Landstar System Inc (LSTR) 2012 Q1 法說會逐字稿

Good afternoon, and welcome to the Landstar System Inc. first quarter 2012 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 H. Gerkens, Chairman, President and CEO, Jim Gattoni, Vice President and Chief Financial Officer, Pat O'Malley, Vice President and Chief Commercial and Marketing Officer and Joe Beacom, Vice President and Chief Safety & Operations Officer.

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

Thanks, Dory, and good afternoon, and welcome to the Landstar 2012 first quarter earnings conference call. This conference call will be limited to no more than one hour. In addition, please limit your questions to no more than two questions 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 conference call, I and other members of Landstar's management may make certain statements containing Forward-looking statements such as statements which relate to Landstar's business objectives, plans, strategies and expectations. Such statements are by nature subject to uncertainties and risks, including, but not limited to, the operational, financial and legal risks detailed in Landstar's Form 10-K for the 2011 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 2012 first quarter was another outstanding quarter for Landstar and a great start to what could yet be another banner year for Landstar. Freight demand continues to be strong and pricing continues to increase, albeit not at the pace we saw in 2011, but consistent with our forecasts. In our 2012 first quarter mid-quarter update call, I stated that I expected our revenue for the 2012 first quarter would increase over revenue generated in 2011 first quarter in a low to mid-teen range and that I estimated that 2012 first quarter earnings per diluted share would be in a range of $0.51 to $0.56 per diluted share. Actual revenue increased 13% and earnings per diluted share was $0.57, a 33% increase over the 2011 first quarter diluted earnings per share. Not only was it the highest first quarter revenue and diluted earnings per share in Landstar history, but also the highest first quarter operating income amount in Landstar history.

Since the end of the 2009 year, Landstar has now put together 9 consecutive quarters of sustained current year over prior year quarter growth, and I anticipate that trend to continue. Consolidated revenue at 2012 first quarter was approximately $649 million, up approximately $77 million from the revenue generated in the 2011 first quarter. The increase was primarily driven by the 15% increase in truck transportation revenue. Truck transportation revenue represented 92% of consolidated revenue in the 2012 first quarter versus 91% in the prior year first quarter. Revenue hauled by BCOs in the 2012 first quarter increased approximately 7% over the 2011 first quarter and represented 51% of total revenue in the 2012 first quarter versus 54% in the 2011 first quarter. Total brokerage revenue increased a healthy 27% in the 2012 first quarter over the 2011 first quarter and was 42% of consolidated revenue in the 2012 first quarter versus 37% of revenue in the 2011 first quarter.

From a load volume and revenue per load standpoint, total loads hauled by BCOs and broker carriers in the 2012 first quarter combined increased approximately 9% over the 2011 first quarter and revenue per load increased approximately 6%. Flat bed revenue was particularly strong in the quarter and increased 28% versus the prior year quarter, while van and other truck transportation revenue increased 8%. Current indications are that flatbed revenue will remain strong throughout the year. Rail intermodal revenue increased 6% over the prior year first quarter, entirely due to increased pricing. Air and ocean revenue was down approximately $4 million versus the prior year first quarter, primarily due to several one-time moves that occurred during the prior year first quarter. Our gross margin in the 2012 first quarter was 16.3% versus 16.9% in the 2011 first quarter and was reflective of the increase in brokerage revenue. However, this was more than offset by lower insurance and claims expense as a percent of gross profit. As you know, brokerage has a lower claims risk profile. Jim's going to talk more about that shortly.

From a new agent revenue standpoint, revenue generated from all new agent locations added over the past year amounted to $31 million in the 2012 first quarter. If you recall, the comparable number in the 2011 first quarter was approximately $27 million. The point is that we continue to recruit quality, productive agents. As I have said before, our prospective agents continue to be attracted to Landstar because it is an agent-based company whose operations are geared towards supporting its agent base. If you're a small, independent entrepreneur in the transportation business, there is no better place to be than Landstar.

As it relates to truck capacity, we ended the seasonally slower 2012 first quarter with 128 more BCOs and 2,208 more truck brokerage capacity relationships than we had at the end of the 2011 first quarter. The first quarter of any given year is typically the slowest quarter for BCO truck capacity gains. However, our net decline in BCO capacity in the 2012 first quarter from the end of the 2011 year was only 46 compared to a decline of 168 from the 2010 year end to the end of the 2011 first quarter. I might add that through the first several weeks of April, we have already recouped that 46 BCO decline. From a profit and loss standpoint, operating income for the 2012 first quarter increased approximately 27% over the 2011 first quarter. Operating margin was 40.8% in the 2012 first quarter and better than anticipated. Tracking back over the past three years, operating margin was 31.3% in the 2010 first quarter, 35.4% in the 2011 first quarter and now up over 40% in the 2012 first quarter. I believe we are well on our way to achieve a full year operating margin of 45% in 2012.

Those of you who still have concerns regarding Landstar's operating model and where Landstar obtains its operating leverage only have to look at our current year quarter over prior year quarter comparisons since the 2010 first quarter. As long as we can effectively manage costs and can improve our gross profit dollars, we will improve our operating margin. Again, take a look at this quarter versus the prior year first quarter. Revenue was up 13%, which yielded a gross profit dollar improvement of 10%, an operating income improvement of 27% and the operating margin of almost 41%. That is the Landstar model.

