Landstar System Inc (LSTR) 2014 Q2 法說會逐字稿

Good afternoon, and welcome to Landstar System Inc.'s Second Quarter Earnings Release Conference Call. All lines will be in a listen-only mode until the formal question-and-answer session.

Today's call is being recorded. If you have any objections, you may disconnect at this time.

Joining us today from Landstar are Henry Gerkens, Chairman and Chief Executive Officer; Jim Gattoni, President and Chief Financial Officer; Pat O'Malley, Vice President and Chief Commercial and Marketing Officer; Joe Beacom, Vice President and Chief Safety and Operations Officer.

Now I'd like to turn the call over to Mr. Henry Gerkens. Sir, you may begin.

Thanks, Caroline, and good afternoon and welcome to the Landstar 2014 Second Quarter Earnings Conference Call. The call will be limited to no more than one hour. So please limit your questions to no more than two questions when the question-and-answer period begins.

But again, before I 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 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 2013 fiscal year described in the section Risk Factors and other SEC filings from time to time.

These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking statements and Landstar undertakes no obligation to publicly update or revise any forward-looking statements.

The 2014 second quarter results were truly exceptional as Landstar achieved historical records in just about every metric. Before I talk about our outstanding second quarter results, I do want to review what I stated during our second quarter mid-quarter update call.

On that call, I said that I was very comfortable with the previously announced range of revenue guidance of $750 million to $800 million, with a strong bias towards the upper end of that range. I further stated that I anticipated gross profit dollars to increase in a low teen range over the gross profit generated in the 2013 second quarter.

And finally, I said I was very comfortable with the previously announced range of diluted earnings per share guidance of $0.73 to $0.78 per diluted share with a bias towards the middle to upper end of that range. Landstar finished the 2014 second quarter with revenue of $814 million, a 21% increase over the comparable 2013 quarter, as the June 2014 revenue was better than what we anticipated.

Additionally, Landstar generated, one, gross profit of approximately $122 million, a 17% increase over the 2013 second quarter. Two, operating income of $59 million, a 21% increase over the 2013 second quarter. And three, earnings per diluted share from continuing operations of $0.80 per share, a 25% increase over the 2013 second quarter.

Additionally, our operating margin was 48% compared to 47% in the 2013 second quarter. The second quarter record operating performance comes on the heels of an outstanding 2014 first quarter. Simply put, it was a fantastic quarter.

But even more importantly, it sets the stage for what I believe will be a record final two quarters of 2014. The key to our success so far in 2014 has been execution and more execution. Our ability to attract and retain capacity, and in turn, provide shippers with needed capacity has allowed Landstar to expand its revenue base.

Additionally, because capacity is extremely tight, the pricing environment remains very strong. I don't see that environment changing any time soon.

The total number of loads hauled by trucks increased almost 9% in the 2014 second quarter versus the 2013 second quarter, and truck revenue per load increased approximately 14% versus the prior-year second quarter. Revenue generated through BCOs increased a healthy 16%, while revenue generated through broker carriers increased a very robust 31%. Total revenue generated through our unsided and platform equipment service offering in the 2014 second quarter increased 17% versus the 2013 second quarter, 6% due to increased load volume and 11% due to higher revenue per load.

Total revenue generated through our van equipment service offering was 25% higher in the 2014 second quarter versus the 2013 second quarter, due to a 12% increase in load volume and a 13% increase in revenue per load. Revenue from new agent additions was $23 million in the 2014 second quarter, compared to $15 million in the 2013 second quarter, a 53% increase.

Our new agent pipeline remains very strong and as I said during the last conference call, with our new field organization in place, the focused and more concentrated geographic coverage, coupled with our back-to-basics approach, all should contribute to additional revenue opportunities and market share gains over the upcoming quarters.

As it relates to truck capacity, we ended the 2014 second quarter with a total truck capacity base of 43,624, compared to 39,948 at the end of the 2013 second quarter, and 40,801 at the end of the 2014 first quarter. Trucks supplied by BCOs was 8,591 at the end of the 2014 second quarter versus 8,368 at the end of the 2013 second quarter, and 8,424 at the end of the 2014 first quarter. Also, over 40% of our trucks are now supplied with ELDs.

I'm now going to turn the call over to Pat O'Malley, Joe Beacom, and Jim Gattoni, to discuss in further our record-setting quarter. Pat?

Thank you, Henry.

As noted by Henry, the 2014 second quarter revenue grew 21%, or approximately $140 million, when compared to the 2013 second quarter, ending the quarter at approximately $814 million. The year-over-year revenue increase continues to be broad-based across many accounts, agents and product lines. Total truck transportation revenue increased 23% from approximately $623 million in 2013, to over $764 million in the 2014 second quarter.

Transportation demand in the van service remained consistently strong through the entire quarter, while platform and LTL opportunities improved each month through the second quarter when compared to 2013. The improvement in the number of loads hauled by platform equipment that began in March continued through the second quarter as volumes in this service offering increased in April, May, and June by 5%, 6%, and 8% compared to the prior year months. These trends have continued thus far in the third quarter.

As demand for the van services remained strong in the quarter, year-over-year revenue per load increased sequentially throughout the second quarter. In total, revenue in the van segment increased 26% year-over-year with nearly half of the increase contributed to improved volume. Revenue in the platform service offering increased 17% in the 2014 second quarter when compared to the 2013 period with approximately two-thirds of the increase attributed to improved revenue per load.

As we mentioned, year-over-year volumes increased sequentially throughout the quarter, while the difference in pricing in this segment remained relatively consistent year-over-year. Transportation demand for core industrials have improved and we believe that in the third quarter, business generated from the industrial base will continue to show year-over-year improvement. Currently, approximately 35% of Landstar's truck transportation revenue is generated using unsided platform equipment.

