Landstar System Inc (LSTR) 2012 Q2 法說會逐字稿

Good afternoon, and welcome to Landstar System Inc's second-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, please 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, Terry, and good afternoon. Welcome to the Landstar 2012 second-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 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 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 second quarter was another outstanding quarter for Landstar, and resulted in record second-quarter revenue, record second-quarter operating income, record second-quarter operating margin, and record second-quarter diluted earnings per share. Our ability to find the appropriate solutions for customers continues to drive our growth and profit, and will be the driver of future growth and profit.

In our 2012 second-quarter mid-quarter update call, I reiterated our range of earnings per diluted share guidance of $0.71 to $0.76 per diluted share. Actual earnings per diluted share for the 2012 second quarter was $0.76, a 23% increase over the earnings per diluted share reported in the 2011 second quarter. Consolidated revenue in the 2012 second quarter was approximately $736 million, up approximately 9% from the revenue generated in the 2011 second quarter, which compared to our estimated increase of approximately 10%.

Total truck transportation revenue in the 2012 quarter over the 2011 second quarter increased approximately 9%, and represented 92% of consolidated revenue in both the 2012 and 2011 second quarters. Revenue hauled by BCOs in the 2012 second quarter increased 2% over the revenue generated by BCOs in the 2011 second quarter, and was 51% of total revenue in the 2012 second quarter versus 54% in the 2011 second quarter. Total brokerage revenue in the 2012 second quarter increased a healthy 19% over the brokerage revenue generated in the 2011 second quarter, and was 42% of consolidated revenue in the 2012 second quarter versus 38% in the 2011 second quarter.

From a load volume and revenue per load standpoint, total truck transportation loads hauled increased approximately 8% from the 2011 second quarter, while revenue per load increased approximately 1%. Total van revenue in the 2012 second quarter versus the 2011 second quarter increased approximately 4%, entirely due to increased volume. Total platform revenue increased approximately 18%, as volume increased 11% and revenue per load increased approximately 7%. Collectively, revenue generated from all other sources increased approximately 4% in the 2012 second quarter versus the 2011 second quarter.

Our gross margin in the 2012 second quarter was 15.9% versus 16.5% in the 2011 second quarter, and is reflective of the truck transportation revenue mix change, meaning the increased brokerage revenue as a percentage of total consolidated revenue; and, as the model should work, a change in mix of this nature had a favorable impact on insurance and claims expense as a percent of revenue, thus offsetting the gross margin change. Jim will talk more about this in a few minutes.

One more comment on gross margin and gross profit dollars. Total gross profit dollars generated in the 2012 second quarter was $117 million, and increased approximately 5% from the 2011 second quarter. The entire gross profit dollar increase, and then some, fell right through to the operating income line. It resulted in an overall company operating margin increase in excess of 50%, the highest operating margin for any second quarter in Landstar history. As I have said many, many, many times before, this is how the Landstar model should work, and how we gain our superior operating leverage.

From a new-agent revenue standpoint, Landstar continues to attract quality, productive agents. Revenue generated from all new-agent locations added over the past year amounted to $21.5 million in the 2012 second quarter. Landstar's total available truck capacity providers was 36,293 at the end of the 2012 second quarter, up 1,902 capacity providers from the end of the 2011 second quarter, and up 140 capacity providers from the end of the 2012 first quarter.

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

Thank you, Henry. Henry's already discussed certain information regarding the 2012 second quarter. I'll cover various other financial information included in our second-quarter release.

Gross profit, representing revenue less the cost of purchase transportation and commissions to agents, increased 5% over the 2011 second quarter, to a second-quarter record of $116.7 million, which was 15.9% of revenue in the 2012 quarter, compared to $111.6 million or 16.5% of revenue in the 2011 quarter. The decrease in gross profit margin to 15.9% in the 2012 second quarter, compared to the 16.5% in the 2011 second quarter, was primarily due to a change in mix, as revenue contributed through truck brokerage grew to 42% of revenue in the 2012 second quarter, compared to 38% in the 2011 second quarter.

The cost of purchase transportation was 76.5% of revenue in the 2012 second quarter, compared to 75.5% in the 2011 second quarter. This increase was primarily due to an increase in the percentage of revenue contributed to truck brokerage, which has a higher rate of purchase transportation, and a 30-basis-point increase in the rate of purchase transportation paid to truck broker carriers. Commission to agents was 7.7% of revenue in the 2012 second quarter, compared to 8% in the 2011 second quarter. The decrease in commissions to agents as a percent of revenue was primarily due to the increased rate of purchase transportation paid to truck brokerage carriers.

Other operating costs were 4% of gross profit in the 2012 quarter, compared to 6.9% in the 2011 quarter. This decrease was primarily due to the effect of increased gross profit, gains on sales of trailing equipment in the 2012 quarter, a decreased provision for bad debts on contractor and agent receivables, and lower maintenance costs on company-owned trailer equipment compared to the 2011 second quarter.

Insurance and claims costs were 8% of gross profit in the 2012 quarter, compared to 12.1% in the 2011 quarter. The decrease in insurance and claims as a percent of gross profit was primarily attributable to an increase in the percent of gross profit contributed through truck brokerage carriers, which has a lower claims risk profile than gross profit contributed to BCO independent contractors, and decreased severity of commercial trucking claims in the 2012 second quarter.

Selling, general and administrative costs were 32.3% of gross profit in the 2012 second quarter, and 32.1% of gross profit in the 2011 second quarter. The increase in selling, general and administrative costs as a percent of gross profit is primarily due to increased costs under the Company's employee benefit programs in the 2012 second quarter, partially offset by the effect of increased gross profit in the 2012 second quarter.

