Landstar System Inc (LSTR) 2013 Q3 法說會逐字稿

Good afternoon and welcome to Landstar System, Inc.' s third 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, Brad, and good afternoon, and welcome to the Landstar 2013 third quarter earnings conference call. This conference call will be limited to no more than one hour. In addition, please limit your questions to no more than two questions each when the question-and-answer period begins.

Before we begin, let me read the following statement. The following is a Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts are forward-looking statements. During this conference call, I and other members of Landstar's management may make certain statements containing forward-looking statements, such as statements which relate to Landstar's business objectives, plans, strategies and expectations. Such statements are by nature subject to uncertainties and risks, including, but not limited to, the operational, financial, and legal risks detailed in Landstar's Form 10-K for the 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.

In our 2013 third quarter mid-quarter update call, I lowered Landstar's 2013 third quarter revenue and earnings forecast. Actual 2013 third quarter revenue finished at approximately $681 million, slightly above the lower end of our revised range of revenue guidance. Although the revenue generated in the 2013 third quarter was within our estimated range, the revenue generated in the fiscal month of September 2013 was somewhat softer than we anticipated. Diluted earnings per share for the 2013 third quarter came in at $0.64 per diluted share and was $0.03 below the lower end of our revised guidance. The primary reason for the earnings miss was due to an unanticipated increase in insurance and claims expense. The high insurance and claims expense in the 2013 third quarter resulted primarily from unexpected adverse development in certain case reserves.

In contrast, the 2012 third quarter insurance and claims expense benefited from favorable development of case reserves and was unusually low, making the comparisons between quarters very unusual. We typically estimate insurance and claims expense to be approximately 3.3% of BCO revenue, which represents our trailing five-year historical average. However, in the 2013 third quarter, insurance and claims expense was 3.9% of BCO revenue, or $13.4 million, whereas insurance and claims expense as a percent of BCO revenue in the 2012 third quarter was 2.3%, or $8 million. As we move into the 2013 fourth quarter, we project insurance and claims expense to return to a more normalized run rate of approximately 3.3% of BCO revenue. As a result of increased insurance and claims expense in the 2013 third quarter over the 2012 third quarter of $5.4 million, operating income as a percent of gross profit in the 2013 third quarter was 44% compared to 48% in the 2012 third quarter. Jim will talk more about insurance and claims expense in his financial review a bit later.

As I said, consolidated revenue in the 2013 third quarter was approximately $681 million, versus approximately $717 million in the 2012 third quarter. Total truck transportation revenue declined approximately 5% in the 2013 third quarter versus the 2012 third quarter, and represented approximately 92% of consolidated revenue in the 2013 third quarter versus 93% in the 2012 third quarter. Revenue hauled by BCOs represented approximately 50% of total revenue in both the 2013 and 2012 third quarters, while total brokerage revenue was approximately 42% of consolidated revenue in the 2013 third quarter versus 43% of consolidated revenue in the 2012 third quarter. From a load volume standpoint, total truck transportation loads hauled in the 2013 third quarter declined approximately 4% versus the 2012 third quarter and revenue per load decreased approximately 1%. Collectively, revenue generated from all other sources decreased only slightly in the 2013 third quarter versus the 2012 third quarter.

From a new agent revenue standpoint, revenue generated from all new agent locations added over the past year amounted to approximately $17.3 million in the 2013 third quarter. Year-to-date through the third quarter, we have added $56 million in new agent revenue. Although we are still not at our historical run rate, new agent revenue has improved over the 2013 first and second quarter amounts, and more importantly, I expect to see continued increased new agent revenue as we move into the fourth quarter and into 2014. Pat will expand on our new agent revenue outlook and our overall revenue shortly.

Landstar again increased its available capacity providers. Landstar's total available truck capacity providers was over 40,000 providers at the end of the 2013 third quarter. Joe will talk more about our capacity, in addition to other operating items in a bit. I'm now going to turn the call over to Pat O'Malley, Joe Beacom and Jim Gattoni. Pat?

Thank you, Henry. As noted by Henry, the 2013 third quarter revenue was approximately $681 million, compared to the 2012 third quarter of approximately $717 million. The top 10 revenue accounts from the third quarter 2012 declined over $40 million in the third quarter of 2013. This represented more than the entirety of the revenue shortfall in the quarter of $36.6 million. In 2012, this small group of accounts represented 18.6% of revenue in the quarter versus 13.7% in the 2013 third quarter. While two of the accounts in this segment are predominantly platform, with an emphasis in heavy specialized transportation, the majority of the others experienced lower demand for overflow shipments due to softness in their respective industries. What is important to note, the revenue decline in this segment of accounts is very unusual and, with the exception of one customer who assumed the transportation management function that was previously performed by a Landstar agent, is the result of soft demand in these industries rather than lost market share. While transportation demand for core industrials in the United States government remains soft, we have seen some minor improvement in business related to alternative energy. We continue to receive bid opportunities for energy projects and remain cautiously optimistic on the revenue potential in this segment for the balance of the year and into 2014.

In spite of this minor pickup in demand, pricing in the heavy specialized segment remains well below the previous year. As we have mentioned, the barriers to entry into the heavy specialized segment are significant. Cost of equipment, operator qualification and operational knowledge conspire to limit competition. As a reminder, approximately 37% of Landstar's truck transportation revenue is generated using unsided and platform equipment. Account and industry diversification are natural, given the Landstar business model. We are encouraged by the market share gains in the secondary and tertiary accounts served by our agents and should benefit, as any economic recovery will positively impact transportation and the industrial base.