Revenue in the LTL service offering increased 15% when compared to the second quarter of 2013. Load volumes improved sequentially through the quarter, while the year-over-year difference in price declined sequentially. We continue to increase the number of agents and customers participating in this service offering.

As for new agent revenue, new agent additions remained very strong. In the 2014 second quarter, new agents produced over $23 million in revenue. This is a 53% increase in new agent revenue over the 2013 second quarter.

As a reminder, a new agent in the 2014 second quarter represents an agent who had contracted with Landstar after April 1, 2013. This improvement in new agent revenue is a direct reflection of the quality and availability of new candidates and our pipeline remains well-seeded. We're confident that our scale, systems and support will help us maintain momentum in adding productive new agents for the balance of 2014.

Revenue from our top 10 accounts contributed approximately 16% of the total revenue for the 2014 second quarter, as compared to approximately 14% in 2013. More impressive, over 62% of our year-over-year second quarter revenue growth came from customers outside our 2013 top 100. This reflects the natural diversity of the Landstar model and demonstrates the broad-based nature of the revenue growth.

While opportunities were positive across many industries, business in the automotive, government, and consumables sectors were particularly strong in the quarter. As mentioned, demand for platform-related transportation services improved as we moved through the quarter.

As mentioned, our growth has been broad-based across many accounts, agents, and product lines. The current environment provides a significant opportunity for agents to build new customer relationships and provide solutions to capacity-related disruptions to their supply chain. We believe that capacity shortage is systemic and a byproduct of increased regulation, reduced productivity, and a moderately improving economy.

Joe?

Thanks, Pat.

As mentioned earlier, Landstar ended the 2014 second quarter with a total truck capacity provider network in excess of 43,000 providers, a significant increase in the quarter. This growth in capacity is attributable to effective recruiting and retention outreach programs and a strong freight environment. Given the ad hoc and unplanned nature of much of Landstar's freight mix, this size and scope of the network of capacity providers is very important in sourcing capacity across a wide range of service offerings, often within a short window of time.

From the a truck capacity perspective, we remain well-positioned to support new opportunities going forward. The second quarter concluded with Landstar BCO count up 198 BCOs over the prior year period, increasing BCO truck count by more than 220 trucks. This second-quarter increase is the largest in several years.

BCO truck additions in the quarter were up over 12% from the 2013 second quarter, while terminations were 13% fewer. Both total approved carrier count as well as active carrier count were at record levels at the end of the 2014 second quarter.

The total approved carrier count increased more than 10% over the prior year period to more than 35,000, while active carrier count increased more than 14% to nearly 24,000. Active carriers are defined as those carriers who have transported shipments for Landstar in the prior six months.

BCO load volume improved 4% in the 2014 second quarter, compared to the prior-year quarter, a result of the increase in BCO truck count and the 2% improvement in BCO truck utilization. Truck utilization is defined as the number of loads divided by the average number of trucks.

Loads hauled via truck brokerage capacity utilizing van, unsided, and platform or LTL equipment increased 14% in the 2014 second quarter over the prior-year quarter. This second-quarter load volume improvement in truck transportation is attributed to the increasing capacity relationships and loading opportunities attractive to Landstar capacity providers.

The cost of purchased transportation increased to 77.2% of revenue in the 2014 second quarter, from 76.7% in the 2013 second quarter. The percentage of revenue on a fixed margin, which has an overall lower cost of purchase transportation than revenue on a variable margin, decreased to 57% of revenue in the 2014 second quarter, from 60% of revenue in the 2013 second quarter.

We believe that the increase in the rate of purchased transportation paid to truck brokerage carriers was primarily attributable to a tight capacity environment. It should be noted that the increase in the rate of purchased transportation paid to truck brokerage carriers on revenue hauled under variable margin agreements was partly offset by a decrease in the rate of commissions paid to agents for that same revenue.

Capacity remains tight and demand is strong, resulting in improved pricing, and with that, increased price paid to capacity, benefiting Landstar on nearly 60% of the revenue that is generated on a fixed margin as we pursue rate increases in order to protect the margin on revenue generated with the variable margin.

DOT crash frequency improved in the second quarter of 2014 as compared to the weather-impacted first quarter. The resulting severity of these crashes has been moderate with the cost of insurance in the quarter at 3.5% of BCO revenue, consistent with our historical average.

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 over 40% of the BCO fleet equipped with ELDs. We continue to see customers seeking reliable solutions that take into consideration a means to manage carrier selection, provide product visibility, and safely deliver on service requirements.

As customers continue to pursue and evaluate reliable and safe capacity providers, we believe our access to capacity and attention to safety and compliance is a competitive advantage that will be additive in light of the additional regulation and exposure aimed at shippers, motor carriers, freight brokers and forwarders which exists today with more on the horizon.

Jim?

Thanks, Joe.

We've already discussed certain information regarding the 2014 second quarter. I'll cover various other financial information included in our second-quarter release.

Gross profit representing revenue less the cost of purchased transportation and commissions to agents was $121.6 million dollars, or 14.9% of revenue, in the 2014 second quarter, compared to $103.6 million, or 15.4% of revenue, in the 2013 quarter. The increase in gross profit was attributed to increased revenue, partially offset by a decrease in the 2014 second quarter gross profit margin. The rate of purchased transportation paid to truck brokerage carriers in the 2014 second quarter was 70 basis points higher than the rate of purchased transportation paid to truck brokerage carriers in the 2013 second quarter, while the rate of commissions paid to agents on that net revenue decreased 40 basis points.

Additionally, approximately 30% of the decrease in the 2014 gross profit margin was due to a decrease in the percent of revenue contributed by reinsurance premiums, which have no purchase transportation costs or agent commissions. Other operating costs were 5.1% of gross profit in the 2014 quarter, compared to 4% in the 2013 quarter. The increase in other operating cost as a percent of gross profit was due to lower gains on sales of trailing equipment as gains on sales of trailer equipment in the 2014 second quarter were approximately $700,000, compared to $1.7 million in the 2013 second quarter, and increased trailer maintenance and other trailing equipment costs.

