Landstar System Inc (LSTR) 2012 Q4 法說會逐字稿

Good afternoon and welcome to the Landstar System, Inc.'s year-end 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 Gerkens, Chairman, President and CEO; Jim Gattoni, Executive Vice President and CFO; 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 fourth quarter and year-end earnings conference call. This conference call will be limited to no more than one hour. Please limit your questions to no more than two questions each when 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 team may make certain statements containing forward-looking statements, such as statements which relate to Landstar's business objectives, plans, strategies and expectations. Such statements are by nature subject to uncertainties and risks including, but not limited to, the operational, financial and legal risks detailed in Landstar's Form 10-K for the 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.

2012 was a record setting year for Landstar as revenue finished just shy of $2.8 billion, and diluted earning per share was $2.77 per diluted share. Both metrics, the best in Landstar history. Operating income was $206 million, 12% above that of the prior year, and represented 46.2% of gross profit. Yes, 2012 was a very good year. Keep in mind that the fiscal year 2012 was a 52-week year, whereas the 2011 fiscal year was a 53-week year, which makes our record revenue and earnings per diluted share performance even more impressive.

As you may recall, our goal set after the 2009 recession was to be at a 45% annual operating margin within a three to five-year timeframe. As we move into the future, Landstar's objective is to continue to increase gross profit dollars and drop that increase to the bottom line, thereby improving our operating margin. As stated in this morning's press release, Landstar's new operating margin goal is to be at a 50% operating margin within a three to five-year time horizon. To accomplish this goal, one of our objectives is to drop at least 70% of the incremental gross profit dollars to operating income. Increased gross profit dollars, effective cost management, continued safety improvement and increased productivity of our capacity and agent base through technology improvement will be the formula to get to our new goal.

Let me now address the 2012 fourth-quarter results. As I said in the 2012 third quarter conference call and again on our fourth quarter mid quarter update call, it is important to keep three points in mind when looking at the 2012 fourth quarter when compared to the 2011 fourth quarter. Point one was that 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, thus making absolute comparisons between the 2012 fourth quarter to the 2011 fourth quarter very difficult, if not impossible. Point two was that the 2011 fourth quarter also included a $0.03 per diluted share increase from a favorable tax benefit. As pointed out in this morning's press release, the 2012 fourth quarter included an $0.08 per share diluted share increase from a favorable tax benefit.

So if you take these two items together and add up the estimated favorable impact to each quarter, you are looking at an estimated $0.08 per diluted share effect on the 2012 fourth quarter earnings per share versus an estimated $0.09 per diluted share effect on the 2011 fourth quarter. Finally, the third point was that the fourth quarter of any year has historically been the most difficult to forecast. The 2012 fourth quarter was no different. Revenue for the 2012 13-week fiscal fourth quarter was approximately -- $691 million compared to $718 million in the 2011 14-week fiscal fourth quarter. As I said before, the extra week in the 2011 period makes the 2012 quarter versus the 2011 quarter just about incomparable.

There were 61 full work days in the 2012 quarter versus 66 full work days in the 2011 quarter. On a per full workday basis, loads per day transported via truck were 3.2% higher in the 2012 fourth quarter versus the 2011 fourth quarter. Overall, it was the best Landstar fourth quarter consolidated revenue performance for any 13-week fourth quarter in Landstar's 25-year history.

That being said, revenue for the 2012 fourth quarter finished a little shy of our internal expectations as December load volume was a bit lower than our expectations. For the 2012 quarter, truck transportation revenue per load was $1,772 versus $1,744 in the 2011 quarter, a 2% increase. Total brokerage revenue represented approximately 45% of consolidated revenue in the 2012 quarter versus 43% in the 2011 quarter. Revenue hauled by BCOs for the 2012 fourth quarter was approximately 47% of consolidated revenue versus 49% in the 2011 quarter. All other revenue represented 8% of consolidated revenue in both the 2012 and 2011 fourth quarters. Revenue derived through air cargo providers was again very weak.

Total operating income for the 2012 13-week fourth quarter was approximately $50 million versus $51 million in the 2011 14-week fourth quarter. And Landstar's operating margin was 45% in both the 2012 and 2011 fourth quarter. The 2012 fourth quarter operating margin of 45% was particularly impressive when compared to the 45% in the 2011 fourth quarter because the 2011 fourth quarter included approximately $25 million to $30 million of incremental revenue due to the extra week.

Earnings per diluted share for the 2012 fourth quarter was $0.73 per diluted share compared to $0.70 in the 2011 fourth quarter. But as I said before, there are items to consider in both years to put the numbers on an apples-to-apples basis. Landstar finished the year with 504 agents who generated over $1 million in Landstar revenue, the same amount as in 2011. I had anticipated a slight increase in the number of million-dollar agents in 2012, but as I said before, December load volume was a bit shy of our expectations. That being said, there were 83 agents who generated between $750,000 and $1 million in 2012 versus 69 agents in 2011. And our 504 agents who generated over $1 million in revenue in 2012 averaged $5 million a piece. Overall, for the 2012 full year, new revenue from 2011 and 2012 agent additions amounted to approximately $107 million.

From a capacity standpoint, Landstar ended the 2012 year with a BCO count of 8,010. A broker carrier -- and a broker carrier account of 31,545 versus 7,871 and 28,495 respectively in 2011. As an aside, our BCO turnover rate for 2012 was a low 23.8%. Now I'm going to turn it over to Jim for his financial review.

