Landstar System Inc (LSTR) 2015 Q2 法說會逐字稿

Good afternoon and welcome to Landstar System Inc.'s second-quarter 2015 earnings release conference call.

(Operator Instructions)

Today's call is being recorded. If you have any objections you may disconnect at this time. Joining us today from Landstar are; Jim Gattoni, President and CEO; Kevin Stout, 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. Jim Gattoni. Sir, you may begin.

Thank you, Dori. Good afternoon and welcome to Landstar's 2015 second-quarter earnings conference call. This conference call will be limited to no more than one hour. Due to a high level of participation on these calls, I'm requesting that each participant have a two question limit. Time permitting, we can circle back for additional questions.

But 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, we may make statements that contain forward-looking information that relates to Landstar's business objectives, plans, strategies and expectations. Such information is by nature subject to uncertainties and risks, including but not limited to, the operational, financial and legal risks detailed in Landstar's form 10-Q for the FY14, 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 information and Landstar undertakes no obligation to publicly update or revise any forward-looking information.

2015 second-quarter results, including many second-quarter records, revenue, gross profit, operating income and diluted earnings per share were all second quarter records. Additionally, the number of loads hauled via truck during the 2015 second quarter was at an all time high and 9% over the 2014 second quarter. During our second quarter mid-quarter update conference call, I stated that I anticipated revenue for the 2015 second quarter to be within a range of a $830 million to $880 million. I also stated that I anticipated diluted earnings per share to be in a range of $0.87 to $0.92.

Second-quarter revenue was $868 million which was $54 million or 7% above 2014 second quarter revenue. Diluted earnings per share was $0.92 which was $0.12 or 15% above 2014 second quarter diluted earnings per share. Demand for Landstar's transportation services was strong throughout the 2015 second quarter. Truck transportation revenue, which was 93% of revenue in the 2015 second quarter, grew 6% over the 2014 second quarter. The increase was driven by a 9% increase in the number of loads hauled via truck partly offset by a 3% decrease in revenue per loaded.

2015 second quarter less than truckload revenue grew 4%. Revenue hauled via railroads increased 28% and revenue hauled via air and ocean cargo carriers increased 12% over the 2014 second quarter. Revenue hauled via van equipment increased 8% over the 2014 second quarter entirely from an 8% increase in the number of loads hauled.

The 2015 second quarter was the sixth consecutive quarter where the number of loads hauled via van equipment exceeded the prior year quarter by an upper single digit percentage. The increase in volume was broad-based across many customers and industries.

Revenue hauled via on-sited platform equipment increased 2% over the 2014 second quarter on a 10% increase in the number of loads hauled offset by a decrease in revenue per load of 7%. The number of loads hauled via on-sited platform equipment experienced strong growth resulting from the addition of a large award from single count during the quarter with underlying demand consistent with prior year second quarter.

The Company's heavy specialized service offering representing loadings requiring specialized equipment, escorts and permits and comprising approximately 30% of the Company's on-sited platform revenue continues to be soft. In prior earnings conference calls we have commented that quarter over prior year quarter revenue per load comparisons were going to be difficult as we move through this 2015 second quarter. And those difficult comparisons will continue throughout the remainder of the year.

Additionally, revenue per load unloads hauled via truck in the 2015 second quarter, was impacted by both mix as demand for heavy specialized services, which has a high revenue per load, continued to be soft in comparison to 2014. And the impact of lower diesel fuel costs unloads hauled via truck brokerage carriers. I estimate that lower diesel fuel costs reduce revenue per load on loads hauled via truck brokerage carriers by approximately 6% in the 2015 second quarter compared to the 2014 second quarter. Although revenue per load unloads hauled via truck broker carriers was 6% lower than the 2014 second quarter, the cost of purchase transportation on those loads was 7% lower during the same period.

Revenue per load in the 2015 second quarter unloads hauled via BCO capacity which excluded fuel surcharges billed to customers and therefore represents a somewhat pure line haul rate remained the same as prior years' all time high second quarter BCO revenue per load. During the 2015 second quarter, we net added over 260 trucks provided by BCOs and ended the second quarter with over 9,300 trucks provided by BCOs. The highest number of trucks provided by BCOs in Landstar history.