Insurance and claim costs were 11.4% of gross profit in both the 2014 and 2013 second quarter. Although insurance and claims costs were 3.5% of BCO revenue in both the 2014 and 2013 second quarters, the 2014 second quarter increase in the absolute dollars of insurance and claims expense was attributable to unfavorable development of prior-year claims. In the 2014 second quarter, we experienced unfavorable development of prior-year claims of $4.9 million, as compared to $2.3 million of unfavorable development of prior-year claims experienced in the 2013 second quarter.

Selling, general, and administrative costs were 30.2% of gross profit in the 2014 second quarter, and 31.4% of gross profit in the 2013 second quarter. The decrease in selling, general and administrative costs as a percent of gross profit is primarily attributable to increased gross profit. The increase in absolute dollars for selling, general and administrative costs in the 2014 second quarter was due to a $4.7 million provision for incentive compensation, whereas the 2013 quarter had none.

In addition, as it relates to absolute dollar change comparing the 2014 second quarter to the 2013 second quarter, the Company reported an increase in customer bad debt in the 2014 second quarter, while the quarter-over-quarter comparison was favorably impacted by the timing of the annual agent meeting, which was held in the 2014 first quarter, and in 2013, held in the second quarter.

Depreciation and amortization was 5.4% of gross profit in the 2014 second quarter, compared to 6.9% in 2013 second quarter. This decrease was due to increased gross profit in the 2014 second quarter.

Investment income was $332,000 in the 2014 quarter, compared to $371,000 in the 2013 period. The effective income tax rate was 37.9% in the 2014 second quarter, compared to 38.1% from the 2013 second quarter.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $130 million. 2014 first-half cash flow from operations was $13.6 million, cash capital expenditures was $1.4 million in the 2014 first half.

During the 2014 first half we purchased 940,000 shares of Landstar common stock at a total cost of $56.4 million. There are currently over 1.8 million shares available for purchase under the Company's stock purchase program.

Trailing 12 month return on average shareholders equity was 35%, and 2014 trailing 12 months return on invested capital, representing net income divided by the sum of average plus average debt, was 28% (sic - see press release, "net income divided by the sum of average equity plus average debt"). On June 28, 2014, shareholders equity represented 83% of total capitalization.

In summary, 2014 second quarter gross profit increased 17% over the 2013 second quarter, while operating income increased 21% over the same period. Although the 2014 second quarter results were outstanding, several items negatively impacted results when compared to the 2013 second quarter.

2014 second quarter insurance and claim costs included a $3 million charge to settle a single claim that was incurred in the prior year. The 2014 second quarter included a provision for incentive compensation of $4.7million, whereas no provision was reported in the 2013 second quarter. And gains on sales of trailing equipment were $1 million less in the 2014 second quarter when compared to the 2013 second quarter.

Regardless of these items, operating margin was 48.1% in the 2014 second quarter. As it relates to operating leverage, on an annual basis our long-term goal is to pass 70% of year-over-year increase in gross profit to operating income. In the 2014 second quarter, the Company passed 56% of the 2014 second quarter growth in gross profit to operating income.

The quarter's shortfall to our annual goal was mostly due to the headwind created by the Company's incentive compensation program as no provision for bonuses were provided in the first three quarters of 2013, plus the impact of the unfavorable claim development reported in the quarter and lower gains on sales of trailing equipment. The impact of the incentive compensation headwind to our incremental operating income goal was anticipated. We expect the third quarter results to be similar to the 2014 second quarter, as we have the same incentive compensation headwind in the third quarter as we had in the first half of 2014.

However, the Company reported a significant provision for incentive compensation in the 2013 fourth quarter, limiting this headwind for the fourth quarter and on an annual basis. Assuming current trends continue, we expect that on an annual basis approximately 70% of the growth in the 2014 gross profit will pass through to operating income.

Back to you, Henry.

Thanks, Jim.

Through the first several weeks of the 2014 third quarter, we have seen the trends experienced in the first half of the year continue, as both load volume and revenue per load continued to be at very high levels and exceeding prior-year amounts. Historically, the revenue generated in any third quarter of a year is similar to the revenue generated in the second quarter of that year. Given that, and assuming current revenue trends continue throughout the 2014 third quarter, I would anticipate 2014 third quarter revenue and diluted earnings per share to be similar to that of the 2014 second quarter.

For comparison purposes, Landstar generated earnings per diluted share from continuing operations of $0.62 in the 2013 third quarter on revenue of $675 million. And as I indicated, based on our current forecast, and the continuation of our current trends, I would anticipate healthy increases over those prior-year amounts.

I am very optimistic as we move into the back half of the year, and at this point I see no change in the positive momentum we have generated as we close in on $3 billion of annual revenue. Caroline, with that we can take questions.

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

(Operator Instructions)

Bill Greene, Morgan Stanley.

Henry and Pat, maybe I can ask you to clarify a little bit more on the guidance there. So the trends continue, but if we look at the second quarter trends, those were actually much better than the seasonality which suggests a sequential improvement in trend.

I realize the first quarter had a weather effect there. But are you sort of saying you feel like at this point toward the end of the second quarter things stabilized and that's why you're saying trends will kind of continue at that rate, or is there conservatism built in there? I'm just trying to get a sense for kind of what's the baseline here.

I think the baseline is when we look at what our second quarter results have always been, they've been consistent with the third quarter results. We did see a big pickup in June, that's normal. The weather impact in the first quarter -- I mean, I sort of discount that because what we've seen is just a continuation of pretty good trends.

And you can make a judgment call as far as whether you think these are conservative or not, but what we're saying is that we think the results are going to be similar to what we experienced in the second quarter and those results were pretty good. So Pat, you got any other thing you want to add to that?

