Okay, I guess that's fair. Shifting gears a little bit to the cost side of the equation, you guys had briefly mentioned insurance and claims, that was an item which jumped out. Could you talk a little bit about the different puts and takes in a little bit more detail as it came through Q3 and how should we be thinking about that as we look out to Q4 and 2012?

Actually, it's pretty simple, and if you understand the business model, you should understand why the insurance is the way it is. The -- if you understood the revenue piece, all right, 51% of our revenue was generated through BCOs. That means 49% of our revenue was generated through capacity other than BCOs which has a much lower claims profile, so once you get that mix moving, all right, you should expect that, that insurance and claims number is going to come down. In addition when you look at the numbers as far as -- if you track back to 3 quarters -- the third quarter since back to, let's say 2006, the range has been anywhere from 1.1% to 2%, all right? 2% being the highest in 2009, 1.1% being the lowest in 2008. So at 1.4%, it's pretty much within that range. So it really doesn't surprise me at all because you have a lot of volume in the third quarter and you've had a lot of brokerage revenue as far as the mix.

When you look at a year-to-date calculation, I think we've always said that it's about 2% of revenue, so far year-to-date it's about 1.8%. If you look at that range from an annual basis, it's run from 1.4% all the way up to 2.3% in 2009. And if you'll recall in 2009, we had -- it was 3.1% of revenue because we call them the way we see them when the accidents happen, so in fact, when the accident occurs, we book it. When it doesn't occur, you don't book it; So it's pretty simple.

One thing to just touch on, too, is just recall -- and I know we tell everybody this but twice a year, we use a third-party actuary to take a look at our claims reserves and we're probably 1 of the only ones in the industry that does that.

All right. Thanks for the time, guys.

Tom Wadewitz, JPMC.

Let's see, so I wanted to ask you on the growth, and so you saw more growth in platform but you also -- it looks like you saw some decent growth in the dry van. What are the customer segments in areas that are driving the growth in dry van? How do you expect those to continue or not?

Tom, this is Pat. I would tell you that the growth on the van side is spread among all of our base of customers. There's not 1 particular segment that's going to jump out at you that I think it's a great execution on behalf of the agents and I will tell you that it's across a broad spectrum on the van side.

Okay, and then a question in terms of how we think about 2012. I guess it's -- it seems like things are playing out well going into fourth quarter for you. I don't know how much visibility you have on 2012 but what would your view be on 2012 in terms of the driver of revenue? Do you think a lot of that is going to come from the pricing side? Or do you think you'll end up with a pretty good growth from the volume side? And if you want any margin comment on just for a 2012 modeling framework, how we might think about it?

I always like that. I'll tell you some macro things as far as what I think, all right?

Sure.

I fully believe that capacity is going to remain tight, all right? I think from the platform side, I think Pat has already discussed that. We're getting requests to try to lock in as soon as they can and we know that we've got some customers that are lined up into 2012 that want that capacity, so we're pretty confident in that. It's a matter of what your economic forecast is. I can tell you if the economy picks up a little bit, it's just going to get a lot better. Our agent pipeline remains pretty strong, so I'm confident from that standpoint, and as I said, we just barely tapped the leverage I think we're going to get off of our supply chain. So from my perspective over the next 3 to 5 years, I'm more confident than I have ever been at Landstar as far as what we're doing. From a margin standpoint, I already gave my numbers out there that I wanted to be at 45%. We're going to move past that as we move forward into the future. Not promising that for 2012 but when we go out further on since -- where we are now, I can see that getting much better.

Okay, great. Thanks for the time.

Chris Ceraso of Credit Suisse.

Thank you, good afternoon. Just 1 follow-up on the mix of your business. It seems that brokerage is growing quite a bit faster than BCO. Maybe you could comment on what's happening in the market that's driving that? And then you mentioned the positive aspects of that to your margin as you get lower insurance and claims associated with brokerage. But is there a flip side, say down the road, that maybe your margin profile gets a little bit more volatile if brokerage becomes a bigger share of your business?