Depreciation and amortization was 5.7% of gross profit in both the 2012 and 2011 second quarters. Investment income was $405,000 in the 2012 quarter, compared to $393,000 in the 2011 quarter. The effective income tax was 38.2% in both the 2012 and 2011 second quarters.

2012 second-quarter operating income increased 21% to $58.8 million in the 2012 second quarter, compared to $48.7 million in the 2011 second quarter. Operating margin, representing operating income divided by gross profit, increased to 50% in the 2012 second quarter, compared to 44% in the 2011 second quarter. To further emphasize Henry's earlier comments, the $10.1 million increase in operating income reflects the $5.2 million increase in gross profit plus favorable insurance and claims expense in the 2012 second quarter compared to the 2011 second quarter. The increase in gross profit was entirely passed through to operating income, as the Company has an established infrastructure to support a significant amount of revenue growth without adding a significant amount of selling, general and administrative costs. And also, as it specifically relates to truck brokerage revenue, truck brokerage revenue has a lower commercial truck and claims exposure.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $101 million. During the 2012 second quarter, the Company purchased 316,000 shares of its common stock at an aggregate cost of $15.8 million. 2012 year-to-date cash flow from operations was $54.8 million. Cash capital expenditures was $3 million in the 2012 year-to-date period. Trailing 12-month return on average shareholders' equity was 31%, and trailing 12-month return on invested capital, representing net income divided by the sum of [average] equity plus average debt was 29%. At June 30, 2012, shareholders' equity represented 73% of total capitalization.

Back to you.

Thanks, Jim. My message for the balance of the year remains the same. As I have said before, I believe the economy will move along in an upward direction, but at a very slow, gradual pace. I expect Landstar to continue to take advantage of its market position and increase revenue by -- one, coupling its technology with superior service through its solutions-oriented approach to customers; two, attracting new quality productive agent locations; and three, continuing to penetrate its existing accounts with its wide array of service offerings. Considering the sluggish environment, our increased load volume in the first half of 2012 indicates to me we are executing very well and taking market share. I believe we will continue to gain market share throughout the year, no matter what the operating environment. I anticipate pricing in the van market to be flattish, and flatbed pricing to remain relatively strong. Our dominance in that marketplace will continue to benefit Landstar for the balance of the year.

Right now, I anticipate the 2012 third-quarter operating environment to be very similar to the 2012 second-quarter operating environment. Given the above assumptions, I would, therefore, anticipate our 2012 third-quarter revenue over the 2011 third-quarter revenue to increase in the 7% to 10% range. I would anticipate gross profit dollars to increase in a range of 5% to 7% in the 2012 third quarter over the 2011 third quarter, and diluted earnings per share in the 2012 third quarter to be in a range of $0.71 to $0.75 per share.

And with that, Terry, I will turn it over for questions.

Thank you very much, sir. At this time, we will begin the question-and-answer session.

(Operator Instructions)

Your first question comes from Jason Seidl, Dahlman Rose.

Hello, guys. How are you today?

Hello, Jason. How are you?

Hanging in there. Quick question. Can you talk a little bit about the market for growing the BCOs and attracting new guys going forward? We've obviously seen some people with company drivers have to take pay up. Has it gotten more difficult, or what are you seeing out there?

I'll turn it over to Joe in a second -- Joe, go ahead. I promised my guys again I was going to let them try to answer the questions. You know I like to talk a lot. So I'm going to let Joe take it right from the beginning.

Thanks, Henry. Jason, again, I think the Landstar model continues to be attractive for BCOs coming in the door. It has been. We've seen, as you noticed, growth in the quarter of 134 BCOs since the end of the first quarter. The attractiveness of the percentage pay, the pass-through on fuel surcharge and the LCAPP program continues to be strong. And the interest from perspective BCOs continues to be pretty strong. What we have decided to do is implement an on-board recorder requirement for new BCOs who are coming on or entering applications after August 1. What that does to the in the door number remains to be seen.

Have you guys decided to do anything in terms of percentage pay, or have you kept that the same?

Kept our compensation the same. I will add that the on-board recorder work, that Landstar is going to pick up the cost of the recorder for all new BCOs.

Okay. And you don't anticipate having to do anything with the percentage pay going forward?

I think the quality of our freight really takes care of that. If you look at the percentage pay model, the quality of the freight in the system and the pricing that we're able to obtain from the customer, really I think is an advantage to us, and will continue to be an advantage to us going forward.

Jason, I've been here since 1988 at the start of Landstar and our percentage pay, literally, has been virtually the same since that time. We've not moved that up or down. I don't anticipate moving that up or down, quite frankly. I think the advantages of a percentage pay system speak for themselves. Our general rates are higher than, I think, most competition out there. And the fact that we pay a percentage of our revenue to our BCO's, they develop that loyalty to Landstar and that ties into really some of the things -- a lot of things we offer. Our objective is to make our BCO successful, because if he's successful as a business man, guess what? Landstar is successful. That has been our business model. We don't plan on changing that, or at least -- I think I answered your question.

No, it does. And real quickly, on the flat bed side, obviously you said strength throughout the remainder of the year. Could you talk about some of the end markets that the flat bed serves and where you have seen the strength?

Pat?

Power generation, Jason, whether that's traditional power generation sources or alternative energy. If you look at mining and that kind of business, that's kind of where it's coming from. Machinery is a big part of that platform business, and we anticipate that continuing throughout the balance of the year.

So still nothing -- you guys do very little housing-related stuff, but you do, do a tiny bit. You haven't seen any up tick at all there?

No, and we traditionally haven't done a lot of housing, Jason. If housing pick up, it may suck some capacity out of the marketplace and improve pricing. But we don't see any increase in the housing business.