No, I agree.

And then, can you remind us, last year hours of service obviously went into effect. Are there puts and takes we need to remember in the third quarter of this year as we start lapping that? So, areas of easier or tough comps that you want to remind us about?

Pat, I mean, if you want to --

Generally, I think -- and I think we addressed this. The general moving into this year, you heard a lot of the Company, iron companies talk about the hours of service that was going to impact their productivity, anywhere from 1% all the way up to probably as high at 8%, 9%. Said from that standpoint, that we didn't think that was going to impact us to any large degree and that we potentially could benefit from that, because of our ability to access capacity.

And I think that is really the big thing here, is that Landstar historically has been able to access capacity. And what you're seeing a lot, in my opinion, is people have promised capacity based on all these great computer programs and whatnot and things and what you -- if you can't deliver the capacity, it doesn't mean a lot.

And that's what's happening. Therefore, I think we're starting to get better relationships inside certain accounts and it's driving volume.

Joe, you want to add anything to that in?

The only thing I would add, Bill, is that if you think about much of the Landstar load offerings are ad hoc, unplanned-type business. And when you have as many loads in the system as we have in the system, you tend not to have a productivity impact. It's not like we have defined lane business and all of a sudden we can't run the lane with one truck, so you now we have to try to squeeze two in there, and we can't find a driver. That's just not our model.

We've gotten more loads in the system now and a few more BCOs, but the load selection for the BCO has improved significantly, giving them more options, ELD or no ELD to be just fine. If you look and listen to our BCOs with ELDs, they don't seem to be talking about a lack of productivity or a lack of ability to haul the freight they want to haul. And I just don't see that changing as we go forward.

But just to put a finer point on it, you're not suggesting that that creates a tougher comp because obviously you've been somewhat advantaged by this change.

No. Correct.

Robert Sal, Deutsche Bank.

Henry, with regard to your outlook, when you said trends had continued, it feels like the June trends accelerated a little bit from what was seen in the month of May. Were you indicating they continued off the month of June or just off the Q2 average overall?

It's pretty interesting. It's been pretty consistent into July as far as what we saw from actually the June numbers. The revenue per load is high, the volume increases are very good.

So you can look at it a bunch of different ways. The July trend is pretty consistent.

This is Jim. If you look at the comparisons year-over-year, that's one thing.

But we're saying it looks, sequentially, third quarter looks similar to second quarter, and not really talking about growth over prior year. When you look at the growth over prior year, the revenue per load on truck transportation prior year, the comp gets a little tougher because we saw climbing rates into the third and fourth quarter last year. So from a comp standpoint, if you're looking over prior-year the rates started to climb back half of last year.

That's helpful. I guess, Jim, when I'm thinking about the balance sheet, debt as a percentage of total capital has come down. It's about 17% now, historically it had been in the 30% to 40% range.

How should we think about -- should we think about the optimal capital structure around that 30% to 40%, or do you feel more comfortable at current levels? I'm trying to get your feeling about potential uses of capital if the balance sheet, you guys see it as optimally a little more levered than where it is today.

Well, you kind of know our model, right. There's three things we can do with our cash. We can pay dividends, we can purchase stock back, we look at acquisition opportunities and we often talk about opportunities being few and far between; we do look at opportunities, but there's very few that fit into our model, so the two things you got left is dividends and stock buybacks.

I think you'll continue to see us do what we've historically done, is use our cash flow to buy back stock and that's kind of -- we don't really look at the optimal ratio on the balance sheet. We kind of focus more on being opportunistic in the marketplace.

Right now, our balance sheet's very strong. And we still have 1.8 million shares authorized for repurchase. It's kind of same as we've been. It's just right now we don't have a lot of debt on the revolver.

It's not we're not troubled to put debt on the revolver. You've seen us run the revolver up to $100 million for stock buybacks. It's not something we're sitting on the sideline waiting for, it's just where we sit today.

Okay, so then we should think about free cash flow being used and if there's an opportunity to get more aggressive with the share pullback, potentially levering up a little bit that way?

Yes.

Jason Seidl, Cowen & Company.

Well, personally I hope you guys don't get that share pullback for your sake. When I'm looking out at your guidance, you mentioned that you had a $3 million charge in the current quarter based on an accident from last year. Did I hear that correctly?

That is correct. And when Jim mentioned the unfavorable development of whatever it was, $4.9 million, $3 million of that came from a single accident that we had on the books at one number and when you take these things to trial, which we thought we were extremely strong on in this case and those things happen.

So, when you say you're expecting 3Q to look like 2Q, is that excluding the look back accident that you recorded, or including?

That would be -- the second quarter was at 3.5% of BCO. We model to be 3.5% of BCO revenue.

My next question, you mentioned you noticed an increase in utilization. We were talking to other carriers and we're hearing that shippers have more of a willingness to sort of work with them now that they've realized that this capacity issue is probably going to be around for some time. Should we expect utilization in your network to creep up in the next couple quarters?

Well, it's hard to say. I mean, right now we're seeing a whole lot of load volume in the system and BCOs, making the decisions that only they'll make.

So I think you would expect us to see year-over-year improvement as we did in the second quarter, but to what extent it's hard to say, because we really don't manage to utilization. That's just a function of available of loads and available trucks. So, but right now we've got plenty of loads and truck count is moving up, and obviously the rate is strong right now and that plays in, as well.

Scott Group, Wolfe Research.

So, wanted to get your perspective on why you think you're seeing so much better growth on the brokerage side than the BCO side in terms of volume. And the comps may be a little bit easier, I don't know if it's end market, maybe it's just because you got more brokerage capacity.

Just want your perspective on that. And I'm thinking when we start modeling 2015, should 2015 be a year where we see another big jump in brokerage volume relative to BCO, or should we start thinking about more similar volume in the out years?

