Landstar System, Inc. (LSTR) Q2 2011 Earnings Report, Transcript and Summary

Joseph Beacom - Chief Safety and Operations Officer and Vice President Jim Gattoni - Chief Financial Officer, Principal Accounting Officer and Vice President Henry Gerkens - Chairman of the Board, Chief Executive Officer, President, Member of Strategic Planning Committee, Member of Safety & Risk Committee, Chief Executive Officer of Landstar System Holdings Inc, President of Landstar System Holdings Inc and Director of Landstar System Holdings Inc Patrick O’Malley - Chief Commercial and Marketing Officer and Vice President

John Barnes - RBC Capital Markets, LLC Matthew Young Justin Yagerman - Deutsche Bank AG Todd Fowler - KeyBanc Capital Markets Inc. Thomas Wadewitz - JP Morgan Chase & Co Chaz Jones - Morgan Keegan & Company, Inc. Jack Waldo - Stephens Inc. Anthony Gallo - Wells Fargo Securities, LLC Jon Langenfeld - Robert W. Baird & Co. Incorporated Christopher Ceraso - Crédit Suisse AG Edward Wolfe - Bear Stearns Jason Seidl - Dahlman Rose & Company, LLC Nathan Brochmann - William Blair & Company L.L.C. Matthew Brooklier - Piper Jaffray Companies Alexander Brand - SunTrust Robinson Humphrey, Inc.

Good afternoon, and welcome to Landstar System Inc. Second Quarter 2011 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 from Landstar are Henry Gerkens, Chairman, President and CEO; Jim Gattoni, Vice 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 would like to turn the call over to Mr. Henry Gerkens. Sir, you may begin.

Thanks, Terry. And good afternoon and welcome to the Landstar 2011 Second Quarter Earnings Conference Call. This conference call will be limited to no more than 1 hour. [Operator Instructions] Before we begin, let me read the following statement. The following is a Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts are forward-looking statements. During this conference call, I and 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 2010 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 2011 second quarter was an outstanding quarter for Landstar, measured by just about any metric. It marked the sixth consecutive quarter of rock-solid performance for Landstar and resulted in record second quarter diluted earnings per share. I might add that if current trends continue for the balance of the year, I would anticipate record 2011 full year diluted earnings per share. In our 2011 second quarter mid-quarter update call, I reiterated that I expected operating margin for the 2011 second quarter would be approximately 42% and then I was very comfortable with our range of earnings per diluted share estimates of $0.56 to $0.61 per diluted share. Actual second quarter 2011 operating margin was 43.6%, up from 38.2% in the 2010 second quarter. And actual earnings per diluted share for the 2011 second quarter were $0.62 per share, a 27% increase over the earnings per diluted share reported in the 2010 second quarter and $0.01 above the upper end of the range of our earnings guidance. Consolidated revenue in the 2011 second quarter was approximately $676 million, up 5% from the revenue generated in the 2010 second quarter. The 2011 second quarter over 2010 second quarter revenue increase was net of $51.7 million or a 73% decline in revenue from our low margin substitute line haul service offering. Again, this decline has been well previewed on prior earnings conference calls and factored -- and was factored into our prior guidance. Substitute line haul revenue represented over 2.8% of consolidated revenue in the 2011 second quarter versus 11% in the 2010 second quarter. Excluding the substitute line haul revenue from both the 2011 and 2010 quarters, all other revenue increased a healthy 15%. Total truck transportation revenue represented 92% of consolidated revenue in both the 2011 second quarter and the 2010 second quarter. Revenue hauled by BCOs represented 54% of total revenue in both the 2011 and 2010 second quarters, while total brokerage revenue was 38% of consolidated revenue in both the 2011 and 2010 quarters. Excluding substitute line haul revenue from both periods, revenue generated through all broker carriers increased approximately 36% and revenue generated through BCOs increased approximately 5%. From a load volume and revenue per load standpoint, total truck transportation loads hauled, excluding loads hauled in our substitute line haul service offering, increased approximately 3% from the 2010 second quarter, while revenue per load, again excluding the revenue per load associated with our substitute line haul service offering, increased 12%. The 2011 second quarter versus the 2010 second quarter total van revenue, excluding substitute line haul revenue, increased 14%, with about 0.75 of that increase due to rate. Total platform revenue increased approximately 18%, almost entirely due to increased revenue per load, which is reflective of a tight flatbed capacity market. Collectively, revenue generated from all other sources increased approximately 9% in the 2011 quarter versus the 2010 second quarter. Our gross margin in the 2011 second quarter improved to 16.5%, up from 16.3% in the 2010 second quarter. The increase in Landstar's gross margin was driven by the replacement of low margin substitute line haul revenue with higher gross margin BCO and brokerage business. From a new agent revenue standpoint, revenue generated from all new agent locations added over the past year amounted to $25.9 million in the 2011 second quarter. As I said on the 2011 first quarter conference call, prospective agents continue to be attracted to Landstar because it is a 100% agent-based company whose operations are geared towards supporting its agent base. Our list of prospective new agents remains strong. In this environment of tight truck capacity, Landstar was able to increase its available capacity providers. Landstar's total available truck capacity providers was 34,391 at the end of the 2011 second quarter, up 856 capacity providers from the end of the 2010 second quarter and up 574 capacity providers from the end of the 2011 first quarter. I'm going to now turn over to Jim for his financial review. Jim?