Jim, financial review.

Thank you, Henry. Henry has already discussed certain information regarding the 2012 first quarter. I will cover various other financial information included on our first quarter release.

Gross profit representing revenue less the cost of purchase transportation and commissions to agents increased 10% over the 2011 first quarter to a first quarter record of $105.9 million, which represented 16.3% of revenue in the 2012 quarter compared to $96.4 million, or 16.9% of revenue in the 2011 quarter. The decrease in gross profit margin to 16.3% in the 2012 first quarter compared to 16.9% in the 2011 first quarter was primarily due to a change in mix as revenue contributed through truck brokerage grew to 42% of revenue in the 2012 first quarter compared to 37% in the 2011 first quarter. The cost of purchase transportation was 75.9% of revenue in the 2012 first quarter compared to 75.4% in the 2011 first quarter. This increase was primarily due to an increase in the percentage of revenue contributed through truck brokerage, which has a higher rate of purchase transportation. Commissions to agents was 7.7% of revenue in both the 2012 and 2011 first quarters. Other operating costs were 6.1% of gross profit in the 2012 quarter compared to 8.2% in the 2011 quarter. This decrease was primarily attributable to the effect of increased gross profit and lower maintenance costs on Company-owned tram equipment compared to the 2011 first quarter.

Insurance and claim costs were 10.5% of gross profit in the 2012 quarter compared to 11.7% in the 2011 quarter. The decrease in insurance claims as a percent of gross profit was due to an increase in the percentage of gross profit contributed through truck brokerage carriers, which has a lower claims risk profile than gross profit contributed through BCO independent contractors. Selling, general and administrative costs were 36.6% of gross profit in the 2012 first quarter and 38.6% of gross profit in the 2011 first quarter. The decrease in selling, general and administrative costs as a percent of gross profit was primarily attributable to the effect of increased gross profit in the 2012 first quarter. Depreciation and amortization was 6.4% of gross profit in the first quarter compared to 6.6% in the 2011 first quarter. This decrease was due to the effect of increased gross profit in the 2012 first quarter. Investment income was $387,000 in the 2012 quarter compared to $528,000 in the 2011 period. The decrease of investment income was primarily due to a lower rate of return on investments held by the insurance segment during the 2012 first quarter.

The effective income tax rate was 36.7% in the 2012 first quarter compared to 38.2% in the 2011 first quarter. The decrease in the effective income tax rate in the 2012 first quarter, which added $0.01 to our previous solution guidance and $0.01 compared to prior year was entirely due to tax benefits recognized by the Company on the exercise of incentive stock options exercised during the 2012 first quarter. 2012 first quarter operating income increased 27% to $43.2 million in the 2012 first quarter compared to $34.1 million in the 2011 first quarter. Operating margin representing operating income divided by gross profit increased to 41% in the 2012 first quarter compared to 35% in the 2011 first quarter. The $9.1 million increase in operating income reflects the $9.4 million increase in gross profit. The increase in gross profit was almost entirely passed through to operating income as the Company has an established infrastructure to support a significant amount of revenue growth without any significant amount of selling, general and administrative costs, and it specifically relates to truck brokerage, a lower commercial truck and claims exposure.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $85 million. 2012 first quarter cash flow from operations was $20 million. Cash capital expenditures was $1 million in the 2012 first quarter. Trailing 12-month return on average shareholders equity was 41% and trailing 12-month return on invested capital representing net income divided by the sum of average equity plus average debt was 29%. On March 31, 2012 shareholders equity represented 74% of total capitalization.

Back to you, Henry.

Thanks, Jim. With a tight capacity environment and freight demand relatively strong, I expect a strong 2012 second quarter and for that matter, a strong year. I am anticipating a particularly strong second quarter and full year as it relates to our flatbed offering. In the 2012 first quarter, we set first quarter all-time records in just about every financial metric. I anticipate we will see more of the same in the upcoming quarters absent any negative change in US economic conditions. As I have said before, I expect the US economy will continue to improve, albeit at a slow and sometimes choppy pace, basically similar to what we have seen in the past. Any pickup in economic activity should only add increased pricing power and even better results. Assuming no change in current operating trends, I would anticipate diluted earnings per share for the 2012 second quarter to be in a range of $0.71 to $0.76.

And Dory, with that, we will take questions.

Thank you. (Operator Instructions) Our first question comes from Alex Brand, SunTrust Robinson Humphrey.

Hey. Good afternoon, gentlemen. Sorry, this is Sterling in for Alex today.

Okay.

Thanks for --

How are you?

Thanks for having me on. I'm well, thank you. I wanted to ask about the merge in the reporting of the ocean and air carriers. Is that just an acceptance that that's going to be a small part of the business going forward and so you're not going to report it separately?

Well, it is a small part of the business, and when you consider that, it's 92% truck. Again, we've just decided that we're going to combine that, just what we decided to do.

Okay. So, nothing to read into that.

No, nothing to read into that at all.

Okay. Thanks, Henry. And I appreciate the clarity on the BCOs, and you said you had already recouped, I think, the 46 sequentially?

Correct.

Through April. So, could we expect, then -- does that trend rate continue, would you expect, through the first quarter, so we can expect a pretty substantial increase in BCOs?