Scott, I think historically I've always said based on the limited amount of BCOs that are, if I can use the term recruitable, all right -- is that a new word I just invented? It's tougher to basically get that volume growth up as fast as the brokerage.

So the real bottom line is as we secure more load opportunities from our customers, there's two choices. It goes to a BCO, which I've got -- I think I said 8,500 trucks, approximately, run by BCOs, versus I've got 40,000 in excess of carriers out there that have, obviously, a lot more trucks.

So, it stands to reason that if I can throw more volume on the system, it's going to be hauled disproportionately by broker carriers. And that's really the whole rationale. Just a matter of how much capacity I have, as far as broker carriers versus BCOs.

And do you think the limiting factor right now is your brokerage capacity or the loads from the customer?

Limiting capacity from what regard?

Meaning could you -- you could have done more volume in the quarter if there was more demand from the customer or if you had more access to brokerage capacity?

I think we have access to brokerage capacity. I think it's just a matter of -- and we've got a lot of loads in the system, I mean, 21 -- overall, 21% of whatever was the revenue increase is pretty good, and when you look at just the load volume piece, that's pretty strong. So I don't know, Pat, Joe, do you have -- that's kind of a question that's kind of difficult to answer because we think we did a pretty damn good job.

And I wasn't implying that you didn't. Obviously you had great volume growth in the quarter.

I was going to say, not to be flip, but I think it's hard to apologize for the revenue growth we had in the quarter, particularly on the volume side, Scott, where you see we're taking increasing volumes, it's not just price that we're winning. Clearly we have an awful lot of demand from the customer base. We talked about where the revenue came from the customer base, that it was widespread throughout different product lines and agents. And so I think the one word that I would kind of think about is the one that Henry used in the opening, and that is we're executing, and we continue to execute and we think that this market is ripe for Landstar.

That makes sense. Just last thing on the pricing side, what's your view of same-store pricing relative to mix or length of haul, or do you have an explanation for how you're seeing revenue per load up strong double digits right now?

Jim, you got those numbers? Obviously I think we had some -- in the second quarter, and especially as we moved through the quarter, and I think Pat alluded to this, I think the industrial flatbed platform business got stronger, and then obviously from a mix standpoint, it's going to drive that rate or the revenue per load up. But Jim, maybe you've got some more information on --

If you're trying to apples-to-apples, our mix really is mostly whether it's van or platform. A regular van load could be $1,600, $1,700 and a flatbed's $2,400.

So when you look at the pure van revenue per load, we grew it. It was 8% over prior-year in the first quarter, 13% over. And that's probably apples-to-apples of where that was coming at.

And if you look at the flatbed or the platform equipment, we're getting growth there of 2% in the revenue per load was 5% over prior year in the first quarter and it grew to 11% over prior-year in the second quarter. I think what we're saying, looking forward, is that growth is -- that revenue per load stabilizes going forward for the next couple of months in both those -- the van plus the flat services.

That makes sense. Did you give the breakout of how much the van volumes were up and how much the platform volumes were up?

We didn't, but we can. Van volumes over prior-year were up 12%. Flat load count was up 6% over prior-year in the second quarter.

Jack Atkins, Stephens.

So, just to go back to Scott's question for a moment, maybe to ask it a little bit different way, when you looked at your load board at the end of the day, how many loads on there are not getting filled on average, either because of insufficient pricing to attract capacity or just because of a lack of capacity in general? Does that make sense? I think we're all trying to understand what the ratio is to demand versus capacity out there.

Pat, you got -- I think that's a tough question to answer. I think you got to remember that if our agents want to get paid they're going to cover that load, but we obviously don't cover every load. So Pat, I don't even know how to.

Jack, I think regardless of the environment we probably don't pick up every load that's been offered to us. And I think this environment's no different.

But I think it's the volume of the opportunities that is much stronger on -- certainly in the quarter, this year compared to last year. And we anticipate that continuing here in the third quarter. That's the best answer I can give.

That makes sense, that makes sense. I guess from a bigger picture perspective, just trying to understand what's driving the demand side of things. 9% volume growth in truck transportation is certainly faster than the underlying domestic economic growth.

So just sort of curious, from a big picture perspective, what do you guys think is really driving that? Is it the fact that you guys are taking share from asset-based carriers who maybe are capacity constrained?

Are you taking business from new customers? Are you growing your business within your existing customer base? Just trying to understand the different puts and takes there, where that 9% growth is coming from.

Look, I think it's -- I think Pat tried to answer that question in general when he said the increases are broad-based, and I can point to just about everything you just said as far as contributing to what's happening. You're absolutely correct. The economic growth is not as strong as I think we might have wanted for the last several years since the 2009 recession. But I've always said that with the capacity coming out of the market, if you got any sort of tick-up, a slight tick-up, it's going to put pressure on capacity and it becomes, obviously, tighter.

I think then you've got a regulatory environment which has created even more issues. And if you go back in Landstar history, whenever there's an issue for capacity, Landstar performs at optimum. And that's what's happening now.

And what's interesting, this is not just one one-off where you've got the Katrina or you've got a flood somewhere where we can rush capacity. This thing is all -- it's across the United States. You've got a tight capacity environment and Landstar is there. We've historically been able to provide capacity whenever there has been a tight capacity environment or there's a need for that.

Jack, it's new customers, it's old, it's existing accounts, it's that we're executing very well. We're able to aggregate an awful lot of capacity to bring solutions to customers. They have recognized that and those opportunities then have grown for Landstar.

Scott Schneeberger, Oppenheimer.

I'm going to follow up on Jack's question. Obviously, you quoted 16% of total revs from the top 10 up from 14% year over year. So healthy in the top group, and then 62% of growth outside the top 100; I'm going to guess, too, that from 11 up to 100 are pretty strong as well.