As for new agent revenue, Henry talked about our new agent revenue performance in the quarter. The revenue from new agents represented 2.6% of the total revenue. As a percent of revenue, this is the best quarter in 2013 and closer to our historic average of 3% to 6%. As a reminder, a new agent in the 2013 third quarter represents an agent who had contracted with Landstar after July 1, 2012. Revenue from this segment of the business increased 16% compared to the second quarter and is up 41% from the low water mark in the fourth quarter of 2012. This improvement in new agent revenue is a direct reflection of the quality and availability of new candidates and our pipeline remains well seeded. In addition, the number of new agents added in the third quarter of 2013 was higher than the same period in 2012.

We continue to believe the challenges for small, independent brokers are many and difficult to solve without support. Whether it's access to capital, cash flow, type capacity, or inferior systems, this segment of the industry is fertile ground to recruit productive new agents. We are confident 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. The environment for owner/operators and small fleets has been and remains challenging through the softness of the freight environment. This softness in general puts pressure on pricing, yet cost of truck operations, fuel, tires, maintenance, et cetera, remains relatively high. We are seeing balanced demand for dry van capacity and softness in demand for flatbed capacity. Based upon this demand, pricing for dry van services is stable, while pricing is soft and somewhat volatile among the flatbed service offerings.

BCO load volume in the 2013 third quarter was 1.1% lower than the 2012 third quarter, an improvement from the 2013 first quarter and second quarter, which were 5.7% and 5.3% lower than the prior year quarters, respectively. This progressive load volume improvement is attributed to the increase in stock market loading opportunities attractive to our BCOs. Broker carrier load volume in the 2013 third quarter was 7.5% lower than the 2012 third quarter, deteriorating from the 2013 first and second quarter, which were 3.8% higher and 4.4% lower than the prior year quarters, respectively. This load volume decline is attributed to several customers whose shipments were transported predominantly using broker carrier capacity. In the third quarter, Landstar was able to grow BCO count, grow approved broker carrier count, as well as active broker carrier count, achieving a total truck capacity provider network in excess of 40,000 providers. The Company's approved truck capacity provider network at the end of the third quarter exceeded the prior year quarter by 2,341 truck capacity providers and exceeded the 2013 second quarter by 256. The number of active broker carriers -- active meaning that the carrier has hauled a minimum of one load in the last six months -- exceeded prior year by 697 carriers and exceeded the second quarter by 327.

Interest in Landstar from owner/operators considering BCO status remains strong, based upon telephone volume into our recruiting personnel, visits to our recruiting website leased to Landstar.com, and the work history application volume that flows from those two activities. In general, we see the BCO recruiting outlook as challenging, as owner/operators look for stability and shelter from a tough environment. Annualized 2013 BCO turnover is less than 30%, a very respectable outcome considering the economic environment and speaks to the strong retention programs in place. As demonstrated by the record number of approved and active broker carriers in the Landstar network, we continue to make progress building relationships with carriers who see the opportunity to grow their business with Landstar. Many agents have personnel dedicated to communicating the opportunities that exist within their agency to carriers, while corporately, Landstar has carrier relationship staff selling the opportunities that exist across the organization.

The foundation for further growth is in finding win-win relationships with quality carriers. Given the ad hoc and unplanned nature of much of Landstar's freight mix, the size and scope of the network of capacity providers is very important in sourcing capacities across a wide range of service offerings, often within a short window of time. Upon release of a smartphone app to carriers in the third quarter, roughly 1,000 carriers had downloaded the app within the first several weeks, allowing them to find loads and provide status reporting. Where customer freight patterns are more predictable or freight lanes are being managed by Landstar agents, loads are compared to a 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 Landstar's current or future freight mix can resolve. Whether a single load or multiple lanes, capacity relationships drive capacity growth and allow for improved account penetration, as opportunities present themselves.

We continue to see customers seeking reliable solutions that take into consideration a means to manage carrier selection, in-transit freight visibility, and meet several service requirements. The standards and methodology Landstar deploys to ensure the quality of capacity made available to our customers, we believe, is a competitive advantage. Landstar has proven consistently that the model is appealing to third-party capacity and any economic environment through the volume and quality of freight, the freedom they have to operate their business, timely payment for services, and their ability to benefit from meaningful discounts on tires, fuel and equipment.

Turning to safety performance, 2012 was one of the safest years in Landstar history. Thus, throughout 2013, replicating the quarterly results is difficult. DOT crash frequency in the third quarter of 2013 was a respectable 0.43 per million miles traveled, improving from the 0.47 in the 2013 second quarter, yet higher than the very low 0.41 per million miles traveled in the third quarter of 2012. Severity of accidents occurring in the third quarter of 2013 compared to the third quarter of 2012 increased slightly; however, insurance costs in the third quarter of 2013 compared to the third quarter of 2012 were significantly higher, primarily due to unfavorable development across multiple prior period or prior year accident claims, as well as favorable development experienced in the 2012 third quarter. We continue to have strong participation and commitment around the Company's safety programs from agents, BCOs and employees. The Company continues on pace with the implementation of its electronic logging device initiative, with approximately 30% of the BCO fleet equipped with ELDs, and has seen the desired improvement in its CSA hours of service basic scores since its inception in September of 2012. Each of the seven CSA basic scores for each Landstar carrier is below the threshold established by FMCSA. As customers continue to evaluate capacity providers, we believe this level of safety and compliance performance is a competitive advantage.