Thank you, Henry. Henry has already discussed certain information regarding the 2012 fourth quarter, I will cover various other financial information included in our fourth-quarter release. As Henry mentioned, due to the Company's practice of closing a physical year on the last Saturday in December, the 2012 fourth quarter, which was a 13-week period, had 8% fewer full workdays than the 2011 fourth quarter which was a 14-week period resulting in difficult operating result comparisons quarter over prior year quarter. However, it should be noted that 2012 fourth-quarter revenue, gross profit, operating income and diluted earning per share were all the highest amounts reported in any 13-week fourth quarter in Landstar history.

Gross profit, representing revenue less the cost of purchase transportation and commission to agents was 15.9% of revenue in the 2012 fourth quarter compared to 15.8% of revenue in the 2011 quarter. The rate of purchase transportation paid to truck brokerage carriers in the 2012 fourth quarter was 20 basis points lower than the rate of purchase transportation paid to truck brokerage carriers in the 2011 fourth quarter. And on a sequential quarter basis, 60 points -- 60 basis points lower than the rate of purchase transportation paid to truck brokerage carriers in the 2012 third quarter. The cost of purchase transportation was 76% of revenue in the 2012 fourth quarter compared to 76.3% in the 2011 fourth quarter. This decrease was primarily due to a higher percentage of revenue followed by BCO independent contractors hauled on Company provided trailing equipment and a decrease in the rate of purchase transportation paid to truck brokerage carriers in the 2012 fourth quarter.

Commissions to agents was 8% of revenue in the 2012 fourth quarter compared to 7.9% in the 2011 quarter. The increase in commissions to agents as a percent of revenue was primarily due to the decreased rate of purchase transportation paid to truck brokerage carriers. Other operating costs were 4.8% of gross profit in the 2012 quarter compared to 6% in the 2011 quarter. This decrease was primarily due to a lower provision for contractor bad debt in the 2012 fourth quarter.

Insurance and claims costs were 8.2% of gross profit in the 2012 quarter compared to 7.7% in the 2011 quarter. The increase in insurance and claims as a percent of gross profit was primarily attributable to the decrease in gross profit due to fewer full workdays in the 2012 period, and an unfavorable development of prior year claims in the 2012 fourth quarter partially offset by lower severity of claims in the 2012 period.

Selling, general, and administrative costs were 36% of gross profit in the 2012 fourth quarter and 35.9% of gross profit in the 2011 fourth quarter. The increase in selling, general and administrative costs as a percent of gross profit was primarily attributable to lower gross profit due to fewer work -- full workdays in the 2012 period and an increase in the cost of claims under the Company's employee benefit programs, partly offset by a low provision for incentive compensation under the Company's incentive compensation programs and a lower provision for customer bad debt in the 2012 fourth quarter. Depreciation and amortization was 6.3% of gross profit in the 2012 fourth quarter compared to 5.7% of gross profit in the 2011 fourth quarter. The increase in depreciation as a percent of gross profit was primarily attributable to lower gross profit due to fewer full workdays in the 2012 period, and increased trailing depreciation as we replaced older, fully depreciated equipment with new trailing equipment.

The effective income tax rate was 30.3% in the 2012 fourth quarter compared to 35% in the 2011 fourth quarter. The effective income tax rate in both periods was favorably impacted by reductions in the provisions for uncertain tax positions. Operating income in the 2012 period was a record 13-week fourth quarter $49.5 million. Due to 8% fewer full workdays in the 2012 fourth quarter compared to the 2011 fourth quarter, gross profit in the 2012 fourth quarter was $3 million lower than gross profit in the 2011 fourth quarter. However, operating income decreased only $1.4 million compared to the 2011 period. Excluding the additional full workdays from the 2011 fourth quarter, it is estimated that operating margin in the 2011 fourth quarter was 43% compared to 45% in the 2012 fourth quarter.

The Company's variable cost business model is supported by a relatively fixed cost infrastructure designed to pass a significant amount of any incremental gross profit through to operating income on an annual basis. On an annual basis, the Company increased physical year 2012 operating income by $22.6 million over 2011 operating income, from an increase of $13.8 million in gross profit over the same period. As a result, operating income increased from 42.4% of gross profit in physical year 2011 to 46.2% in physical year 2012. As Henry mentioned, our goal is to continue to pass approximately 70% of incremental gross profit through to operating income going forward on an annual basis.

Look at our balance sheet. We ended the quarter with cash and short-term investments of $110 million. Physical year 2012 cash flow from operations was $126 million. Cash capital expenditures was $7 million in physical year 2012. Trailing 12-month return on average shareholders' equity was 38%. And trailing 12-month return on invested capital representing net income divided by the sum of average equity plus average debt was 28%. At December 29, 2012, shareholders' equity represented 77% of total capitalization. Back to you, Henry.

Thanks, Jim. Overall, truck transportation revenue load count trends experienced in January, 2013, compared to January 2012 were choppy. And as with the December load volume, we're below our internal expectations. Revenue per load was virtually flat when compared to the prior year. I believe what we have seen in January of 2013 correlates a little bit to current economic forecasts. GDP and industrial production forecasts were for slower growth in the first half of 2013 and better growth in the back half of 2013. If forecasts are correct, load volume should begin to stabilize as we move through the first quarter and the balance of the year.

But before I provide specific 2013 revenue and earning guidance, I want to see evidence that the economy will indeed show improvement as per forecasts. Yesterday there was a negative GDP print, the first since the first quarter of 2009. Not very reassuring. As a result, I am not providing specific revenue and earnings guidance at this time. Right now being cautious, my best estimate, is that the 2013 first quarter operating results will mirror that of 2012. And with that, Dori, I think we can take some questions.

