Landstar System Inc (LSTR) 2012 Q3 法說會逐字稿

Good afternoon and welcome to Landstar System, Inc.'s third-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 and Operations Officer. Now I would like to turn the call over to Mr. Henry Gerkens. Sir, you may begin.

Thanks, Dori. Good afternoon and welcome to the Landstar 2012 third-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 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 statement.

The 2012 third quarter ended up to be another very good quarter for Landstar despite the choppy and slowing economic conditions that impacted the 2012 third quarter. In our 2012 third-quarter mid-quarter update call, I revised Landstar's 2012 third-quarter revenue and earnings estimates from a revenue increase in a range of 7% to 10% over the prior year third quarter to an increase in a mid-single-digit range and from an earnings per share range of $0.71 to $0.75 per diluted share to a range of $0.66 to $0.71 per diluted share.

Revenue for the 2012 third quarter finished at $717 million, an increase of approximately 5%, while earnings per diluted share was $0.71 per diluted share, an increase of 11% and at the top of our revised range of guidance.

Operating income, as a percent of gross profit in the 2012 third quarter, was 48.1% compared to 44.7% in the 2011 third quarter as Landstar continued to gain operating leverage as a result of its unique operating model and its safety performance and ability to control costs. As I said, consolidated revenue in the 2012 third quarter was approximately $717 million, up approximately $33 million from the 2011 third quarter revenue.

Total truck transportation revenue increased approximately 6% in the 2012 third quarter over the 2011 third quarter and represented approximately 93% of consolidated revenue in the 2012 third quarter versus 91% in the 2011 third quarter. Revenue haul by BCOs represented 50% of total revenue in the 2012 third quarter, versus 51%, excuse me, in the 2011 third quarter, while total brokerage revenue was approximately 43% of consolidated revenue in the 2012 third quarter versus 40% of consolidated revenue in the 2011 third quarter. BCO revenue increased slightly in the 2012 third quarter over the 2011 third quarter whereas revenue generated through broker carriers continued to increase at a double digit pace and increased a healthy 12%.

From a load volume standpoint, total truck transportation loads hauled in the 2012 third quarter increased approximately 7% over the 2011 third quarter and revenue per load was virtually flat.

Collectively, revenue generated from all other sources decreased approximately $4.5 million or 8% in the 2012 quarter versus the 2011 third quarter primarily as a result of lower revenue generated through air cargo services.

From a new agent revenue standpoint, revenue generated from all new agent locations added over the past year amounted to approximately $17 million in the 2012 third quarter. Although this amount of new agent revenue is lower than amounts in recent quarters, our list of prospective new agents remains long. Year-to-date through the third quarter we have added $78 million in new agent revenue.

Landstar again increased its available capacity providers. Landstar's total available truck capacity providers was 37,863 at the end of the 2012 third quarter, up 2,575 capacity providers from the end of the 2011 third quarter and up 1,570 capacity providers from the end of the 2012 second quarter. I'm now going to turn it over to Jim for his financial review.

Thanks, Henry. Henry has already discussed certain information regarding the 2012 third quarter. I will cover various other financial information included in our third quarter release.

Gross profit representing revenue less the cost of purchased transportation and commissions to agents increased 2% over the 2011 third quarter. Gross profit was 15.8% of revenue in the 2012 third quarter compared to 16.2% of revenue in the 2011 quarter. The decrease in gross profit margin in the 2012 third quarter was primarily due to a change of mix as revenue contributed to truck brokerage grew to 43% of revenue in the 2012 third quarter compared to 40% of 2011 third quarter, and an increase in the rate of purchased transportation paid on revenue haul by truck brokerage carriers which increased 120 basis points over the 2011 third quarter.

However, it should be noted that the rate of purchased transportation paid to truck brokerage carriers in the 2012 third quarter was 30 basis points lower than the rate of purchased transportation paid to truck brokerage carriers in the 2012 second quarter.

The cost of purchased transportation was 76.4% of revenue in the 2012 third quarter, compared to 75.8% in the 2011 third quarter. This increase was primarily due to an increase in the percent of revenue contributed through truck brokerage which has a higher rate of purchased transportation than the previously mentioned 120 basis point increase in the rate of purchased transportation paid to truck brokerage carriers in the 2012 third quarter.

Commissions to agents was 7.8% of revenue in the 2012 third quarter compared to 8% in the 2011 third quarter, the decrease in commissions to agents as a percent of revenue was primarily due to the increased rate of purchased transportation paid to truck brokerage carriers. Other operating costs were 5.7% of gross profit in the 2012 quarter compared to 5.8% in the 2011 quarter. This decrease was primarily due to the effective increased gross profit. Insurance and claim costs were 7.1% of gross profit in the 2012 quarter compared to 8.5% in the 2011 quarter. The decrease in insurance and claims as a percent of gross profit was primarily due to an increase in the percent of the gross profit contributed to truck brokerage carriers which has a lower claims risk profile than gross profit contributed through BCO independent contractors and favorable development of prior-year claims on the 2012 third quarter.

Selling, general, and administrative costs were 33.2% of gross profit in the 2012 third quarter and 35.4% of gross profit in the 2011 third quarter. The decrease in selling, general, and administrative costs as a percent of gross profit was due to a lower provision for incentive compensation under the Company's incentive compensation program. Depreciated amortization was 6.3% of gross profit in the 2012 third quarter compared to 5.9% of gross profit in the 2011 third quarter. The increase in depreciation as a percent of gross profit was primarily attributable to increased trailer depreciation as we replaced older fully depreciated equipment with new trailing equipment.