In looking at the CSA performance of both large national carriers and regional or smaller niche carriers, we find our performance compares very favorably. When looking specifically at other owner/operator-based fleets, we find our CSA performance compares even more favorably. Consistent with our strong safety and compliance culture, we believe we have made the long and difficult transition to the regulatory environment brought about with CSA over the last few years. Decisions on how to prepare and manage within the new regulatory environment are in place, and in reviewing the CSA performance of specifically our owner/operator-based peers, it would appear we are ahead of the curve, which we see as a long-term benefit in attracting owner/operator capacity. We currently see favorable reaction from customers who place a priority on safety and compliance performance, and believe this will be additive in light of the additional regulation aimed at motor carriers, freight brokers and forwarders, which are on the horizon. Jim?

Thanks, Joe. We've already covered certain information regarding the 2013 third quarter. I will cover various other financial information included in our third quarter release. Gross profit, representing revenue less the cost of purchased transportation and commissions to agents, was $108.9 million, or 16% of revenue in the 2013 third quarter, compared to $113 million, or 15.8% of revenue in the 2012 third quarter. The decrease in gross profit was generally due to lower revenue hold on unsided platform equipment in the 2013 third quarter compared to the 2012 third quarter. The cost of purchased transportation was 76.1% of revenue in the 2013 third quarter, compared to 76.4% in the 2012 third quarter. Revenue contributed by truck brokerage carriers, which has a higher rate of purchased transportation, was 42% of revenue in the 2013 third quarter, and 43% of revenue in the 2012 third quarter. The rate of purchased transportation paid to truck brokerage carriers in the 2013 third quarter was 30 basis points lower than the rate paid in the 2012 third quarter.

Commissions to agents was 7.9% of revenue in the 2013 third quarter, compared to 7.8% of revenue in the 2012 third quarter. The increase in the rate of commission paid to agents was primarily due to the increase in net revenue margin, representing revenue less the cost of purchased transportation divided by revenue, on truck brokerage, rail, air and ocean revenue during the 2013 third quarter. Other operating costs were 5.5% of gross profit in the 2013 quarter, compared to 5.7% in the 2012 quarter. This decrease was primarily due to lower maintenance costs on company-owned trailer equipment compared to the 2012 third quarter, as we replaced older trailer equipment with new equipment.

Insurance and claims costs were 12.3% of gross profit in the 2013 quarter, compared to 7.1% in the 2012 quarter. The increase in insurance and claims as a percent of gross profit was primarily attributable to unfavorable development of prior year claims of $3.6 million in the 2013 third quarter, compared to favorable development of prior year claims in the 2012 third quarter of $1.6 million. Also, insurance and claims expense was 3.9% of BCO revenue in the 2013 third quarter, compared to a low 2.3% in the 2012 third quarter. Average insurance and claims expense as a percent of BCO revenue over the previous five years was 3.3%.

Selling, general and administrative costs were 31.4% of gross profit in the 2013 third quarter, and 33.2% of gross profit in the 2012 third quarter. The decrease in selling, general and administrative costs as a percent of gross profit was primarily attributable to a decreased provision for bonuses under the Company's incentive compensation program in the 2013 third quarter compared to the 2012 third quarter, as the Company did not achieve targeted operating results in the 2013 quarter. Depreciation and amortization was 7.2% of gross profit in the 2013 third quarter, compared to 6.3% in the 2012 third quarter. This increase was due to the effective lower gross profit in the 2013 third quarter and increased depreciation of trailer equipment, as we replaced older, fully depreciated equipment with new equipment. Investment income was $366,000 in the 2013 quarter, compared to $393,000 in the 2012 period. The effective income tax rate was 37.7% in the 2013 third quarter, compared to 38.2% in the 2012 third quarter.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $132 million. 2013 third quarter year-to-date cash flow from operations was $132 million. Cash capital expenditures was $4.9 million in the year-to-date period ended September 20, 2013. Trailing 12-month return on average shareholders' equity was 31% and trailing 12-month return on invested capital, representing net income divided by the sum of average equity plus average debt, was 24%. At September 20, 2013, shareholders' equity represented 78% of total capitalization. To you, Henry.

Thanks, Jim, Pat and Joe. As stated in this morning's press release, I don't see any indication that US industrial output will significantly improve in the near term, nor do I see any near-term significant improvement in the overall US economic condition. At this point, my best guess is that economic conditions will improve, but only at a very, very, very slow pace. In my opinion, there remains much economic uncertainty.

Based upon the economic uncertainty and the fact that the fourth quarter of any given year has been the most difficult quarter to forecast, our estimated range of fourth quarter 2013 revenue is a very wide range, from a low of $650 million to a high of $700 million. Based upon the above revenue range and assuming insurance and claims expense as a percentage of BCO revenue is at a level consistent with our trailing five-year historical average, which I refer to as a normalized rate, I would anticipate diluted earnings per share for the 2013 fourth quarter to be in a range of $0.62 to $0.70 per diluted share. It should be noted that the 2012 fourth quarter diluted earnings per share amount of $0.73 included a tax benefit of $0.08 per diluted share. No such tax benefit is included in the 2013 fourth quarter range of diluted earnings per share estimates, nor, as I stated in this morning's press release, does the range of fourth quarter EPS estimates include any affect to the impact of any potential acquisition or divestiture that may become or may be available to the Company. With that, I will open it up for questions.

Thank you very much, sir.

(Operator Instructions)

Jason Seidl, Cowen.

Thank you. Hello, guys. How's it going?

Pretty good, Jason. How are you?

No complaints. Always better than I deserve. Couple quick questions. Henry, you mentioned, I think very specifically, that it doesn't include any potential transactions. Are we to read in that that the transaction market is heating up for you guys?

No comment on any of that -- on that statement whatsoever.