Thank you very much, sir. At this time, we will begin the question-and-answer session. (Operator Instructions) Nate Brochmann, William Blair Company.

Wanted to talk a little bit in terms of, I certainly understand the economic uncertainty and a lot of folks have mirrored that. I think there's a sense of less pessimism out there, but definitely not a great sense of optimism. But given your niche focus within the flatbed and a little bit greater exposure than average to favorable end markets such as housing, auto, energy, how do you think that plays out throughout the year beyond just the average GDP trends?

Well, I think, look, when you look at Landstar, I think we're probably more -- we probably are more correlated to industrial production than any other stat that's out there. I think what you saw as part of the resolution to the Fiscal Cliff, well maybe there wasn't a resolution, but the tax increases that were passed, part of that -- I mean you had an extension of the tax credit. I think what you'll start to see, that'll help as we move throughout the year. And I think people are still waiting a little bit as far as when we go forward with 35% flatbed.

I think what we saw in December and continuing -- it's continued into January, if forecasts are correct as I said -- I mean, that was predicted or if you look at any Blue-chip indicators as far as industrial production and it is -- the forecast is for that to get better, and that obviously will impact us on a favorable basis as we move forward. But as I said, right now, I want to see a little bit of evidence. January is always a tough month to base anything off because it is one of our slowest if not the slowest month we have. So rather than coming out with something currently, we'll wait until I get another month under my belt before I basically step out. But Pat, I don't know if you want to answer any of that also.

Nate, this is Pat. I think a couple of things. We mentioned last conference call that on the platform side we believe because of our size, scope, reliability, we're the first in and the last one out. So if the platform business starts to turn favorably, we believe we're brought in early to help companies manage their transportation to that type of cargo. Conversely, if things are slow down in that marketplace, we think we're the last one asked to leave.

All that said, I think one of the things that Henry mentioned that's worth repeating is the production tax credit. No one thought that was going to be a part of the -- going forward here in 2013. The production tax credit remains in place. It was renewed. We've seen some movement around those companies that participate in that alternative energy business. So I think again, I think it's important to note that if there's a turnaround in this area, we believe that we're first in, last out.

Okay, fair. And then just a follow up to that, and this is a little bit more longer term thinking. But how do you guys think about the impact of -- on the margin, some of this heavy manufacturing coming back in terms of the ideal of near shoring? I would assume obviously being closely tied to IP that that can only help your business. But have you seen any evidence of that, and how do you think about that longer term? Thanks.

Well, I think near shoring is a reality and to the extent more manufacturing moves either back to the United States or certainly to North America, that benefits Landstar. As it relates to margins, it really depends upon the type of capacity that we use to move that shipment.

In general, I agree with Pat, and I think that in theory should have a favorable impact on our margins.

Fair enough. Thanks, guys.

Jason Seidl, Dahlman Rose.

Question, what percent of your business right now is exposed to the military?

It's probably at its lowest point since -- in its 25-year history. I think last year I want to say it was about 3.5%.

Yes.

3.5%. Okay, so any exposure, any sequestration is really going to be negligible for you guys? I mean it might hit a little, but not that big.

Right, we've already absorbed a bulk of that. At that point in time, I mean -- at one point in time, it was close to 10%. Historically it's been 5%, 6%. We've basically absorbed the bulk of that already.

Okay, fantastic. Also when I hear you talking about the longer term goals in terms of layering on more revenues in your business, can you talk a little bit about some of the ways that you guys are going to do it and some of the signs that investors should look for that it's actually taking hold?

I think a couple things. I think as you see our brokerage revenue continue to grow, that means obviously we're putting more loads in the system. We've already said that there's a defined group of owner operators out there. We want to recruit as many of those as we can, but we have to recognize that as far as qualification into the system is going to be (inaudible). So as we improve our brokerage ability and have more relationships, it feeds into the fact that we can take more revenue from a customer. Because with the more capacity you can go into a customer with to say that I've got this capacity, the more they're willing to basically give you your revenue. So obviously from a revenue standpoint we are looking to bring on more agents.

I think Pat's -- I'll turn it over to Pat in a second. He'll describe what occurred in 2012, what we've got going on in 2013. We're very encouraged with I think where we are as far as what's in the pipeline for our agent base. But there's other things that need to consider as far as how to improve that margin. And some of the things is really making our capacity and our agents more efficient, more productive to allow more loading opportunities which I think we're moving in that direction also. So obviously we will continue to stress our safety performance. It's been -- was very good in 2012. We got to continue to drive those costs down.

And when you add that all up and put it into the hopper, I think again over the -- I can't point out and say that next year we're going to be here or next year we're going to be there. But I think over that time horizon our goal is to drive that to 50% and clearly that is something we can do. Pat, do you want to talk a little bit about agents and what we're doing there?

Yes, Jason, I think that we're the home for small businesses. As we've detailed in conferences and on this call in the past, we think that those small brokers and the challenges that are facing those small brokers are really going to drive them to a Landstar solution. In an uncertain world, we think that Landstar's a certain bet. And so we continue to reach out to those small brokers that are challenged by sourcing capacity, funding their growth, funding their existing business, and then meeting the demands of the customers and the underlying technology that it takes to do all that. We think we've got the best mousetrap.

