Landstar System Inc (LSTR) 2013 Q2 法說會逐字稿

Good afternoon and welcome to Landstar System, Inc.'s second-quarter 2013 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, 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, and good afternoon and welcome to the Landstar 2013 second-quarter earnings conference call.

This conference call will be limited to no more than one hour. In addition, please limit your questions to no more than two questions each when the question-and-answer period begins. But before we begin, let me read the following statement. The following is a Safe Harbor statement under the Private Securities Litigation and 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 the 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 2012 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.

During our second-quarter, mid-quarter update call, I stated that I anticipated that, one, revenue for the 2013 second quarter would be in a range of $660 million to $700 million. That, two, our gross profit margin would be in a range of 16% to 16.2%. That, three, our operating margin would be in a range of 44% to 46%. And that, four, diluted earnings per share would be a range of $0.63 to $0.68 per diluted share.

Actual 2013 second-quarter revenue was $679 million, our gross profit margin was 16.1%, our operating margin was 45.7% and diluted earnings per share was $0.66 per diluted share, all approximately at the midpoint of the revised estimated ranges. As I said in this morning's press release, despite the choppy and soft industrial and manufacturing environment, Landstar's variable cost operating model generated a very healthy 45.7% operating margin, thus, again, demonstrating the strength of Landstar's operating model.

Consolidated revenue in the 2013 second quarter was approximately $679 million, down approximately 8% from the revenue generated in the 2012 second quarter. As was the case for the 2013 first quarter compared to the 2012 first quarter, the decrease was largely driven by decreased revenue in certain of Landstar's industrial-based accounts. Additionally, as I anticipated and stated in a prior conference call, total revenue generated from new agent additions continued to be below our historical new agent revenue run rate of between 3% and 6% of revenue and only represented 2.2% of total revenue to 2013 second quarter, the same as in the 2013 first quarter. On the positive side of that number, however, the dollar amount of new agent revenue increased 10% over the dollar amount of new agent revenue in the 2013 first quarter.

From a service offering standpoint, total revenue from truck transportation for the 2013 second quarter declined 8% from the 2012 second quarter. The decline was from an approximate 5% decrease in load volume and an approximate 3% decrease in revenue per load. Total revenue generated through our unsided platform equipment service offering in the 2013 second quarter declined 12% compared to the 2012 second quarter, 5% due to lower load volume and 7% due to lower revenue per load. Total revenue generated through our van equipment service offering was 6% lower in the 2013 second quarter versus the 2012 second quarter, due primarily, to a 5% decrease in load volume. Total revenue generated from rail intermodal service declined 1% in the 2013 second quarter over the 2012 second quarter, while total revenue generated through ocean cargo and air cargo providers increased 7% quarter over quarter.

As it relates to truck capacity, we ended the 2013 second quarter with a total truck capacity base of 39,948 carriers compared to 36,293 at the end of the 2012 second quarter, and 39,622 at the end of the fiscal 2013 first quarter. As an update, over 2,200 electronic onboard recorders have either been ordered or installed on our BCO capacity base.

Before I turn it over to Jim for his financial review, Pat O'Malley and Joe Beacom are going to add a little more color to the second-quarter performance from an operating standpoint. Pat?

Thank you, Henry, and good afternoon.

Henry talked about the performance of our Platform business. Transportation demand for core industrials around agriculture, forestry and mining remain muted while alternative energy projects have gained momentum. Several customers have presented bid opportunities for projects commencing later in the year and 2014. In spite of the anticipated pickup in demand, pricing in the heavy specialized segment remains below the previous year. As we've mentioned, the barriers to entry into the heavy specialized segment are significant. Cost of equipment, operator qualification and operational knowledge conspire to limit competition. Currently, approximately 37% of Landstar's truck transportation revenue is generated using unsided platform equipment.

During the 2013 first-quarter earnings call, we provided detail around our LTL initiative. Although Landstar's historically participated to a small degree in the LTL market, beginning in August 2011, we increased our emphasis on this service offering by implementing an easy-to-use capacity procurement tool, established standard rates with LTL carriers and worked with our agents to identify customer opportunities. Early in the 2013 second quarter, one of Landstar's customers decided to manage their transportation business in house. Landstar had formerly managed the customer's domestic transportation. This action adversely affected our LTL business and volumes decreased 2%, quarter over quarter.

We remain confident in our ability to grow this segment. We continue to add quality carriers to our base of capacity providers, more agents are selling this service and the number of customers that request account-specific pricing is increasing. As we mentioned, most of our sales staff and many agents have a background in LTL and are comfortable selling this product.

From the perspective of the LTL carrier base, Landstar's business model, diverse agent population, and large customer base represents an attractive variable cost of sales channel. In addition, virtually every existing Landstar truckload customer has some LTL business. This gives Landstar and our agents an additional revenue stream inside our existing account base.