Investment income was $393,000 in the 2012 quarter compared to $373,000 in the 2011 period. The effective income tax rate was 38.2% in both the 2012 and 2011 third quarters.

2012 third quarter operating increased 10% to $54.4 million in the 2012 third quarter compared to $49.5 million in the 2011 third quarter.

Operating margin representing operating income divided by gross profit increased to 48% in the 2012 third quarter compared to 45% in the 2011 third quarter. The $4.8 million increase in operating income primarily reflects the $2.2 million increase in gross profit plus the effect of a lower provision for bonuses under the Company's incentive compensation program and favorable insurance and claims expense in the 2012 third quarter compared to the 2011 third 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 as it specifically relates to truck brokerage revenue, the lower commercial trucking claims exposure.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $118 million. During the 2012 third quarter, the Company purchased 184,000 shares of its common stock at an aggregate cost of $8.8 million. 2012 year-to-date cash flow from operations was $103 million. Cash capital expenditures was $4.4 million in the 2012 year-to-date period.

Trailing 12-month return on average shareholders' equity was 39% and trailing 12-month return on invested capital, representing net income divided by the sum of average equity plus average debt, was 29%. At September 29, 2012, shareholders equity represented 76% of total capitalization. Now back to you, Henry.

Thanks, Jim. As I look to the 2012 fourth quarter, it is important to keep in mind these three points. One, the 2011 fourth quarter included an extra week which I estimate added approximately $25 million to $30 million in additional revenue and approximately $0.06 to diluted earnings per share. Two, the 2011 fourth quarter also included a $0.03 per diluted share increase from a favorable tax benefit and, three, the fourth quarter of any year has historically been the most difficult quarter to forecast.

As I stated in this morning's press release, demand in the first several weeks of the 2012 fourth quarter has been sluggish. However, total revenue is up from the same period the prior year. The inconsistent demand is reflective of what appears to be sluggish economic conditions. My belief is that the uncertainty in the business community about regulatory policies and the so-called fiscal cliff has caused a gradual slowdown in economic growth.

Businesses are just reluctant to invest and spend money until they see a clear direction. I am hopeful that after the election, there will be some resolution to the uncertainties that are currently preventing businesses from moving forward. The picture right now is at best cloudy, making our ability to forecast short-term results somewhat difficult.

All that being said, if the current operating trends continue for the balance of the 2012 fourth quarter, I would anticipate diluted earnings per share to be in a range of $0.63 to $0.68 per share. Once those clouds of uncertainty that are plaguing business investment and growth begin to dissipate, I believe the picture becomes much brighter. The November election results should be the catalyst that creates that certainty and restores business confidence. In any event, Landstar's flexible business model will continue to capitalize on any and all opportunities presented to it. And with that, Dori, we will open it up for questions.

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

(Operator Instructions)

Todd Fowler, KeyBanc Capital Markets.

Maybe following on your comments about the outlook, a lot of the machinery and equipment manufacturers here in the quarter have talked about a slowdown in September. I'm curious if you guys have seen any of that in either the current quarter results or if you have any visibility into the potential impact of that into the fourth quarter and how you've thought about that with the guidance.

I think we have thought about that and I think that's why we are a little bit hesitant as far as -- in our guidance as far as what we put out. We have clearly thought about the revenue effect of what's happening and the slowdown I think that you are seeing and I do think, however, it's just the holdback, if you will, and I think once we get through the fourth quarter or -- I think things will change because I just think businesses in general are just holding back and as I look at our, you know, flatbed business, if you will, or let me call it unsided, fourth quarter actually there's a lot of things going on in the fourth quarter and if you look at our flatbed business, it's actually dominated by heavy haul and it's been pretty good.

Pricing actually in the first several weeks has been very good. Demand, however, is a little bit sluggish.

So I think there's a lot of things here that are going on and I think it really revolves around which I mean everybody is talking about is really the uncertainty out in the business -- out in the environment but in answer to your question, yes, we factored that into our guidance.

Okay good. No that helps and that's kind of what I was looking for. And then I guess for two follow-ups, at this point, can you remind us where you're at as far as installing electronic onboard recorders with the BCOs? I think that was an issue for the second half of this year and if you've seen any sort of impact either on the utilization side or on the cost side, is that going to give you some incentives to help with that?

Yes, we've actually had -- I would -- and I'll let Joe answer but I think it's upwards of over 500 that have been installed at this point on a voluntary basis and they have taken advantage but Joe you want to --

Todd, yes, we've got several hundred already installed in the fleet, over 500 as Henry stated. We really haven't seen any effect from a utilization standpoint. We have actually seen very consistent positive comments from the BCOs just because it makes life a little bit easier, but again most of those on a voluntary basis.

As you may recall, we started requiring it of new BCOs who came on board in the back half of the third quarter and it's been very well received and we are supporting them with the cost of the unit and then they pay the monthly airtime fee which is pretty insignificant. But all things are going about as well as we would have hoped.

Actually just let me add one point. At this past month's Safety Thursday call, it's always, and I think everybody out there understands what we do on Safety Thursday as far as a nationwide call, phone lines are open. In the last couple of months, we've had actually a BCO or two call in and basically sing the praises of the electronic onboard recorders and stating that he was reluctant because -- only because he was being told what to do by the government but now that he has it installed, he finds it the best thing he's ever had.