If you look at our -- Henry outlined the revenue production from new agents. The number of new agents we brought on was fewer than before but not that many fewer. It's just that the revenue that was produced by those agents -- we had some large agents that had produced revenues in previous years, we didn't have those big hitters, if you will. But listen, our strategy remains the same, it remains sound and effective. And that is, we're going to go after these small broker who need to have someone like Landstar with the scale, systems and support to help them grow their business.

So if you had to look at it between your brokerage business and just the BC -- bringing on additional BCOs, would you say it's more targeted toward the brokerage, more to the BCOs, or is there more of an even split in how you want to grow this?

Again, I think -- let's make sure we get this clear. I want to grow both types of capacity. What we have to recognize and we've recognized in the past, is that there's only a finite number of owner operators that we can bring on that really qualify as Landstar business capacity owners. That being said, the growth will come from brokerage. That's not to say I don't want to recruit both types of capacity. I don't -- I want that to be perfectly clear. I want to bring in as many owner operators to be BCOs as possible. But again, I just -- you got to realize that with our qualification standards, that's not probably going to happen because there's a finite number that I can basically bring on. But there's a lot of small carriers out there, and that's where we think the growth is going to come from.

Perfect, guys, thanks for the time as always.

Tom Wadewitz, JPMC.

Did you give the tons by month, overall tonnage by month, or is that something you can provide or loads by month?

No, we didn't do that. We did not -- you have that for the quarter?

Yes, if you want to give it. Let me put it up on the chart and --

Yes. You can give -- truck load.

This is all truck. It doesn't --

Yes, that's fine.

Yes, this is Jim, you've got 115,400 in October.

Can you give me the year-over-year growth, or you want to just -- or you can give loads in both periods?

115,400 this year versus 113,400 last year -- October.

Okay.

November was 110,300 versus 116,400 last year. December was 135,100 over 148,400 last year. Now there's some clarifiers on that. It's not just -- when you look at November, it looks like we shrunk. But even November with the way we closed our books, Tom, is that November actually only had 18 workdays this year compared to 20 last year. So it gets a little bit squishy. You really -- month by month is tough to compare. That's why we try and look at just quarter over quarter and the number of days.

Okay.

Just to clarify, it's not that November got weak, it's that it had two fewer workdays.

Okay. All right. And so -- and how are you -- you're viewing January as being flat in loads or down in loads, or how are you thinking about how January started to play out?

January is not where we thought it was going to be. And therefore, a little shy of our expectations. And I don't have the final counts on that, but based on what we see on daily load counts, it's shy of where we wanted to be. Yesterday's daily load count was a little bit better, not much. It's hard for me to make a statement based on January. Thus, that's why I basically given the projection -- not -- I've given no guidance other than right now if I had to make a guess, I would say that overall we're going to be close to what we did last year or at what we did last year. Now things should hopefully improve.

Right, okay. Are there -- I know you talked a little bit about some of the customer groups and government or military is less than it used to be. But was there anything interesting in the way that customer groups changed in fourth quarter, or how you see them changing going into this year in terms of what's relatively strong or what had gotten weaker?

I think automotive's been pretty strong all year and remains pretty strong. I think flatbed was very strong, started to tail off a little bit in the fourth quarter. I think you clearly saw that in January. And again, when you got to think about that we're flatbed industrial production, and that really is where I think you saw most of the issues. Government's been weak all year last year. Those are the three basic -- Pat, I don't know you want to add anything else?

No. I would agree.

Those are the major categories, highs and lows.

Okay. So you don't have a lot of visibility on loads. Do you have any on pricing, or is that also tough to tell?

Pricing, again, was virtually flat.

But in terms of what you think it might be for 2013, any sense of --?

Yes, I'm not going to -- again, let's back up, you got to go -- if industrial production forecasts are correct, all right, and things start to get better as we move through the year, I would anticipate that pricing and revenue per load would get stronger.

Right.

I'm not -- as I said in my prepared remark, I'm not going to make any of those until I start to see some evidence that, yes, those trends are going to continue.

Right, okay. That's fair enough. I appreciate the time. Thanks.

William Greene, Morgan Stanley.

Henry, there's sometimes a sense out there that you guys can benefit from things like recovery. So we think about Superstorm Sandy in the northeast and stuff, is that a false impression, or could we see a pickup for non-economic reasons as things get rebuilt in the northeast for you guys?

A couple things. Obviously people -- and Bill, that's a good point. The -- back in 2005, 2006 and prior to that when we had the contract with the FAA which we provided all the relief work for disasters, I think that's where people get the association that, quote, Landstar's going participate in, quote, disaster recovery. We did to a very small degree with Superstorm Sandy, but clearly there's no master contract. I think there's a whole bunch of companies that participated in that and it was pretty well spread.

Where I think the benefit -- the potential incremental revenue comes from is as things are being rebuilt, all right, whether we participate in some of that, it's clearly going to suck up capacity, all right. And any time you suck up capacity, it's going to have a favorable effect on rates overall. And if you get any kick from demand, if in fact forecasts are correct that things will improve as you move throughout the year, consider that when the northeast is being rebuilt and capacity's being diverted there, that's going to drive revenue up. Plus you've got demand going up. So what's what I think potentially plays out. And I think 2013 could be a very, very good year.

But right now it's starting off slow, which basically everybody said it was going start off slow. And I just want to see evidence. I know I've heard a lot of chatter about the negative print that was on GDP that's for this and that and whatnot. But the fact of the matter, it was negative. So that spooked me a little bit. So before we go -- I want to see if there's -- there is going to be a pick up.

Okay, no that's fair enough. And then when we look at your -- the long-term guidance you provided, you gave some of the metrics that we're to watch. What -- is there one of those that's particularly critical or important? In other words, if you're at the -- if you hit your guidance early or later, what really is the big lever there?