Okay. Fantastic, guys. Thank you for the time, as always. It's appreciated.

Thanks, Jason.

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

Great. Good afternoon.

Hello, Todd.

Hello, guys. Henry, or maybe for Jim, I just want to make sure I understand, if I look at the insurance and claims, and I look at the commissions to agents as a percent of revenue, if I understand the comments right, as long as the mix stays where it is right now, the increase in the brokerage revenue relative to the BCOs, we should see similar percentages for the commissions to agents and insurances. Is that a fair statement or a fair way to think about it?

From the commissions standpoint, that would be a fair way to look at it. But you know with the volatility of the insurance, you can use that, but it is a little volatile on that line, because we are subject to accidents and they're unfortunate, but --

I guess I was assuming, obviously, no unusual accidents or no severe accidents.

Todd, the way I look at it, really, as 90-something percent of the claim line is really related to BCOs. So you just really look at -- what I try and do is just watch -- you look at how much revenue the BCOs are riding on. And historically, if you do it that way, you're 3% to 3.5% of that revenue.

Okay. And then just as a follow-up with that. Jim, there was nothing unusual here in the quarter, when you think about that, within the insurance line item. That is a relatively clean number. It was just a good quarter, nothing unusual from a severity or frequency.

Generally a very safe quarter. If you compared it to last year, last year we had the claim that pierced -- we look at it in layers. There is the first million dollars and then there's 4X 01. Last year, we had a claim pierce that 4X 01layer and that $13 million number. So it's really just a good severity quarter.

But getting back to your point, though, as your percentage of revenue increases as far as brokerage, the percentage of insurance and claim as it relates to the percentage of gross profit or revenue, obviously, that's going to drive it down, with the more brokerage we have.

And the same thing with commissions to agents, because if there is some margin compression on the PT line, the agents absorb some of that. Is that the right way to think about that, too? Okay. And then the follow-up one that I had, Henry, I don't remember if you made this comment or if Jim made it, but in the prepared remarks there was a comment that there was a 30 basis-point increase paid to -- for broker capacity. Did you have a same number on what the increase would have been from your customers? So essentially, were you able to get 100 basis points more, or was what you were getting from your customers, was that down a little bit on a rate per mile? I'm just trying to get a sense of the magnitude of the customer rate increase was relative to what you paid out to the brokers.

That is hard to measure. Our pricing -- we said from the van standpoint, the pricing in the quarter was flat. We said from the flatbed -- or the revenue per load number, I should say, the revenue per load on the platform equipment was up 7%. But I wouldn't be able to carve that down as far as that 30 basis points, what that equated to in price. The fact of the matter is that price was up to a certain degree. I just don't have that -- I mean, I don't think we really can capture that right now.

Can you look at it on the broker side, though, was there a squeeze year-over-year, based on what happened with capacity and what you were receiving on the rate side?

I'm -- total brokerage -- the gross profit margin on brokerage stayed relatively flat this year over last year, if that helps.

Yes. That does. Okay. I'll turn it over. Congratulations and thanks a lot.

Thanks.

Your next question comes from the line of William Greene, Morgan Stanley.

Hello there. Good afternoon. Thank you for taking the question. Henry, I'm curious as to your view on something. We hear a lot about this competition in the brokerage space, I'm sure you've seen some of this stuff. And I'm curious if that kind of competition -- I'm sure you'll say, well, that doesn't affect us that much, in terms of Landstar's business. But does that affect the pipeline for agents? Does that make it more attractive to come to Landstar, or is that not the way -- it's not really a factor, maybe.

You probably answered your own question. Look, there is a lot of competition, lot of people getting into brokerage. My theory on people getting into brokerage, I mean, you started with the company iron guys they wanted to be brokers, because they saw what happened in 2009. So therefore, you had an expansion of margins. I think right now you've got a lot of capacity that has exited the marketplace. Capacity is being paid a premium right now. So your margins on pure brokerage can be a little bit squeezed, from an agent's standpoint.

My whole philosophy has been is that we have over 36,000 relationships with various carriers. What attracts agents to Landstar, when you think about it, is the ability to access capacity, and I have that available. So the fact that I also don't have any internal revenue where I'm going to keep it from someone, and I share it, if you will. Not share it, but basically I don't have any in-house revenue. Again, I said it before, if I can make our capacity successful, that's going to make Landstar successful. I also need to make our agents successful. So if I can provide more capacity for our agent, that is going to make him successful. So I think Landstar is -- has got -- is a more of a pure play, where I don't have any external or internal business that I keep for ourselves. Everything is either agent-based and it's driven by third-party capacity. I think that makes Landstar pretty unique. And the fact that we've built up this loyalty and when you look at our 504 agents that did over a million dollars, I don't lose any of those people. Or very few.

Because once you're here with Landstar, they understand the benefits with Landstar. So I don't think it's a direct issue with Landstar, as far as all of these other people trying to get into brokerage, because again, I think Landstar's operations are wholly different. And we deal with entrepreneurs, so I'm not looking to -- you've got other start-up companies, for example, that are trying to roll up various companies. I mean, that is not Landstar's model. That is employee base. Again, this is entrepreneur.

Pat, do you have any comments on that?