I expect that to grow. Joe, you want to comment on some of that? I promised my guys, that, by the way, I was going try to let them answer as many questions as possible, even though I like to talk a lot. So, Joe, go ahead.

Thanks, Henry. I would say this. We've reinvigorated the campaign around BCOs and BCO truck initiatives last year, and we've seen some pretty decent improvement. The number of inbound calls are up, the number of applications in and out are up, the number of adds year- over-year are up, so, yes, I would say you would continue to see a growth in BCO equipment in the second quarter and for the rest of the year.

Okay, great. And I just had one last one. Could you remind us again where the higher proportion of platform trucks is, that is in BCO relative to brokerage? And what pricing did for you in flatbed in the first quarter?

It's about 50/50.

That's of your Flatbed business, 50% is in BCO and 50% is brokered?

Yes, that's correct.

Okay, and how did Flatbed pricing trend in the first quarter?

Do you have that number, Jim?

On a revenue per load quarter over last year's quarter, flatbed pricing was up 12%.

Oh, great. Thanks for the time.

Thanks.

Our next question comes from Justin Yagerman with Deutsche Bank.

Hey, Justin.

Hey. Good afternoon. Was curious on the flatbed side if you guys are buying trailing equipment right now and how aggressively you're doing that? Obviously, we're getting a lot of activity with manufacturing picking up and shale play out there in the US, a lot of tightness in that sector. Are you guys investing there?

Justin, this is Pat. As you know, we have purchased some trailers in the past to help us manage through the heavy haul business, but we haven't bought many trailers at all. The BCOs that come to Landstar have that trailing equipment, that expertise, that sophistication, so by and large, the equipment that's in that business is owned by the BCO.

Okay. And then I guess it sounds like we should expect the BCO count to pick up, but, I mean, what are the commensurate recruiting costs? Is it costing more per BCO to get guys on board right now as you look at this tight driver environment? And I guess, how do you guys look at that in terms of cost per truck that you bring on relative to what you project those guys are going to be earning in the future?

There is some cost in advertising, which we've ramped up, but as it relates to having the guy come in and go through orientation and feeding them and putting them up, it's a pretty insignificant cost on the overall. Really what we've done internally is just try to get our agent network and our advertising campaign back on track to grow that BCO count. There isn't a significant cost involved in bringing BCOs on board.

Justin, it goes back to what we said in the past. We got back to basics, all right? When you consider this environment, all right, and we pay percentage of revenue, that's a huge incentive. Every time there's an increase in that revenue per mile or price, if you will, BCOs share in that. We emphasize the LCAPP program, things that are core to the Landstar model, and we started doing that last year because we sort of lost, as I said before, a little bit of focus.

And if you go back in the first quarter, when you look at that first quarter negative 46, if you will, that was the best first quarter we had in five years as far as net trucks because the first quarter typically is where you lose trucks. And as I said, we've already recouped that plus some as we moved through April. So, from that standpoint, we're pretty confident as we move forward as far as what we're going do with capacity from a BCO standpoint. We think we've got the right leverage in place to make that number continue to increase as it did last year.

All right.

Go ahead.

We've tried to focus some of our advertising, obviously, on the flatbed market and through the middle of April, we've seen flatbed and heavy haul truck adds up about 60% on the BCO side year-over-year, which is nice. And we've done some things as far as doing web demos and available load demos to prospective flatbed operators. And once many of those guys see the Landstar opportunity, it's just a matter of working through the paperwork, making sure they meet the safety profile that we're looking for and getting them into the system. So, I do think we've got a lot of good things going on the BCO add front, whether it's vans or flatbeds, but with the environment we're in now and the rate environment we're in now on the platform side, we like what we're seeing.

That's a great segue into my last question, which is on the safety side, I know we're not up to using CSA yet on the broker side in terms of rating safety of carriers. I think you're still on the safer or safe net or whatever it is, the old system. But how are you guys -- where are you with educating customers and getting to a place where you'll be more CSA ready when we eventually switch over? I know Landstar has got a strong safety culture, so kind of curious how you guys are tackling that mess and really how that changes the way you think about liability in the brokerage world?

Well, you know, CSA has been around, as you know, for well over a year, year and a half or so. We took a -- the position last March, and if you look at our historical broker carrier count, you saw it dip last March. And we actually implemented a form of the CSA metric at that time because you couldn't use the safer stats, they'd taken away the ability to use that, which most of the industry had used before.

So, we did implement some standards around CSA scores back in March. We've changed them once since then, and we continue to evaluate what the FM CSA is doing around the basics. And as you may or may not know, they're contemplating another change in the basics now. So, it's been a somewhat fluid environment as it relates to that. Our first order of business is if they have a satisfactory safety record -- rating and if they don't have a rating, then we revert to the CSA scores, because that's pretty much the only metric out there. And to this point, I think we feel we're evaluating and bringing on carriers that from a legal liability standpoint we feel comfortable we could defend against.

Got it. All right. Well, I appreciate it. Thanks for the time.

Thanks, Justin.

Our next question comes from Peter Nesvold with Jefferies. Your line is open.

Peter, how are you?

I'm doing all right. How about you guys?

Pretty good.

So, other operating costs down year-over-year. You talked a little bit about what drove that. Are those going to be -- should we consider those recurring benefits through the rest of the year, so we update the model, or do those kind of come back to year ago type levels in the out quarters?