The question in there, building off of Jack's, is are there a few, maybe, industrial themes that are really helping it? In the past you've had the alternative energy vertical can really help or hurt a quarter. Can you elaborate on that a little bit, and any other end markets that you think are worth highlighting?

You know what I love about this quarter is that it's hard to point out one thing, because we've got basically -- it's a broad-based approach, I think. If you've got the spread between, I think it was the top 25 customers --

You remember the first quarter? A lot of our growth came from the 101st and smallest customer. I think if you look at 1 through 100, everything is pretty much equally distributed in the second quarter.

So you've got things coming back pretty nicely, and I don't know if there's anything -- there's really nothing I can point out. I know the government increased for the first time in a long time and that was good news. But I don't know, Pat --

Jack, if you go back to my prepared remarks, one of the -- we cited three verticals, if you will, automotive, government, and what we characterize as like consumables were particularly strong in the quarter, but each one of the product lines were pretty strong.

Following up on that, I was wanting to hone in on the alternative energy. That seems to ebb and flow in halves or years. Are you optimistic on that in the back half or is just everything going so well that even if good, that's just going to be a small bit piece?

I've got to tell you, if that is as strong, that's just gravy on what we're saying. So I mean, that's the best way to answer that.

One other if I could. You highlighted a lot about the new agents. That sounds like that's going well.

I don't recall hearing anything on million-dollar agents or those on the cusp. Could you just give a little color on those?

With the track that we're on as far as our annual revenue, I would anticipate, obviously, that our million-dollar agents, this is purely speculation because it's hard to factor that in, but I would think that we would have a record number of million-dollar agents.

Matt Brooklier, Longbow Research.

So just to clarify things, Henry, it sounds like you guys didn't do a lot of wind energy business in 2Q?

No, we did not.

And the expectations are that that could potentially pick up in the second half of this year?

It could but as I said, that would be gravy. We're not banking on that.

If it did, would be beneficial from a yield perspective given the profile of that freight?

Correct.

And then just a general question. The flatbed market got really tight in second quarter. Trying to get a sense for what were some of the drivers.

It obviously sounds like volume picked up nicely, but I'm trying to get a sense for how, maybe, supply-constrained that market is and if anything changes the supply side of things within the platform market going forward. Do carriers add more capacity? Just trying to feel out that particular market, given it's a little bit more niche.

Matt, I think we've said consistently that we believe that we have a competitive advantage in that particular -- in the platform area, because there's many things that conspire to limit competition, including cost of the equipment, expertise of the operator, but those are two things that really kind of work against someone bringing a lot of capacity into that marketplace. So we don't expect and don't anticipate a lot of new entrants into the business on that platform side.

And then just last quick question here. The BCO count up nicely in second quarter. Is that just a function of Landstar having more volume at more attractive rates, that you're able to attract incremental BCOs, because right now all we're hearing from asset-based trucking companies is drivers are very hard to come by. But just trying to get a sense for if it's the freight profile and the opportunities in the system, or if you guys are doing anything differently here to recruit BCO capacity.

Well, I tell you, Matt, we do a lot of different things. But really, if you boil it down, it is the model and the fact that we're exclusively a third party capacity Company. We pay BCOs on a percentage.

So when the prices are moving in the right direction they participate and really benefit from that on day 1. 100% of fuel surcharge, some of the technology that we use to deliver loads to their truck, it's all of the above really.

This is just a terrific environment and then the strong load environment is clearly helpful, as well. But really, all those things come into play when you're in this kind of an environment.

John Larkin, Stifel.

About three or four months ago you all rededicated yourself to the core business, the core strategy, the owner-operator BCO agent approach. How much of your great success in the second quarter do you attribute to that renewed focus and how much of it is just due to tightness of supply and demand in the marketplace?

I think it's a combination of a lot of different things. I think as I said before, with the sale of the supply chain companies, I think the people out in the field are refocused and that helps. I think we've got an agent pipeline that's strong.

Obviously, the environment plays into that, the regulation plays into that, and as I've said before, if you had a pot and put it all in, you stir it up, it's just a very good environment for Landstar. And don't forget, tying into that first comment I made, that whole field reorganization that we did vis-a-vis creating that third field division, if you will, I don't think we've even -- I mean, we've seen some of that benefit, but I think that's yet to come. So I think we're positioned pretty well but it's a lot of different things, John, and I don't want to point to just one thing. And Pat, I don't know if you've got anything that you want to add to that.

John, clearly the environment in the market is driven some of the results. There's no question about it. But I would point you to the you new agent revenue number which I think is pretty symbolic of Landstar executing very well on the core fundamentals. And that new agent revenue was up 53% when compared to the same new -- second quarter 2013, and I think that's a pretty good barometer of how well we're executing and how much of it we're responsible for as opposed to how much of it just the general market's responsible for.

Then just a two-part follow-on. You said that 40% of the BCOs are equipped with ELVs. Have you been keeping track of the relative -- of revenue productivity of those that are equipped and those that are not, and are you worried about sort of a fall-off in productivity as the entire fleet is equipped?

And then secondly, there are a couple of different brokerage models out there. Yours is somewhat unique as an agent-based model. Would you say that the carrier capacity is more inclined to gravitate in your direction as opposed to a more traditional broker like a Robinson or a TQL or a Coyote?

We don't currently track the revenue production of an ELD-equipped BCO versus a non-ELD-equipped BCO because what we're hearing, just from the guys, is that they're as busy as they want to be and they're working smarter, not harder, and they're generally comfortable with the ELDs in our environment and it works pretty well. Because, and also based on when they installed it and a host of other things, it's kind of hard to do a true ELD to non-ELD comparison, given the window of time that we've been using them and the fact that we're only part way there.