Additionally, we had the highest number of truck broker carriers haul Landstar loads compared to any quarter in Landstar history. Landstar ended the 2015 second quarter with a total (technical difficulties) quarter and approximately 3,500 over year end 2014. Both approved and active truck broker carrier count were at record levels at the end of the 2015 second quarter. Although we ended the second quarter with over 700 more trucks provided by BCOs, or an 8% increase as compared to end of the 2014 second quarter, the number of loads hauled by BCOs was only 1% above the number of loads hauled in the 2014 second quarter, as BCO utilization, measured in loads hauled per BCO per week, was 6% lower than the 2014 second quarter. Regardless, the Company's ability to source capacity remains solid as a number of loads hauled via truck broker carriers increased 18% over the 2014 second quarter more than offsetting the effect of the lower BCO utilization.

New agent revenue, representing revenue from agents who joined the Company after April 1, 2014, contributed $22 million of revenue in the 2015 second quarter, while revenue at existing agents increased 5% over the 2014 second quarter. The 2015 second quarter freight transportation environment continued to provide significant opportunities to increase the account base and strengthen our relationship with customers. The Company's top 100 customers ranked by 2014 second quarter revenue, comprised approximately 40% of (technical difficulty) was approximately the same as the 2014 second quarter, while revenue and customers beyond the top 100 increased $54 million. With over 25,000 build to customers, the Company's account base is highly diversified.

I will now pass it to Kevin.

Thanks, Jim. Jim has covered certain information regarding the 2015 second quarter, so I will cover various other financial information included in our press release.

Gross profit, defined as revenue less the cost of purchase transportation and commissions to agents, increased 8% to $130.8 million and represented 15.1% of revenue in the 2015 second quarter compared to $121.6 million or 14.9% of revenue in the 2014 second quarter. The cost of purchase transportation was 76.9% of revenue in the 2015 quarter versus 77.2% in the 2014 quarter. The rate of purchase transportation paid the truck brokerage carriers in the 2015 second quarter, was 97 basis points lower than the rate paid in the 2014 second quarter and 45 basis points lower than the rate paid in the 2015 first quarter. The decrease in the cost of purchase transportation was mostly due to the effect lower diesel fuel costs have on revenue and the cost of purchase transportation on freight hauled via truck brokerage carriers.

Both revenue per load and the cost of purchase transportation per load on loads hauled via brokerage carriers, decreased from the 2014 second quarter by similar dollar amounts reflecting the decrease in year-over-year fuel costs. As such, 2015 second quarter net revenue per load on loads hauled via truck brokerage carriers was similar to the 2014 second quarter.

The favorable impact of lower diesel fuel costs on the cost of purchase transportation as a percent of revenue was somewhat offset by an increase in the percentage of revenue contributed via truck brokerage carriers in the 2015 second quarter which has a higher cost of purchase transportation. Missions to agents as a percentage of revenue were 22 basis points higher in the 2015 quarter as compared to the 2014 quarter, due to an increased net revenue margin, revenue less the cost of purchase transportation, on loads hauled by truck brokerage carriers.

Other operating costs were $8 million in the 2015 quarter, compared to $6.2 million in the 2014 quarter. This increase was primarily attributable to increased trailing equipment rental and maintenance costs and decreased gains on the sale of used trailing equipment. The Company has increased its Company controlled trailer fleet by 8% over prior year as demand for transportation services followed via van equipment continues to be very strong.

Insurance and claims costs were $12.3 million in the 2015 second quarter, compared to $13.8 million in the 2014 second quarter. Total insurance and claims for the 2015 quarter were 3.1% of BCO revenue compared to 3.5% in the 2014 quarter. The 2015 quarter had unfavorable development of prior year claims over approximately $800,000 and the Company experienced increased severity of accidents in the 2015 period as compared to 2014. The 2014 quarter had unfavorable development of prior year claims of approximately $4.9 million.

Selling, general and administrative costs were $37.7 million in the 2015 second quarter, compared to $36.8 million in the 2014 second quarter. The increase in SG&A costs was primarily attributable to increased employee wages and benefits and an increased provision for customer bad debt partially offset by decreased provision for bonuses under the Company's incentive compensation program. The increase in customer bad debt was primarily related to one specific customer. Although SG&A dollars increased year-over-year, SG&A expense as a percent of gross profit, decreased from 30.2% in the prior year to 28.9% in the current year.

Depreciation and amortization was $7 million in the 2015 second quarter compared to $6.6 million in the 2014 second quarter. This increase was due to increased depreciation related to the replacement of older fully depreciated trailing equipment. As it relates to operating leverage, operating income was $66 million or 50.5% of gross profit in the 2015 quarter versus $58.6 million or 48.1% of gross profit in the 2014 quarter. Operating income increased 13% year-over-year and was the highest second quarter operating income in Landstar history. During the 2015 second quarter, 82% of incremental gross profit was passed to operating income. We continue to expect to past 70% of incremental growth profit through the operating income on an annual basis.