And, you know, those are the types of endorsements that go a long way as far as getting our BCOs to buy off on it, you know, me telling them what that is is usually not something that sometimes they listen to but having one of your own do that, I think that is -- that means a lot.

And what's the expectation for the rest of the BCOs? I mean, is there a time line that you have in place or something that you're thinking about (multiple speakers)

It's a slow grind. As I said, you know, our BCOs are truly independent contractors. I can't force them to do that and what they have to do is decide on their own that the -- there's a benefit to them and I think slowly but surely they are going to see that. I think we are ahead of where we thought we would be based on our time line. But you're going to see this thing move all throughout the next couple of years. Obviously if it becomes truly mandated, that's a different issue, then we can basically -- then they have to do it, but right now, you know, it's up to them.

Okay. And then the last one I had and I'll turn it over but you know, strategically and I know you've talked about this in the past, I'm not trying to rehash something that's come up, but the growth within the brokerage business relative to the BCO business, can you just remind us from a strategic standpoint? I mean that's pretty much agent driven, right, as far as how the loads actually come through. It's not a top down decision where you're saying we want more brokerage volume through the network.

And then as far as the growth here in the quarter, do you think that's something reflective of capacity dynamics and the fact that there's been more available capacity and so maybe it makes there's more of an incentive to actually book some brokered loads or can you just talk about the growth between brokerage and BCO on the past couple of quarters. Thanks.

I think the -- there's a couple of things. A lot of things mixed in there. When we started moving into brokerage, our issue was always getting agent buy-in to move loads on brokerage carriers, all right, that it helps them, and it helps generate more business because the more capacity I can basically haul for any particular customer will generate more business, and I think our agents have clearly bought into the brokerage model and I think that really, if I had to lay one thing on it, that's the primary driver.

I think what we have done recently with some of the technology that we have added at certain agent locations that allows them to source the capacity better clearly is another avenue and I think again, I don't have any specific goal as far as a split because all I want to do is haul the customers' freight. I want to grow both BCO and brokerage. I think we've been pretty successful at doing that and it really is just, I think, a byproduct of the fact that people are starting to realize that it's okay to do that. Pat, I don't know if you've got anything you want to add to that. No? Okay.

That's what I remembered so thanks a lot for the help. I'll talk to you soon.

Justin Yagerman, Deutsche Bank.

It's Rob on for Justin. When you guys had called out the -- in the prepared remarks as well as in the press release, you had called out about some of the slowing demand trends that you guys had experienced. Can you go through how the load growth trended by month as well as what we have seen thus far into October?

I don't know if you've got that trend, Jim, as far as load growth for the quarter. What we have seen in the -- what I've stated before is that the -- the daily loads were sort of -- and I think I even used this example, maybe up 10% one time and then down and then flat the next time. I think you've seen right now more of a -- I'm going to call a low single-digit increase in volume but on the other hand, what you've seen is a pickup in price and it's kind of strange because pricing in all the quarter was sort of flat. You've got a pretty big pickup from the platform side on price, although some demand on certain businesses of the flatbed industry is down, we obviously do a lot of heavy haul, we do a lot of other stuff and the pricing and the demand is actually stronger there and it's driven price increase better than we anticipated in the fourth quarter. But again, as I move forward to the fourth quarter, I really am cautious only because of the fiscal cliff and what's approaching. I do think once that gets past, I really think things can actually explode but we will see what happens. But right now, if that answers your question, Jim, I don't know if you got the --

Yes, July, August, September, July, 6% over -- this is just truck, so 90% something of our revenue. This is just truck volumes. July was 6% over, August was 7% over, and September was 7% over prior year.

And then Jim, into October, what we've seen thus far?

I don't have final numbers. I get daily load reports and I think to quote a number as far as load volume probably would be not something I think I want to share at this point because I don't really know the number, only from a daily point and what I'm saying from a daily standpoint when I said it went from zero to 10, you're now down to a little bit more consistent volume flow at the lower end.

That's fair, Henry. Then if I think about just the overall guidance range that you guys issued for the fourth quarter, I would imagine if the fiscal cliff if we get kind of better visibility and load growth accelerates, that would probably put you toward the higher end and the low end of the range is worry about demand falling off more than (multiple speakers)

It's interesting because everybody tries to be short-term focused but I don't think things turn on a dime. I think obviously that's going to build momentum as you go through. I think right now, I mean the election results happen, they get through the end of December, I mean, if something is going to be decided in the lame duck congress, that would be great. But I don't know how quickly that takes -- that that actually takes effect. Maybe, and you might see some pickup, but I think within that range, yes, obviously anything that is more positive is in my mind beneficial towards the upper end of that range.

And you had indicated in response to Todd's question earlier that you guys are expecting some degradation in terms of the heavy haul machinery growth as we look out based off of some of the reports and recent updates on the earnings calls. How should we be thinking about the declines you guys are baking into the model looking out for the full fourth quarter?

I think when you look at the whole fourth quarter, I think generally if I use the term just platform or unsided equipment, I think that's going to be up. If I start to split that between certain accounts that's pure flatbed versus heavy haul and some other things, then I think you can say some of the flatbed accounts are going to be down.

But in general, as we have looked at it always, is that our platform business or our unsided business is a combination of all that stuff and we believe that through the fourth quarter based on what we have seen now that that will remain strong, pretty much through the end of the fourth quarter.

That color is really helpful. Thanks a lot, guys.