I think, look, I think, obviously, when capacity is tight, you do have some issues as far as what you've got to pay for that capacity and it takes -- it is a delay, as you well know, as far as getting that cost turned into revenue through the customer through a price increase. So you've got that squeeze; eventually, you catch it and then depending on how tight things get, so you play that game from that standpoint. Look, from our standpoint, we want to grow both capacity, BCO and brokerage; however, when we started brokerage way back in early 2001, when we really got into that -- if we were going to grow our revenue, you have to get into the brokerage avenue and other third-party capacity because there's just not enough qualified owner-operators out there that are going to make it into the Landstar system. We look every day to try to move more people in but that's just the dynamics. Joe, I don't know if you want to add anything on capacity?

Just the fact that as capacity remains tight, more and more customers are open to that discussion. Maybe they were previously a BCO-only account but that opens their eyes to our capabilities in a different front and 1 of the statistics that we look at is, we've got a pretty good-sized base of broker carrier capacity but the number that is pretty meaningful is, if you look at Q3 year-over-year basis, we had over a 1,000 more carriers who hauled a load in the last 6 months year-over-year. So I think we're doing a better job of finding carriers that can fit and do fit into the freight volumes that we have.

Okay, that's helpful, thank you.

Matt Brooklier, Piper Jaffray.

Yes, thanks. Good afternoon. First question, I think you quoted your truck business ex-substitute line haul the volume there being up 9% year-over-year in September. What does that number look like in October?

It's -- ex-substitute line haul, it's actually higher.

So it's greater than the 9% in September?

Yes, and 1 other comment, I don't plan, and hopefully this is accurate, but I don't plan on talking about ex-substitute line haul in the fourth quarter because all that should be behind us. And the comparisons now will be, although I've tried to spell it out for people, for as far as trying to look at what I'm going to call a continuing revenue basis because on a continuing -- the things we know, it was 16% in the quarter. The substitute line haul won't be as large and we won't talk about that but, again, it's larger in October as far as the actual load volume increase.

Okay, a welcomed grandfathering of the substitute line haul business in fourth quarter. And my second question, when I look at your gross yield or gross margins, however you want to call it and you look at third-quarter BCO gross yields and the change there, I'm assuming they were up and then within your truck brokerage operations, potentially you've got squeezed a little bit. Can you talk about those 2 margins separately and provide a little bit more color?

I'll let Jim answer that but the -- I don't think what you just said is accurate but go ahead.

Yes, gross margin to us, to Landstar, is revenue less what we pay the trucks less what we pay the agents, all right?

Sure.

And I think what you see is that was 16.2% in the third quarter and I think when you're driving that, we were at 16.5% in the second quarter and that's entirely due to mix. The BCO gross margin doesn't move a lot. They're all contracted rates so if it's $1,000 load, you keep so much percent; if it's $2,000, you keep that same percent so that doesn't drive it. Second quarter to third quarter, we saw a similar improvement in the PT rate on the brokerage business where -- not PT rate, on the gross margins -- we picked up 0.5 basis point over prior year's truck brokerage gross profit. We did the same compared to the second quarter, a little bit better than that actually, so we're not getting squeezed on margins. It's entirely mix that's in our number that drove it from 16.5% to 16.2%. There was more non-substitute line haul brokerage businesses in the third quarter compared to the second quarter and that's really just mix. And if you look, we keep more of those dollars because we grew the operating profit.

Okay. Thank you.

Todd Fowler of KeyBanc Capital Markets.

Hi, Henry -- excuse me. Henry, With your fourth quarter guidance, I mean, generally you guys are pretty conservative with how you lay out your expectations. But if I take the midpoint, you're up about a $0.01 sequentially from what you did here in the third quarter on a GAAP basis, which is pretty consistent with how the fourth quarter has been relative to the third quarter historically. But I'm curious at the high end, that $0.67, what do you have contemplated in there? What would it take for you to see that high end from a peak standpoint and from how the fourth quarter would play out?

Well, we obviously go through our own modeling and it's just a matter of we hit certain revenue numbers, we are safe, and really those are the 2 drivers of our business. Our business, as you well know, is pretty easy to model given a revenue number and so we put a high/low based on what my people tell me as far as where they think the numbers are coming out. So we derived it from there, so that's how you get it. I mean, and the unknown obviously is, are you going to be safe? If we're safe like we were in the third quarter, that bodes very well.