I think when I look at -- it's obviously load count and revenue per load. I need industrial production, I think, to start to move forward. I think we're starting to see some -- I think the tax credit, the production tax credit for the alternative energy I think is very big for us. Things started -- were in their completion phases in the fourth quarter. It takes a little bit of time to ramp all that stuff up. As Pat alluded to, we've gotten this contact from our providers that they're going to start ramping that up, and it's going to be I think better than we initially thought. So -- but again, I'm being cautious here, Bill, because I -- January was a little bit slow. Although we anticipate it to be slow, but it was a little bit slower than we thought. And we'll see how we progress throughout the year. If all forecasts are correct, I think it could be a very good year.

Yes and one last question. I know you prepaid some of the dividends, but you still have a very strong balance sheet. So would you revisit that, or is that set in stone, you wouldn't re-introduce the dividend in 2013? Thanks for the time.

Nothing is set in stone. So I wouldn't say set in stone. I think what we would more than likely do with the excess cash is buy stock back, though. But I'm not saying we wouldn't do that. But right now, I think the -- I'd discuss it with the Board and see which direction the Board wants to go. But I think right now the Board is favorable to buying back stock.

That's great. Thank you for the time.

Justin Yagerman, Deutsche bank.

I feel like beating a dead horse here a little bit. But you said industrial production feels like it's tailed off a little bit, but that doesn't -- I guess I'm trying to figure out if you're seeing something that nobody else is in the economy here in the first half of the year. Because my pre-supposition would be that with housing getting better and the rest of the economy stabilizing, both domestically and globally, that we should start to see a little bit of resurgence. And maybe that's what you're hoping for in the back half and you're just not ready to start talking about it yet because you're not seeing it. But I guess what I'm trying to find out is if you're seeing something that gets you incrementally more worried, or if it's the lack of seeing any strength that has you a little bit cautious here in the beginning of the year?

I can answer that a whole bunch of different ways. Because you actually answered how I feel, all right, on almost just about every statement you made there. Look, we're tied at 35% flatbed, industrial production is very key to us. Forecasts offer slow first half, quite frankly, building later. Yes, and I think you heard from my prior comments to Bill that in fact things could be very good depending on how things play out. I am cautious here because I saw December, I see January, I see all the favorable comments as far as projections out into the future. And I want to see a little bit before I take that and go with it. And that's the way I've been. I think we've been a pretty good leading indicator as far as how we look at things in the future and based on what we have.

And right now I'm -- I'm going to be cautious because I don't want to be caught when I see a negative GDP print and people are making all sorts of different excuses for why it's negative when, in fact, it was negative. All right? And -- yes let me see some change in some of the stats. And as I said, I'm starting to hear from other customers now that deal with the wind energy, for example, which is flatbed, that hey, we're going to start kicking in again. So that gives me confidence, but I want to see some of that before I go out on a limb and say this is what we're going to do. But again, let me repeat, this could be a very good year. I'm just saying right now, January started off slow, very similar to what we saw in December. And until I start to see some of that pick up, I'm going to be a little bit cautious.

Okay. And maybe a little bit of color, I know in the past you've said margins in brokerage versus BCO are similar when you take insurance into account. Is there any better breakdown that you can give us at this point? I mean, we've seen the load growth obviously on the broker side materially outstrip the BCOs now and wanted to see what that mix is doing to the overall margin.

Jim?

We generally don't disclose the profitability on the individual line items on the brokered side for obvious reasons. But we generally tell you what direction they're moving in but don't give you a profit margin on that line.

Okay. Just a housekeeping question. How big was -- you talked about this tax credit, how big is alternative energy as an end market for you guys?

Can you repeat that, Justin?

How big is alternative energy as an end market?

You mean the industry or for Landstar?

For Landstar, I'm not asking you what the industry is. For Landstar, what is it as a percent of sales? So flatbed is x, and of that how much is the alternative energy?

Last year approximately $60 million.

Okay, that's helpful. Thank you so much, appreciate the time.

Chris Ceraso, Credit Suisse.

So that $60 million, that of the amount of wind, or is there other stuff in the energy category?

Wind.

And then it sounds like -- I want to make sure I understand how you characterize this that these programs were ramping down, but then the tax credit got renewed. So they're going to ramp back up again, but maybe you've got a period of a quarter or two where you don't have that activity. Is it fair to say that maybe you'll miss half a year worth of that volume in '13 versus '12?

Chris, this is Pat. So the production tax credit, everyone's expectation was it was not going to be renewed. It was renewed. If you read any of the financial pages and some industry stuff, they'll talk about how long it takes them to get that supply chain ramped back up in order to satisfy some of these orders. What we've understood from our customers is that they are in the process of doing that, and they plan on delivering greater number of towers in wind energy this year than they had previously thought because of the production tax credit.

Okay. But you'll have some down, some dead space here between the end of last year and when it ramps back up again?

You think about last year, Chris, because everyone believed that 2012 of going to be the last year for the PTC production tax credit. They were going full bore at the beginning of the year to make certain that they could get everything in, assembled and producing electricity in order to qualify for that tax credit. So if you think about it that way, it was really front loaded last year because they want to make sure they had all of those installed in order to get the production tax credit.

Okay. So it's probably going to be down regardless because they went bananas in '12 doing this stuff?

It will be down compared to 2012, but up compared to what they'd anticipated when there was no production tax credit.

Okay. I get it. Thank you.