Our available load trends have been improving. In order to attract capacity and cover their shipments, Landstar agents typically use our proprietary load board to post their available freight. The underlying technology enables our agents and capacity providers to quickly identify those shipments that meet their approval, commit to the shipment, and move the load. Landstar tracks the number of loads that are available each day. For most of the first half of this year, available load levels were well below 2012. The number of available shipments in July is trending higher than any other time since we started recording this data in 2006. In general, the number of available loads reflects a pattern of loading opportunities.

Finally, for our new agents, as a reminder, new agent is consider -- in the 2013 second quarter represents an agent who had contracted with Landstar after April 1, 2012. As Henry stated, new agent revenues in the 2013 second quarter was 2.2% of revenue, below the historic range of 3% to 6%. We believe the challenges for small independent brokers are many and difficult to solve without outside support, whether it's access to capital, cash flow, tight capacity, inferior systems, or assorted October 1, 2013, mandates under the MAP 21st Century Act. This segment's population is fertile ground to recruit productive new agents.

We continue to do a good job of seeding our top -- pipeline with quality new agent prospects. Although the number of new agents added in the second quarter of 2013 declined slightly year over year, the average revenue for new agents per week is near an all-time high and approximately 19% greater than the previous year. We believe that our recruiting strategies, business environment and systems will help us maintain momentum in adding productive new agents through the balance of the year.

Joe?

Thanks, Pat, and good afternoon.

The environment for owner-operators and small (inaudible) and remains challenging due to softness in the freight environment that has put pressure on pricing, yet cost of operations, fuel, tires, maintenance, et cetera, remains relatively high. We see no evidence that the pool of owner-operators is growing, which is understandable given the more balanced demand for truck capacity thus far in 2013 and with it flat diminished pricing power, difficulty accessing credit and anxiety over the regulatory landscape. Despite the soft freight environment in the second quarter, Landstar was able to grow BCO comp, grow approved broker/carrier comp, as well as active broker carrier comp, active meaning that the carrier has hauled a minimum of one load in the last six months.

The Company's truck capacity provider network at the end of the second quarter exceeded prior year by 3,655 truck capacity providers and exceeded the first quarter by 326. Interest in Landstar from owner-operators considering BCO status remains strong, based upon telephone volume into our recruiting personnel, visits to our recruiting website, lease2landstar.com, and the work history application volume that flows from those two activities. In general, we see the BCO recruiting outlook as challenging, yet improving, as owner-operators look for stability and shelter from a tough environment.

Landstar has been consistently proving that the model is appealing to third-party capacity regardless of the operating environment due to the volume of freight, timely payment for services regardless of when a customer may make a payment, and their ability to benefit from meaningful discounts on tires, fuel and equipment. 2013 annualized BCO turnover is approximately 30%, a very respectable outcome considering the environment.

We continue to make progress building relationships with broker carriers who see the opportunity to grow their business with Landstar. The foundation for success in growing the number of active carriers is in finding a win-win proposition. Many agents have personnel dedicated to communicating the opportunities that exist within their agency to potential carriers, while corporately Landstar has carrier relations staff selling the numerous opportunities that exist across the organization.

Ongoing examination of agent freight patterns and available loads are compared to the database of carrier operational profiles. These profiles identify both carrier capabilities, van, flat, heavy-haul, et cetera, and their freight needs, the objective being to determine what imbalances or inefficiencies the carrier may have that our current or future freight mix can resolve. This carrier freight profile is kept up to date and used operationally, as we try to identify or respond to opportunities to future penetrate accounts.

Whether a single load or multiple lanes, this carrier relationship, similar to a BCO relationship, is a driver of capacity growth and utilization. We continue to see customers seeking a reliable capacity solution that takes into consideration a means to manage carrier CSA performance. The standards and methodology Landstar deploys to ensure the quality of capacity made available to our customers, we believe, is a competitive advantage.

Turning to safety performance, 2012 was one of the safest years in Landstar history, thus throughout 2013, the quarterly comparisons may prove difficult. DOT crash frequency in the second quarter of 2013 was a respectable 0.47 per million miles traveled, yet higher than the very low 0.43 per million miles traveled in the second quarter of 2012. Severity in the second quarter of 2013 when compared to the second quarter of 2012 was worse, in part due to this increase in frequency, but primarily due to the unfavorable development of a prior-year accident.

We continue to have strong participation and commitment around the Company's safety programs from agents, BCOs and employees. In July Landstar held the Company's second-annual BCO All-Star event and induction ceremony where 125 new one-million milers, eight new two-million milers and two new three-million milers were honored, bringing the Company's total million miler count to 741.

Jim?

Thanks, Joe.

I'll move on and cover various financial information included in our second-quarter release. Gross profit representing revenue less the cost of purchased transportation and commissions to agents was $109.2 million, or 16.1% of revenue in the 2013 second quarter, compared to $116.7 million, or 15.9% of revenue in the 2012 second quarter. The decrease in gross profit was generally due to lower revenue volume (inaudible) unsided platform equipment in the 2013 second quarter compared to the 2012 second quarter, partially offset by an increased gross profit margin. The cost of purchased transportation was 76% of revenue in the 2013 second quarter compared to 76.5% in the 2012 second quarter.