Okay. Next question. Just so you know, I know I've taken like four questions from Todd and three questions the next one. We will try to limit it to two, otherwise we are not going to get through everybody so I apologize but we are going to now try to do it at two but anyway, go ahead.

Nate Brochmann, William Blair.

Good afternoon, gentlemen and I will limit it to two. Quick question on the agent additions, Henry. One of the things that we talked about was some of the dislocation maybe going on in the industry with some of the agents. Was wondering if you continue to see that in your pipeline and whether those agent kind of additions are coming on because of some dislocation. Can you talk a little bit about that?

This won't count as a question but what do you mean by dislocation?

Well, I mean just in terms of some of the competition that's coming into the industry that's making it more difficult for some of the independent guys to compete.

Pat, do you want to --

You know what, Nate, I think we've been pretty consistent in our message that if you think about a small broker that's out there today the challenges are many and the solutions that we provide are superior.

They are out there, they have increasing competition for capacity, we have capacity sourcing tools that will help them manage that. They are challenged to make sure that they pay their carriers quickly and yet in this environment, shippers are paying them slower so there's a cash crunch. Landstar helps them with that. If you think about the systems investment that they have to make in order to be able to accommodate those capacity sourcing challenges and the shipping and billing practices, they don't have to do that. Landstar helps them provide a solution to that as well.

So clearly we think that that environment is very rich and that that, you know, $1 million to $3 million broker is able to maintain their identity, come to Landstar, and have greater solutions to help them grow their business. Their access to capital is also limited. If you think about that, we think that those things are what's going to continue to kind of drive some of those players to people like Landstar.

And are you indeed seeing some of that?

Yes.

And then second question is -- and I'm really optimistic with you Henry that things can go off to the races if we get some clarity on all these issues and hopefully that happens. If that doesn't happen and we end up in this again sluggish economic thing all throughout 2013, how does your leverage look on that? Obviously you've been able to put up some great numbers here over the last 12, 18 months. But if we end up in a, you know, 1% GDP environment and we are talking freight along the lines of that, granted you still get some share but how does the leverage and the margins look in that scenario?

Look, I think, you know, depends on -- look, I believe under any scenario, all right, my primary belief is that smarter heads are going to prevail and there will be some resolution to this. The question, what resolution that might bring, I don't know.

And I think under one resolution and solution there might be a faster pickup and the other way -- but I still think things just have to be resolved. I just can't believe our lawmakers, our elected officials will allow this to happen. It might tick into next year, all right, at the very beginning but something is going to get done because I just think -- if I look at it -- if we fall off the cliff and things just shut down and -- I think that's -- we will have to deal with that environment when we get there. Obviously we've got a variable cost model, we will have to relook at a lot of different things we do as far as from a cost standpoint but one of the things that that will present is obviously I think an opportunity for us to, I think, go out and even increase our penetrations for bringing in new agents because I think that's going to be a problem, even capacity.

So I think, you know, our model is such that, you know, we perform fairly well in most environments, in all environments. We don't have that fixed cost but obviously it takes a different mentality as far as when you deal through another period. I don't think you're looking at a 2009, all right, I mean that would be more of a dramatic change and would have to take some real dramatic measures but my basic response to that, Nate, is I don't think that's going to happen. It might linger a little bit, but I do think once clarity is established and, you know, if there's more regulations, people are going to deal with that. If we have -- if we deal with things where we -- businesses realize there's going to be less regulations we deal with another way, we deal with it that way. So it just depends. I just think on either scenario there will be certainty and I think people then will be able to deal with that.

Fair point. Thanks, Henry.

William Greene, Morgan Stanley.

You know, Henry, I'm curious what you think about some of these, we talked a little bit earlier about the EOBRs but these broad sets of regulations that are coming into the industry whether you think about CSA or proposals to change hours of service or what not, does ultimately this prove to be a good thing or a challenge for Landstar? You obviously have flexibility but it could reduce some capacity from some of your providers, so how do you think about how that nets out for you?

Well, I've said for a long time, all right, in this environment and what -- I really believe the company that can access capacity effectively is going to win long term, and how is Landstar going to access capacity? Obviously I've got to continue to take market share, put more loads in the system because that will attract capacity. The regulation piece you put aside.

We have historically dealt with regulatory issues and the advantage we have is that the smaller companies that can't deal with the regulatory issues, we can provide the infrastructure to basically have them be in compliance and to do certain things for them. I mean, obviously, we've got to do things, I mean in California, for example, CARB, there are things we have to do with our trailers now that basically -- and that's going to probably entail and will entail an increase in some of our capital costs going forward in order to get trailers up to speed as far as what they want.

But we will deal with that. Smaller companies won't be able to deal with that and when you think of Landstar, you've always got to think of the fact that we are the home of small business so I think there's some pluses and minus, Bill, but I think overall it's got to be a plus.

Okay. So from the perspective of the industry, maybe it's a challenge but you're relatively better positioned in that regard?

Correct.

Is what you're saying? Okay. And then just on share buybacks, I know you sort of had a pretty steady approach over the years. Is there a -- I don't know, you talked about it being opportunistic in the past calls. Is there a valuation level or something you think about when we look at how the stock has done over the last six months? You think, gosh why wouldn't have there been an acceleration, I would think it would sort of be that kind of opportunism because you've done pretty well amid the sluggishness but maybe that's the wrong thing to think about it.