The effective income tax rate was 38% in the 2015 second quarter compared to 37.9% in the 2014 second quarter. The effective income tax rate, which historically is 38.2%, was impacted in both periods by tax benefits resulting from disqualifying dispositions of the Company stock. Over to our balance sheet, we ended the quarter with cash and short-term investments of $131 million, cash flow from operations for the 2015 year-to-date period was $82 million and cash capital expenditures were $3 million. During the 2015 year-to-date period, we purchased 1.3 million shares of Landstar common stock at a total cost of $85 million and there are currently 3 million shares available for purchase under the Company's stock purchase program. At the end of June, shareholders equity represented 83% of total capitalization.

Back to you, Jim.

Thanks, Kevin. Overall, Landstar had very good second quarter. Currently, industry fundamentals remain similar to those experienced in the 2015 second quarter. We continue to have very strong demand for our services. I expect that strength to continue throughout the third quarter. I expect the pricing environment experience in the 2015 second quarter to continue through the third quarter which includes the impact of lower diesel fuel costs, a lower contribution of revenue attributed to heavy specialized services and a stable supply and demand environment with somewhat tight truck capacity and strong yet steady demand for our services.

Assuming recent trends continue, revenue per load on loads hauled via truck in the 2015 third quarter should be similar to the revenue per load experienced in the 2015 second quarter, which would represent a decrease in the low to mid single digit percentage as compared to the 2014 third quarter. Historically, the number of loads hauled via truck in the third quarter has been slightly less than the number of load hauled in the second quarter. I expect that historical sequential trend to continue into 2015 third quarter.

Given that trend, I expect the number of loads hauled via truck in the 2015 third quarter to increase in a mid to upper single digit range compared to the 2014 third quarter. Based on the continuing of recent trends, I currently anticipate 2015 third quarter revenue to be in a range of $830 million to $880 million. And based on that range of revenue, diluted earnings per share to be in the range of $0.87 to $0.92.

With that, Dori, we will open to questions.

Thank you very much, sir.

(Operator Instructions)

Jason Seidl, Cowen and Company.

Jason, how are you?

Pretty good. It is earnings so I'm trying to keep our head down and keep working here. A couple quick questions for me.

Number one, in your conversations with your customers how is the shaping up with peak season looking? We are getting some different responses from the companies that we follow.

Jason, this is Pat. The few customers that we run peak business for on a routine basis, we've talked to them and they anticipate similar if not slightly up from last year.

Okay. That's good.

You also, Jim, I think you talked a little bit about describing the overall market as fairly or slightly tight. Do you think that that's going to change later this year after the announcement of any potential government regulations or do you think that that moves on only implementation phase not just the announcing?

Jason, this is Joe. I don't think that the announcement of ELDs, if that's what you are referring to, is going to have a big impact on capacity in the short-term. I don't think it is really much of a surprise.

I think over time, I think it could and it remains to be seen on the implementation side of that. But in the short-term, I wouldn't think that in and of itself would be a big deal.

Jason, I would anticipate that we're going to look at this stable environment for the next six months. Through the end of year is our expectation.

We think -- we do still think it is somewhat tight. When you look at our revenue per load, the BCO revenue per load is still sitting at an all time high. So that implies it is at some level of tightness in the industry. More so on a van side than the flatbed side.

Okay, and just a quick follow-up. That one customer that seems to have given you some issues in the quarter, what area was that in? What is the end market?

Automotive.

Automotive? Okay. Thanks for the time as always, guys.

Jack Atkins, Stephens.

Good afternoon, guys. Thanks for the time.

So I guess, Jim, just to start off, this is really the third or fourth quarter in a row where we've seen very strong volume growth from you guys even as comps get much more difficult. And I'm curious if you could maybe talk about what you guys are doing internally and what the agents within your network are doing to really drive this? Because it is quite impressive, the type of volume growth that you guys have been able to see even in the face of a relatively soft spot market.

I think it is just execution by the agent family, to tell you the truth. As you saw, we added about $22 million in new agent revenue during the quarter and that's pretty consistent with historical patterns of what we see.

We are getting some good penetration into some existing accounts. There's a significant amount of demand for drop and hook operations where we drop trailers at a facility and then our BCOs go, they load them up and then our guys come in and haul them away. That adds significant value to our relationship with customers.