Okay. That's kind of enough for me. When I look at the overall market, can you talk a little bit more about your dry van exposure? You said that, I believe, make sure I'm not misquoting you here, but that it's sort of at capacity right now. So have you seen a normalized seasonal move for this time of the year?

Anyone here?

I think -- if you're referring to my comments, Jason. This is Joe. I don't think we're at capacity on the dry van side. I think dry van capacity is a little more stable, pricing is a little bit more stable as compared to the open-sided equipment. That was really the intent of my comment.

Okay. And the weakness is still persisting on the platform side of the business.

Yes, it is.

Okay. On the brokerage front, how are you guys, in terms of finding it -- paying existing carriers, are their rates still staying down, or how are you looking at your gross margins in that business right now?

Well, Jason, as I said -- this is Jim. We were at 30 basis points improved over the prior year on our rate of purchased transportation that we paid to the broker carriers. So they are basically holding. I mean, the rates are holding, is what we're paying.

Okay. And there's been no change on that for 4Q thus far?

Not in the week or two that we anticipate, that we expect, no.

Okay. Okay. Well, guys, listen, that's all I got. I appreciate the time, as always.

Okay. Thanks, Jason.

Allison Landry, Credit Suisse.

Thanks. Good afternoon.

Hello, Allison.

Following up on Jason's question on brokerage, maybe from a longer-term perspective, we've seen some pretty significant competition. There's a lot of players that are aggressively going after market share and not really focused on price. How do you see that playing out maybe in the next couple of years? And does that ultimately cause sort of a downdraft in net revenue margins for the overall industry?

I think the more -- this is Henry. The more people out there trying to compete for the same amount of trucks that are out there, I think that clearly will drive the price of the truck, if you will, higher. I mean, that's just logical. The real question is, is the -- is demand going to pick up as far as services, in which case the customer's going to be willing to pay that additional price. But logic would tell you that if more people are going to go into brokerage and, therefore, your margins should be squeezed, then I would think that with everybody jumping in brokerage, that some of the other players will not want to play in that margin squeeze game, i.e., I believe all the company iron guys got into that because of that, they saw what happened with CH, for example, back in 2009, expanding the margins, but now everything is getting sort of tight with that, with everybody getting into that. So I don't know. We'll see how that plays out. I think really the issue is when is the economy going to come back? But in answer to your question, yes, the more players that are after that one single truck, that truck's going to look for the best price.

Okay. And then -- that was really helpful. Thank you. And as a follow-up question, you did mention that there was some slowdown from July and August into September. I was wondering if you could maybe just give a little bit more color on if there was any specific industries or end markets that were particularly weak or any lanes or anything like that.

When you go back to my third quarter, mid-quarter update, I think I had given a run-through as far as where we were, June over June, prior year, current year over prior year, then July over July and August over August. And you saw a gradual improvement as far as -- when I say improvement, and I don't recall the exact numbers, but it was like minus 6, minus 5, minus 3. And we anticipated -- or whatever those numbers were -- we anticipated an improving trend, if you will, into September. On the other hand, the trend in September, basically that didn't improve. And therefore, that's why we finished at the lower end of our range. But the story is basically the same. It really has been the softness in our industrial-based flatbed business that has really been the driver of that, and it just did not pick up as we thought the trend was going to indicate, coming out of -- or into September.

And your expectations, was that based off of what your customers were telling you and it just turned out differently?

It was really based off of what we saw the trend coming. I mean, we're predominantly spot market, and we just -- we believe that that's what was, what the trend was going to be. Some of the stuff that we anticipated from some of the customers, yes, did not materialize.

Okay. Fantastic. Thank you so much for the time.

Thanks, Allison.

Tom Wadewitz, JPMorgan.

Hello, Tom.

Hello, Henry. So maybe I can just follow up on the last question a little bit more. So it's kind of continued to be weakness in industrial and flatbed. Can you give a little bit more perspective? Is there some that's construction-related? Is it just -- is there mining equipment-related, kind of what we heard out of Cat yesterday? Or how-- Can you give more flavor on what the verticals are that are driving that weakness in flatbed and in industrial?

I think it really is the heavy specialized piece of our flatbed business. And the customer base that we cited before, Cat, obviously, is a customer of ours. You've got Deere, you've got GE, which didn't materialize as we thought it would be. But Pat, do you want to add anything else to that?

No, I think if you go back to some of the comments about our top 10 accounts, some of the top 10 accounts, including the one that insourced that business that we had previously had, that was kind of a dramatic shift in September, as well. So there were a couple large accounts that had an impact, as well, in addition to the wind, heavy haul specialized business that we had.

Okay. And then I guess for the second question, your language in the press release, Henry, was a bit unusual in terms of just highlighting that you might do an acquisition and your guidance is excluding any impact of acquisitions. So I guess it draws a little bit of attention. Maybe, can you talk about what type of acquisitions would be typical for you to consider?

I don't think, as I said in response to Jason's first question, I'm not going to comment on that comment whatsoever.

Right. But if you step back and say, okay, I'm not going to tell you if I'm doing one tomorrow or next week or whatever, but what historically are the types of companies that you think the --

I'm not going to comment on that comment at all.

You -- okay.

Thank you.

Fair enough. Yes, fair enough. Thanks for the time.

Jack Atkins, Stephens.

Hello, Jack.

Hello, guys. Thanks for the time this afternoon. I guess first of all, if we could talk about just back to the month-to-month trends, could you maybe give us some hard numbers on what the loads and revenue per load was like in the month of September and also what you've seen month-to-date in October?

You got those? Go ahead.