William, I think certainly to the extent that there are people that are engaged in the brokerage business, it creates a pool of people that may be interested in the Landstar solution. Whether they're currently in another system or they're a small broker on their own, we have unparalleled systems, scale and support, that we can help them grow their business. So if you're a small broker, two, three, four million dollar broker out there, the surety bond is hanging over your head. Is there going to be an increase in that? That brings some uncertainty. And then, if we can bring the systems to you to help you source that capacity better, faster, easier, smarter, then ultimately, you're going to be able to win. And to the extent that you're going to compete with people like Landstar that are sourcing capacity better, faster, easier and smarter, you are going to lose. So we think the uncertain times, Landstar is a certain bet. Clearly, the more people that are involved in the brokerage business that are independent brokers or in other systems, we think that, that, to echo your thesis, creates a pool of potential agents for Landstar.

That makes a lot of sense. That what I was getting at. Okay. Great. Thank you. Just a separate question, I want a clarification on something you mentioned earlier, which is sort of the end markets. Is shale and shale gas and shale play not a big deal at all for flatbed?

William, not particularly for Landstar. Clearly, there is pumps and pipes, and that sort of thing that are going to the shale, but it has not been a particularly large segment of Landstar's business.

So just taking that then, when you look at kind of the commentary about the balance of supply and demand in flatbed versus drive in, do you think the relatively better tightness, if you will, in flatbed is a cyclical outcome or is that more structural? Is there something about that market that just makes it better, if you're in your position?

I think it is structural. Because if you think about the barriers to entry, William, they're pretty significant. You're not going to go deliver a load of groceries this morning and then one of these oversized pumps this afternoon. Just from a capacity operator standpoint, from a cost of equipment standpoint, there is a significant barrier to entry. And then, how are you going to get the customers? And if we think there is a real kind of -- back to the structural thing, customers are not calling 1-800-find-me-a-truck-broker for this. They're looking for people really gives us a leg up in that respect.

Very, very helpful. Thanks for the time.

Thank you.

Thank you. Your next question comes from Justin Yagerman, Deutsche Bank.

Hello.

Justin, are you there. Justin?

Mr. Yagerman, please check your mute button. We'll go ahead and move on at this time.

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

Hello, Tom.

Hello, Henry. Maybe follow up a little bit further on the kind of verticals that matter and how they're affecting the supply/demand dynamic here. You said in response to a prior question you don't do a lot directly in the fracking area, but do you think broader flatbed does? And you've had weakening in drill -- in dry gas drilling areas, and it does seem like you've seen some deceleration in the tightness of flatbed. Is it fair to think that there is some relationship? Or -- I guess you're saying it is not only a relationship for Landstar, it's not a relationship for flatbed in general.

Tom, this is Pat. As we mentioned, a lot of our platform business is not derived from the Bakken shale and those kinds of areas. On the other hand, there is capacity that serves those markets. As that capacity becomes available, we think that we have the right mouse trap to utilize that capacity to cover freight that Landstar has from its direct customers. Yes, any decline in business in shale exploration I'm sure will have impact on platform. Impossible to tell, don't know. But we don't consider that necessarily a negative from Landstar's perspective. Because today if someone has 15 flatbed's, and previously 12 of them were in the shale and now today only 8 of them, and they're looking for something for those 4 trucks to do, we'll have them call Landstar. And we think we have the business to help them move it. That is how we look at it.

Okay. That's helpful. I appreciate that. And then in terms of the deceleration in pricing in the van area, what do you think is behind that? Because I think I've had the view, as you would say, Henry, the view the company iron guys tend to put forward that there's not a lot of net capacity coming in. The Class A truck orders would certainly seem to support that idea. Do you think it is just that there are certain verticals that are weakening a lot, and how do you -- why do you think that is that you're seeing such a deceleration in the van pricing?

Look, I'll let Pat follow up on that. But I think in general, I think you've seen, even when you look at our volume increases only 4%, I think there has been some deceleration just as a general macro effect that you have some sort of a soft patch here, which is no different than I think I've been saying all along. This thing is not going to be a smooth economy and you're going to have certain points in time where things become soft. I just don't think that, that's going to maintain. I know everything is negative again right now, so everybody is thinking in a negative light. I can tell you from what we talk to our agents and our sales people, that they're pretty positive, as we move forward in the back half of the year. I understand how people feel, however, because that is all you hear is negative. I think it is just a general soft patch that has affected the van area more so than the flatbed area. And when you think about why that is, because there is a lot more equipment that came out way back when from the flat bed arena and that made that market extremely tight. And then you had some pickup in manufacturing and whatnot.

So Pat, I don't know if you want to add to that.

Clearly, the balance, Tom, is a function more of volume decline than it is a function of new equipment in the system.

Okay. So do you think that continues, in terms of July would indicate that maybe that -- do you think that van pricing is flat in second half, or do you think that weakness in demand points to maybe pricing even going down?

I think what I said in my comments is that our look at van pricing will be flattish. Now whether that means slightly below or slightly above, I don't have that crystal ball. And believe me, if I had that crystal ball, I would give you an exact answer, Tom. But I don't have that. So we're thinking that, that's just going to muddle along that way. And obviously -- in my mind, I think there is a more of a chance of turning around than things collapsing. I think there is more upside than downside to any of these things.

Okay. Great. I appreciate the time.

Thanks, Tom.

Okay. Thank you.

Your next question will come from the line of Justin Yagerman, Deutsche Bank.

It's really me this time. Hello, guys.

I was wondering, Justin. Maybe you got nervous talking to us. I don't know.

No, never. Margins, 50.4% in the quarter seemed well above your 45% long-term guidance. There is some help there from the insurance side, but is it time to revisit that guidance? How should we think about Landstar structurally going forward?