But it is just an overall deeper penetration into the existing customer base with our agent family. And it is been consistent, like I said, for about 18 months now, which historically is probably beyond anything we've done on that kind of a trend.

Makes sense. From a bigger picture perspective, you referenced ELDs in response to the last question but thinking out over the course of the next couple of years if we do see this ELD implementation, how do you think that impacts the brokerage market, and your business specifically, if you were to look into the crystal ball over the next couple years?

Yes, Jack, this is Joe. I think the ELD market, if that comes to pass. I think it will have some impact on the small guys.

And I think it is not just ELDs but it is a lot of these other things that are coming down the pipe whether it is the driver physicals or whether it is speed limiters or some of the things they are trying to do around drug and alcohol. I think you could see -- and you could see that impacting some of the small guys who don't know how to manage that and it could affect it from a capacity standpoint to where they might want to come find a home. And we think Landstar is a decent place for them if they want to go that route.

I think it will definitely tighten the capacity market if it goes that way. I think if you're a Company driver and you are getting paid by the mile, I think it may impact you more because there's a lot of things that are going to limit your productivity. Whereas, if you are an owner operator and you own your own truck and you are getting paid on a percentage, you are seeing the benefits for that inconvenience so it may not impact you as much. But that's how I'd see that play out from a capacity standpoint.

I don't think any of these regulations improve productivity or the number available capacity. I'm sure you are all aware of that. So it is hard getting your hands around and two to three years down the road is what it does to capacity and does that drive a reduction of productivity of 3% to 5%. It's just right now, I think it is hard to predict.

Okay. Guys, thanks again for the time.

Allison Landry, Credit Suisse.

Good afternoon, this is Danny Schuster on for Allison. Thanks for taking my question.

I saw that the pace of your share buyback accelerated quite a bit this quarter. You bought back almost 2% of the stock on a net basis. So we're just wondering, would you expect that same pace to continue throughout the rest of the year if shares remain at a similar level?

We are always opportunistic in the market and speaking to the history of what we've bought, we bought more during our first half of the year. We bought less during the first half of the year. We will still be opportunistic in the market and to put a specific target on what we think we are going to do, we don't have one set so we don't really discuss a specific target.

Okay, great. Thank you.

I know that you mentioned SG&A saw a bit of a tailwind from lower incentive comp this year. Would you be comfortable providing us with what the either sequential or year-over-year tailwind was from that line?

Danny, this is Kevin. The second quarter of 2014 had about $4.5 million of incentive comp and second quarter of 2015 had about $1.1 million.

Great. Thank you.

To put it in perspective, a normal annual year is probably $7 million, $8 million so it's about $2 million a quarter. We are slightly running behind that little bit and last year, I think we had $17 million in total because we had an excellent year.

Understood.

To put in perspective.

Great, thank you. That's very helpful.

Tom Kim, Goldman Sachs.

Good afternoon, guys. Congratulations on the quarter. It is obviously turning out to be a pretty challenging one for transport so it's great to see the tremendous volume growth. And with regard to that, I'm curious with the one relatively large customer that you'd want in the flatbed side, should we expect that volume growth to sustain in the third and fourth quarter?

We anticipate that that account will be with us in the third and fourth quarter, yes.

Okay, great. Would you be able to provide any color in terms of what the organic growth would have looked like? You said it was soft. Is that up or down and can you give us a little bit of a sense of what that would look like?

I think one of the things I said in my prepared remarks is that the underlying demand was consistent with last year which means without that vines are relatively flat on the flatbed side. Consistent with where we were prior year.

That's really helpful. Thanks.

With regard to the BCO side of the business, can you give a sense of your outlook for the second half? Do you anticipate this may be picking up?

It is hard to say. BCO utilization, as I think what you are referring to there, Tom. They had a terrific earnings year last year and I think there's just a little less motivation by some to get out there and haul freight.

I also think we are adding so many new guys, which is great for the long-term prospects of the BCO fleet, but as a new BCO here, you tend to be a little less productive. Just takes you a little bit to get assimilated into the network and make your agent relationships and those kinds of things. I wouldn't expect a huge increase in utilization as we go forward. I think we are kind of where we are and until something changes, it is hard to forecast any huge improvement in utilization.

That's great, thanks a lot guys.

Scott Group, Wolfe Research.

Hey, thanks, afternoon guys. Just to followup on that one question on the large customer. Do you think you'll have that in 2016?

I think that's too far out to project at this point. We are pretty confident we will have it for the next six months but I don't want to speculate on what happens next year.