Thanks, Henry. Henry has already discussed certain information regarding the 2011 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 a second quarter record at $111.6 million or 16.5% of revenue in the 2011 quarter compared to $104.7 million or 16.3% of revenue in the 2010 quarter. During the 2011 and 2010 second quarters, revenue hauled under contracts that generate a fixed profit margin contributed 67% and 74%, respectively, of total revenue. Overall, the cost of purchased transportation was 75.5% of revenue in the 2011 second quarter compared to 76.4% in the 2010 second quarter. This decrease was primarily due to the significant decrease in the company's less-than-truckload substitute line haul revenue, which has a higher rate of purchased transportation. Commissions to agents was 8% of revenue in the 2011 quarter compared to 7.3% in the 2010 quarter. This increase was primarily due to the significant decrease in the company's less-than-truckload substitute line haul revenue, which has a lower rate of commissions. Other operating costs were 6.9% of gross profit in the 2011 quarter compared to 7.6% in the 2010 quarter. This decrease was primarily attributable to increased gross profit and a significant reduction in operating costs related to lower revenue in the 2011 from a kitting service provided to one specific customer, partially offset by increased maintenance cost on company-owned trailing equipment. Insurance and claims costs were 12.1% of gross profit in the 2011 quarter compared to 13.2% in the 2010 quarter. The decrease in insurance and claims and a percent of gross profit was primarily due to an increase in the percent of total gross profit contributed by revenue hauled by third-party truck brokerage carriers, which has a lower claims risk profile and decreased costs of cargo claims in the 2011 second quarter. Selling, general and administrative costs were 32.1% of gross profit in the 2011 second quarter and 35.3% of gross profit in the 2010 second quarter. This decrease -- the decrease in selling, general and administrative cost as a percent of gross profit was primarily attributable to increased gross profit in the 2011 second quarter and a decrease in the provision for bonuses under the company's incentive compensation plan. Depreciation and amortization was 5.7% of gross profit in the 2011 second quarter compared to 5.9% in the 2010 second quarter. This decrease was primarily due to the effect of increased gross profit. Investment income was $393,000 in the 2011 quarter compared to $289,000 in the 2010 period. The increase in investment income was primarily due to an increased rate of return on investments held by the insurance segment. The effective income tax rate was 38.2% in both the 2011 and 2010 second quarters. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $70 million. 2011 year-to-date cash flow from operations was $23.5 million. Cash capital expenditures was $2.8 million in the 2011 first half. Trailing 12-month return on average shareholders' equity was 35% and trailing 12-month return on invested capital representing net income divided by the sum of average equity plus average debt was 25%. During the 2011 second quarter, the company purchased approximately 197,000 shares of its common stock at a total cost of $9.3 million. The company currently has 526,000 shares available to purchase under its authorized share purchase program. At March 26 -- at June 26, 2011, shareholders' equity represented 72% of total capitalization. In summary, Landstar had one of its best quarterly financial performances in its history. During the 2011 second quarter, revenue excluding the impact of the significant decline in the company's less-than-truckload substitute line haul service offering increased 15%. Operating income increased 22% and diluted earnings per share increased 27% over the 2010 second quarter and the company reported its best-ever second quarter gross profit and diluted earnings per share. Back to you, Henry.