Todd Fowler, KeyBanc Capital Markets.

Jim, can you give us the number of days in December, I think you gave Tom the load count, but I was hoping we could have the days in '11 and the days in '12 so we can work that into a --

These are full workdays. So October over last October was -- each October had 20 full workdays. November had 18 this year and 20 last year. And December had 23 this year and 26 last year.

Okay.

The holidays is the non full workday really.

Okay, good. I can do the math on that. And then Henry, on the net operating margin goal, I think back in 2009 you also talked about some top line expectations and I want to say that that was mid teen revenue growth over a couple year period. Do you have any comments on what you'd expect to grow the top line at? And then for some of the other components that aren't variable within the model, something like SG&A, what's the expectation for -- should we see 2% or 3% type inflation in SG&A over the next couple of years as well?

I think our objective is really -- I'm looking more towards the growth in gross profit dollars because that's really what's important to grow that operating income margin, if you will. So when I look at gross profit dollars, I'm looking upper single-digit numbers which is what our goal is in order to make that 50% as we move forward into the future.

Okay. And then what about something like thinking about how SG&A should trend? I understand that you've got a pretty fixed cost base in place, but I do know that obviously there's some moving parts with that. Is it fair to think that over the next couple of years, that would move up 2% to 3%, or is there some investment that's going to come that would need to support higher revenue rates at some point in the foreseeable future?

Todd, this is Jim. Our SG&A is really -- about 65% to 70% is headcount. It's mostly administrative, it's not really on the revenue side, the revenue-generating side. Of course we have some people on the revenue-generating side, but the majority of the staff is really administrative. From the -- whether payables or receivables or customer calls, stuff like that. So if you look at the model, the infrastructure's built, if you assume that 70% of that SG&A line is people and we give 3% to 4%, 5% raises each year, that's what you expect the growth rate of SG&A. The big variable is the bonus program, whether we hit targets or not. But other than that, pre-bonus estimates, 3% to 4% a year growth in that line item.

And you can handle upper single-digit gross profit growth with the current staffing level that you have at this point?

Yes.

Hello, Todd, let me make -- I was looking at my five-year projects here as far as what we've got -- actually, to get us to that 50% margin I need to grow gross profit dollars in a, let's call it a mid single-digit pace. And that's dropping 70% of that increase to the bottom line which is another one of our objectives.

Okay, that actually seems a little bit better. I thought that that was -- I thought your numbers were conservative, and I thought that it implied more of a mid single-digit growth rate, so that makes sense. Okay, thanks a lot for the time.

Scott Schneeberger, Oppenheimer.

Staying on the theme of getting to the 50% operating margin, how important is what you're doing in IT? And a derivative question off that, what are you thinking of spending on CapEx? Is IT a big component of it? And then following up with views on free cash flow going forward, thanks.

Well, look, IT's a very big component of trying to get to that margin because what you're trying to do is make our capacity more efficient so that -- more nimble so they can select loads. You're trying to get our agents to basically electronically get that capacity. So that's what we're trying to get to even more so. I mean, we've got load alerts, the load alerts going out to the broker carrier. You got a lot of things that we're working on, that we are -- that makes our capacity more efficient. The next thing is to get our agents more efficient as far as to source the capacity. And that we're working on. So that over a five-year time frame is going make them generate more of those gross profit dollars because they don't have to spend as much on that. We want them out there actually selling as opposed to doing some of this administrative stuff. Jim, you want to address capital?

On the capital side, it's really infrastructure on the IT side. Our cash CapEx, like I said in 2012, our cash CapEx was $7 million. And the majority of that is just IT equipment. And if you look back at history, we're going to spend $4 million to $6 million, $4 million to $7 million a year on CapEx related to IT infrastructure type stuff and expansion into other areas. But that's really the cash CapEx.

On the trailer side, you don't see it coming through cash CapEx because we finance it with capital leases. We own about 8,000 van trailers, 53-foot trailers that we swap out about every seven years. So you're replacing 1,000 to 1,200 vans a year at about $30,000 a pop. So you're constantly going to see that rolling through, $30 million to $35 million coming through capital expenditures just to keep the fleet up within seven to eight years of age.

Thanks. And then any thoughts on free cash flow in the coming year? And then also you touched on it earlier on the dividend return question, and thinking about buybacks, it sound like you might be a little bit more active there. And I don't really associate you guys much with M&A, but any thoughts across the board on those topics. Thanks.

Well as I said before, a couple of things. Everything clearly is always in the hopper. So we could revisit a dividend. I think the -- and I would talk to the Board if that's the case, but I really think the Board is more inclined to buy back shares. I think that would be probably the use of our cash flow. And as far as M&A, again, if there are companies out there that fit our business model, we would clearly be more than willing to talk and look at that. And that's the way I would answer those questions.

Okay. Thanks, guys.

Scott Group, Wolfe Trahan.

So the softer volume trends in December and January, can you give us some color if you're seeing that in BCO or brokerage or both?

I think it's pretty much across the board. If I had to -- Joe, is that a fair statement?

Yes, yes. I'd say both.

Pretty much across the board.

Okay. And Henry, can you give us some color, you had good progress, sir, in the year on adding some BCOs, it dropped off sequentially in the fourth quarter. Is that seasonal, or something going on there? And then maybe your expectations for growing the BCOs this year.

I'll let Joe answer that. But -- go ahead.