Sure, that makes sense. Maybe let me ask it this way. In the base case, taking the midpoint of the guidance, are you assuming a modest peak maybe through mid-November? Or what are your assumptions for the peak that's in your guidance?

I don't assume any peak, because I've just -- I've been saying this for so long, I think you know that, Todd. I just don't think there is a peak. I mean, it's -- anymore, and I think our -- and that's just the way I look at it based on what Pat is telling me what he foresees, and he gets his information from the field as far as what the revenue numbers are. We know where we think we're going with PT, we understand how tight the capacity market is, so you factor that all in, you make an assumption for safety and it's just a matter if those numbers from the top line hit and everything flows down.

Okay, that makes sense and then just for the follow-up, on the SG&A line item, as a percent of revenue, it looks relatively in line. Sequentially, though, it did move up. That's 1 line item where I think that you guys historically get some leverage. Was there anything coming through unusual this quarter either on the incentive compensation side or anything that we should think about this quarter?

Yes, well, obviously, since we had a little bit higher anticipated revenue, there was a little bit more of a bonus accrual in there in the third quarter but other than that I'm not aware of anything else that was --

We had a little bit of a tick up in legal fees compared to the second quarter just -- we're just tidying up some stuff around here with some issues we're having but nothing significant. I think you saw in the K, we had talked about the Kentucky [CIDs] but it's not material but it does make that line grow a little bit so it's basically the incentive comp being higher in the third quarter and a little bit of legal fees.

Okay. And so for the fourth quarter, is the placeholder then that $39 million on an absolute dollar basis?

I would probably be okay if that's what you were thinking, somewhere around there.

Okay, thanks for the help today.

Peter Nesvold, Jefferies.

Good afternoon. This is Tavio Headley in for Peter Nesvold.

Okay, Todd.

Thanks for taking my call.

Okay.

I was wondering what impact Hurricane Irene had either on your business or the overall flatbed market?

I can't pinpoint anything specific that Hurricane Irene had. I think it probably put -- my guess is it made the overall flatbed market a little tighter because of a lot of things going on but it didn't have any material impact that would move the needle for us at all. Pat? I mean --

No, Todd. As much as there -- for all of the disruptions there would have been, it would have been offset by any revenue opportunities to take freight in there, but it's a push. It's a wash. It had no material effect on the third-quarter results.

Okay, and my follow-up, some of the construction-related data points seemed to look a little bit better in the past couple of months. Have you seen any evidence of that?

No.

Okay, thanks a lot guys.

Scott Group of Wolfe Trahan.

Just want to follow-up on that earlier question on insurance. Assuming there's no real mix changes going forward from here, is that $9.5 million number a quarter a good spot to be or does it go back up?

It depends on your -- as I said, your mix and it also depends on your -- the amount of accidents you have and if you have an accident. We book the accident within the quarter it occurs or make an estimate for that. There's a lot of other companies that do it differently, all right? But it's booked when it happens, so as far as an estimate, I would take a revenue piece and I've always said, it can run anywhere from about, all right, pick a number, 1.5%, 1.4%, 1.3% to 3%. We were at 3.1% in the fourth quarter of 2009; don't anticipate that. We had some really adverse development in the fourth quarter and we booked it. This quarter was extremely safe and we had just excellent -- not, we had excellent experience and we had a lot of brokerage and if that brokerage continues to -- in a 49%, 51% mix, you would anticipate that you would have a lower claims profile and therefore lower insurance. That's all based on the fact that I'm also safe on the 51% side. Do you follow me, Scott?

No, that makes sense. That makes sense. Okay then, last thing -- actually 2 quick things. Can you talk about the tax rate you're assuming for fourth quarter? And then Jim, I think you mentioned that brokerage gross margin ex-line haul was down 50 basis points year-over-year. Do you have that number sequentially relative to second quarter?

Second quarter to third quarter was a little bit better than 50 basis points, pick up on that non-substitute line haul truck brokerage, so it improved.

You're saying the margins got better sequentially second quarter to third quarter?

Yes.

Okay.

And on the tax rate question, I'd just assume that we'll continue with where we've been for the year.

So still in that 38% range, not the 31% like we've done in the past 2 years in the fourth quarter?

That's the assumption, yes.