Revenue contributed by truck brokerage carriers, which has a higher rate of purchased transportation, was 41% of revenue in the 2013 second quarter and 42% of revenue in the 2012 second quarter. The rate of purchased transportation paid to truck brokerage carriers in the 2013 second quarter was 80-basis points lower than the rate paid in the 2012 second quarter. Commissions to agents was 7.9% of revenue in the 2013 second quarter compared to 7.7% of revenue in the 2012 second quarter. The increase in the rate of commissions paid to agents was primarily due to the increase in net revenue, representing revenue less the cost of purchased transportation on truck brokerage revenue.

Other operating costs were 3.8% of gross profit in the 2013 quarter compared to 4% in the 2012 quarter. This decrease was primarily attributable to lower maintenance costs on Company-owned trailing equipment compared to the 2012 second quarter, as we replaced older trailing equipment with new equipment. Included in other operating costs were gains on sales of trailing equipment of $1.7 million and $1.8 million in the 2013 and 2012 second quarters, respectively.

Insurance and claims costs were 10.9% of gross profit in the 2013 quarter compared to 8% in the 2012 quarter. The increase in insurance and claims as a percent of gross profit was primarily due to unfavorable development of prior-year claims of $2.3 million, that was primarily attributable to one claim in the 2013 second quarter. Also, insurance and claims expense was 3.5% of BCO revenue in the 2013 second quarter compared to a low 2.5% in the 2012 second quarter. Historically, average insurance and claims expense as a percent of BCO revenue was 3.3% over the previous five years.

Selling, general and administrative costs were 32.7% of gross profit in the 2013 second quarter and 32.3% of gross profit in the 2012 second quarter. The increase in selling, general and administrative costs as a percent of gross profit was primarily attributable to lower gross profit in the 2013 period, and costs associated with the Company's annual agent meeting, which was held during the second quarter of 2013 but held in the first quarter of 2012, partially offset by a decrease for provision for bonuses under the Company's incentive compensation program in the 2013 second quarter, as the Company has not achieved targeted operating results in the 2013 period.

Depreciation and amortization was 7.2% of gross profit in the 2013 second quarter compared to 5.7% in the 2012 second quarter. This decrease was due to the effect of lower gross profit in the 2013 second quarter and increased depreciation of trailing equipment, as we replaced older, fully-depreciated equipment with new equipment. Investment income was $337,100 in the 2013 quarter compared to $405,000 in the 2012 period. The effective income tax rate was 38.1% in the 2013 second quarter compared to 38.2% in the 2012 second quarter.

Look at our balance sheet we ended the quarter with cash and short-term investments of $102 million, 2013 second quarter year-to-date cash flow from operations was $85 million. During the 2013 second quarter, Landstar purchased 884,000 shares of its common stock at a total cost of $46.6 million. Currently there are 1.1 million shares available for purchase under the previously-authorized purchase program.

Cash capital expenditures was $2.7 million in the 2013 first half. Trailing twelve-month return on average shareholders' equity was 33% and trailing twelve-month return on invested capital, representing net income divided by the sum of average equity plus average debt was 25%. On July 29, 2013, shareholders' equity represented 77% of total capitalization.

Back to you, Henry.

Thanks, Jim, Pat and Joe.

Through the first several weeks of the 2013 third quarter, excluding the week that included the extended July 4th holiday, we have seen improved truckload volume and revenue per load trends. Although total revenue still lags that of the 2012 prior-year comparable period, the trend is better, which I believe signals we have bounced off the bottom. It is still very early in the quarter and the US industrial production forecasts for the balance of the year remains soft.

However, I am encouraged by the recent trends in load count, the current average revenue per load amount and our new agent revenue potential. Considering the improving trends and counter balancing that with the soft US industrial production outlook, I currently anticipate 2013 third-quarter consolidated revenue to be in a range of $670 million to $715 million, and operating margin of 46% to 48% and diluted earnings per share in a range of $0.67 to $0.72 per diluted share.

It should be noted that the previously-mentioned estimated ranges of operating margin and diluted earnings per share for the 2013 third quarter were estimated, including the same level of insurance and claims expense as a percentage of BCO revenue as incurred in the 2013 second quarter.

Dori, in a minute I'm going to open it up for questions and I hope everybody appreciated the change in format, giving everybody a little bit, I think, insight into some of the operational and revenue, and I'm actually going to let Joe, Pat, and obviously, Jim, handle most of the questions.

With that, Dori, we can basically start.

Thank you.

(Operator Instructions)

Todd Fowler with KeyBanc Capital Markets.

I think maybe this is a question for Pat. I'm curious how much, if any, wind energy revenue there was in the second quarter, and then what you had factored in for the third quarter?

I can't tell you, Todd, how much Wind business was in the second quarter and I can't tell you what we factored into the third quarter. As I mentioned in my remarks, we see some of that building in terms of projects that are coming in that we're bidding on, but at this time I wouldn't want to estimate what the third quarter's going to be.

Okay.