Part of John's questions is any productivity loss as the fleet --

I don't see the productivity declining for the BCOs as the ELD -- we haven't seen anything that would suggest that, because -- and I think we would. I truly believe if there was a huge productivity decline we'd be hearing that, we'd be seeing terminations for guys who had to have an ELD and we're just not seeing that. On the contrary, we're seeing a lot of favorable comments that allow them to focus a little bit more on running their business than on doing some of the other stuff that the system automates.

And as far as your last part of that piece, John, I think, getting back to our model, vested interest by that agent to make sure that that load gets delivered and I think that makes our model, I think, stronger than any other model out there, because he doesn't get paid a dime unless he can locate a truck to move freight. So I think as far as, you've got a guy, a 1,500 or 1,300, whatever we've got as far as locations out in the field right now, that basically are actively working every single day to, basically, satisfy a customer. So as long as that customer's being satisfied and the load is being picked up, that's the key.

And that's what I think is driving a lot of our load volume growth, is that we're, as we said before, we're executing on delivering. It's not a matter of just hey, if you've got the capacity relationships, you can deliver it, and I think that's what's happening here. That's why I think our model is excellent in this environment.

Todd Fowler, KeyBanc Capital Markets.

I jumped on a little bit late, so I apologize if I missed this. But the $36.8 million of SG&A here in the quarter, it sounds like that there was some incentive comp. Is there some catch-up from the first quarter in there?

And I think I also heard there was some bad debt. Should we be using the $36.8 million as the run rate going forward, or does that come down because of the catch-up in the incentive comp and the bad debt here in the quarter?

As you know, and we've talked about this before, a targeted incentive comp rate would be $7 million, $8 million a year and we put up $4.7 million in the quarter. And I think we disclosed that we put up $1.9 million in the first quarter. That gives us a total of $6 million something, $6.5 million in the -- $6.6 million in the first half.

If we exceed our expectations, as we said, we say that third quarter's going to look similar to the second quarter which would imply that your SG&A line is going to look similar to that line item with a similar number for the incentive comp. Do I anticipate a million dollar increase in my customer bad debt? No, I don't. But at this point I'd say $36 million to $37 million is probably a good number based on what we're projecting in the third quarter.

That helps. The bad debt number was $1 million here this quarter.

Higher than last year was the comment, I believe.

Up $1 million year-over-year. The last one that I had was the target for 50% net operating margins, I think if we do some math and adjust for, if it's the incentive comp or the bad debt here this quarter, you're very close to getting to that.

I mean, are you at the run rate now where that's the level that the Company's operating at, and what would be some of the factors that could take that higher? Is that just now seeing growth on top of the system and the costs that you have in place?

I think Jim's demonstrated the operating leverage that this Company has. Because really what you're taking is that gross profit dollars and dropping them down to the bottom line. And I think what Jim stated was that by the end of the year his belief right at this point in time was we'll be at that 50% on an annual run rate, and that was -- 70% of that being dropped down.

That, in theory, gets to, close to, will be at, don't know that for a fact but we're going to drop 70% of the gross profit down to operating income. That's going to drive it pretty close. Jim, I don't know if you --

Clearly the incentive comp and then the unfavorable development on the accident, if you take those out we would have been at 50% for the quarter. You've got to remember, seasonal softness in the first quarter, we're generally like in the low 40%s, even in the high 30% range. So from an annual basis, we've still got -- your back three quarters have to catch up for the seasonality in the first quarter.

So do I anticipate the year being at 50%? No, but will we be on a run rate like Henry says, yes, for the back half of the year, would expect to be up there. But we've still got that -- you've got to move forward through the first quarters to offset; the first quarters are lower.

Kelly Dougherty, Macquarie.

I just wanted to chat about how the current environment impacts your ability to recruit new agents. I have to imagine in a really tight capacity situation it makes it more difficult for some of these folks to go out and go it alone, so is it the right way to think about that providing a boost to the new agent growth over the coming quarters? And then just when do you think you can comfortably get that new agent revenue back into your normal 3% to 6% range?

Couple of questions. I've said many times that what an agent needs to be successful is access to capacity and what capacity needs is load volume which we need loads. So right now what you've got as far as what will attract agents to the Landstar System is the fact that we've got capacity and access to capacity, because obviously, as you alluded to, the environment is very tight, and it makes it more difficult for them to satisfy their customers' needs. So I think that is, I think, a critical component of why we are able to secure the new agents.

Now, as far as the new agent revenue, 3% to 6%, $814 million of revenue is a large, large number and we -- in fact, that's a record quarter including, I believe, the years when we had the hurricane revenue. So it's the largest quarter in Landstar history.

So the fact that we had not 3% to 6%, yet we increased the total dollars, yes, I'd like to get that number to be 3% to 6% of an $800 million number. That would be great. And Pat is going to work on that, he's rolling his eyes right now.

But the fact that I think the key takeaway here is we've got a very good agent pipeline, we've demonstrated that we can bring in new agents in this environment because of our access to capacity. And I would anticipate that the total revenue being generated is going to continue to increase especially when we -- when you consider the different approach with the third division, because we expect some good productivity out of that. So that's a little of a long-winded answer to your question.

And just one more quick one. When I think about competition and brokerage space, you obviously have a different model, somebody alluded to. Can you talk about some of the attributes where you might not have as much competition for that sweet spot freight?

Is it the type of freight that you move? Is it the market you focus on? Or are you starting to see increased competition creep into your areas, as well?

Competition is fine. I think our model stands out and as I said, we've got not a lot of carriers or companies out there that have the access to the amount of capacity we have, and I think what you've seen is a lot of customers that might have tried to go with another carrier and the promised lower rates. If they can't deliver the capacity, it ain't going to work, because it gets back to the execution phase.

We deliver capacity. That's the whole ballgame. Pat, Jim?

Kelly, I think if you look at it, we're going to a bring capacity solution that's unique. We're going to either bring some permanently leased BCOs or we're going to bring brokerage capacity. I think that makes us unique in the marketplace.