Well, let me take you back to the -- we'll just do load count first and the trend that we've seen since June and why we thought we saw favorable trends.

Okay.

Load count June over prior year June was minus 6%. In July, it was minus 4%. In August, minus 3%. And in September, it jumped back to 5%.

Okay.

Over prior year September. And then from a revenue per load, similar, you had June minus 3% on the revenue per load. Then June -- July was at minus 2%. August was flat. And then we jump back up to negative 2% in September.

Got you.

So Jack, you could tell. The trend was positive. We thought things were turning. It actually, it went a little bit more unfavorable. That's why we were at the lower end of that range. And as far as your question, as far as what we're seeing now, is quite frankly our load volume, truckload volume, is for the first time I've seen it in a long time, is actually positive month-over-month. But on the other hand, revenue per load is down more than we would have anticipated. And again, that has to do with some of the mix. So it gets back to my wide range of fourth quarter revenue. It's unpredictable. The economy's uncertain. We've got some good things going right now, but I don't want to lay a wide range out there, because of that uncertainty.

Understood. And then I guess for my second question, could you maybe quantify to some degree the one customer that you lost in the quarter, of that top 10 customer group, that insourced that activity. Could you maybe put some brackets around how big of a customer that has been on an annual basis for us, just so we can understand that's going to be difficult to comp as you move through the next couple of quarters?

I think that was primarily an LTL customer. So it really wasn't our major -- bulk of that was LTL, but Jim's got that.

I want to say it's about $6 million to $8 million a quarter when he was running, when they were running at the high.

Okay. When did that begin to phase out, then? Was it in the third quarter?

About May. Mid-second.

Okay. That's great. Thanks for the time, guys.

Justin Yagerman, Deutsche Bank.

Hello, Justin.

Hello. Good afternoon. Henry, I get where you're coming from in terms of your exposure to the heavy specialized. And we did hear from Cat. But I'm trying to reconcile some of the weakness that you guys are talking about with what we're seeing in the LTL numbers and in ISM. Is there anything that you've got out there that would make you feel like -- it didn't sound like it, but that would make you feel like anything's changing on the margin?

At this point, Justin, again, I thought things were moving in a positive direction in our mid-quarter update and we -- it actually went back, took two steps backwards. I can say the same thing now, as we enter into October. I haven't seen a positive load count for almost all this year, but right now through three and a half weeks, our load count is slightly positive, despite some of the other stuff. But revenue per load's a little bit down. I'm just -- I got to tell you, I'm just leery about making a bullish-type forecast, because I think it -- there's so much uncertainty out there. And I've seen the fourth quarter go in a lot of different directions. I saw September go in a different direction than we thought. So I don't think it would be very prudent of me to -- I think it's prudent to give a very wide range, and that's where we see it right now.

Yes, I guess, and I think I know what you're going say to this, but even if I take the high end of your range for the fourth quarter and I look at what you did in the third quarter and I try to extrapolate off of seasonal numbers, it obviously gives me a different environment in the back half of the year than I think where Street numbers are for the full year this year. And then thinking about growth off of next year, it's pretty tough to bridge to where you are on a '14 basis, given where consensus is right now. How do you feel about numbers as you look out over the next 12 to 18 months and think about where the Street is on a today basis? It sounds like the numbers are tough to get to, but I'm just trying to get an idea of how you guys think about the reality of where you are.

Well, a couple things. One, I do think revenue comps become a lot easier as we move into 2014, but that's all predicated also upon some sort of economy that makes some sense. And I'm not so sure anybody can make any sense out of what's happening right now. But clearly, the comps are going to be a lot easier as we move into the fourth quarter and into 2014. As far as our EPS numbers, for example, for the fourth quarter, I have no idea, when we give ranges and we give estimates -- and I had, for example, when I gave the $0.67 to $0.70, somebody revised the estimate and went to $0.71. So sometimes people don't even listen to what we're saying. And when you think about the fourth quarter, I tried to lay out that last year we had an $0.08 pickup due to really one-time type favorable tax adjustments. So if you adjust that down, you're talking $0.65 last year. Now I've given a range of $0.62 to $0.70, despite lower revenue.

So there's a lot of ins and outs. It's hard for me to comment on how people factor their models and whatnot. As far as Landstar is concerned, I think what we've got going as far as new agent revenue, the fact that our comps are better, clearly I think we've turned the corner on new agent revenue, so I think you'll start to see that move in a northerly direction. At some point in time, the industrial production piece is going to pick up. I'm not ready to call that happening yet, though. That's my point.

No, that's very fair. One last one. Hours of service and government shutdown, any impact in terms of what you guys are seeing in your business from either of those events?

Justin, this is Joe. Continue to see really no material impact from hours of service. There's some grumbling from the BCOs about understanding it, and why do we have to do this and why do we have to do that? But short of some of the grumbling, from a productivity standpoint, we haven't really seen anything.

And government shutdown in September or October?

Justin, there were some -- this is Pat. There were some bases that were closed. But due to sequestration and other things in Washington, the government business hasn't been that robust. So it wasn't all that meaningful. There were some bases closed, but it didn't have a dramatic impact on Landstar.

Okay. All right. I'll turn it over to someone else. Thanks.

Thanks, Justin.

Todd Fowler, KeyBanc Capital Markets.

Thanks. Good afternoon, everyone.

Hello, Todd.

Hello, Henry. To Pat's comments about the performance of the top 10 accounts here in the quarter, if you exclude the customer that you lost, was the performance among those accounts, was that worse than where it was in the second quarter? And I'm also assuming that there's probably a higher revenue per load, so a negative mix impact. Is that the right way to think about what's going on with those accounts, as well?