Todd, as just a comment. I quoted before the number one customer in that particular category and in the third quarter that was down and, Jim -- that was down about 56% quarter over quarter, which accounted for much of the flatbed heavy haul decline. I don't know if that gives you any color for -- obviously, as Pat said, the vol -- what that customer's told us things should be picking up in the third quarter.

I guess maybe, Henry, let me ask it this way. It doesn't sound like there was much contribution from Wind in the second quarter. The comments about the momentum with Wind and what you're seeing on the bid side, is that expected to come in in the third quarter, or is that something that we should expect later in the fourth quarter and into 2014?

I would expect, Todd, the majority of that to be late third quarter, some fourth quarter and then 2014.

So what's in the guidance, the revenue guidance? It doesn't sound like that there's a lot in there from contribution on the wind side?

That's correct, and weather will really determine a lot of what the fourth quarter is like.

Got it. Okay, that's very helpful. Then the follow up one that I had -- this is probably for Jim. On the SG&A side, I guess if I back out the $2 million for the agent convention, that gets me to about a $34 million run rate for the quarter, is that a good place holder for the rest of the year based on planned incentive compensation levels?

Yes.

Okay, good. Thanks a lot for the time. I'll turn it over.

Kelly Dougherty with Macquarie.

You mentioned you see improving trends, but then the revenue guidance suggests revenue could be down more than 6% at the one end. Can you help us think about that, whether you're just seeing a decelerating pace or how you think about load volumes and revenue as we move through the rest of the quarter?

I think what I've given out there is a pretty wide range. I think we did -- and, Jim, correct me if I'm wrong -- about $720 million last year in the third quarter, $717 million, so the upper range -- the upper end of that range is pretty much on target there. You've got to factor in -- and I'm a little bit gun shy, because the US forecast for industrial production clearly is declining. If you looked at those production forecasts back in March and look at them now on July they've gone south. So I've got to counterbalance, as I said in my comments, what we're currently seeing with what is projected to be seen, so I don't want to get ahead of myself. Jim, you want to say something?

Yes, Kelly, if you look at the last five or six years, sequentially third quarter over second quarter has been either 2% over -- third quarter 2% over the second quarter or 2% behind the second quarter, so it's a very consistent quarter over quarter comparing the sequential. If you look at the midpoint of our range, we're saying the midpoint is 2% over what we did in the second quarter, really that's kind of how you look at it. So we are building a little bit better third quarter sequentially than the second quarter, as you've seen historically.

Okay, that's helpful. And then can you just help us think about the impact on your revenue of some of the more favorable manufacturing reports that have come out recently? Granted, they're lower than they were earlier in the year, but they're starting to tick up a little bit higher than expectations. Have you started to see that in your results? Is that what you're talking about, or maybe if not, is there any lag that we can think about before you start to see that increased activity?

Well, on that's fresh in my mind is Caterpillar's report, which wasn't too favorable, as far as I recall. Look, as I said before, these whole -- those revenue projections are based on the trends we're currently seeing, which, clearly, are better than what we've been experiencing when you look at the daily comparable periods and that's a clear positive sign. On the other hand, the forecasts out there are just not very good and when I look at -- Flatbed/Heavy Specialized Transport Topics just put out the top 100 carriers thing, and we're clearly ranked number one in specialized and in flatbed by, quite frankly, a wide margin over number two. When that segment goes through a cyclical downturn, which is what we've had, that's going to impact us more so than probably any other carrier. So that's what we're feeling. On the other hand, we've seen -- we believe it's bounced off the bottom and we're starting an upward climb. Pat, you want to --?

Kelly, one of the things that we look at is the number of quotes that we're making on our Platform business. If you look through the first two quarters, quotes year over year we're behind. In July, the quotes that we're doing are up about 7.5% compared to 2012 so that could be people rebuilding their supply chains, that could be the fact that they're anticipating some business and we're currently quoting on it. If you think about from quote to move, depending upon what they're manufacturing there could be 30, 60 days between them. So that's one item that we look at that says, hey, maybe this is building, but we haven't seen evidence of it right at this point. We're largely spot business on that side and we just haven't seen it.

Okay, great. Thanks very much.

Justin Yagerman with Deutsche Bank.

It's Rob Salmon on for Justin. Henry, we'd seen that one of the larger competitors in the heavy flatbed specialized segment had recently completed a restructuring in early July. Have you guys seen any sort of benefit from some of the noise that may have been going around, either from a BCO perspective or from a customer perspective as a result of that reorganization?

No, but I'm looking at my guys. Help me out here. (laughter)

We're not seeing -- from a recruiting standpoint things are pretty stable but nothing specific to anybody leaving one competitor and coming over here that we've noticed.

From the revenue generation side, Rob, we haven't seen customers flocking to us saying that there was some problem with a provider that had been servicing that account.