Okay. How do you explain the huge growth in the BCO count that you are seeing right now? And what does that tell you about what you are doing? What does it tell you about the overall market and capacity?

This is Joe. I think as I look out, the BCO growth to your point, has been pretty significant.

I think some of the things that could be driving it, I don't think there's any one thing, I think it is a multitude of things. There are a large number of carriers who have Company iron who have also gotten into the owner operator business.

I think when things get a little bit -- the demand gets a little bit softer, they tend to not treat those owner operators like they did in 2014 so they look for new home. And I think we are a pretty good home because that's a pretty level playing field at Landstar.

I think given the year that we had in 2014, many of our existing BCOs were very quick and very active in recruiting for us and recommending Landstar as an option for other owner operators in the business that they knew. I think the van drop and hook piece, being as strong as it was and the way to participate in that at Landstar is to lease on. You cannot really do that as well as a broker carrier.

Then a big story, a big part of this story for BCO fleet growth in 2014 and thus far in 2015, has been turnover in the low 20 percentile. We are like 21%, 22%, which if you are doing that and you are doing a decent job on the recruiting side, you (technical difficulties).

Okay, that's helpful. Last question for you, Jim.

When I look at typically second quarter to third quarter, we often see some earnings growth sequentially. The guidance implies it's just at the midpoint that you will see earnings go the other direction. What is different in your mind this quarter with the guidance?

If you look at the range of revenue we put out, the midpoint is $855 million and we did approximately $868 million in the second quarter. Looking sequentially, typically what we see and if you look back five years, revenue per load generally increases third quarter over second quarter by an average of about 3%. The number of loads third quarter over second quarter usually drops off about 3%. So when you do that math, the second quarter and third quarter revenue generally look similar.

Then there some insurance, and gives and takes and some MICP and stuff like that. But generally, you end up in a position where the quarters look the same.

What we're seeing this year though a little bit, in the third quarter what we are expecting is, we're not going to get the revenue per load drove coming into the third quarter. We are seeing a stable compared to the second quarter. So that 3% growth, so we're expecting (technical difficulty) 70 of our range, that kind of explains about a penny or two of what we are dealing with.

That make sense. Okay, thank you, guys.

Todd Fowler, KeyBanc Capital Markets.

Jim, how are you? Good afternoon. Congratulations on the quarter.

I guess maybe where I wanted to start was with the flatbed business being flat if you strip out the share gains from the large customer. I still think that's a good performance given some of the data points that we are seeing in the industrial end markets. And I don't know if this is for you or for Pat, but maybe I was hoping you could talk a little bit about where you are seeing some of the strength on the flatbed side? And also some of the areas where you see some weakness so we get a sense of some areas that we should be paying attention to, to either turning up or improving or maybe softening a little bit as we move forward?

Todd, this is Pat. We saw, as Jim mentioned in his opening remarks, it was pretty broad-based. Coming into the year, we talked about some of the impacts in the energy market and we certainly saw that. To oil and gas, we certainly saw some negative impacts there and in the government sector.

But if you think about the diversification of Landstar, it really protects us in this down market and I think it is been evidenced by the results here this quarter. You take government, some energy stuff, those two were soft, but other than that, we held our own in every one of those markets that we serve.

Just to be clear, Pat, the other markets would be? Machinery's been okay and then some of the construction markets or what were some of the other markets?

(Multiple speakers) been okay. Machinery has been okay up in the quarter. So those end markets I think are performing well and we are performing well within those end markets.

Any sense on the government and the oil fields, does it like that's bottoming at this point and that should stabilize? Or do you have any indication on how those markets could trend into the second half?

I would think that what we have seen in the government is going to continue for the balance of the year. I think we use the term bottomed out.

I think we've bottomed out on where the energy markets are but it is a low bottom. So I would expect similar results here in the back half of the year. Certainly in government, it is going to be what we see in the first half, we are going to see in the back half.

Okay, all of that is very helpful. And just for my followup, and Jim, I'm not trying to ask something I know the answer to. But the cast generation is very good. You're dropping a lot of the gross profit down to the bottom line. Do you consider anything else besides the share buybacks at this point or is that still the predominant use of free cash?

Right now, that's the predominant use of free cash.

Okay, that's what I thought. Thanks again for the time and congratulations.

Thanks.

Matt Brooklier, Longbow Research.

Good afternoon. I think I can back into it per your earlier comments, but I'm just going to ask it. If you could quantify either how much revenue or volume roughly this customer win, the big customer that you added during Q2, how much that added during the quarter?