In the first quarter and partly into the second quarter last year, we had some issues on some specific trailers as it relates to trailer maintenance. So, I would expect more of what you saw this year than what you saw in that first half of last year. Maybe a little bit more on the maintenance side because it was a little bit lower than I anticipated, but it's not where last year was.

Okay. And so tax rate was the same sort of thing. You talked a little bit about why it was down year-over-year. Does that come back also, just for modeling purposes?

Tax rate, yes.

Yes. Our normal tax rate -- like I said, the entire pickup, the 36.7 was from the exercise of stock options. I'm at 38.2, anywhere from 38 to 38.5 without having a discrete item.

Got you. Okay. And then last question, the brokerage, I mean, really nice growth quarter here. I apologize if you kind of went into this in the prepared comments, but what drove the outsized growth there in truck brokerage versus the BCO segment?

I think it's just better execution. If you think about it from an operator standpoint, they're out there, they're looking for high-quality freight from a customer that's going to pay them timely, and I think Landstar is a great choice under that circumstance. If you look at some of the capacity sourcing tools that are embedded in the acquisitions, I think that made a big difference in our ability to source capacity as well. So, I think those are the things that led to the growth in brokerage.

And so do you anticipate -- and so is this -- any kind of new strategic change? I mean, is this an area that you're going to be a little bit more focused on going forward, or is this sort of, in this particular quarter, it sort of clicked?

Well, I think -- Pat, if I may, you can add. I think Pat hit it on the second part of that answer. I mean, again, to grow this revenue base, we're going to have to basically increase our brokerage, and in order to increase our brokerage, we have to supply our agents with the appropriate tools in order to source capacity. One of the things that we did with this acquisition, and I said this before, that what you're going to see with these acquisitions, and the effect it's going to be increased revenue from the transportation side. So, the fact that we've made people more productive on our side is going to yield more covered loads, if you will, and that, I think, is part and parcel. And that we hope goes forward and that should go forward.

Does that speak to maybe the penetration rate where you're already in flatbeds, that perhaps it's nearing some kind of structural ceiling and so therefore, you're sort of growing into other trailer types, and the easiest way to do that is through the truck brokerage area?

I think Peter, it's fair to say that we service all of our customers and try and cover all of the freight that's made available to us. And so brokerage has to be a big part of that. Clearly, our customer base has both van and platform customers in there, and we're able to execute on that strategy of covering more freight for the customer. Brokerage is a big part.

Okay. Thank you.

All right, Peter.

Our next question comes from Scott Group with Wolfe Trahan.

Hey, good afternoon, guys, how are you doing?

Pretty good, how are you?

Good. I was wondering if you have the monthly volume and yield numbers, if you can give us those and if you can give us any color on April volume and yield?

I think on those types of questions, we'll either take those offline -- I mean, the -- or whatever. I'd rather get into other questions. As far as April numbers are concerned, I think April's pretty much as we anticipated and in line with where we are. The pricing is still better than the prior year, but better -- how do I put this? The prior year over -- the current year over prior year is still increased, but not at the rate that we saw from 2011 over 2010, and I think that's going to hold throughout the year. I think we said that at the very beginning of the year and from a -- we're a couple of weeks into April and things look pretty good at this point in time.

Right up to the 13% revenue growth in first quarter, how is April feeling?

I think I just answered that question (laughter). I said it feels pretty good, all right? So, I don't know what else you want me to say. I mean, I'm not going to lock into a number for two weeks.

Okay. Can you talk about what you're seeing on the brokerage side specifically from a gross yield or net revenue margin standpoint? CH, their comments are that things tightened pretty aggressively in March into April, and they're getting squeezed, it seems like pretty hard in second quarter. What are you guys seeing on the brokerage side specifically? I know there's obviously some mix things going on as brokerage goes faster, but if you try and isolate the brokerage piece, what are you seeing on the yield side? The --

I would concur that pricing is -- I mean, you're paying more for a truck because trucks are scarce, get that and that's logical in a tight capacity environment. On the other hand, if you followed what I had said, that's normal and about 50% of our Business, I think it's 51% of our Business is BCO fixed margin.

And you've really got to understand how Landstar operates because then whatever we get, also I've got a benefit on the pickup from the safety side from insurance and just take a look at those numbers. But your general question as far as is capacity tight, yes. Are you going to pay more for that, yes. Are you going to get that back in price increases as you move forward, yes.

Are you seeing that pressure get worse in second quarter on the brokerage side?

No, no, not at all.

Okay. And then -- I didn't hear anything on the buyback. Can you just give an update on what you guys bought in the quarter?

We didn't buy anything in the quarter.

Is that --

We didn't buy anything.

Does that represent a change in spots or strategy at all, or is that just --

No, our strategy has always been that the price settles in a range, and we will buy stock and when the price settles in a range, we will buy stock. We -- as I said many times before, stock buyback is part of our model, it doesn't mean I'm going to go out and buy stock on a equal pro rata basis every day. I mean, it depends on where we see the price of stock and where the stock is and if it's leveled off. And that's been pretty much consistent as far as what we've said. We did not buy anything in first quarter. You also had -- we had a mid-quarter update, I think at the end of the February. You didn't have a lot of time, also, if you think about it, from a window standpoint, either.

That's fair. All right. Thanks for the time, guys.

Thank you.