I think as we move forward, and I think I've said this at the mid-quarter call, and probably first quarter, and I will set out a new target as we finish this year. Yes, you're right, 50% is beyond what we set as our target. I think again, as Jim alluded to, we had some favorable insurance developments from a pure severity standpoint, so I think that impacted that. And that's not to say we're not going to continue to try to drive safe numbers. On the other hand, if brokerage continues to be this portion of our consolidated revenue, or increases, what you'll see is in a good effect on the insurance and claims line as a percent of total gross profit, the-- look, we're going to drive that higher. I've said it before, our objective is to continue to drive that higher.

I think the key of Landstar's operating model is the fact that the SG&A supports any level of revenue. And I don't need to add a lot of that. So the more revenue I can pour on, and you just saw from a dollar standpoint, we increased from a dollar standpoint, our gross profit increased by 5%. That fell right to the bottom line. And because of the favorable insurance -- not the favorable, but the good experience we had, it just added to that. So fact of the matter is, the infrastructure is there to support revenue, and now it's our job to go out and build revenue and manage costs as we historically do. And I think you'll see continuing improvement in our numbers. Now, whether we're going to hit 50% every quarter, I wouldn't want to say that.

Got it. That's a good segue, I guess, because the brokerage is driving some of that. When I look at brokerage loads up in the quarter, as I think about revenue flat in the third quarter, the comp gets more difficult there. What does that number look like, in your mind, in terms of brokerage loads? Can you keep up that 16% pace? Is that thinking that you're going to continue to have an acceleration in agent count? How should we frame that up as we move into the back half of the year?

Go ahead, Pat, you can go ahead.

All of the above. I mean, we certainly -- we anticipate continue to grow the brokerage piece. We have things that we put in place that we think will help develop that. Bringing on new agents has been part of our core business philosophy. Henry talked about it in his opening remarks. So we anticipate doing all of those things.

Got it. And can you talk a bit right now to where the agent pipeline is? I think you mentioned 504 $1 million dollar agents. How does that compare to a year ago? And what is the revenue so far this year contributed from new agents?

Obviously, the 504 $1 million dollar agents were 2011. I can't really tell what our million-dollar agent number is going to be until I complete 2012. That is what we had last year. I mentioned that we had $21 million of new agent revenue contributed in the second quarter of this year, as far as the pipeline. I mean, we meet weekly and review pipelines as far as who is on that list, and our list continues to be strong as ever. And I would anticipate similar numbers in the third quarter.

Okay. And lastly, you said that obviously that the splits haven't changed, but maybe it's somewhat environmental. Are you guys doing anything particularly different on the DCO recruitment side? Because the 125 --

Absolutely. Absolutely. You know, we have clearly made a change in how we're approaching our advertising and recruiting. We talk a lot about brokerage. Even at the beginning of this call, we talk a lot about brokerage. But 51% of our revenue, anywhere from 50% to 55%, and historically BCOs' revenue has driven this business. I don't want to lose sight of the fact that, that is an integral part of how Landstar operates. They are the safest guys out there. And we have re-initiated, renewed, our approach to advertising, talking about the Landstar benefits of being a BCO, as far as the percentage pay, as far as the LCAPP program, reducing their costs, as far as the freedom to choose your own loads.

There's so many advantages to being a Landstar contractor. And what we've done is just basically gone out and started to reenergize that, and you see it in advertising in the trucking magazines and newspapers. We just recently completed our first, what we call BCO All-Star Weekend, where we had all our million-milers and road stars for a two-day event in Orlando, where we gave away the second -- a new truck -- a second truck this year to one lucky million-mile safe driver. And, again, it's making that individual understand that he is successful. And I don't think, if you go back a couple of years we sort of lost sight of the advertising, and the strength of what Landstar offers an owner operator. And all we've done is just revisited that and made that very clear. And I think that's driven a lot of our increased recruiting efforts, our retention -- our turnover rate is, I think on annualized basis, is about 25%, Joe?

Yes.

-- which is pretty low. I've said it, I don't know how many times on a conference call before, if I'm an owner operator and I want to run my own business, there is no better place to be than right here at Landstar.

Fantastic. Love the passion. Take care.

Thanks.

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

Hello, Chris.

Hello. Good afternoon. A couple of things. I'm sorry if I missed this, but what was it that drove such a big increase this quarter in brokerage relative to the increase in BCO, much bigger share of your business this quarter?

I'll answer that a little bit. But it is a combination of a lot of things. But I think when you think about what Landstar is doing as far as taking in more business, more market share, I've got about 8,000 BCOs, I've got a lot more relationships. So the more business I bring in and the more solutions we find for our customers, there is going to be a much higher percentage being driven by brokerage revenue. It's got to be, because there is only X amount of loads that our BCOs can haul. I think it is really a function of when you start to see revenue move up, we want to grow both, as I've said many times before, but brokerage is going to grow at -- should grow at a faster clip, especially with some of the things that we're doing in regard to some of our work as far as trying to find solutions for defined lane type stuff.

Pat, is that just about it?

Right on the money.

Okay. And then you spoke to this a little bit, but typically your margins are stronger in the back half than the first half and here you've hit 50% in Q2. I know that the claims are a little bit better, but is that seasonal pattern still applicable? Should we expect second half margins to be better than the first?

Yes, but that's not to say -- the big -- I say that with a lot of hesitation because, again, one accident, as we all know, and I'm questioned many times on our insurance and whatnot, but we carry a $5 million deductible. We book them when it occurs. And you have an accident, where we didn't have any severe accidents in the second quarter, that is the type of impact that you get on the other hand. Insurance is an area where, if you have an accident that is severe, could impact any one in particular quarter.

And, you know, the first quarter is always going to drag down the first half. Because the first quarter is always lower because we have a lower gross profit, and we have the convention in the first quarter. So when you're looking at the first half, second half, the better way to look at it is, second and third and fourth quarters generally look like similar margins, where the first quarter is always the lighter end.