I'm not going to give you an exact revenue number but if I say that the underlying demand on flatbed that loads were almost similar to flatbed in the 2014 second quarter, just take this year's and take it down to what last year's was and that should be the number of loads.

It's the delta there, okay.

Yes, pretty much. That will get you pretty close.

Okay. And the volume, all of that volume is flatbed?

Yes.

Okay. You are running it through your BCO or your brokerage ops or you are running it through a little bit of both?

It is about a 50/50. It's about a little bit of both. 50/50 split whether it is BCO or broker trucks.

Okay, can you talk to the end market that that customer's in?

That was automotive.

Automotive. That's right, you mentioned that. That's all of I got. Thank you.

Scott Schneeberger, Oppenheimer.

Hi, guys, this is Daniel in for Scott. Most of the questions have been answered and congratulations on a great quarter. Can you give us some perspective on your expectation for carrier pricing and purchase transportation in the back half?

I think what we said is we expect this somewhat type stable environment to stay where it is. And as you know, we picked up a little bit of margin expansion in the second quarter. I anticipate that will continue through the next, at least through the third quarter. And if nothing changes, I expect that to continue into the fourth quarter.

Okay, great. And another question on -- as far as the type of customers your winning business here with, top tier, mid tier and small tier and so forth. Can you provide some color on that as far as the strong volume growth you already generating?

I will tell you that as we mentioned before and we will repeat ourselves, it is broad-based. And again, if they think about the model, the model is naturally diversified because each of our agents comes in with a different level of expertise, account contacts and execution abilities. So it is kind of across the board in many, many different markets. It would be impossible for me to say we are winning business in large accounts, midsize accounts or small accounts because the fact of the matter is, it is true in each one of those segments.

To add onto what Pat said and then from my prepared remarks as we said, our top 100 customers which makes up about 40% of our revenue, was relatively flat the prior year's second quarter. All the growth was coming from the guys 100 and lower.

So just to Pat's point, we are highly diversified, we have 25,000 customers and it's just penetration into our entire account base. There's not a specific account or customer that we can speak to that really drives this growth. Other than the one account we mentioned, for just specific to the flatbed business.

Okay, great guys. Thank you.

Ben Hartford, Baird.

Hey, guys. I guess Pat, maybe we will start with you real quick. We are talking about the BCO account growth load. Loads per BCO have fallen.

Is there a constraint? Can you continue to add BCOs at the pace that you are when the implied loads per BCO is falling? Do you run into your own utilization or satisfaction issues with regard to existing BCOs that provide a constraint if loads per BCO is running negative while you are growing that BCO count?

Ben, this is Joe. I will take that.

The way that our agents operate is that they have available loads and they'll give those available loads to whatever BCO wants them or whatever carrier is available to haul them. So if you look at our load volume growth, a lot of that growth is out there for whoever wants to take it. So clearly, if we had more BCOs who wanted to haul more loads, the opportunities are there for them.

I don't think adding more BCOs is necessarily needs to come to a slow down just because the utilization is poor. I think it is really a mindset among the BCOs to adjust to the environment and decide on their own that they want to haul more freight because clearly the freight is there. We have proven that just by our volume of growth in the quarter.

Okay, that's helpful. Maybe Jim separately.

When you think of the model, obviously, Henry had several initiatives under his belt that he had tried. Some were very successful and some I think just given the nature of the agent network there was a little bit more resistance. When you think about the opportunities in a market, a brokerage market that's likely to consolidate and the amount of cash flow that you guys generate.

Are there large agent networks that you think that you could pursue or potentially acquire and supplement Landstar? Or do you think that the potential overlap with a large agent type property with your existing agent base would make any sort of large acquisition of an existing agent network? Would it preclude you from doing a deal from the get go?

Yes, looking at any potential acquisition of an agent based entity, there's always going to be certain conflicts at the customer level, at the capacity level. So acquisition opportunities at Landstar is a little more limited than it would be at a true pure brokerage play.

When we got opportunities to look at acquisition opportunities, we generally find too many conflicts where those agents are in our customers agents are the same as our agents -- customers for our existing agents. And we don't necessarily play in that game.

So we like the organic growth. If we see acquisition opportunities, we take a look at them. But as you know in this model, we do want to compete against our agents.

We do baby steps. We do organic growth by recruiting agents into the system and supporting the agents that we have today through better tools and technologies.

Right, okay. That's helpful. Thank you.

John Barnes, RBC Capital Markets

Good afternoon, guys. Thanks for taking my question. Two questions on the BCO growth.