Okay, that's helpful. I think it was more on the financial side where that had taken place. With regard to my follow up, Landstar has been doing a really good job of growing its active broker carrier capacity but we have seen the productivity slip a little bit. It was about eight loads per truck this year down from about nine last year and it's been down for about three consecutive quarters. What do think is constraining the productivity on the broker fleet? Is this more of a demand issue, or the regulatory changes, or is it kind of pricing mismatch? Any color would be helpful.

On the BCO front, I think we said earlier in the call that the number of available loads in the system had lagged 2012, and I think that's probably the biggest impact driver to utilization on the BCO side. That would be my guess.

I was going to say as far as productivity for broker carrier, the loads are out there, people haul what they want to haul, we don't actively manage that.

Understand. Appreciate the time, guys.

William Greene with Morgan Stanley.

You know, Henry, I wanted to ask a little bit of a follow up to the discussion you were having before and it really hinges on this tradeoff between growth, but also the margin or the returns. So one of the challenges we have when we talk about Landstar with investors is that the growth's been disappointing but that comment fails to recognize where the margins and returns are.

So, I don't know what the macro's going to do going forward, but if we sit in this tepid kind of environment, do you feel a need that you have to do something to grow faster, or do you feel like, no, look, this is a Company built for when the economy comes back and really what we have to focus on here is maintaining these margins and these returns at these levels and growth will do what it's going to do? How do you think about that trade off?

That's an interesting comment. I'm not going to do something, hopefully knee-jerk, which you've seen a lot of things happen due to multiples being paid for companies and things like that. So I think we've been fairly consistent. We look at -- when you go back to a real downturn like you had in 2009, that actually was fertile ground for Landstar to go out and recruit agents and whatnot and Pat can address some of the quality of the agents we're currently bringing in. So, as certain things slow down -- it actually over the term will benefit Landstar as you move into future years as far as people that we get into this pipeline.

Our objective is, obviously, we want to grow as fast as we can, all right, but on the other hand, we're going to, basically, also look at profitable growth and that's what we are trying to get to. I think our margins, we've concentrated on trying to maintain those and I think we've done a pretty good job. I think our variable cost model works out very well. It's an interesting question but I think when things -- in this type of environment when things get slow it actually helps us out going forward from an agent recruiting standpoint. And Pat, as I said, addressed that in his particular commented.

Pat, did you want to add anything to that?

I think we're always trying to grow but I think -- and be mindful of the margins, William, and I think Henry articulated that.

I'm curious what you think about the concept of maybe using those margins to, in effect, invest in the growth. In other words, you've already got a spread over your cost of capital that's quite good, so you could arguably invest at a lower return on capital and grow much faster if you wanted to. But it doesn't sound like that's something you want to do, because these margins and getting to these targets is more critical than growth for some period?

It's a combination of both, Bill. I can't say one -- if I had my druthers I'd be doing everything and would be doing both at the same time and you try to manage that carefully. I'm not saying would I sacrifice some margin for some growth that over the longer term might benefit us? Yes. But I think you've got to -- as I said before, I don't think we're going to do something that just is paying 13, 14 times from a company.

And you've got to remember, Landstar's business model is very unique and it's probably -- there's really not one like it out there when you consider the agent piece and the third-party capacity piece. I would not destroy anything by trying to bring something in that hurts that loyalty that we've built up with our agent model, for example, or our third-party capacity base. So we've got to be very careful as far as what we bring in, so it's not a matter of just -- I can't just go out and do something for the sake of doing it, you've got to look at that, also.

Yes. Okay, thank you very much for the time. Appreciate it.

Scott Schneeberger with Oppenheimer.

First, I just want to follow up on Todd's question earlier. I believe you had alluded to, back at the beginning of the year, expecting about $30 million in revenue from wind and what I inferred from how you answered that question, it sounds like part of the guidance reduction was out of that a bit, but also I inferred that still there -- maybe it would just be trickling into 2014. Is it possible to clarify that a bit more?

Jim's going to clarify that but I always like when the guidance is a little bit lower. We never gave guidance for the third quarter at this point in time and I always want to remind people of that. It's the estimates that are out there. This is the first time we've given revenue guidance for the third quarter.

Jim, go ahead.

Just happen to have the Wind numbers in my hand right now and they just magically appeared. (laughter) I can tell you, second-quarter Wind number was about $6 million compared to last-year's quarter was about $20 million. First half of this year we're running about $10 million and we continue to see that. I would still say that we might hit that $30 million target.

Okay, thanks, I appreciate that clarification. And then following up on -- you'd mentioned in prepared remarks that, I believe, guidance was based on the second-quarter insurance and claim level and it sounds like you had a big one timer in there. How should we infer, is there potentially upside, or maybe that one timer carries over, was that fully settled? Just a little more clarification on how we think about that line. Thanks.

There's always up and downs in the claim line, but if you at look history it's 3.3%, whether it comes from frequency and severity of current year accidents or development of claims from prior years. There's nothing to infer there. 3.3 is average you use. Can we be higher than that? Yes. Can we be lower than that? Yes. It all depends what happens during the quarter or any existing claims we have outstanding. There's really not a lot -- that's why we forecast it that way, there's really no better answer.