Right. That makes sense. I'm sorry, just one other quick one. The institution of EOBRs, we've heard some other brokerage type models that, that has the effect of scaring away some drivers, because they want to try to be on a network that doesn't yet have the EOBR. Is that something that you're nervous about, or do you have a view on that?

Yes, I think Joe answered that before. Effective August 1, again with our BCOs, any new application we receive after August 1, we're going to basically require an electronic on-board recorder, and we'll actually take that out of our inventory and put that in that truck, so it will be basically free to the owner operator. What effect that has initially on recruiting of new BCOs, not sure. And that's -- but I mean, that is where we are on that.

Okay. Thank you.

Thanks.

Your next question will come from the line of Peter Nesvold, Jefferies.

Good afternoon, guys.

Hello, Peter.

Question on the guidance. With $0.76 or so this quarter, when I look over the last five years, going from 2Q to 3Q, typically you're up $0.01 or $0.02, going sequentially. The only exception was really 2010. This year, even the high end of the range implies $0.01 down. I wanted to get a sense, is that coming mostly from insurance and other operating expenses, or--

I'm not going to anticipate, for example, another insurance quarter like we just had. But I think you hit the answer -- you already have your answer. I mean, the second and third quarter are very similar. I think I said that. And discounting insurance, if you will, you get back down to that range. And obviously, again, if I don't have a crystal ball, it is hard to forecast things. But that is how we come up with that number.

Okay. That is my only question. Thank you.

Thanks, Peter.

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

Good afternoon, gentlemen.

Hello, Nate.

I wanted to ask a little bit in a different vein, Henry, in terms of some of the other questions that have already been asked; but obviously, you guys are winning some good market share out there. We've heard from some of the other brokers that, given the supply demand equilibrium that has been somewhat hard to penetrate some of the larger shippers out there, can you talk a little bit in terms of maybe the mix of customer base that you've been able to be successful at?

Nate, this is Pat. I think that the mix of the customer base remains fairly consistent. I can tell you that we continue to take, as Henry talked about in his opening remarks, penetrating our existing customers with new solutions, bringing on new customers. There is nothing material that I could point to and say, oh, this is emphatically where we've taken some market share. Clearly every new agent we bring on is automatic market share, it is business that we didn't previously have. But I couldn't point to a specific account and say, here is where we really capitalized on taking some market share.

But I mean do you think that your agents are gaining a little bit of penetration in terms of the extra 1% or 2% of a freight lane, or is it with completely new customers and new areas?

Nate, it's both.

Okay.

It's both.

And then just, Henry, you've been one of the few to express decent optimism going forward and not just letting some recent deceleration cloud that. Is there anything specific, and I know you don't have an exact crystal ball, so I won't hold you to it, but --

Oh, you caught that? (Laughter)

But is there anything that you could really point to in terms of what gives you that enthusiasm?

Again, I think it's what we are hearing from our field. All right? And what our customers are telling our field offices and how that gets relayed. Because we talk about that all the time. There's so much negativism, when you listen to CNBC, or listen to any of them. And by the way, my thesis has been the same virtually for the whole year. I've never said that this was going to be a robust economy. I said this was going to be moving along at a snail's pace, sluggish. And I even said you'll some spots where maybe it appears that things are going in the other direction. But I think generally, you're going to move in a northerly direction. And I think there is more upside than downside, and that is based on what the intelligence is we're getting from the field. And that is where it comes from.

Okay. Fair enough. Thanks for that, guys.

Your next question comes from the line of Ed Wolfe, Wolfe Trahan.

Hello. Good afternoon, guys.

Hello, Ed.

Can you talk a little bit about your plans on the share buy-back side? It's been a couple of quarters now. You have been deleveraging the model quite a bit. When do you plan to get a little bit more aggressive on the share buy-back?

I think you saw in the Press Release that the Board authorized an additional 2 million shares to be bought back. We did buy about 300,000 shares in the quarter. So we've got a lot of shares, basically, that we can deal with, at this point in time. I mean, I don't have -- it's hard to answer that question, because I don't have a specific plan that two days from now, I'm going to basically go in and buy 2 million shares. It will be as we normally do, being opportunistic. The fact of the matter is I've got the shares out there at this point in time to purchase. As you well know, Ed, you've followed us for a long time, that has been part of our model for a long time.

And you really can't point to a specific time frame, other than maybe 2005, or I should say 2006-2007 with all of the money we got from the FAA stuff, that we really had some exorbitant share purchases. But it's been pretty consistent, and it's varied from when we've done it. So will we utilize and buy those 2 million shares back? Yes. The timing of which is -- I don't have a specific time frame.

Okay. It feels like the last year and a half or so you have been a little less aggressive, and now the balance sheet is pretty -- it's gone from 50% a couple of years ago to 30% debt ratio, but it sounds like you'll use up the 2 million as the time comes. Is that the way to look at it?

Can you, Jim, while we're on cash flow, just give us a couple numbers? Cash flow from ops in the quarter, and CapEx.

The year was $54.8 million. So you just have to back out the first quarter.

That's cash from ops?

Cash from ops, $54.8 million. Cash CapEx, $3 million. And that is also for the year.

Okay. Appreciate that. Jim, don't want to beat the dead horse, but I just want to make sure I'm understanding this. Before, you gave in response to an answer, something about 3% to 3.5% of BCO revenue as a way to -- as good as any to kind of predict what the insurance and claims would look like.

Yes.

Is that right?

Yes, I just do it over history. Look at the last five years or so.

When I do it in the quarter, I'm getting about $11 million. And so it's not perfect.