Thanks, Jim. As we move into the 2011 third quarter, I believe capacity will remain very tight. I also believe that load volume will slowly strengthen as we move throughout the quarter. As I have said several times before, I believe the economy will continue to improve, but at a gradual pace. Could we have some periods of short-term softness? Sure. We saw a little bit of that in May and early June. However, we saw a rebound in the middle to late June. Overall, I expect freight demand to continue to improve throughout the balance of the year, albeit at a sluggish pace. I anticipate pricing to remain strong. As in the first and second quarters of 2011, the 2011 third quarter revenue will again be negatively impacted by the loss of a significant amount of low margin substitute line haul revenue, although the impact will begin to subside towards the end of the quarter. I anticipate 2011 third quarter substitute line haul revenue to be approximately 65% lower than the $48 million of substitute line haul revenue generated in 2010 third quarter. I anticipate this decline will again be more than offset by the increase in other revenue. Given the above assumptions and assuming that current operating trends continue, I would anticipate our 2011 third quarter results to be consistent with the 2011 second quarter. And with that, we will open it up for questions. Terry, so...

[Operator Instructions] Your first question comes in the line of Justin Yagerman, Deutsche Bank.

I wanted to ask a quick question on disaster relief activity and see if there's been anything in the quarter. Obviously we've had a lot of weather-related issues around the country. Curious if Landstar's been involved in any of that and called in with the flooding and tornadoes that we've seen?

Nothing, again, that is really worth mentioning that moved the needle. I think we did a little bit, but it was very minor in relation to everything else.

All right. So it's not something that...

It's not something that moved the needle in the quarter.

Okay. One of the things that's interesting, Jim, in your remarks, you noted that percentage of fixed gross profit revenue is dropping on a relative basis year-over-year. Last year, I think you said 74%. This year is 67%. Can you talk to what's going on that's shifting that? And if you guys view that as preferable or if you don't have a preference or if you'd rather keep it at a higher degree of fixed gross profit revenue?

Now the drop off is -- substitute line haul was a fixed margin, all right, and since that drops off, it's replacing with a little bit more of that brokerage variable business, so that's really what's going on. We're not really trying to control it much. Obviously, in an environment where there's tight capacity, we get squeezed on the variable margin a little bit. When capacity is loose, we expand margins a little bit and that -- but we're not really -- there's not a preference here. We try and drive it either way and it's really just been a natural decline due to the substitute line haul drop off.

And when you think about that, the substitute line haul drop off, I mean, is our lowest gross margin business. So the fact that we replaced it with higher margin, whether it'd be brokerage or the brokerage being predominantly variable, BCO business prominent predominantly with a fixed gross margin. But the reason that swing as you are talking about is really due to the substitute line haul business, which was again only 2% fixed margin.

No, that makes a lot of sense. I guess the last question I'll ask and I'll turn it over to somebody else. I mean, Henry, you've been consistently positive on the economy. You noted that you're seeing a tight flatbed capacity market. Can you talk to what factors really give you that confidence and if there are things you're hearing from customers or seeing in the tea leaves as you look at the data that they give you confidence we don't backslide in the back half of this year?

Well, again, I think my remarks have been pretty consistent that I've never expected something to jump off the page that the economy was going to go in a huge recovery. But on the other hand, I do see and based on conversations that I have or Pat has with the agents and our region salespeople, what their customers are seeing is that they feel pretty comfortable in the back half of the year. And as I said, I'm in the camp of a moderate type movement north. I mean, I think it can be sluggish at times. I think we saw a little bit of that. We had some external factors that might have contributed to that, whether it be the weather or whether it be the earthquake in Japan. I mean, there's a lot of things that happened. But generally, I think you're going to see that northerly movement, and that really has been confirmed by our contacts out in the field, namely our agents. And Pat, do you want to add anything to that? Patrick O’Malley: Justin, if you think about it from a platform perspective, it's power generation, power transmission, some exports in there, high commodity prices are driving some mining. But most importantly, if you think about the barriers to entry on that platform side, whether it's the ability to generate enough capital to invest in some of the equipment that's necessary to transport it and/or to have the qualified operator, somebody doesn't start driving a van today and then tomorrow jump into a specialized piece of equipment. So the barriers to entry are also going to drive a lot of that platform business, but those areas specifically that I mentioned are kind of where we're seeing some opportunities.

Your next question comes from the line of Chris Ceraso, Crédit Suisse. Christopher Ceraso - Crédit Suisse AG: Update on a couple smaller business lines here, can you tell us what's happening in intermodal? I saw that it was down a bit in the quarter. What's the story here? When will this become, if ever, a significant part of your business? Have you begun to train your brokers to sell this and the capacity guys?