Number one, the recent success you've had on the BCO growth and maybe some of the regs that you've talked about maybe pressuring some of the smaller players, do you forecast a material shift in the mix of your business more? Maybe back a little bit more in the BCO favor on a go for -- again, does more of the growth come from the BCO side going forward than it does maybe the broker side?

No, John. I just think we are in a very good market right now for recruiting BCOs into the system. But whether it be the quality of the freight or the price of the freight out there, I anticipate our majority of our growth going forward still going to come from a broker carrier.

If we could add 5,000 BCOs, would add them. It is still competitive market to add owner operators into the system.

One of Joe's comments was, what we are really benefiting is that they are not leaving. Our turnover is really low. That's really where we are getting part of the growth from.

I would anticipate we're going to continue to push through the freight onto the broker carriers to supplement the BCO limitation. Even if we get the 10,000, I still think the majority of our growth is going to come from the broker side.

Okay. Then just given your record on the safety side and the focus there, as some of these regs come in, will you dictate the implementation of this on top of maybe quicker than what the FMCSA is? For example, if ELDs are announced and it's a two year implementation, are you going to force the BCO into using it quicker if they're operating under your authority? Or are you going to start to look at the brokers maybe a little bit more aggressively on the use of this technology?

We would not force ELDs or any type of regulation on top of the BCOs prior to that regulation being enacted. So when it comes down to if in September, if they put the rule out and in two years from now they have to get an ELD on their truck, we will strongly encourage but we will not enforce on the ELD side.

Okay, very good. Thanks for your time guys. Appreciate it.

Rob Salmon, Deutsche Bank.

Hey, good afternoon, guys. Jim, when I've traditionally thought about the Landstar model, it is been much more of a transactional based business. And you've been highlighting these new drop and hook relationships that you have been expanding.

I'm curious, does this change the overall context of the length and the volume visibility that Landstar has? And maybe any color that you could provide around how big this represents of the business and where you see that going over time?

We've always been a drop and hook and it is always been a decent part of our business. I would tell you that 60% to 70% of our BCO van is on our trailer.

I think it is something that's maybe just wasn't understood by the investment community or the analysts is, that freights a little bit more -- we're a little bit more engrained in that customer when we stick a trailer on your lot. It doesn't necessarily mean we are tide up in long-term contracts but it does give you a little more permanence with that customer.

We have 9,000, approximately 9,800 trailers out there. The majority of them working in drop and hook operations. And we could continue to get more and more demand for that kind of service.

And there's somewhat of a thought process that as it relates to hours of service, that some of the shippers are starting to think hey, instead of getting the truck in here and waiting for an hour to load them up, give us some of your trailers, we will load them up and then have the BCO come in and not waste some of his hours.

We think there's a little bit of that demand coming out of the hours of service ruling. That no, not the limit the amount of hours that a driver can drive.

Everybody historically has thought of us as the overflow carrier. I think most people think of us that way. But it's not necessarily true especially when you say 70% of our van on BCO is one of our trailers. We are kind of a core carrier in that. We may not be the top one but we are probably the top three in that scenario.

I think that's very fair. Certainly, one of the things that's really jumped out to me on the quarter was the growth that you are seeing in the truck broker carrier marketplace with volumes up off of very tough comp. And you would think would be transactional market softer year-on-year that that actually probably would have been down.

So maybe you could talk to some of the business growth that you are seeing there? And provide us a little bit more color in terms of what driving, I think it is north of 30% on a two-year compounded basis, two-year stack basis with regard to load growth.

Do you know what it is? It is all the agent. Because we were talking about that before. It's agent execution and penetrating deeper into their customer base and getting access to new customers.

Over the last 18 months, we've probably engaged some smaller, a lot of small customers that wouldn't necessarily come to us but now that when the capacity margin got tight over 2014, they came to us and we were hauling freight for those guys. And I think that continued through this year. They stayed with us because they can see the value in the service that the agents provide because the agent's in the local market and they build a relationship with those shippers.

I think that's what drives the capacity coming to us. It's kind of a, you bring the freight and they will come, kind of concept. And I think again, I think it is just all about the execution by the agent family putting more quality loads in the system.

And that brings capacity and it not only brings capacity, it allows that capacity to stay in our system and haul, if they want to, just Landstar freight. Because if you think about it, we have about 50% of our loads are hauled by BCOs. That's 50% of our loads available to broker trucks.