Like I said, we're -- our severity was very good in the quarter, so we're at 2.5%.

Okay. But it is of the BCO revenue, that is what I'm looking at.

Because 90% of the insurance really relates to BCO business.

Okay. Just wanted to make sure I'm seeing that. And then in the quarter, the other operating cost, that $4.7 million felt a little bit light. Was there anything that's a contra expense, or something that's not ongoing there?

We had gains on sales of trailing equipment. It's basically replacement trailers. We're not building the fleet, but there were gains in there -- and plus lower maintenance costs. Biggest drop-off, though, was really the gains.

And roughly how much was that?

$1.8 million.

And so is that going to continue for another quarter or two, do you think?

At a lot less. It will be less. We're anticipating maybe somewhere, you know, maybe $400,000 or $500,000 into the third quarter.

Okay. And then the last question I have was regarding the on-board computers. Is the plan, Henry, that the existing BCO is grand fathered, they don't have to have it, or do they already have on-board computers?

We rolled out a program for million-milers at the All-Star Weekend. We're going to gradually move into that. We're not going to force them to do that, because we can't. Again, they're independent contractors. We're going to basically try to sell the benefits. So from our existing fleet, it will be up to them.

That makes sense. And you're paying for the actual hardware and the monthly subscription fees.

Paying for the hardware. It is coming out of our inventory.

Just the hardware, I got you. All right. Thanks for the time. Appreciate it.

Your next question comes from the line of Thom Albrecht, BBT.

Hello, Tom.

Hello, Henry and others, good afternoon. Most of my questions have been answered. I did want to ask, in the brokerage arena, within the BCO ranks, about a third of your fleet is platform equipment. How about in the brokerage arena, do you broker platform loads equal to about a third of your loads? Or my understanding was it might even be higher than that. Do you have any sense of that?

Flatbed revenue is about 55% BCO, 45% brokerage in the quarter.

I'm sorry, say that again.

55/45. 55 Landstar equipment and 45 broker.

Okay. On the actual loads that are brokered, do you know if they're flatbed versus drive-in? I guess that is what I'm getting at.

Brokerage. Total of how many are flatbed? Total brokerage.

We're going to lose questions, if we start -- I got people still probably wanting to dial in. The question is, of our flatbed revenue, how much is brokerage?

Or loads. It might be easier to look at loads. How much would be a load that gets moved by a piece of platform equipment?

About 30% brokerage is going on site in platform.

30%?

Yes, of the brokerage loads are going on side of the platform.

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

Thanks, Tom.

Your next question comes from the line of Anthony Gallo of Wells Fargo.

Hello, Anthony.

Great quarter, guys. Just one housekeeping and then one bigger picture. Housekeeping, what was supply chain solution revenue in the quarter?

About $5 million.

Thank you. And then, a CSA basic question, can you remind us how you incorporate CSA basic scores into your carrier selection? I'm thinking about this in the context of increased brokered freight and also the new FMCSA guideline on how to use basic scores.

Anthony, this is Joe. What we have done and we did it -- we started actually last March. We get the download of the basics for all of the carriers in our approved database on a daily basis. And what we've done is set thresholds internally, and I don't have the numbers or where we set the percentages off the top of my head, but what we've done is set standards internally as to what we'll accept to be able to be a qualifying carrier, assuming that you don't already have a safety rating. So if you have a satisfactory safety rating, that takes precedence. But if you are unrated, then we bounce it against where our standards are on the basics as to what percentile ranking you have in each of the public basics.

Anything changes after this recent FMCSA announcement?

No, right now I'm not anticipating any changes.

Sounds like you're a lot more rigorous than others. Thank you.

Thanks, Anthony.

The next question comes from the line of Ben Hartford of Baird.

Good afternoon. Wanted to know, Henry or Jim, if there has been an inflection, if you normalize for the severity on the insurance and claims side, there has been an upward inflection in the rates paid on the insurance and claims side. Anything noticed in the second quarter that would portend the back half of the year?

Increase in insurance rates?

Yes.

Increase in insurance rates that are going to affect the back half of the year?

No, not significant.

Okay. And lastly on the retention side of agents, I know we talked about the attractiveness of the Landstar platform, but certainly you have some larger competitors that have gotten interested in the agent model and the environment is more competitive generally. Any more money or effort spent on retaining the agents that you do have and keeping them within the model?

I think I've said this many times before, the advantages of the Landstar model are second to none. And we have more people wanting to get into the Landstar model on our list, as I said before, than I think people -- people would be very foolish to -- our turnover on our agents that do over a million dollars, as I said before, is very, very small. You've got to be very careful as far as what you pay. A lot of people can get squeezed on margins when they offer splits to agents that are just going to make any money on, or very little money on. And when you start going down that road, you start to get into a little bit of a problem.

Okay. Great. Thanks for the time.

Thanks, Ben.

Your next question comes from the line of Ryan Bouchard, Avondale Partners.

Hello, Ryan.

Hello there. Congratulations on the quarter. I know you said the brokerage gross margins were flat year-over-year in the quarter. Are you guys seeing any compression in July?

Don't have -- I don't have that data available from a gross margin standpoint, on a -- that detail at this point. So I can't answer it. I don't know.

Okay. What about throughout the quarter, were they pretty stable, flat all quarter long or did it start higher and then compress? Do you know about that?

Jim is going to check. I've got to say that if anything, it probably was more stable maybe to the little bit of a down side in June. June was a little bit soft. But Jim is checking the numbers on a trended basis.

Okay. Maybe while he's looking into that, my last question. I know that you guys are putting some money into advertising and trying to recruit more BCOs, and it was up 134 in the second quarter. Do you know how July is trending so far, is it on that same run rate or has it slowed down a little bit or is it picking up?