Okay. Thanks, guys.

Tom Wadewitz with JPMorgan.

Wanted to see if you could start by giving us some thoughts here on the by-month volume trends in truck, but I don't know if we want to give combined or BCO and broker, but just wanted to get a sense on the load side whether it was even growth or -- excuse me, whether the decline was stable through the quarter, or whether it improved?

On total truck, which includes flat, van, LTL, it's all together, we were -- April, May, June, we were -- compared to prior year April, May, June was minus five, minus four, minus six, that's a load count. Minus five, minus four, minus six.

Okay. And in July, so far, it looks like what?

We're looking at daily load counts.

We've got daily load counts. It's kind of hard to basically say what that is, but I will tell you we've had days where it's positive, which we haven't seen a lot of positive days, so that's clearly a good sign. But as I said, total revenue based on what we've seen on an accumulative basis is still lagging what we had in July. The trend from a load count thing is getting better and the same thing with the revenue per load. So, where I can't give you a definitive answer on that that should help you at least couch what we're trying to say here.

Right, okay. Henry, what's your view on the market in general? It seems like we've had -- I guess from the drive in or Company errand guys, if you like to call them, they're pointing to softness in general in second quarter, both in terms of activity and rates. I know they're not levering necessarily the same verticals, but how would you see the market playing out? Do you think that it's relatively balanced so if we see a little pick up you'd see the rates come back pretty quickly, or does it feel like it's kind of weaker and takes more time than that and a bigger pick up to see the market tighten and see stronger rates?

I think, when I look at what happened at vans or at Landstar, our total revenue there was down about 6%, 5%, with load volume, rates were just down a little bit, if you will. I'm going to say I think things are fairly balanced and if volume were to pick up I think you would see those rates go higher and actually probably pretty quickly.

Right. Okay, thank you.

Scott Group with Wolfe Research.

So I'm not sure if I missed this or not, but the LTL customer that you lost, can you quantify how big that is, and is that in brokerage or BCO? Should we think about this like the substitute line haul LTL guy you lost a few years ago? That was a decent chunk of revenue but pretty low margin, or is this more--?

I don't recall the exact amount of LTL revenue. Jim will give it to you. But you're talking about $18 million to maybe $17 million last year, $18 million, $17 million this year, so you're only talking $1 million, but we were talking about just in LTL itself, all right? It really is not material at all to the total consolidated results. But just when you look at LTL by itself.

LTL numbers for the quarter were $19 million last year and $18 million this year.

Yes, so it's not -- the point was just that that one customer caused the decline.

Okay, got you. Jim, I think you said that the brokerage gross margins were up 80 basis points. Can you just remind us how much they were down, or what they were in second quarter a year ago? Is your sense that it's just an easy comp? Or is there something where the brokerage environment has just gotten a little less competitive or just better? Do you think that it's sustainable into the third quarter seeing brokerage margins improve?

That was a joke, right, Scott? (laughter).

I missed what you said. Sorry.

I said there's never an easy comp. Last year -- and it's not the gross margin, it's the PT rates. It's what we are paying for purchase transportation, right? So this year quarter over quarter's positive 80 basis points, last year it was negative 30 basis points. Are we probably -- was last year probably more toward a higher end of the rates you pay? Yes, if that's the question.

Do you think that's sustainable to expect improvement in the back half of the year?

Well, it depends really what happens to capacity. If it tightens up -- it's really about supply and demand, right, and that's what drives those rates.

And in addition to that, when you broker some of the specialized heavy haul stuff, you're paying a higher rate, and when you see that mix change in the second quarter where that number goes down, that's going to drive the overall number to be more favorable. If, in fact, that number starts to pick up -- as Pat alluded to -- in the back half of the year, I would anticipate that purchased transportation, it'll drive that up a little bit because that's more expensive.

Okay, and that makes a lot of sense. Okay, thanks, guys.

Jack Atkins with Stephens.

Jim, just to go back to your comments earlier about guidance relative to the sequential changes historically, I know you were referring to revenue. But when you look at the earnings, the average historical earnings change from the 2Q to 3Q I think it's typically up 10% to 12%, but guidance is calling for only 2% to 10% at the low end versus the high end. I was wondering if you could walk us through the puts and takes on the earnings side to drive the high end and the low end of guidance.

If you go back to 2007, if you go sequentially, third quarter over first quarter, I take out disaster relief -- you may not, because disaster relief had significant impact -- and when you compared third quarter to second quarter for certain years, and when you look at that, 2007 was flat; 2008 it was plus 5; 2009 was plus 11; 2010 was minus 10; 2011 was plus 3; and 2012 was minus 7. Very inconsistent when you pull that stuff out, and a lot of that really truthfully gets driven by the volatility you have in insurance and incentive compensation programs. That's really what it comes down to when you're driving the gross profit changes and revenue changes down at the operating income.

Okay. So then more broadly, if you think about the low end versus the high end of the earnings guidance range, could you maybe walk us through the puts and takes, as far as how you get to one versus the other?