Our next question comes from Chris Ceraso with Credit Suisse.

Hey, Chris.

Good afternoon, two questions. The first one, the revenues up 13%, that was kind of the low end of the range and even as of you mid-quarter update, you were saying low to mid-teens. Was there anything that slowed down or any reason that it wasn't at the middle or the high end?

Well, a couple of things, one, we were down $4 billion in total from the international air, ocean side, which I don't think we anticipated. And there were some one-time moves that we didn't have this year, only because there was special project cargo moves that just we didn't have. We thought we would get some of that. In addition to that, if you looked at the month of March in general, the first week or two in March we had somewhat of a slowdown in total volume and we finished, actually, pretty strong in March. And so we underestimated March, quite frankly, more so than anything else which, again, when you look at our truck transportation, I mean, that was the 15% or the mid-teen range that we were looking at. But I'm happy with 13% in our earnings.

Okay. And then the second question may be more theoretical. The 45% margin that you're targeting for this year, I think we've seen some other sort of similar models run into resistance at that level and kind of run out of room to grow margin. Can you talk about your model and how you'd be able to push through that and get to a higher number over the next one or two or three years if you think you can?

I think Jim, at the end of his comment, I thought, did a nice job. It really is a matter of increasing your gross profit dollars and if you increase those gross profit dollars on a consistent basis, you're going to get the same thing. I don't have to add SG&A costs, and that's the key. Jim said it very well. We've got sufficient infrastructure to support a much higher revenue base, and it's a matter of concentrating on getting that gross profit dollar increase. And that is a matter of ultimately bringing on more revenue.

So, I don't see any obstacle as far as getting past that 45%. And as I think I said way back when, a couple of years ago, that our objective full year was to get the 45% within a three to five-year time frame. I think we're a little bit ahead of schedule on that and obviously, I think someone tried to back me into a corner, what's my next goal? Let me hit 45% first and I'll get at another target. But as far as the general question, can we get over that, sure we can.

Okay. Thank you.

Our next question comes from Tom Wadewitz with JPMorgan.

Hey, Tom.

Hey, Henry, hey, Jim. Let's see, I guess as a little bit of a follow-on on the prior question in terms of thinking about operating leverage. On the SG&A line, what do you think that looks like going forward? Do you have incentive comp that kicks in if you perform well, that steps things up? Or how would you look at SG&A, I guess, this year, Jim? Thanks.

I would say it looks very similar to what it looked like in the first quarter. As you know, we have -- our convention is in the first quarter, so it's typically -- taking out the bonuses, of course, the first quarter is usually a little heavier on SG&A than the back three quarters. And then based on either exceeding targets or hitting targets, the other variable is the bonus plan, and I would expect if I were -- that that first quarter is probably going to look pretty similar to the next three quarters.

Okay. In --

There's not a lot of headcounts coming in, there's -- we don't need to grow the infrastructure, so it's -- I'd say it's very similar to where we are. And like I said, you do have the big convention in the first quarter, so it might be a little lighter than where we are. But then there's raises and stuff you've got to consider, but it's pretty much where we are.

And you're talking absolute terms, not percent of revenue?

Dollars.

Dollars, okay. And then wondered if you could comment on some of the verticals and kind of what you're seeing. Are you seeing some benefit from housing? Do you think that auto would continue to stay at a pretty high level of activity or just kind of what you see within some of the verticals?

Tom, I think that housing really hasn't turned. You read different things, it really hasn't turned. So, I don't think you're going to see anything there. We think automotive is going to continue to be a bright spot in the industry and consequently, a bright spot for Landstar.

Henry, in his opening comments talked about where we stand in the platform business. We feel very good about our position in the platform world. We feel very good about our capacity sourcing tools in the flatbed world and the agent adds that are coming to us in some of those verticals. So, we think the platform side is going to be strong.

Automotive will be a bright spot and housing, nothing is there, Tom. And government, as we talked about, last year leading into this year, government was going to be down some simply because the government has cut back. That's been well documented. And so we continue to see some of that decline on the government side.

Okay. And the look forward is kind of similar growth to what you're seeing in some of those verticals that have been strong.

Correct.

Okay. Great. Thank you for the time.

Our next question comes from Jason Seidl with Dahlman Rose.

Hey, guys, good afternoon.

Hey, Jason.

Just a couple quick questions. You mentioned that pricing is going to be up, just not as much as last year. Are you looking at sort of equal strength between flatbed and dry van, or is there a marked difference?

I think there's a marked difference. I think flatbed -- I'll let Pat answer it, but I'm going to answer it anyway (laughter). Flatbed is going to be higher as far as -- than van, but Pat, you can add your --

Exactly. (multiple speakers)

It's just tighter.

Now, is that all a lot from steel demand here or --

No, not really, Jason, it's not from steel demand, but as we've talked before, the barriers to injury are pretty significant on the platform side. I think our expertise in the model itself where it's naturally diversified puts us in a better position in the platform world, but it's not driven by steel, necessarily.

Okay, and on the flatbed side, is it getting harder to recruit the drivers in that world? Are we going to see a slowdown or are you guys still having success?

Tom, this is Joe Beacom. We've actually seen a nice increase year-over-year bringing in the flatbed guys in the first quarter or actually, year-to-date. I think it was around a 60% increase in flatbed and heavy haul adds year-over-year, and I think it goes back to the campaign that we've got out there in that flatbed pricing environment that is up double digit pricing.