A lot of the carriers out there that we deal with, some about half of our carriers probably have 10 or fewer trucks. They're almost like BCOs but they're outside of the -- but they're running freight for a further people. And the more freight you provide to them, the more committed they are to your system and they stick with you.

Make sense. It is definitely shown up. Congrats on a quarter, guys.

Thanks.

Matt Young, Morningstar.

Good afternoon, guys. Just a followup on that previous question.

Sounds like capacity still tight but a bit more balanced. When we listen to some of the other truckers out there, we know that the spot market's not quite as strong as it was last year. But do you get the sense that shippers at this point are still concerned with capacity issues and they still are willing to shift business to asset light providers with strong capacity networks like yourself in the interest of securing trucks down the road? Or is there some evidence at this point that maybe the impetus is subsiding even though you've seen that pretty strong in previous quarters?

Matt, this is Pat. I think that the shipping community at large believes that the likelihood of capacity tightening is far greater than the likelihood of capacity getting looser. That's a thesis that I would endorse and it is one that I believe we will see play out over the next 12 months to 18 months.

I read a lot of the reports that you get put out by you guys and some of the other asset-based carriers. And apparently, the contract carries are getting 4% to 6% rate increases. And to me that would be a shipper thinking let's lock it up now because 12 months to 18 months down the road pricing is going to climb again so I want to lock in those contracts.

I think the shippers still a little concerned about the future. Maybe not the next six months, but I think there's got to be concern out there over 2016, 2017 when more and more of these regulations get put in and productivity drops off.

That make sense. One other quick one.

I think last quarter you mentioned that with lower BCO utilization there's some cost headwinds on the trailer side. Is that still the case the quarter? Is that material?

It is not material but it does impact -- as you saw, if you were to take our other operating costs as a percent of BCO revenues probably climbed a little bit. Because of the, like I said 70% -- about 60% to 70% of the BCO band business is on our trailer and to the extent they are not hauling them as much. There is a fixed cost component to that so it's the only part of our business that there's a little bit of a utilization exposure.

It is not significant. It's not going to move a quarter.

Got it. Appreciate it, thanks.

(Operator Instructions)

Kelly Dougherty, Macquarie.

Hey, guys. Thanks for the time. Just a quick housekeeping question and then a bigger picture one.

Just what is your assumption for fuel prices as it factors into your outlook for lower mid single digit revenue declines in revenue per load declines in the back half?

I just looked at the EIA information and it was going to be consistent for the rest of the back half and that's really the only thing I can do is look at that. So it is kind of flat. Diesel is running, I think it is $2.80 to $2.90, and I think that's where I saw it for the next six months and that's our assumption.

Okay. Can you give any color on van versus on-sited, how you are thinking about that from a revenue per load situation or similar to what we saw in a second quarter as well?

I think the short-term, like we said, in the next three months, we're seeing a similar rollout of what's going to happen on van revenue per load and on flatbed revenue per load. Beyond that, into the fourth quarter, we will talk about that as we get the to the mid-quarter call or further into -- not even. Probably in October when we get into the fourth quarter.

Okay, great. Fair enough. And then just a bigger picture question.

We've seen durable goods, industrial production, maybe soften the last three months but the PMI manufacturing has started to improve recently. Just wanted to get some of your thoughts on the broader industrial economy right now. It seems that you seem pretty confident about demand on your end. So maybe what you are hearing from some of your customers about an industrial improvement in the back half?

Our volumes are going against what they are saying about industrial production. Industrial production is under 2%. Even on the flatbed side, we are consistent with last year.

Our customer demand is strong. We still have all the flatbed customers even though we are flat to last year, there's still strong demand coming across there. The loads we did last year in flatbed were pretty high and they are still high this year. From a comp standpoint, we are equal but it still pretty strong.

And on the van side, clearly we continue to get -- I can tell you personally that there's more and more demand for our trailers out there. Demand that I hadn't seen probably in the last 10 years. So strong demand from our standpoint but when you look at some of the stocks out there in industrial reduction, it is not tying back. So again, we got to go back to the execution of the model.

Do you think that you are positioned well with the right customers or you are gaining market share?

I think we are positioned well with the right customers to a certain degree. We are also penetrating some of those smaller customers like I said that our bottom 60% of our accounts, that's where the growth came from. It's some of the smaller accounts.

Great. Keep up the good work, guys. Thanks very much.

At this time, I show no further questions. I would like to turn the call back over to you, Sir, for closing remarks.

Thank you, Dori. That will wrap up the second quarter call and I look forward to speaking with you again on our third quarter mid-quarter update call currently scheduled for September 3. Have a nice evening.

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