It all has to do with the gross profit range coming off the revenue, there's not a lot of other variables in there. Like we said, we put insurance at 3.3% of BCO revenue. We discussed the SG&A number, when Todd said it's about $34 million and the rest of the stuff kind of stays stable. So behind the end it's mostly driven by the gross profit performance and revenue growth.

Exactly right, and the gross profit piece is important because it's really mix. If you've got more BCO revenue versus brokerage revenue a lot of that stuff plays into all of that so I mean -- but it drives from the top line to the gross profit and then the rest of P&L is pretty easy to understand.

Sequentially one thing is done that I think maybe missed. Everybody's aware that we had $2.3 million of convention in the second quarter and that's going to go away. But I think what you've got to focus on is we also had $1.8 million of trailer gains in the second quarter that we only anticipate a couple hundred thousand, maybe $400,000 in the third quarter, so that's a drag. So you've got to make sure you consider that when you're look at the third quarter projection.

Okay, that makes sense. I guess as my follow up, just curious if you guys could comment on hours of service changes and the impact that's having, or you think it may have to the business in the third quarter and beyond?

Joe?

Jack, thus far, again, it's still a little bit early. We haven't seen much of any impact thus far in July. Again, the first week was an extended week where you wouldn't have seen much and even since then, nothing notable that I can tell you we've seen.

Okay. Thanks for the time.

Ben Hartford with Baird.

Jim, on the SG&A side, I know you had said that the $34 million number on a quarterly basis is a good run rate in the back half of the year, and if I look back the past three years it's averaged about $38 million on a quarterly basis, which I assume loads in an incentive comp component and the delta between that $38 million average and $34 million now, is just incentive comp. But I wanted to get your perspective on that? Maybe you could give us the number of what the incentive comp component is in 2013, and what it could have been if you had hit your targets. You see what I'm getting at?

Yes. So you're talking about a $4 million difference, most of it's incentive comp I don't know what the rest of it is, to tell you the truth. We have ups and downs where there are professional fees or other things are in there, but most of it's incentive comp. But from a target standpoint, our bonuses are about $8 million a year, $7 million to $8 million, just use $8 million, so if we got it perfect it would be $2 million a quarter in 2013, and we haven't hit those targets through the second quarter.

Okay, so it's kind of looking at $2 million to $3 million a quarter, and higher SG&A if we were to hit those targets, and that variance is incentive comp.

That would be true.

Okay. Henry, you talked about bouncing off the bottom, just interested in your perspective on hours of service and what we're seeing so far and what you expect to see, in terms of flatbed capacity?

Joe, I will have you answer that question.

Ben, thus far we really haven't seen much impact due to the changes in hours of service. It's something that it's still a little early, really you're effectively three to four weeks in, but thus far we haven't seen a whole lot from it. As capacity tightens up, if that were to happen in the back half of the year you might see more impact from that, but at this point, we haven't seen anything material.

Okay, that's helpful. Pat, maybe one last one on the new agent contributions as a percent of revenue. I think at the April event you said that historically it had run between 4% to 6% of revenue growth, but it could run higher. I'm wondering if that's the case this year and if so, where is it running?

In the quarter it's 2.2% of revenue growth and historically it's run anywhere between 3% to 6% of revenue growth.

Would you expect that to normalize in the back half of 2013?

I think Henry in his comments and in my prepared remarks, we made mention of that, Ben.

Okay, great. Thanks.

Matt Brooklier with Longbow Research.

Henry, you talked to directionally improving truck trends in July. I was just curious to hear if that improvement is equal across your drive in and your flatbed operations, or if one of those segments is feeling a little bit better than the other?

I get daily load count reports and I don't have a split between flat and van, but, Pat, can you add anything to that?

It's still -- the platform remains softer than demand.

Okay. So that's on the load side, what about on the pricing side, is it similar trends?

Similar trends, correct.

Okay, that's all I got. Thanks, guys.

David Temberrino with Stifel.

I was just wondering if you could break down your revenue per load decrease in truck into pricing and maybe mix and changing length of haul for the quarter?

Well, we don't really track length of haul, it's been running anywhere from 750 to 800 miles the last -- for forever, but if you want to talk about -- we give the load count variances quarter over quar -- sorry, month over month and I can give you the revenue per load from a truckload standpoint.

Yes, I had -- I just didn't know if you -- off the top of your head if you guys had numbers or analysis around really if pricing was flat or down, or maybe pricing was up a little bit because of the mix, revenue per load was down because you're running different materials, et cetera?

I think Pat addressed the -- I think the pricing on the flatbed side is down a little bit and I would say the van side is probably also flattish.

Okay, and then just maybe a last one. How are your million dollar agents trending so far through the first half of the year?

Well, the schedule that we show you, David, is the previous year's million dollar agents, and so I can tell you that we have not had any departures of million dollar agents of significance, and we've added agents that have produced $1 million already in revenue that are new to Landstar. That schedule we show you is for the previous year.