That fits right into our sweet spot where a guy gets to participate in that on day one and with every load going forward. That and the fuel surcharge pass through at 100% and the ability to equip his trailer with chains, tarps, binders and buy equipment through LCAPP. All of those things I think feed very nicely into us growing flatbed and capacity on the BCO side.

Okay, well gentlemen, thank you for the time, as always.

You got it. Thank you.

Our next question comes from Todd Fowler with KeyBanc Capital Markets.

Hey, Todd.

Hey, Henry. Congratulations on the quarter.

Thanks.

I wanted to start off with the revenue per load, specifically in the BCO side because I look at that one as being the one that's pure without the fuel in there. I want to be clear, the 3.4% increase in the quarter, you're not seeing anything different in the market, that's just more of a -- the impact of the year-over-year comparisons. And then -- to that point, and then what would you expect going forward with revenue flow? What do you think the market can bear this year?

Well, I think we spoke last, Jim, I think what we were looking at was that type of revenue per load number, I think, is what we were looking at, between that 3% and 4% type thing, correct? So there's nothing unusual, it's just that the comparisons are a little bit tougher because you had such a large increase last year. Obviously, demand starts to pick up, I think, that whole game dynamic could change to the upside. Obviously, if demand falls apart, then it changes to the other side.

Okay, that makes sense. And that's kind of what I wanted to clarify. And then, just the follow-up on that, so with where capacity is at right now, it's tight. But it's tight where it's going to be kind of low to mid-single digit type pricing. You need to see something tighter than what you experienced in March and into April, to see something north, maybe, of 4%?

That's correct. And if you had to balance that, you're going to see better revenue per load or pricing, if you will, from the flatbed side versus the van side.

Sure. Okay, right. And then the second question I had, this is a little bit of Landstar 101, I guess. But Jim, can you remind me again, with the commission to the agents, I know that that fluctuates based on the mix and based on the revenue between BCOs and brokerage revenue, but here in the first quarter kind of at the lower end of the 7% to 8% type range, 7.7% to 8% type range, what really drives that, or what's the factors that impact the commissions as a percent of revenue?

Well, again, a lot of it has to do with mix. There's -- commissions on BCO is slightly less than what it is on broker carriers, yet when we get pressure on broker margins, the commissions to the agents is less because they basically share in that compression, but they also share in any upside on that. So, that's really what drives it. And in the first quarter, generally, we have certain incentives that kick in when people hit certain targets. So, you might see that come up a little bit in the back half of the year, from the 7.7%. Generally see a lower commission number in the first quarter and it kind of grows a little bit throughout the year.

But I think -- and from that brokerage standpoint, I think, is -- as you pay more for the PT, all right, because we share with the agent what's left over. I mean, the commissions as a percent of revenue basically goes down, which is different than, somebody mentioned CH Robinson with me before. They get the full brunt of that, we don't get the full brunt of that.

And that's what I needed, Henry. I couldn't remember exactly how that worked. I seemed to remember that if you are -- on the brokerage business, if your net revenue margins compress, that you get some relief on what you're paying to the agents because there's a split there.

That's right.

Okay, great. All right. Thanks a lot for the time, and congratulations again.

Thanks.

Our next question comes from Ben Hartford with Baird.

Hey, Ben.

Hey, gentlemen. Jim, if you could -- did you quantify what the incentive comp component was in the first quarter of '12?

No, we actually haven't quantified that since it was so large in 2010, but we're accruing to a target number whereas last year we didn't hit our target in the first quarter, so it's more this year than it was last year. But last year when you think about it, since we didn't hit our target in the first quarter, but then we exceeded in the second, third and fourth quarter, so we had a little bit of extra put up in the 2011 second, third and fourth quarter. But we're running the targets. And you probably heard me say in the past that the target -- if we hit targets, probably $7 million or $8 million a year.

Yes, and just to refresh, I think we had talked last quarter, the baseline this year is slightly higher than last year's, is that still true?

Generally, yes, generally it always gets higher, we set our targets.

Okay. Did you also provide a cash flow from ops number?

It was $20 million.

It was $20 million. Okay. Good. And then, Henry, on the revenue side, the supply chain solutions side of the business, can you talk a little bit about the traction there? I know last year there was a large initiative to start building some momentum on that end. I guess Jim, could we first quantify what the net number was on the revenue within the first quarter and then, Henry, if you could talk a little more qualitatively about the momentum there on that side of the business?

Well, I think we've actually already mentioned this, and I've said this a couple of times in the past, that where you're going to see the huge benefit is from increased freight transportation moves. Because that's the approach that we're taking is that I want to basically take all the freight. And as you see freight increase, it's an effect of having put out there to our agents a better sourcing tool and then going to our customers as far as trying to sell this thing as far as a, I want all your freight and basically the system is yours.

From where we are on that, I think the -- you're talking about the fee revenue was basically flat from the prior year, but you've got an increase in the freight piece, if that makes sense to you. Because that's really where -- that's where our better margin is, is really -- when you looked at it, when we actually went through and repriced this stuff and figured out what we needed to get -- to do is we really want to move all the freight.