I can kick myself for not buying more stock back, yes. But the bottom line is it's opportunistic and we look at it and we've got window periods sometimes that get in the way and other things and it is what it is but I think what you said is correct, historically that is part of our business model and we will buy the stock back. We've got, what, 2 million shares now, Jim, currently authorized? I mean, that will happen.

Okay. All right. Thank you for the time.

Chris Ceraso, Credit Suisse.

So just the first one is to clarify to make sure I'm interpreting your comments about the fourth quarter correctly. You've said so far in the quarter, revenues are up a little bit but then you also mentioned that we have one less day than last year. When I roll that together by the end of the quarter, does that mean revenues will be down a little bit versus fourth quarter last year?

Well, a couple of things. What I said was we had one extra week in last year's fourth quarter. Okay? And that accounts for about $25 million to $30 million in revenue.

Right.

All right. And I think I -- if you took the gross margin, I believe that was 15.8% in the fourth quarter and you just did a simple calculation, that will get you about $0.06 a share is what we calculate as far as an effect on the fourth quarter. So from a revenue standpoint, it's about $25 million to $30 million of revenue because of the extra week last year and from an earnings standpoint you've got $0.06 that we attribute to that and then you've got another $0.03 tax benefit we had last year from expiring tax positions that became favorable. Is that correct, Jim?

Yes.

So net net it's about $0.09. Does that answer your question?

No. I'm sorry. Maybe I wasn't clear. I'm speaking just about the revenue. I think you said that so far this quarter revenues are kind of flat versus the same period in last year's fourth quarter.

I said they were up. I did say they were up. I said demand was sluggish but total revenue was up. Pricing is holding better than we anticipated.

So by the time we get to the end of the quarter, if we are on that same path but then we adjust for the $25 million of extra revenue you had a year ago, do we end up down in terms of revenue year-over-year fourth quarter?

Oh, Jim, is that -- Yes.

Okay. Just wanted to make sure I was clear on that.

Yes, sorry, I guess I didn't understand, Chris. Sorry.

Okay. And then just as a follow-up, and I think you alluded to this, but I know you don't do a lot of housing-related business directly but do you think that the increase in housing is tightening the flatbed market and that's spilling over and helping you with pricing in flats?

No. I think -- I think what's really helping us in the pricing standpoint, I mentioned that the -- you bifurcate the flatbed business into heavy haul and all other, I mean heavy haul has been really carrying the day from a pricing standpoint but, Pat, you want to add anything?

No. That's the case. It's the heavy haul piece of the open deck equipment that is kind of driving the price piece, Chris.

And I'm sorry did you say why heavy haul was strong?

If you think about, you know, whether it's power generation projects and to a lesser extent machinery, you know, we continue to get business in that environment. If you think about the model, the expertise and capacity that Landstar has, you know, in the platform arena, we are typically the last one that they are asked to leave as freight slows down and the first one invited in when freight picks up just because of the complexity of the shipments and our underlying expertise in capacity, you know, we are kind of the leader in that arena.

So even if things are slowing down as I mentioned, you know, we are the last ones to sort of say, you know, we don't need you anymore and we are the first ones invited back in when business picks up in that sector.

Okay. Thank you very much.

Scott Group, Wolfe Trahan.

Good afternoon, guys. Jim, I think I heard you mention that some of the yield pressure on the brokerage side moderated a little bit in third quarter relative to second quarter. Can you give us a sense if you're seeing that ease a little bit more so far in October and then longer term, how do you think about yields on the brokerage side just given some of the increase in competition from these private guys that are growing so fast?

October, I don't know the -- what the rates on PT we're paying to the -- at a midpoint through a month. I mean we just don't have that information available. We really just -- it's more of a load kind of type thing, we are looking at revenues and that type of stuff. I'm sorry. What was the second part of your question?

How do you think about those yields longer term? It feels like it's getting more competitive with some private guys really growing so fast and I appreciate you don't have a great sense on it in October. Would you think that the yield pressure would ease a little bit more in fourth quarter?

It's Henry, yes, I would. I'll answer that direct because I think what you've seen is the trend because what you've got is as I said you've got a little bit more sluggish -- demand is a little bit sluggish, so therefore what you've got is -- I think you got a little bit better pricing power from that standpoint.

Okay.

As far as -- the relationship as far as the competition, we haven't really seen anything to that. You've got a lot of guys that are buying up companies but when you buy up the companies, they were out there before, so it really -- I mean, it's really -- I haven't seen any impact from quote additional competition.

We've actually seen the easing in the rate of purchased transportation actually. It eased as it moved from July to August and August and September sequentially so the rates came down a little bit over sequentially each month during the quarter.

So again that's what I said. I would suspect that would continue into October and November.

That's helpful. And just one last question, Henry. So CH is making a big acquisition, they are buying International Forwarder. You guys generate great free cash and if you wanted to make acquisitions you could. Do you think about a big acquisition either internationally or an intermodal to try and jumpstart the growth in one of those segments?

You know, look, we think about acquisitions. Again, I think when I look at our model, our model is different than most models that are out there and what I'm looking for, every piece of business we have basically is pushed out to an agent, we use third-party capacity exclusively and that usually from a major acquisition as you just pointed out, usually will take us away from actually, you know, doing anything like that because it usually doesn't fit.