That's hard to -- obviously, we were down in revenue in the first quarter, down in revenue in the second quarter, so obviously we expect some falloff in our million dollar agents. On the other hand, if I looked at -- if you look at the top five, Pat, I think how many are up, how many are down, I think you've got two or three that are up, two or three that are down.

Okay. Thank you for the time.

Anthony Gallo with Wells Fargo.

I wanted to go back to Bill Greene's question, if I could. I'm kind of in agreement that the cost structure, capital returns all look quite good, but this idea of stimulating growth, in my mind, sort of comes down to either bringing in new agents or allowing each agent to do more, and you touched on the introduction of LTL as one way to get agents to do more. Maybe you could just touch on some of the things that you're doing now to try and stimulate agent growth? I know had you talked in the past about maybe facilitating in-market acquisitions among agents, so maybe just a little color there would be helpful.

Pet, you can talk about that. We've completed one, we've got another one and then we've got -- in fact, we've got two more that are being worked on.

We've done that, Anthony, we've actually executed on that where we've helped agents acquire smaller brokers and bring them into their business. We've also converted agents over that had their own business, as we talked about in the opening remarks from an agent perspective.

I think it's all about providing them with the correct products to sell and then the efficient manner in which to execute that business. So, if you look at what we're trying to accomplish, whether it's from introducing LTL and then the way they execute an LTL shipment is easy. It has to be so that they can execute more shipments. If you look at our underlying technology, whether it's procuring capacity, or it's selling the customer or it's identifying what the right price is, we do an awful lot of work behind the scenes to help them become more efficient.

Because ultimately what we have to be able to do is, if they're going to grow from $10 million to $12 million and add three people, that's a losing proposition. On the other hand, if they're to move from $10 million to $12 million and maintain the headcount that they have, that's incentive for the agent to do that. I think Joe properly outlined in his opening remarks some of the things we're doing from a capacity sourcing standpoint to assist them in that endeavor.

Okay, that's helpful, and then unrelated question. Could you just remind us, what percent of the business right now is military? I know you mentioned ag, mining, et cetera, some of the heavy equipment stuff, what percent of revenue is the heavy machinery business?

What is the DoD piece? Government's 2.8%, and actually government was down quarter over quarter. Part of the decrease was due to the decreased Government business. What was it -- is that it, Anthony?

The machinery piece.

Machinery's 19.6%.

Thank you, gentlemen.

David Campbell with Thompson Davis & Company.

I just have one question. Pat, I think I heard you say that agent available loads were up in July, but everyone's talking about revenue's going down. I may have misinterpreted what you said?

What we talked about is that the number of available loads that are in the system are greater in July, and then we made the statement that, in general, the number of available loads reflects a pattern of loading opportunities. So the first half of the year by and large, year over year, the available loads were down, but in July that's trending favorably, thus the change in our load count trends.

Yes. Right. But as I said, how does that equal less revenues than a year ago?

Not all loads are picked up.

And there's pricing differences, as well. Volume could remain the same, but when price is off then your revenue is going to be down.

I understand that, right. But it is somewhat encouraging, it sounds like it.

That's why I used the words, I am encouraged.

Right. Okay, thank you.

Matt Young with Morningstar.

I know it's a small piece of the business, but just wondering what was behind or what's been behind some of the recent growth on the air and Ocean side. Is that new customers, are you seeing decent same customer growth with Ocean business and so forth?

I think from an Ocean perspective it's a couple of accounts that we've won, and then a lot of our business on the ocean side is project driven. We've had a couple of nice projects along those lines. Same thing on the air, we've had a few charters this year.

Okay. Just curious, have you heard any hints in the air freight market among your customers as you're talking? Have you heard any hints of improvement or stabilization in air freight demand recently?

No, Matt.

No. Okay, thanks.

Final question from Ryan Bouchard with Avondale Partners.

I'll be quick. So you said 2,200 EOBRs on BCOs now ordered or installed, do you know what that was around the end of the first quarter?

Joe? I probably mentioned in the first quarter.

You probably mentioned it. I don't remember off the top of my head what it was.

Ballpark? Roughly half, maybe?

I probably -- yes, I don't have that.

Okay, that's fine. Then, BCO count up 25 sequentially. Can you talk about the trend in the third quarter so far now that we're a month in?

1,250, by the way, just looked at my prepared comments. Looks like it was 1,250.

Okay, thank you.

BCO count in July, we are a net positive through the first three weeks. As I said in my remarks, it's still challenging, but we're making headway and moving in the right direction and it's positive thus far in July.

Okay, that's all I got. Thanks, guys.

Okay. Any closing comments from anybody here? Well, listen, I appreciate everybody dialing in. I think as we enter the third quarter, as I said I am encouraged. But I think you've got to keep in mind as far as what's out there from a forecast standpoint, people who put out these forecasts, and we'll see how this all plays out.

I think as we enter the third quarter I'm much more encouraged than I was, I think, as we entered into the second quarter. So, we'll talk to you on our mid-quarter update call for the third quarter. Have a good rest of the day, a good Friday and a good weekend. Thanks, bye.

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