Joe, this is Scott. Scott, this is Joe. (laughter) We did see a sequential decline in the fourth quarter on BCOs. If you may recall, we introduced a program to implement on-board recorders, and it really started to take hold in September. And so we did see some decline in additions based on the introduction of on-board recorders. And what we're seeing is that there's still a lot of interest in Landstar by a lot of owner operators, but they're sitting on the sidelines a little bit. So that's impacted our in-the-door number, which is why we've got this strategy to continue to grow carrier count. And so as we look to our agents and have our agents move additional shipments, we feel it's our obligation to put a bunch of capacity in the system whether it's BCOs or carriers.

And on an overall capacity provider basis, you saw some pretty nice improvement in 2012, nearly 3,200 additions. So we're going to continue to work the BCO angle, continue to recruit hard. And as you see the on-board recorder thing become a little bit more well accepted across the industry, we expect ourselves to work our way out of that. I guess a little bit of concern that you might see from owner operators as it becomes more mainstream.

I think one of the important parts as far as the program we introduced in the -- we started to see, as Joe said, a little bit of a tail-off in the in-the-door ads. I think overall, when you look at our roughly 8,000 BCOs out there, we've got 1,000 of them with EOBRs now installed. So where we started off very slow -- and again, this is in the door, have to have one, voluntary for people who were here. And then obviously if there are some problems, we give the owner operator a choice either put one on or gone. So we've had actually better than I anticipated results. And it's starting to catch on now because our BCOs are starting to realize that this is a good thing to have. It saves them work.

We just had our BCO Appreciation Days here in Jacksonville, and we had a lot of favorable comments from some of our old timers who put the on-board recorder on, that they swore they'd never do it. But as far as the amount of administrative work that it saves them. So it's just -- it's a process. I would anticipate in the first quarter that typically that's a slow recruiting anyway. But I would think again after the first quarter you're going to see that level off as far as recruiting numbers. So not concerned. We anticipated that we'd have a falloff due to the requirement of electronic on-board recorders. But actually I think we're doing a lot better than I thought we were.

Okay, that's great color. If I could ask one more thing. Jim, you went through some of the brokerage numbers pretty quickly. Can you give us a sense on how brokerage yields or gross margin percentages were in the quarter relative to what we've been seeing?

Sure thing. The fourth quarter over 2011 fourth quarter was a 20 basis point improvement in the rate of purchase transportation paid to broker carriers. And then sequentially the fourth quarter compared to the third quarter of 2012 improved 60 basis points.

And is that 60 basis points, is that better, normal -- better or worse than you would normally think it should be from third to fourth?

Well it varies quarter to quarter depending on the supply, demand. So it's -- that I think if you were to ask me at the end of September, it's better than I thought it would be.

Okay. Great. Thanks, Jim, appreciate it.

Thom Albrecht, BB&T.

I had a simple question here on the revenue per load at brokerage was [$1,825]. I was a little surprised because that was up about $85 from the September average. I think you mentioned that PT had a favorable trend even though brokerage was the only unit with growth. And that's because you were able to pay out less to the carriers that you were brokering to. But my question is in that kind of weak environment where we saw revenue per load decline at other brokers, why did yours go up $85 sequentially? I know it can't all be fuel. And then I had a quick follow up.

Jim?

Well, it's -- generally a lot of it has to do with the mix between how much is on flats and how much is on vans. I'm going to have to actually dig into that one to tell you the truth because I don't -- I'm looking at the brokered side, and I -- on a sequential basis, I'm sorry, I just don't have that right now.

Okay. Well let me ask a related question, but it goes back to some comments you made both in October and on your mid-quarter call, that there was about one-third of your flatbed fleet, so one-third of one-third was still doing very well in the fourth quarter. I think it was related to capital goods shipments. Has that -- based upon everything you said today, it sounds like that finished its loads in the fourth quarter, and that part of the flatbed that was strong is also now sluggish like the rest of things.

Yes. Tom, I think if you go back to what we talked about earlier whether it was alternative energy, that including wind, there was a big push to get a lot of that stuff done at the end of the year. And so look at the year-over-year comparison, again, they started the year strong, wound down as we went through the year. But your thesis is correct.

Yes. I think one of the things, Tom, that you -- our December numbers from a revenue standpoint without giving you what our expectations were, were below our expectations in the month of December. Forgetting about the extra week and all that other stuff, but just December itself was below where we thought it was going to come in which was a little bit disappointing. And that has carried on to January, and where I am actually -- as I said, I'm a very optimistic guy and I'm optimistic about 2013. It's just that when I hear some of the stats that are out there and I know I hear a lot of people being optimistic and it's all back loaded, I just want to see a little bit.

Okay, no I hear you. I'm watching the same stuff. So all right, thank you very much, guys.

David Campbell, Thompson Davis & Company.

Just wanted to ask you about Sandy. No significant impact on revenues, equipment or expenses in the quarter?

No.

Amazed that you didn't have any given what Ryder said and some other companies. Surprised there wasn't any impact on your business.

Not a lot of impact. Pat, do you got anything -- no. Not a lot of impact.

Okay. Well I think my other questions have all been answered. Thank you very much.

John Larkin, Stifel Nicolaus.

If I calculated the numbers correctly, and I think you mentioned this in the press release as well, 92% of the overall revenues came from trucking.

Yes.

Broadly defined including both the traditional owner operator agent business and also the brokerage business, and that stayed steady year over year. And I guess it stayed relatively steady for the last few years. I would have expected maybe that number to drop a little bit as some of the complimentary services grew perhaps a little faster. Rail intermodal, air freight forwarding, ocean forwarding, warehousing, some of the logistic services available with a couple of those acquisitions you did a few years back like Premier and A3i. What's your read on how that's going to play out over the next few years?