And I clearly want safe capacity, I clearly want agents that I think fit in this particular model and as I said many times before, that doesn't mean I wouldn't do anything like that but right now, you know, we are growing agent by agent, brick by brick, and I think we've been successful on it. We might not be hitting quote the grand slam home run from a revenue standpoint that -- from an acquisition, but we've been adding solid revenue with each of our agent additions and that's the way we have done it and that's not to say I couldn't change that if something were to come up but I've got to have a couple things very, very clear and that's -- I've got to -- it's got to be something that is agent based and when you get to that point, I think we are better off looking at individual smaller operations than picking off agent at a time. Again, that's not to say we wouldn't consider something else.

That makes a lot of sense. Thanks, Henry. Appreciate it.

Peter Nesvold, Jefferies.

I thought -- I just want to make sure I understood something right because insurance and claims was on the low side last quarter and I thought the math that we were supposed to run with was that insurance and claims are typically 3% to 3.5% of BCO revenue. When I apply that to the BCO revenue this quarter, that would have been 11.6% but it came out as 8%. Did I -- were my notes wrong or was there something else that explained the variance this quarter?

No. That's kind of the -- how you look at it but the 3%, 3.5% is for an 8- to 10-year average and we did better than that and then we had a very little bit of favorable development. It just turns out to be -- it was a safe quarter from a BCO standpoint along with, you know, the mix of revenue.

But historically, you're probably in the range of that 3% to 3.5%. We just did better and you know if you're safe you do better and if you're not safe you do worse and it's just a good safe quarter.

Okay. And then I know revenue visibility is low right now. You know, is there any -- what kind of top line growth is discounted into the EPS range?

Peter, nice way of asking that. We didn't give that guidance, Peter. We will see. All right?

Okay. And the last one, you know, the 10% sequential decline, if I took the midpoint of the range for the 10% sequential decline is lower than normally the Company puts up. Is there any particular vertical that you're seeing the weakness being more pronounced?

When you say 10%, what do you mean?

Yes, if I did that math right, I took the midpoint of the range that you had for next quarter which is what, $0.63 to $0.68?

Okay.

Versus the $0.71 you put up this quarter.

Okay.

Maybe not quite 10% but the downtick sequentially from 3Q to 4Q is more pronounced than we normally would see. I'm just curious, is it across the board that you're seeing the weaker demand or is it --

No it's not across the board. I think what you got to understand is that again last year, when I look at the, you know, what occurred last year and I don't have the third quarter numbers versus the fourth quarter numbers but, you know, we had $25 million to $30 million of additional revenue in the quarter and then from an EPS standpoint you had what I would say $0.09 of -- I hate to use the word items but things that were nonrecurring although we believe they are nonrecurring in the fourth quarter, so therefore if you took that away from, what was it, $0.70 we did last fourth quarter, Jim? (multiple speakers)

Yes, but I'm trying to look through fourth quarter '11 and just looking traditionally when you went from 3Q to 4Q. It just seems like the downtick this quarter, this year, putting (multiple speakers)

I've got to tell you, because the fourth quarter, I think that was my third point, it's been historically if I go back all the way to 2005 and certain people have heard me give this spiel, it's been really the most difficult quarter to project and I think with what we have going on right now with the uncertainty out there, I think it's prudent basically to be a little bit on the safe side as far as what our projections are.

Okay. Thanks, guys.

Tom Wadewitz, JPMC.

Can you give us -- I don't think you've given us this in terms of on the call pricing by months just how that trended through the quarter. Is that something you can talk about, drive-in side and flatbed?

You got that, Jim?

Yes. Again, this is just truck.

Yes, total truck, that's fine.

Yes, just total truck. July, August, September we were basically July flat to prior year, down two in August and back flat in September.

Okay. And is there any kind of indication of what first couple of weeks of October looks like? Up or down or --

Yes, I mean what we said is we think it's -- it's like a change. In fact, we double checked some of these things. The pricing is up and it's been -- I think I've said this already, it really has been driven by increased heavy haul and that has been driving price in the first several weeks, albeit it's only the first several weeks in the fourth quarter but that's what's been driving price and it is up. It's actually reversed.

Demand, you know if I can say demand, demand as you'll recall all throughout the quarter was sort of up and down each day whereas now you've got a little bit more of a steady play in demand and down from that before and -- but price is now back to where it's more than we anticipated and based on what we hear from -- or what we believe that heavy haul demand is going to continue through the balance of the quarter.

So your comment on the positive platform pricing, that's strong enough to drive your total consolidated pricing you're talking about here that (multiple speakers)

Yes, absolutely.

Okay. Okay. What do you think about supply in the -- supply and demand in the market? You know, you're hopeful as I guess I would be as well, that you would see some increase in economic activity post some of this uncertainty. Do you think the market, you know, you get a little pickup in activity, the market is going to feel tight fairly quickly or do you think that there's enough excess capacity out there that you know it's going to take a while to feel a little tightness again?

You know, that's a great question because I think -- I do think, you know, when -- you know, coming out of 2008, 2009, when you had mass exodus of capacity and not a lot of people have added capacity. I think Knight's added capacity but not a lot of people have added capacity. As a matter of fact I think when I read one of the other analyst's report, I think -- I thought I read that September or whatever it was, we had more people going out of business than -- and not a small -- not a large amount but there was more people going out of business than we have seen of recent.

I got to believe capacity is still pretty tight and if you get any sort of economic boom or economic pickup or confidence or whatever, I got to believe you get right back to a very strong pricing environment.

Okay. And you think that's true for both drive-in and flat?

Yes. More so probably from flatbed side but yes.

Even more so on flat. Okay. Great. Thank you for the time.

Scott Schneeberger, Oppenheimer.