It has not slowed down. We're up about 40 BCOs in July, so far. So, no, the in-the-door number continues to look good.

Okay.

On the quarterly gross margin on brokerage, it was relatively flat during the quarter with a little bit of an improvement in June, slight improvement in June.

I said flat, with a little bit of decline, so I was wrong.

Very slight improvement.

Okay. Thank you.

Thank you.

Your next question comes from the line of David Campbell, Thompson Davies Incorporated.

Hello, Henry and Jim. I just wanted to ask, in your comments you mentioned that the revenue growth for the second quarter -- third quarter up coming, might be 7%.

7% to 10%, I think is what I said.

7% to 10%, right. And your gross profit margins, your gross profit dollars may be up 5% to 7%. That seems to imply a much smaller decrease in gross profit margin year-to-year than you had in the second quarter, but that's relatively unpredictable, isn't it, given that it depends a lot on whether the--

A lot depends on mix, a lot depends on pricing, a lot depends on a lot of different things. We had a 9% increase in the second quarter and a 5% increase in gross profit. I think 7% to 10%, and 5% to 7%, I think it is in the ballpark. I think that actually works, quite frankly.

Right. Okay. Well, thank you very much, and my other questions have been answered. I appreciate your help.

Thanks, David.

Your next question comes from the line of Matt Young of Morningstar.

Good afternoon.

Hello, Matt.

Thanks for squeezing me in. One of the large brokerage firms has been highlighting that a lack of route service failures from the balance of supply and demand have perhaps reduced the incentive for some shippers to turn to brokers to renegotiate pricing, call it contributing to the gross margin squeeze and also tempering share gains. I know you guys are in a slightly different niche, especially with the flatbed, but are you noticing similar dynamics with some customers? It doesn't sound like it.

No, Matt, to answer your question, we're not.

Okay. Are you finding that customers are at all less worried about the access to capacity than in the past? I know that is one of the reasons why some shippers have turned to brokers in general, to get that access when they're worried about not getting it directly from the asset based carriers.

Matt, I think there is still some concern about available capacity, maybe not today at this moment on this week in this day, but I think that there's still genuine concern about capacity tightening in the back half of the year. And so they don't want to be caught as they were a couple of years ago, where they -- capacity is very tight. They were paid extraordinary sums of money to get whatever available capacity there was. I think that there is still concern that, what does the future hold for capacity, because there is not a lot of it coming in.

Okay. Well, that's all I had. Thanks.

Thanks, Matt. We'll take two more calls.

Thank you. Your next one will come from Jack Waldo of Stephens, Inc.

Hello, Jack.

I had two questions. The first question, just housekeeping. What were gains on sale in the second quarter of a year ago?

Gains on sales, second quarter a year ago. He's looking that up. What's your second question?

Kind of interesting watching rollout of EOBRs, and I was just curious in your thoughts on why -- why would you guys -- or what's behind the timing on you rolling out the EOBRs? And do you have any estimates, Henry, obviously, a rough estimate on what percentage of the industry you think currently employs them, and what doesn't?

I think from the EOBR standpoint, the timing of our doing that is, obviously, it has nothing to do with the recent law that's passed, because you have time. But I think when you look at what the competition is doing from a CSA standpoint, as far as putting EOBRs in and, therefore, making sure that their critique basic goes to zero almost immediately once they put that in. And any particular error that a guy keeping a paper log does is going to count as points against. So we're just in an effort to basically make sure we maintain our under threshold amounts. That's really all it is.

Got you.

Insignificant loss, like $40,000.

Okay. So a $1.8 million swing, year-over-year.

Yes.

Thank you.

Okay. Last question.

Thank you. It will come from Scott Schneeberger of Oppenheimer.

Thanks for squeezing me in. I have two questions. I'll ask them both up front, so you can tackle them how you'd like. You answered this earlier, but I think it was just on brokerage. It was flatbed percent of total mix. I'm just curious, is that moving a lot? Do you anticipate that moving up higher? And was that just brokerage not including BCO, just a bit of a cut there? And then the other question, if that takes a moment to look up. Henry, you announced in the beginning of your prepared remarks, that tech is a big revenue driver differentiator. Can you just elaborate on things you're doing differently, update there. Thanks so much.

It ties into some of our brokerage stuff, where we see that really impacting additional freight lanes. I have been saying probably now for the last six, seven months that what's going to happen, we believe, that our technology, as we provide solutions to customers and go into our customers and ask what -- how we can make them more efficient, what can we do to solve your problems, technology is a huge part of that. And what that technology is going to drive is increased freight. That's where I've said over and over that you are going to really start to see how successful that technology implementations are, is in the freight volume. Not so much in the fees for revenue or the management fees, but the freight that it is going to generate. And that is what I meant by that, as far as finding and tailoring solutions for our customers to drive freight.

But, Jim, go ahead, do you have his other question?

I'm not sure which percentage you're looking for, but 36% of revenue is platform unsided and 45% of flatbed is on brokerage.

And how is that trending, is essentially where the question is going? Thanks.

I don't see any change in the total revenue. Actually, I don't see any change in any of that picture, probably. It has historically been between 30% and probably -- historically, about 35% of our revenue. I don't see that changing much. And as far as the percentage that's brokered, probably going to go up because of the tightness in that arena.

Great. Thanks again, guys.

Thanks. I think -- I think that's it. And with that, any closing comments, Jim?

No.

Pat?

No.

Joe, anybody? Anyway, I just want to thank everybody for listening, and we will talk to you again on our third quarter mid-quarter update call. And have a good rest of the afternoon. Thanks. Good-bye.

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