Todd, this is Pat. Yes, the revenue deterioration in that group of accounts was worse in the third quarter than it was in the second quarter, year-over-year. The decline was greater in the third quarter over the third quarter 2012 than the second quarter of 2013 versus the second quarter of 2012.

Okay. That makes sense, Pat. And then as far as the mix, is it right to think about that these accounts would have a higher revenue per load, given the nature of what they're moving, and so the fact that they are down as well, there's a negative mix impact through your business, as well?

Some of them would. That's correct, yes.

Okay. And the second one I had, Joe, you had made some comments about what was going on, the difference between the BCO load count being down 1% and the truck brokerage load count being down 7%. I wasn't quite sure I understood the difference between the volume changes between those two sub segments in the quarter and what the drivers were, why the brokerage carrier loads were down more than the BCO loads.

The reason for that is some of the accounts that Pat was just referring to were predominantly accounts where broker carriers were used on those accounts to haul the loads. So when those accounts were down, then you saw a larger decline in the broker carrier load count than you would a BCO load count. So the accounts that were down big in the top 10 were predominantly accounts that utilized broker carriers versus BCOs.

Okay. So there's nothing to really read into something different between, something different going on with the BCOs versus the broker carrier capacity. It's really more a function of what's going on with the specific accounts that they're hauling for.

That's absolutely correct.

Okay. Okay. That helps. Thanks for the time today.

Matt Brooklier, Longbow Research.

Thanks. Good afternoon. So just kind of a follow-up question. The account that took some of its business, I think it was an LTL account, in-house, was that predominantly within the truck brokerage volume?

Correct.

That is correct.

Okay. So that's the discrepancy we're seeing mostly, the 1% and the 7% down year-over-year, that was the insourcing of that particular account or accounts?

That is one of the accounts, correct.

Okay. That's helpful. And then if I look at your BCO count, you did make some progress in terms of adding to it sequentially. It's still down on a year-over-year basis. You talked earlier this year in terms of revamping and reenergizing the overall BCO recruitment effort. I'm just curious to hear if there's anything else you can do further to attempt to attract more capacity. Do you even need to, given where volumes are trending currently? Just curious to hear if you had incremental comments on BCOs and where we're headed from here.

Sure, Matt. This is Joe. Last year really, I think it was last year, early second quarter, we really tried to revamp and we put in some new initiatives and tried to reinstill the recruiting effort. And it worked pretty well through the second and third quarter last year. We saw some decline in the fourth quarter, as happens from time to time, and it coincided with the onboard recorder initiative. And to your point, we have seen some movement this year, throughout the year, but it's been slow. We've not seen the quarter-over-quarter growth as we have in the past. I think it's a function of the environment, to a great degree. And I think as that improves, hopefully we'll see our BCO count grow. I don't think it's a function of effort. I think it's a function of availability, and just the overall kind of environment right now.

And I would think, Joe, also the fact your point as far as the rollout of the electronic on-board recorders, or ELDs, I think is now taken hold and now everybody knows that that's a requirement, and therefore it's a little bit more accepted. And I think that's why you're starting to see that move in that direction, also.

Yes, I would agree. That's a very -- and we've seen some of our -- more of our peers also go down this path of ELDs. So I think as it becomes more moving towards the norm in the industry, I think we'll continue to see those guys come back. I think there's a lot to believe this is the place to be, but maybe they didn't want to do that right now. I think that changes over time.

Okay. And I believe you do offer your BCOs some group discounts in terms of fuel and also, I believe, on the tire side. Is there anything else you would consider in terms of potentially extending some financing to your BCOs in order to attract more potential capacity, i.e., would you ever think about trying to help BCOs get seated and potentially help them actually lease the tractor, at some point? Or is that something that you wouldn't want to do?

We won't -- we're not going to do a lease purchase program. At least, we're not looking at doing a lease purchase program type of thing, where we own the truck. That isn't something that we've decided we're going to do. We do provide financial assistance in smaller ways, though, with repairs and access to trailers and things like that. But to actually buy the tractor and lease it back, that isn't anything that is on our radar screen right now.

And that's not our business model.

Right. I know historically it hasn't. I was just curious to see if potentially the landscape has changed. But it doesn't sound like your thoughts on that particular topic have changed. Okay. Appreciate the color.

Thanks, Matt.

Kelly Dougherty, Macquarie.

Hello, guys. Just wanted to see if we could talk about operating margins a little. I know you had a longer term goal to get to 50%. Just wondering, is it a demand and pricing needs to improve, or are there things within your own control that we can see over the next few quarters that should be reflected in improved operating margins?

Yes, look, Kelly, I think at 44%, which is obviously lower than our 48% we had in the third quarter of last year, but 44%, when you think about where we came from three, four years ago, is pretty high. So one quarter doesn't make anything. And that projection was over a five-year period. And I think that clearly is on our radar screen, through synergy and other things that we're going to do. It really boils down to having a more normalized safety performance; and again, one quarter on a blip doesn't make anything. But really, getting those new agents on board, bringing our BCOs on board, making sure that I can grow the gross profit, because everything else below that line, the story hasn't changed. The only volatile number, as you've seen in the third quarter here, is the insurance number, and we continue to drive safety. But everything else, I think, is driven to the point where we gain productivity and we gain efficiency through our systems and our people, and that should drive that 50% over a longer-term period. So the fact that even though we were at 44%, which appears that we've made some negative progress, it really was a blip on the radar screen from a safety standpoint. So I'm not -- that goal is still there, and we're going to get there the same way we had said we were going to get there.