Can I follow up just on flatbed or unsided or however you want to frame it, it seems like that's been consistent on recent calls, that that's a strong part of the business. Is that moving a lot in the mix? I think historically you've said maybe up maybe 33%, 34%, has that moved more than 500 basis points as mix?

I don't believe so. Jim?

No, we are sitting at -- you know, this third quarter it's about 36% and then third quarter of '11 was about 36% and then the second quarter of 2012, it was about 36%. I mean it's moving, you know, 20 basis points here or there but it's not moving much.

Okay.

Hasn't moved much in those periods.

All right. Just curious. I guess could I swing it a little bit? Million dollar agents, could you give us an update on how that's trending? Have you had much turnover, those that are on the cusp? Thanks.

Pat?

Scott, no, we haven't had any exceptional turnover and that population of agents has been consistent year over year over year.

Okay. Great thanks.

Anthony Gallo, Wells Fargo.

Nice performance given the volatility of the business you've been dealing with here.

Thanks.

If I look at year-to-date revenue versus last year same period, you're up around a little over $170 million and I thought I heard you say about $78 million is from new agents. Is that correct?

That is correct.

So is the right way to think about this you've got somewhere between $92 million and $93 million of organic growth? That's about roughly 5%? Does that sound right?

That would be correct.

Okay. Great. And then I'll count this as a follow-up. What was the --

(laughter) All right. Go ahead.

What was the claims reversal and is this something you do every quarter or just what was the driver behind that? Thanks, Jim.

The favorable -- what are you talking about? Insurance? The favorable (multiple speakers)

I thought Jim said there was --

Yes, he did.

Yes, we true up every quarter and there's -- you know, we actually adjust claims daily, you know, based on the fact pattern that we know of things changing amongst our claims so it is in the third quarter we do use a third-party actuary to come up with a range of estimated losses and we do that twice a year. We did it this year as we did in the last 15 years but yes, we true up every quarter to what we think the best estimate of what each individual claim is going to experience with losses.

And what was that dollar amount if you can give it?

Oh, I have it.

I'm just trying to get the run rate for what that number should be.

Yes, I have it. Just one second. The favorable -- well you are looking for the favorable movement in the claims? Is that the comment that I made when I talked about favorable adjustments?

Exactly.

That's the number you're looking for? So far, this is a year-to-date number and you can get the half year out of our 10-Q from the second quarter but it's about $1.4 million this year, year-to-date.

Okay (multiple speakers). So really the real driver of the insurance benefits here or lower insurance expense is the mix, that's the primary driver of what's going on.

Yes, there's two things that drive that. There's actually three things that drive your insurance number because when you look at insurance and claims, the premiums are fixed year to year so that stays the same. Then what you've got is the true accidents experience within the quarter and that was good. You've got a change in mix, all right, which we obviously had a lot more brokerage this time than we had in the prior one, and then you've got what happened to existing case reserves. So those are the three pieces and the two big drivers really were the change in mix and the -- Jim, and I believe -- I know we had a safe quarter so I'm going to guess it's the safety quarter.

We were favorable on current year claims by $0.5 million or so and then again the favorable development of $1 million and the rest of it is the results of the quarter and that kind of explains compared to where we were last year.

Perfect. Thank you very much.

David Campbell, Thompson Davis.

Just trying to understand the number of weeks of the year. There's one less week in the fourth quarter for 2012 but what about the total weeks for the year? Is that different as well?

Yes.

Yes, last year would have had 53 and this year has 52. It's all because we end on the last Saturday of December and last year the last Saturday was December 31, we picked up the extra week. That's just the way it works out. And this year, the next couple of years will be a 52 week year.

2013 we are at 52.

Yes.

Same number of weeks we had in 2012?

Correct.

Okay, okay, that's great. All my other questions have been answered, at least the ones you'll let me ask.

Okay. I don't know what that means, David, but okay.

Thanks for everything.

Ryan Bouchard, Avondale Partners.

Wondering if your guidance assumes any certain GDP or ISM estimates for the fourth quarter and if so if you'd be able to share those with us?

The answer to that is no. Jim, I --

We generally do that when we are looking more longer-term projecting out more than 12 -- you know, than the quarter. Most of our stuff is really knowing what's going on in our business in the last three weeks, we are actually back six to eight weeks really what you're looking at more than what's going on in the IP index.

Okay. Second question is, what percentage of your brokerage business is fixed margin? It's been a while since you've given us that figure and I can back into it from some of the 10-Qs but do you have that number for this quarter?

Yes, I do, just give me a second. For the quarter, it was 9%.

Okay. I appreciate the time, guys.

Matt Young, Morningstar.

Just a quick follow-up on the capacity side. I think, if I have this right, I think you said in the past that about 20% of potential BCOs qualify for the network. Has that mix changed at all given the regulatory pressures over the last year or so?

Jim?

Not really. Actually because we've gone to a little bit more of an online type qualification process, it may have eked up a little bit more. You might be a little bit north of 20% but not significantly north of that number.

Okay. And excuse me if I missed it but did you guys comment on the C based supply chain business at all? How is that trending?

I think, I didn't specifically comment on that but I think, you know, when you talk about supply chain and what we were doing and someone asked this question before about incremental brokerage revenue, organic revenue growth, a lot of that stuff is driven and I said that what you're going to do is start to see this stuff come through in freight volume because we've got -- and that's the driver of what we are trying to do right now and so that has been -- we've had successes in that and that's what's driving some of the growth in that organic type business and the brokerage world.