Couple things. It's good observation, let's take them one at a time. The -- we were impacted, and I made the comment as far our air revenue has been down year over year pretty dramatically. A lot of reasons there. One agent gone, but really it's just been a slowdown, a general slowdown in that business. When you take a look at our rail intermodal, you got to go back a couple years. Again, we had lost two years ago our two largest agents, all right, which accounted for a bulk of that. We've slowly built that back up.

Our brokerage revenue has just grown at a pretty phenomenal pace, and remember the brokerage number it's a large number. So when you start growing that double digits, for example, and you could grow air 50%, I'm making that up, but it doesn't have the same impact. It basically remains the same. So it doesn't surprise me that we've guided the same. The growth rate in brokerage has just been phenomenal. And remember, our agents understand truck more so than anything else, and that's what they're really comfortable with.

As it relates to the acquisitions, the technology that we bought there, yes, we have a fee revenue embedded in that other. But that also drives margin business from the truck side. So there's a whole thing -- look, I actually -- if we're doing this right, as much as I want to grow that as a percentage, it's more important for us to grow the total. And our guys are more comfortable with truck. And we're going to continue to push both, but that's where it is. Pat, you got anything you want to add to that or --?

No.

No, okay. (laughter)

Well, I think one of the things that bears repeating is embedded in those acquisitions were some procurement tools that have helped us generate business on the margin side. And we don't want to sacrifice margin business by going over to a fee-based business. We do that at our own peril, John. So you're not going to see in the other revenue category fees accumulating, but you will see in it they won't be attributed to it some of the procurement tools that we have that help us grow the margin business.

And then the other question I had maybe as a final one here, you mentioned that the $1 million agent count remained the same. But that the $1 million agents on average did $5 million per agency. And I think that was for 2002. How did that compare to 2011? Are you seeing growth within these bigger agents also?

Yes. I think the average was $4.7 million. So we saw growth in the $1 million agents. And the reason I gave the $750,000 to $1 million category, because we did have growth in that particular level. And I think as I recall in my numbers, was a growth of about 15 '11 to '12. And when you think about all of that, December was a little bit below where we thought it was going to be. And therefore, took it away because I really thought we were going grow that to a little bit higher than the 504. And then you got consider the fact we had the extra week last year. So actually we -- from that aspect, I think overall that was very good. And the fact that we've got a whole group of new potential $1 million agents sitting in the hopper is just as important.

Sounds terrific. Thank you very much.

Matt Brooklier, Longbow Research.

So you talked a little bit about the wind energy business and that's been a factor here in terms of your load count. I was curious to hear if -- I think you do a decent amount on the drilling equipment side, if that's been part of the softness story, as well, in the second half. And if potentially that part of the market picks up, if that could be a positive for you.

Yes, Matt, Pat here. Yes, domestic oil and gas exploration has declined as you went towards the back half of the year. And if there's a pick up there, we believe we'll participate. Going back to he first in, last out. When things pick up, we think we're the first heavy haul provider that gets called in because of our skills. And we think we're the last one to leave as things slow down.

Okay. And in term of the revenue per load profile on drilling equipment or the wind towers, I'm assuming it's higher maybe than some of your other flatbed business. Is that a fair assumptions?

That's correct. Yes.

Okay. And the margin potentially could be a little bit higher than the other flatbed business, as well?

True dollars there'd be more true dollars because it's a larger revenue per load. But the margins typically about the same.

Okay, that's helpful. Thank you.

All right. Thanks, guys. We've got one more question. I think we're running over time, so we'll take one more question.

Ryan Bouchard, Avondale Partners.

I wondered if you could, Jim, you talked brokerage margins were better by 20 basis points year over year. Could you talk through the quarter, monthly, how did those progress?

You just got to give me a sec.

Okay. My other question was about -- a similar question, a monthly question. But if you could tell us what truck loads were in the first quarter of last year, I'm trying to get an idea of the comps that we're facing in the first quarter this year.

I could say if you go to one of your competitors' conferences next week we have this all on slides.

I'll be there. I'm looking at a strong comp, I mean it looks like the first quarter in truck was--

Yes, you are. I think when you look at and as Jim is getting the numbers together and I'll say part of my calls, when you look at what occurred last year, you had strong industrial production numbers in the first and second quarter and it gradually went down. When you look at the forecasts for 2013, you got just the opposite. Is that it's a slow first half and a build in the second half. So I think you could have just the opposite of the years, 2012 versus 2013. And that's what we're, I think, what we've started to see in January is a slower build. And the question is how quickly does that build in.

And if the forecasts are correct, as I said, 2013's going to be fine. Just going to be the opposite as far as how the first half compares to the first half and the second half compares to the second half. So from that aspect, I mean, I'm pretty optimistic. But as I said before, I got to see a little bit of evidence. And January is no way to base anything on

Right.

Jim?

It was November over last November was 60 basis points better. And then we were flat in December over December.

Okay.

All right?

All right. Thank you.

Hey, I was just told that we have two callers left in the queue and I'll take the final two if they're still on. There's only one? All right, whoever's in the queue, I'll take one more question because I'm a nice guy.

Ben Hartford, Robert W. Baird.

Well, that being said, I was going get him in, but he's not on the phone. Okay, with that we're going close this off, and do we have any final comments, Joe?

No, I'm good.

Pat? Jim? Okay. Look, I look forward to talking to you in our first quarter, mid-quarter update call. And everyone, have a great rest of the day and we'll talk to you then. Bye.

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