Okay, great. Thanks for the time, guys.

Ben Hartford of Robert W. Baird.

Hi guys, thanks for taking my call. Henry, I was hoping you could elaborate a little bit. I know that we've got this 45% EBIT margin target, 3-year target set in 2010 for leverage, and you talked about the opportunity to expand but certainly a good margin result this quarter. Thinking about getting to that 45%, how likely is it that we could see that sooner and is it simply a matter of the external environment continuing to improve or are there additional measures on the cost side you can take to get to that 45% target?

Well, it's not so much measures on the cost side per se. I think it's more or less bringing more revenue in than maintaining that cost, and yes, so that's a hard question because it's really all about increasing gross profit dollars. If I increase gross profit dollars and maintain a cost structure, and we're safe, it should work, but I think we have the ability to go much higher than that as we move forward. But I still think when you look over the next 3 to 5 years, you're going to be in a range to get to that 45% and then hopefully go through that range. But it's really about, really, it's all around gross profit dollars.

Yes, okay, understood. Good, and then Jim, just to clarify, the fourth quarter this line haul revenue run rate, are we at $17 million to $18 million and that should be the assumed placeholder going forward?

2% to 3% of revenue is what we expect.

Okay, good. Thanks for the time, guys.

Nate Brochmann, William Blair and Company.

Good afternoon, gentlemen. Great quarter there, obviously.

Thanks.

Wanted to talk a little bit, we talked about some of the different drivers and a lot of the pricing but it feels that, clearly, you guys are winning a fair amount of market share. I'm just wondering if you could elaborate a little bit on whether that's just the agent additions, whether it's just truly macro, or whether there's some more specific things that you're targeting somewhat behind the scenes a little bit that you could elaborate on?

Nate, this is Pat. I will tell you that I think it is -- some of it is agent additions. Clearly that's 1 way to take market share, but I think that it's about execution. And if you look at how we've been executing from the sales to the execution of the operating side and to sourcing capacity, I think we've done a terrific job and we're starting to get some real traction along those lines. You heard what Joe talked about in terms of the number of additional broker carriers that transported a shipment in the third quarter in 2011 versus 2010. So again, I think we've got greater execution from a sales standpoint and greater execution from an operating standpoint that capacity is capacity is capacity and so use all of the capacity sourcing tools available to you from Landstar and go out and take all the freight. So I think it's a combination of things -- the new agents, certainly, but I think the execution has really ramped up here.

Okay. That's helpful and then maybe just a follow on to that if you could just provide an update on the initiatives and goals of utilizing some of the other modes in terms of international and intermodal and things like that?

Well, I think that those initiatives continue to be a big part of what we're trying to accomplish. Then again, you'll see some traction on the intermodal side, 22% of our revenue came from agents -- this is year-to-date now -- that are not intermodal-certified so they are agents that hadn't done intermodal before and now moved freight so you're seeing some traction along those lines. But I think it's also the traditional business that our agents have that they're going out and they're saying -- okay, I'll take all the freight because again, as I mentioned, some of the underlying capacity sourcing tools that we have and some of the initiatives that we've undertaken on the operation side to help the agents find the capacity. Take a look at what we've got on the international air ocean. Again, we've got new sales initiatives along those lines that I think are starting to pay off dividends.

Great. Thank you very much.

Jack Waldo of Stephens Inc.

My 2 questions, the first 1 is on the share count and balance sheet. Jim, where did you guys end on the share count for the quarter?

Ending balance, 46,900,000.

So would that be a good basis for fourth quarter, assuming no share buybacks?

Yes.

Okay, 46.9 million. And then on the balance sheet side, the -- it looks like you guys have bought back about $40 million -- maybe closer to $45 million worth of stock this year?

Yes, $42 [million].

And that is about one-half of your annual average the last couple years? I was wondering how much leverage you feel comfortable putting on the balance sheet either for acquisitions or to buyback stock? And is there any reason why we should look at your previous buybacks as a proxy for what you might end up doing this year?