From an agent perspective, if we provide them the underlying support, scale, and systems they're going to be able to source that capacity better, faster, smarter, easier than someone else. I think Joe alluded to it earlier, listen, all we do is business with third parties. All we do is business with independent contractors, and so we kind of built our business and our culture around that and we think that gives us better execution as a point of attack.

So would you say that you're starting to see increasing revenue from new customers rather than just an increased share of your current customer or people are starting to realize hey, either I'm not comfortable being able to get this capacity from elsewhere or I've been burned by them so I'm going to move as a new customer over to Landstar. So I was thinking about that just playing into the other question about 9% volume growth versus the market. How much of that is share gain?

It's difficult. Certainly we've got new customers, but I'll repeat what we said earlier, that this entire revenue growth has been broad-based. It's across many accounts, agents, and product lines, and so I'm sure there's accounts that -- I know there's accounts that we've taken business from others.

I know that, I'm not going to list them here. It's very, very broad-based, and I think that's a function of the model if you think about it. It's 3 o'clock. We'll take -- we'll go to 3:15. But then that's -- we're going to cut it off.

Allison Landry, Credit Suisse.

I was wondering if you could just give a little bit more color on your commentary for other operating costs. You mentioned that you saw fewer sales of used trailing equipment. Can you give us a little bit of context of what you're seeing in that market and should we expect that trend to persist for the next couple of quarters?

We basically own and operate about 8,000 trailers, mostly van trailers, 53-foot trailers. Our plan was to turn in 1,400 trailers this year. It's just through a typical replacement cycle, not really upgrading, adding more trailers into the fleet.

When we end up in this environment, the 1,400 trailer turn in, we haven't hit our target for turning those in because, obviously, the number of loads getting hauled on those trailers is up, and higher than what we anticipated coming into the year. So we're holding onto those trailers a little bit longer, and what that does is drives a little bit more maintenance cost.

And so do we anticipate -- I anticipate we're going to hold some trailers through the third quarter too that we otherwise would have anticipated turning in, so I don't anticipate the gains that we had seen last year on trailer equipment turn-ins. And it's really because we watch and we make sure we're running about 0.9 loads per week per trailer, and right now we're still maintaining that utilization with more trailers in the fleet, because there's more revenue out there.

And do you think -- I don't know if it's a little bit too early to tell. But at this point would you say that it's probably likely that you'll hold onto the trailers again in the fourth quarter?

If volumes stay where they are, we're going to turn some in, but we still probably will maintain a little bit higher trailer count. We also do some short-term leases too to fill in, just to make it a little more variable. We will hold down the trailers a little bit longer if it stays as is.

I just wanted to go back to a question that Jason asked earlier. So in terms of the insurance and claims, typically it's 3.5% of BCO revenues. But this quarter you had the accident, so if we exclude that it's closer to 2.7%. So I'm just a little bit confused.

Allison, don't be confused. What we're saying is that typically it's 3.5%. Yes, we had one unfavorable development, $3 million, but that happens.

There are things that happen within that all the time, and that's why we try to -- basically it's just 3.5% because that should encompass a lot of variables. If we didn't have that $3 million, whatever the calculation comes out to be, it would have been that much lower. We generally had a safe quarter.

But I think the issue is we had an accident that we took to trial that we had an unfavorable outcome that we actually thought we were in pretty good shape with and we were kind of surprised. But so -- but again, we're going to repeat, 3.5% is what I think everybody should be looking at of BCO revenue because it just makes sense.

If we don't have favorable development or unfavorable development, the number would have been lower in the quarter. That is correct.

So it's more a long run average inclusive of --

Yes.

One time items and stuff like that.

That's correct.

Matt Young, Morningstar.

I know we did talk about it a lot on the capacity side I just wanted to clarify. On the specialized heavy haul business do you generally have to rely mostly on the BCO capacity for that or can you use third party carriers? I guess I'm trying to see if there's any reason you could run into a capacity constraint on a heavy haul business if you just had a look to BCOs.

We've got -- Matt, this is Joe. We have a pretty good long time experienced fleet of professional heavy haul drivers, but I have got to tell you, we also have an increasingly growing amount of carrier capacity that has come to see Landstar as a very good place to find some quality freight. I think we mentioned it earlier.

It's really the quality of the agent and the quality of the agent's relationship with the customer and his knowledge of what he's doing within the account really is what draws whether it's a BCO with his own trailer or whether it's a broker carrier with their own trailer, it's really both. And I would say on the carrier side that's a growing component.

So it is both. One last clarification, you mentioned that in July volume increases were very good. Just to clarify that, was that year-over-year or was that sequentially you were talking about?

That's year-over-year.

Thomas Kim, Goldman Sachs.

Just a quick question on the number of new agents you added in the second quarter?

We added -- I don't know off the top of my head. I think it was 87 in the quarter.

And then based on your ongoing discussions with prospective new agents, would you be able to provide a little bit of guidance as to how many new agents you expect further in the second half of the year, just sort of roughly?

Tom, that's so hard to predict, because every different small business guy has a different trigger point as far as when he decides to come over. And it just depends, so for me to say what we anticipate or -- we try not to actually talk about that because it's -- that's hard to factor in. I can tell you that the pipeline is large.

Thank you. At this time I show no further questions. I'd like to turn the call back over to you, sir, for closing remarks.

Thanks, Caroline. As I said, the quarter was an outstanding -- first of all, let me go around. Is there any other closing remarks from anybody here?

The quarter was you truly an outstanding quarter. I think, as I said also in my prepared remarks, it does come right off the heels of a pretty strong first quarter and all indications are that the back half of the year we're going to continue with that type of performance.

So with that, I look forward to talking to everyone on our third quarter mid-quarter update call. Have a great afternoon. Thanks.

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