The split makes sense. I guess can you talk -- I guess clarify how you feel relative to a year ago knowing that you were in front of a big year in terms of rolling that out through your agent base. I mean, do you feel like that it's trending above or below expectations, in line, and can you talk a little bit about the direction in 2012?

Well, a couple of things. I'm going to turn it over to Pat because we made some changes because at -- as we worked through 2009 into 2010 and into 2011, I wasn't satisfied as far as where we are, where we were. Much more satisfied as far as where we are now.

As you know, what we've done is restructured -- I hate using that word, but we moved our organization around to basically put all the sales functions together, if you will, under Pat's leadership. And I think we've got a lot of good things happening at this point in time and I think as you look at some of the results last year and into this year, I think it demonstrates some of the success we've had. But I'll let Pat expand on that if he wants to.

Ben, if you think about it, the two elements that are really sort of critical to these acquisitions or that were embedded in these acquisitions were, one, the real time optimization capabilities and then two, the embedded capacity sourcing tools. If you think about where the transportation world is and the shippers are, they're concerned about cost and they're concerned about securing the capacity to move their freight. This solution helps address both of those things for the shippers.

In addition, then, if you think about it from an agent recruiting standpoint, what are small brokerage people concerned about? The ability to source capacity and to provide solutions to their customers. So, it helps us attract agents into the system because we have this. It allows us to go into a customer and provide them solutions on two very pressing issues, A, cost and optimization and B, capacity sourcing. So, we can go in and demonstrate to them why using this solution, why choosing Landstar is a good choice for them. So, if you think about those two elements in the -- embedded in the acquisition, they really play in the current environment quite well.

Great, that helps. Thanks for the time.

Thanks, Ben.

Our next question comes from Nate Brochmann from William Blair.

Hey, guys, how are you doing?

Pretty good, Nate, how are you?

I'm great, thanks. Hey, just wanted to actually go on that issue a little bit more in terms of -- obviously the environment is pretty robust for you right now, Henry, and obviously you guys are delivering good numbers along with that, but is there anything you're doing or your agents are doing to kind of extra put the pedal down a little bit to try to capture even more? And is there an even bigger opportunity for them do that, or are they kind of, at the service levels you're at, doing everything they can?

We haven't even -- as I said before, I haven't even scratched the surface as far as what we're capable of doing here. I think we've gotten traction from our agent-based family as far as our agent capacity gateway product that has been rolled out. I think our TLS product really needs to get more traction, but I think we're starting to get some of that. I think it's a matter of execution and operating on the same page, and I think we've made changes to make that happen, and I think the results are indicative of that in addition to continuing to bring in quality agents that understand that Landstar's whole dedication is to make that individual successful as far as having -- we don't have any Company store operation and an agent operation where there might be some concern over what the true loyalty is.

We're here, and we're only successful as our agents are successful and our capacity is successful. So, what we try to do is to make everybody successful together. And I think we've done a pretty good job -- I take that back, we've done a great job over the past year and a half as far as bringing that together and the future is in front of us. That sounds like a very deep statement, but, Pat, you got anything else you want to add to that?

Nate, in an uncertain world and in uncertain times, Landstar is a certain bet. Whether you're a customer or whether you're an agent prospect, we kind of take a lot of that uncertainty out. And if you think about it, if you go to our agents and our customers and say we can handle all the freight, they're going to want to see the execution behind that. And we can then bring in these acquisitions and say here's how we're going to execute that. So, it's not smoke and mirrors, it's real solutions that make a difference.

Okay. And then just kind of with that, when you're seeing this revenue growth, are you seeing it from greater penetration with existing or are you seeing that with new wins and is it coming from those agents that you've brought on over the last couple of years with their bigger books of business? Could you talk a little bit about where the mix is? I'm sure it's from all areas, but if you could give us a little color.

Nate, you're right, it's from all areas. It's impossible to say. I think we continue to penetrate the accounts that we're currently working on. Our sales people have three initiatives and that is to, A, bring on new agents, B, call on existing accounts and C, call on new accounts. Those are the only three things they're supposed to be doing each day and every day. So, as long as we execute on that, it will come from all of those elements.

Okay. Fair enough. Thanks.

Thanks, Nate. All right, we are running out of time, so I'm going to try to get through as many as we can. So, if you can make it quick, I'd appreciate it. Next call.

Thank you. Our next question comes from Anthony Gallo, Wells Fargo.

Thank you. Within the brokerage business, would you have an idea of the mix between, say, spot versus committed business? I'm thinking about it in the perspective of where the agent makes a commitment to a customer and then has to go and buy the capacity on a spot basis. Do you know what that mix would be within brokerage?

Pat, you got an idea on that?

Anthony, I would say that it's more spot than committed, but I couldn't give you any kind of break out in percentages, I'm sorry.

All right. Rough idea? I mean, is it --

60/40.

60/40. Okay. And then, so if you looked at it that way, the overall business that is susceptible to this potential squeeze is less than 20%, maybe less than -- is that a fair way to think about it?

We don't have a lot of contractual pricing that we lock up for a year. If you're thinking of the spot versus contractual, spot is probably 90% of what we're doing. We're not committing to providing capacity to price at this point, most of it is spot, if you put it in that context.

Fantastic. That's all I had. Thank you.

Thanks, Anthony.

Our next question comes from Matt Young with Morningstar.

Hey, Matt.

How are you doing?

Good.