Look, we're always opportunistic as far as buying back stock and we've been pretty consistent as far as buying back stock and we've been buying back stock since 1997. I think if you post adjust or adjust for splits and whatnot, I think we've taken the share count down from about over what, 100 million, Jim, down to 46 million? We'll operate pretty consistently with that. As far as leverage, look, obviously Landstar can handle a lot more debt. We generate a lot of cash which is really our model; we generate cash. On the other hand, we're a little -- since I've been here and I've been here since the beginning of '88 as you might know, Jack, I'm a little bit debt-averse because I was here when it was a highly leveraged transaction so but we can handle more debt. I wouldn't take anything as far as what we've done in the past as far as to calculate how much we're going to buy because I think we're opportunistic. We'll buy more when we think it's appropriate and we'll buy less when it's not.

Fair enough, and then Henry, I wanted to ask you and Pat. On -- 1 of the big issues entering this year that just hasn't got as much attention lately is CSA and the impact it might have on everybody, but owner-operators as well. Do you think that we've seen the impact we're going to see because of it or the initial impact? Or do you think that the momentum of change is still either building or has it flatlined a little bit?

I'll let Joe answer that 1. Joe?

Yes, Jack, I'm going to answer that so first, from a BCO standpoint, we think that we've got pretty high standards anyway. Our average BCO is 51. He's not a rookie, he knows what he's doing so when we implemented and prepared for CSA, we've been through that so we don't expect any additional fall-out from that. When you look across the landscape of carriers that are out there, I think most of your larger carriers are probably in the same position we are. Some of your smaller carriers, I think, are just now getting familiar with it. And I think at this point it's going to be a little bit of a wait and see as to how the FMCSA reacts to the data and the new findings and the new scores. What are they going to do? And then what domino effect would that have on particularly the smaller carriers is what I would look for but there really is no crystal clear answer to that question as we sit here today.

Okay, fair enough. Thank you guys very much.

Thank you. John Larkin, Stifel Nicolaus.

Thanks for taking my call. There's been a lot in the press not only about CSA but also the on-board trip recorders that is tied up in a lawsuit right now; it looks like it's going to be delayed. What's your read on that and what percentage of your owner-operators currently have on-board trip recorders already?

John, this is Joe Beacom. Very, very few of our BCOs; we've got some guys who wanted 1 and who are volunteering to put them in and we're trying to accommodate that. But I think the way to look at on-board recorders is not so much, or at least how we're looking at it, not so much about what the law will be but about what your CSA Fatigue BASIC score will require you to do. That's how we're looking at it. I think that is why you see many carriers going after the on-board recorders is the way they are, not necessarily because of some mandate but because they need to work on their Fatigue BASIC score. So our Fatigue BASIC scores are in -- below the threshold and we have the luxury of time in evaluating what works well with our BCOs. But we are seriously looking at them and we've got some in test and it is our intent to move forward on that. You probably won't see anything meaningful from us until 2012.

Would you put those into the LCAPP program and help the owner-operators buy the electronics a little more cheaply or would you provide it for them directly? How would you handle that?

We will have a couple of options, clearly, it would be part of the LCAPP program and we're in discussions with the vendors on negotiating a larger volume pricing and we'll pass that on to the BCOs absolutely.

Got it. Then just 1 question on what could be considered a pop-up volume opportunity. The President has announced we're going to be spooling down operations in Iraq. Historically, Landstar has handled a lot of military hardware, either being deployed internationally or coming back home. Do you anticipate a big opportunity there over the next, say, six months or so?

John, this is Pat. Our government representatives were at SDDC Headquarters last week. SDDC is briefing the carriers on that. They don't believe that they can get all of the materials out of theater at the same time that they bring the troops out, so that's currently being looked at. And I really couldn't tell you pending what SDDC and TRANSCOM decides to do.

But you're going to be a big player of that 1 way or the other?

We would anticipate that; that is correct.

Thank you very much.

John, I thought you were going to call me -- call Landstar the Obama Carrier again.

I'll reserve that for October. I want to keep some bullets for just before the election.

All right. Sorry, John. (laughter)

Thank you. Anthony Gallo of Wells Fargo Securities.

Thank you very much. A question around the agent revenue. I thought I heard $28 million in revenue from new agents. Was that for the quarter or year-to-date?

Quarter.

For the quarter, okay. And then can you -- you mentioned the agent pipeline. Could you maybe put into buckets what that agent pipeline looks like today? Is it independent freight brokers? Is it guys buried within an LP operation or generally, what does that look like and maybe any characteristics around the size of the typical agent you come across?