Just a quick follow-up on that 3.3% number. Has the business not changed much -- it seems that it's changed in the last five years. So what gives you comfort that that 3.3% number over the last five years is still a good one to use going forward?

Well, it is -- and Jim, you can comment on it -- but it is our five-year trailing average. I think in the past we've said usually it can be anywhere from 2.5% to 3.5%. But when you do a five-year trailing average, it averages about 3.3%. Now obviously, you can have an accident in any given quarter that is going to make that number in the quarter look higher. Conversely, you can have a super safe quarter and it would be lower. Or you can have what we had this particular quarter. We had some case reserves that new facts came about and therefore we booked the cases up, based on where we saw those cases were ultimately going to come out. But that's the historical average that we would basically go by. Jim, do you want to comment on any of that?

Yes, that's actually a very good question, because when you think of the claims that cost us, it's the one when generally is a bodily injury, and bodily injury costs generally rise with medical inflation, and everybody knows what medical inflation does around the country. So it was actually kind of right on point. But as you're growing, if you look at revenue per load based on where the BCO is for the last five, six, seven years, you see growth in revenue per load and growth in your cost per claim, so they kind of balance out. So we're kind of still comfortable with where that 3.3% is. And we'll adjust it accordingly as we look at the history and what we think is maybe anything that might change in the risk profile in the future.

So if you look at it for shorter time periods, it's still kind of in that 3.3% range, as well?

Yes.

Like if you looked at it two years or something like that?

Yes. We had two quarters this year, it was at 3.9%. But all of last year, it was 2.7%.

Okay. Great. And then just a quick one. Are there things that you can do actively to diversify your customer exposure so it's less concentrated, maybe to some of these segments that have had a tough time in the past, or that really is just the nature of the business that you're working with? Can you recruit new agents that specifically look at different end markets or anything like that?

Well, Kelly, this is Pat. As we've mentioned in the remarks, that top 10 accounts, there's some diversification in there. Two of those top 10 accounts are heavy specialized accounts, predominantly. What we talk about is outside that top 10 accounts, we've seen some very good growth in our secondary and tertiary markets. The Landstar model naturally diversifies itself by bringing on, as you mention, new agents who have expertise for accounts that we're currently not in. So I think the diversification just takes place naturally. And again, in those top 10 accounts, some of that is heavy specialized, and a big part of that's pricing. But there's a mix of accounts in there, as we've mentioned. And absent some overflow business in those accounts, because those industries are soft, it's impacted Landstar. And as we've talked about several times now, the one account that went from having us manage their transportation to insourcing it, that too had significant impact in the quarter.

But machinery was something like 20%, I think, last quarter. Is that still that high of a number? And is there anything you can do to maybe work around -- I understand the customers may be diversified, but it seems like there's clusters within certain segments, or is that just really the nature of the business that you haul?

I think it's a lot of the nature of the business we haul. You got to remember, we've got 36%, 37% of our business is flatbed. We are the largest carrier there. I mean, when you look at our customer base, it is an extremely diversified customer base with nobody over 5% of our revenue, and as we're very big in the secondary and tertiary accounts. On the other hand, the US government, which is our number one customer, was down, for example, close to $10 million quarter-to-date. So those things hurt. And then when you couple it in with a couple of the other customers I gave you, in that top 10, that's where we've actually felt the decline. And as Pat's tried to -- or said, that other than that one, this is all a temporary because of the slowdown that they're experiencing, so therefore there's not a lot of that overflow stuff coming back to Landstar. On the other hand, we've picked up some accounts and market share gains from the lower end, or lower tier, the secondary, tertiary accounts, which is really where we're good at and what we've always done well. The other stuff's going to come back. So I think as much as I'd love to say I'm more bullish in the back, you can't, because what's happening is the economy is such that it's unpredictable. And when these accounts start to come back, which they will, and what we've built on our foundation basis, I think bodes very well for us in the future. But right now, it's kind of -- it's a cautious time, I think.

Thanks very much, guys.

Thanks, Kelly.

Scott Schneeberger, Oppenheimer.

This is (Inaudible) filling in for Scott. Just to follow up on the previous question there, if we would see some continued softness in machinery going into 2014, can you just highlight a few of the end markets that you might see opportunistic and mitigate that?

Scott, this is Pat. We believe, as we said in our comments, that there are some opportunities in the alternative energy markets. We think that mining, ag, are going to kind of drag into next year. But again, they were kind of down this year. So we think that that energy market, whether it's alternative energy or energy in and of itself, we think those markets are going to be perhaps opportunities for Landstar next year.

Okay. And also, if we see this environment continuing, can you just take us around the horn what flexibility you have on the cost side to improve margins next year?

Well, I think a couple things. You take a look at our margin, the number one thing you're going to look at is about 60% of our business is on a fixed gross margin business. So I mean, if I don't have revenue, I don't have a substantial amount of the costs. Obviously, everybody's always impacted by slowdowns, but again, even though our revenue number was at the lower end and we're impacted by some adverse insurance development, we still generated a lot of cash. And I think that's the Landstar business model. Our variable cost model, I think, protects us in a lot of different ways. But obviously, with a lack of revenue, lack of -- it's going to impact us, but I don't think we would be hurt as a guy who has the asset that he's got to carry.

Okay. Thanks, guys.

All right, thanks. We're going to take three more callers, because we're actually pushing 3.00. We'll take three more.

Anthony Gallo, Wells Fargo.

I appreciate it. I hope you do, as well. A question about cross-selling activities. I know in the past there were some efforts underway to try to stimulate organic growth within the existing agent network by either introducing transportation management services or facilitating cross-selling, say, TL with LTL. Just maybe if you could give us an update on where that is and any catalyst you might have on the horizon. Thanks.