Quick question on the Intermodal business. Are your agents seeing strength in any specific customer verticals or geographies? Perhaps growth in the local east business where some of the larger IMCs are reporting strength in the mode conversions?

Intermodal volume, Matt?

On the Intermodal business, yes.

If you look at what some people have been doing off the West Coast, they're pricing the product, I'll use the term aggressively, and so there's been some impact there.

So, are you seeing any strength on the East Coast at all, like with some of the kind of Local East business with the mode conversions?

I've heard a lot about that and read a lot about it, Matt, but we have not seen that.

Really? Okay. Interesting. And then you guys -- I didn't catch it. Did you guys talk about gross margins in the Intermodal? How does that trend in general?

We didn't talk about the gross margins in the intermodal.

Just a general trend or a direction.

First quarter over first quarter prior years, about the same.

Oh, great. That's about all I had, thanks.

All right, thanks.

Our next question comes from Thom Albrecht with BBT.

Hey, guys. I know you've covered a lot of ground. I wanted to just clarify one thing on pricing. I got your forward-looking stuff, but you mentioned flatbed pricing was up about 12%. Does that include fuel? And then what was the van pricing in the quarter? I've got my own assumptions going forward.

To the extent the flatbed is 50/50 brokerage, yes, brokerage would include fuel to some degree. The BCO obviously wouldn't. And on the van pricing, it's up -- it was up 1%.

Okay. That's all I had. Thank you.

Thanks, Thom.

Our next question comes from David Campbell with Thompson and Davis.

Yes, hi, thank you very much. I just wanted to see if you had any visibility on the air and ocean revenues? Based on what you said about the first quarter, you may not, although I know you've seen big increases in sea freight increases since March. And wondered if -- what we should be doing with those two -- those revenues in the second quarter?

I think you're going to see some year-over-year issues related to projects that we had in 2011 that we're not going to have in 2012. As you know, a lot of air is moving to ocean because of cost and just time and then ocean pricing, where that's at. So, I think you'll see something similar in the second.

Similar revenue, total revenue.

Correct.

Right, okay. Thank you.

Thanks, David. Last -- we got one more? Okay.

Thank you. Our final question comes from Jack Waldo with Stephens, Inc.

Good afternoon, and congratulations on the quarter.

Thanks, Jack.

I just wanted to get your perspective, kind of following up on Tom's comment, Henry, the -- on the overall dry van rate environment. I mean, we're in a situation with a fleet-- I just wonder -- it's one of its oldest ages in history, you've got new government regulations, the public truck load carriers in aggregate are reporting, material declines in utilization, yet we seem to be in this somewhat tepid pricing environment. And I just would be interested in getting your take on, A, what is causing the tepid pricing environment if do you agree with that assertation and, B, what could change it?

Well, a couple of things. I'm not sure I -- when you say tepid pricing environment, look, I think pricing increased a lot last year and I said this at the very beginning or in the fourth quarter earnings conference call, that to anticipate the same type of pricing increase, I think, would be a little bit foolish. So -- and I don't think you're seeing that. You're seeing increased pricing. I think if the economy picks up, I think you will start to see that.

I understand Knight maybe adding some capacity and maybe some other -- once you start adding capacity, that changes the mix to some degree. But the economy has been -- GDP or whatnot, it's not moved very strongly, if that's a word, but it's moved normally and pretty consistent. And from the van standpoint, there might have reached a certain amount of balance as far as supply and demand. That's not to say that can't change whereas in the flatbed environment, totally different set of circumstances.

I mean, capacity remains tight, manufacturing is -- in industrial production is still pretty good, outperforming a lot of other sectors. And that is our sweet spot and based on what we hear from customers, that's going to continue. But as far as the general environment from the vans side, again, I don't see any -- we've got a pricing forecast and we've basically forecasted the fact that we didn't think the pricing was going to be as good as it was last year. That's not to say pricing isn't good. But, Pat, I don't know, have you got anything you want to add to any of that? No? You think that's right? Jim?

Jack, one of the things is when we talk about revenue per load, that can be influenced by a bunch of different things, whether it's expedited business or not. And we don't track this for all the revenue, but I can tell you on the van side for a bunch of the revenues, probably makes up about 6% or 7% of revenue, where we actually look at a mile number, how many miles are driven. Our average length of haul compared to last year's first quarter is down about 2% or 3%.

So 1% increase in revenue per load, really, if you take that length of haul and the fact, probably we had a better revenue per load increase than that. But there's other factors that affect that. It's not clearly as saying our rate per mile went up 1%. That's not really how I look at it. But I can tell you that our length of haul, I can't tell you why it's down, but it's down about 2% or 3% compared to prior year's quarter.

Got you, got you. Okay, well, thank you guys very much.

Thanks, Jack. Is that it, Dory?

Yes, at this time we have no additional questions. I'd like to turn it back to -- for closing remarks.

All right, thanks. Hey Jim, you got anything you want to say?

I think we're coming on a terrific quarter. If you look at record revenue and record EPS, our EPS in the first quarter was significantly higher than any other first quarter we ever had. And I'm just looking forward to coming into the second quarter and looking at similar kind of trends.

Pat, Joe, nothing? Joe, nothing? I echo Jim's comments, and I look forward to talking to everyone during our quarter update call for the second quarter. So, have a great afternoon. Thanks.

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