Anthony, this is Pat. I would say that most of, or a good portion of the agent prospects that we find in the pipeline that we believe are going to be able to convert -- 50/50 chance of converting are folks that currently have their own business and they've got either their own small brokerage or small IMC, or they're trying to touch their customer across all of those modes. They find it appealing then to come to Landstar because the scale, systems and support that we offer. So they can take part in our buying power, they can take part in our systems that help them source capacity and they can sell all services to their customers, so we find that to be somewhat of an advantage to prospective agents coming to Landstar.

That's helpful and then Henry, is there a number that you would like us to think about in terms of what portion of your revenue growth each year should come from new agents? Is it a quarter of the revenue growth? Is it 10% of the revenue growth? What -- is there a way to think about that or is it just going to change too much?

Historically, Jim?

Historically, if you look at any given quarter, revenue contributed by new agents is anywhere from 4% to 6% of total revenue in the quarter but I don't think we have a specific target on new agent revenue.

Okay, 4% to 6% of total revenue, not 4% to 6% of the growth?

Right.

Okay, that's helpful. Thank you, gentlemen.

Thom Albrecht of BB&T.

Hi, guys. Good afternoon and congratulations on a good quarter.

Thank you.

I wanted to just make sure I got a couple of numbers right. I know you gave the LTL line haul substitute revenues. The last couple of quarters you've also given us loads just as we complete this weird set of comparisons. What was the loads for that in the quarter?

7,400.

And then second question, I'll combine. The -- I was a little confused on what you said the load growth was, well, scratch that. Where did you finish the quarter for agents? You used to give that and you no longer give that.

Yes, we don't give that because it's not the count that is important. It's the quality and the productive agent. Rather than talking about adding 200 agents and contribute no revenue, I'd rather talk about 1 and -- however, the way the Street reacts to 1 agent versus 200 agents -- I'm using extremes -- is negative, so I'd rather talk about the revenue, which is what we did.

All right and that LTL business was primarily in the brokerage arena, right?

Yes.

Okay. That's all I had, thanks.

David Campbell of Thompson, Davis & Company.

Good afternoon. Thanks for taking my question. I just wanted to ask about the substitute line haul business. You seem to think 2% to 3% of the normal rate that you will continue to have. I just wondered, how do you know that? Is it something you would control? Do you get some requests for that business and turn them down because you want to keep it at 2% to 3%? How do you know?

No, no, no. Way back when -- it seems like way back when. About a year-and-a-half ago, we were told by 1 large -- the largest customer that we provide substitute line haul with, that they wanted to take that back in-house. So they began a plan to basically take that back in-house. And as we moved through 2010, if you will, because of certain other things, they actually increased our business and then they started taking it away pursuant to their plan. And so now you've got these comparisons between 2011 and 2010 that, it's just the way it is and that cycles out in the fourth quarter or just about cycles out in the fourth quarter to where it's an apples-to-apples. It wasn't anything actively that we said -- we don't want this business. It was decided by that particular carrier that -- I'm going to bring it in-house and do it myself.

Okay, so the remaining customers using it, substitute line haul, ends up being about 2% to 3% of your revenue?

That's correct.

But it's something that could be more or less depending upon what those customers want. It's not predictable completely?

Well, it's like nothing is predictable in this world, as you well know. So yes, for all I know, they could take the 2% away, they could make it 10%. But I anticipate, based on the knowledge base we have right now, that it should maintain in a range from 2% to 3%, as we knew that we were going to have a big reduction when they told us that, so I don't anticipate any major change in that.

Okay, great. Thanks for the help.

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

Thank you. We are right on time, 2.57 PM. Any closing comments from anybody here? Jim?

No, we followed a record second quarter with a record third quarter and the volumes and pricing feel real good right now. I feel, continue the momentum throughout the fourth quarter.

I echo those comments and I really believe the future is in front of us at this point in time. We've got a lot of good things going and I think on behalf of the management team this year, we're pretty confident as we move forward into 2012. With that, we look forward to talking to you again in the fourth quarter on our mid-quarter update call. Thanks and have a great afternoon.

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