Okay. Great. That's all I had. Thanks.

Jack Waldo, Stephens Inc.

I wanted to ask -- you guys have done a great job reaching your net operating margin goal, I guess it's 45% and have you revised that goal at all?

Nope. I think I've -- I think when we first hit our thing in the first quarter, I think I got that question for the first time, what's your new goal? And my response is the same, when we do our fourth quarter call, we will -- I will provide new goals as far as where we are going to try to take that margin.

Got you. Okay. Thanks. All my other questions have been answered.

Thanks.

Ben Hartford, Baird.

I guess just real quick, you've talked about 35% or so of your revenue being generated by flatbed-related equipment. Can we break that down within the BCO component and brokerage, what is the flatbed -- the flatbed component in both of those verticals?

Jim can get that for you. And while he's doing that, I was in your presentation at the automotive summit, by the way. I don't know if you knew I was in the audience.

I did not. That's good. Hopefully you learned something?

I always learn something every day, even at my age.

It's pretty close to a 50-50 split, BCOs in the third quarter were about 53% of the flatbed and brokers were the other 47%.

Broker -- so if I look at the brokerage business how much of that revenue is flatbed and similarly on the BCO -- on the brokerage side how much of that is flatbed slash industrial? Just trying to get a sense for what the breakdown is in those two components as it relates to flatbed related equipment.

I'm not sure I followed your question.

Looking for, I guess give it to me this way, the industrial-related revenue generated within the BCO side of the revenue bucket as well as the truck brokerage side. Do you have that breakdown (multiple speakers) which is more heavily concentrated.

I don't necessarily have to that level of detail within that category.

Is it fair to assume that it's similarly split, that there isn't -- one isn't disproportionately weighted toward the other?

I would believe that, yes.

Okay. Thank you.

Matt Brooklier, Longbow Research.

Wanted to dig in a little bit more on the flatbed side, Henry, you mentioned the open decker, whatever we are calling it these days, has felt healthier and specifically from a price perspective, what percentage of your total book of business is that type of equipment and servicing those types of markets?

What I did was I said, you know, if you referred to -- when you talk flatbed, okay, let's talk unsided because flatbed to us also includes specialized hauling which is really some of the specialized equipment and that's the part I was talking about which really is some power generation stuff and that has been up and carrying the whole flatbed area if you will or I called it unsided. Unsided, flatbed, platform.

But there's a segment of that called heavy haul that is really specialized equipment that Landstar has got a lot of expertise in and we are hauling a lot of that in the fourth quarter and that is driving and carrying that whole segment, if you will, and as I said, there are certain elements within accounts specific that flatbed is down, other flatbed is down, but in general if I look at Landstar's business, Landstar's flatbed as you might refer to it, is actually doing very well in the first several weeks. If that --

Okay. I guess my question is of the -- of the business that's feeling good now, the heavy haul specialized, how much of that is -- you know, how does that look with respect to your total business I guess is the question.

The heavy specialized is about a third of the flatbed.

It's one third of the flatbed?

Of the, you know, flatbed 36% of revenue, a third of that 36% so. That's really heavy haul and heavy haul is either a specialized piece of equipment or it requires permits or escorts is how we identify what a heavy haul load is.

So a third of a third?

Yes.

Okay. What's your best guess as to what's driving that better demand and better price for, I guess, the power generation machinery? Can you talk about kind of the customers you serve in that market or just your general sense as to, you know, why does that market, you know, feel better than some of the other flatbed markets?

Pat?

Well, Matt, I think we will not give specific customers. We will give lines if you will, but certainly power generation, there's a number of projects that are going on, to a lesser extent, machinery.

And as I mentioned earlier, and I think it bears repeating here, if you look at Landstar and the model and the expertise and the capacity that we have and then you look at the overall marketplace and the expertise and capacity that's available in that segment, Landstar is the clear leader in the heavy haul segment.

And so when freight starts slowing down in that heavy haul segment, we are the last one to be asked to leave and when things pick up, we are the first one invited back in. So we don't see any degradation in that power project business, to a lesser extent, machinery, but it's really kind of the model itself, if you will, and the expertise and capacity that we bring to bear in that segment.

Okay. Very good. Those are my two. Thanks.

I'm going to take one more question, Dori, and then we will close it up.

Ryan Bouchard, Avondale Partners.

Thanks for the follow-up. I'll be quick. What do you expect the tax rate to be in the fourth quarter? You talked about a year ago being favorable tax treatment. And I'll leave it at that.

The estimates just use our effective rate of 38.2% is basically what we've been running like for the third quarter. You know, there's a potential for having another, you know, maybe a favorable benefit in the fourth quarter. I just didn't include it. It's somewhere less than what we had last year at this point but until we wrap up the year, it's tough to really calculate that number, but I'm expecting something, just not to the extent it was last year but that is not included in the estimate we put out.

Okay. Thank you.

At this time I'm showing no further questions. I'll turn it back to you, sir, for closing remarks.

Thanks, Dori. Anybody here have anything -- no? I think my only closing remark is again I think it was a very good third quarter. I think we are looking forward to the fourth quarter. As I said before, I think once some of this uncertainty gets resolved, I really believe things are poised to take off and I really believe that our elected officials will do the right thing and resolve this thing and -- but in any event, I look forward to talking to you guys on our fourth-quarter -- or our fourth-quarter mid-quarter update call. Thanks, have a great afternoon.

Thank you for joining the conference call today. Have a good afternoon.