I think the best opportunity that Landstar has on a cross-sell, whether it be intermodal, air, ocean, supply chain, or LTL, is the latter, LTL, because that's truck. And I think we've seen more success with that in a shorter period of time than anything else. That's where that success is going to come from.

What do you think you need to do there? Do you already have the scale and the relationships, or--

I think that one works with the scale and the relationships, because we have a -- we've got rates in place. Our agent base, which is predominantly truck, understands truck, all those -- they are more comfortable selling that. And it's as I said, I think on the last couple of calls, that is where I think you're going to see some movement northward.

So just time and execution.

Yes.

Great. Thank you.

Thanks.

Matt Young, Morningstar.

Hello, Matt.

Thanks. Good afternoon. Just to follow up on the LTL question, I think it was about 3% of trucking revenue in the quarter. Where do you guys think that could shake out over the long-term? It sounds like it's a pretty good opportunity. Obviously, all of your TL clients, your specialized clients, do LTL, to some degree.

Matt, you're absolutely right. If you think about it, just about every one of our shippers that we handle truckload business for is probably going to have LTL. If you think about the LTL carriers, why is Landstar one of the preferred people to help sell their services? Because we're in accounts where they are never going to go to. We're in the secondary, tertiary accounts and so we're able to provide that service to those accounts at competitive pricing and provide tonnage to the LTL carriers. It's a nice mix, where we have leverage and relationships on the carrier side and we have leverage and relationships on the customer side. That's kind of a nice, perfect storm, if you will, for Landstar.

Do you think you guys could get that to 10% of trucking revenue at some point, or is that kind of high or it's just too soon to say, at this point?

I think it's too soon to say.

And one last, have you had to invest in any new IT infrastructure or add headcount to source LTL capacity? I'm assuming it's a little different dynamic than TL.

Very minimal. Very minimal. Obviously, head count, a couple head counts, but very minimal. Our field continues to work with the agents to sell that. But not dramatic at all.

All right. That's all I had. Thanks.

Thanks, Matt.

John Larkin, Stifel.

Gentlemen, thank you for squeezing me in here.

Okay, John. You're the last one.

Thanks for making me the last, given that I had a conference call started two minutes ago. In any event, anything happening in the legal world that would lead you to believe that adverse development is a trend that's developing where you could see a situation where maybe some under accruals have taken place on accidents that have taken place in prior periods? Is that just a odd event that happened here in the third quarter, or is that something we might see more of?

Yes, John, let me give you an example. And I'm not going to mention specifics or whatnot. But one of the things that developed on us in this particular -- at the end of September -- was a case that came about in the year 2000.

Okay. 15 years ago.

Yes.

So is that settled?

Well, no.

Amazing.

So the society we live in is a litigious society, and you just never know what's going to come out of the woodwork.

I get the picture. And then a final question here that may tie all of this together, at least hopefully. It seems to me that the Company has gone through a couple of different eras, maybe three eras. One was sort of the owner/operator agent build out, and then the integration of the IU truckload companies into what we now know as Landstar. Then there was the great revelation that you had that, gee, because we can't recruit owner/operators doesn't mean we can't grow. We can also broker some of this freight, that drove growth for quite a long period of time, maybe close to 10 years really. And then there was maybe a third era, where there was diversification into TMS, warehousing, freight forwarding. And as you just suggested in your answer to Anthony's question, that's been a little bit difficult, maybe with the exception of LTL, which is maybe more of a straightforward sell for your classic agents.

Is it possible that we're in need of maybe a fourth era, of sort of a new approach in order to drive growth here over the next 10 years, or do you think that with all the elements you have in place currently, that once the economy normalizes that you're going to be able to continue driving growth off this platform?

You know, very, very good question, strategic in nature, obviously. And I think one of the things that we've tried to move around, and think about what you said about what's driven maybe some of the growth for the past 10 years, which is truck brokerage, which we didn't have a lot of prior to, in those other eras. That's why we like the LTL piece, because that still is in its infancy, although again, sort of like brokes, we have a little of that, but we never really put a full effort towards that. I think that is going to drive some things for us, also. I think the other solutions that we have will always be part of the Landstar suite of services. But again, given our business model, as far as an agent-based business, which is what we're going to stay in and promote and continue to move in that direction, I think they're predominantly truck guys. When we can pick off intermodal people or if we can pick off air, ocean, we will do that, but predominantly we're truck. So that third element, or fourth element, as you want to call it, really I think is the LTL piece, because that is what our guys really understand. And so that is where I think you're going to see a lot of growth.

That's not to say, again, you got to look at, as you well know, that the truckload industry is dominated by a lot of, still a lot of small mom-and-pop people. And I can't think of a better home for agents and/or capacity than Landstar. And Landstar has developed that scale to make all of those small business constituents more successful. And I think that, again, will add to our growth. I think right now, the economy is where it is and it's uncertain right now. But I think that, hopefully, will free up. And I think that's going to drive, in the long term, Landstar's future success. We just completed our 25th year, about to complete our 25th year of operation, and we are looking forward to the next 25 years, because we think Landstar will reach new heights at that point.

Thanks very much.

Thanks. With that, I think that's it. We ran a little bit over. We apologize for people we didn't get to. We did go a little bit overboard. I think the format, having Pat and Joe participate, and giving a little bit more insight and color into Landstar and its operations and what we're thinking, I think is very helpful to everybody on the call. So we appreciate your indulgence. And we look forward to talking to you next time on our mid-quarter update call for the fourth quarter. Have a great afternoon.

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