A couple of things. One, again, we still have some fallout from as we lost that one agent in -- we terminated one agent back in -- I want to say now, the end of 2009 and another one of our agents I think, as I mentioned last time, had resigned, so we still have some -- with 2010, so we have some fallout in 2011 from that. I think if you strip that out, intermodal business actually has grown pretty nicely. It clearly is a strategy that we want to continue to move on. I mean, obviously, the issue we have always had on that is the availability of boxes. And Pat, if you want to add anything to any of that? Patrick O’Malley: Chris, I think the comparisons are -- Henry did a nice job kind of laying that out for you that there's some 2010 information in there relative to that one agent that left. But we saw some nice opportunities in the second quarter. I'll repeat what I've said in the past. We have to continue to kind of rationalize the system and look at across the landscape of Landstar's agents and say how can we best utilize the boxes and utilize the dray providers and bring some -- bring to bear some leverage on that, including we need to continue to go out and recruit new agents that have that book of business and we have to look at the existing business like I said and kind of rationalize and determine how we can best utilize the equipment. And as I mentioned, leverage against the dray provider. So it remains a product line that we're focused on. And if you look at the year-over-year numbers, they're a bit misleading. Christopher Ceraso - Crédit Suisse AG: Okay. And then Henry, any update on A3i or NLM on how the business levels are and what the outlook is? And maybe just tell us if this is playing out the way that you had expected or is it better or is it worse?

I think, as I said on the last conference call and it's really -- that is combined type thing, we really refer to this whole thing as Landstar Supply Chain Solutions going through some of that -- what I'm going to call cultural blend. Is it where I want it to be right now? No, I probably thought it was going to be a little bit stronger, actually a lot stronger. But I'd say, we are making excellent progress in that and we have barely scratched the surface as far as what this opportunity is in front of us. I mean, obviously, we've gotten business. But to answer your question, it's not where I want it to be, but we barely scratched the surface and I'll leave it and refer to Pat again. Patrick O’Malley: I think one of the things that we have to always be mindful of, Chris, is there are some capacity sourcing tools that were embedded in both of these acquisitions that aren't going to show up as A3i or NLM revenue, but are going to show up as productivity gains for our agents and our ability to source capacity better, faster, easier and smart.

Your next question comes from the line of Alex Brand, SunTrust Robinson Humphrey.

Jim, can you tell us what the bonus accrual was in the second quarter G&A and just remind us what the comp was from last year?

It's about half of what it was last year and last year it was $4.1 million. Christopher Ceraso - Crédit Suisse AG: All right. And so it's only a couple of million dollars?

Yes.

And it seems like -- do I remember you saying in the first quarter that it would be -- I thought it was going to be more like $7 million a quarter. Should we expect that to go back up?

No, that's the annual run rate.

The annual run rate, all right...

If you recall what we're saying last year is last year was almost twice what a normal target would be.

Okay, that's right.

So yes, $7 million annually is the number.

Okay. And then if -- you've talked before about your operating margin as a percentage of net revenue target and you obviously had a very good margin quarter here. Any further thoughts on what that target might look like? Patrick O’Malley: Well, I think our target we laid out was 45. We're getting pretty close to that. We'll look at that when I get to 45.

Fair enough. And Henry, it sounds like what you're saying is and maybe I'm reading too much into it, if things gradually get better in the third quarter, kind of like normal, right? Are you saying that we might actually just have normal seasonality and maybe that's all that was going on in the second quarter? Do things feel like we might have a pattern that looks more like it used to look this year?

I'm not even sure what used to look like is anymore. I mean, that's a difficult question to respond to. I mean, I'm not sure what the normal pattern is other than -- consistently from Landstar's perspective the second quarter, historically, when you strip out the FAA business we did or disaster relief business, the second quarter historically has, all things being equal, has looked very much like the third quarter. So thus when we say consistent or be similar to, I mean, that reference is because that's what historic trends would indicate.

Your next question comes from the line of Jon Langenfeld, Robert W. Baird. Jon Langenfeld - Robert W. Baird & Co. Incorporated: On the load count, how many loads or maybe you have it total load count, what would the total load count be excluding the line haul year-over-year? Or any sort of number that could back me in the data if there's number of loads that we're in last year versus this year?

Jon, just count -- we used about 8,000 loads last year -- this year, I'm sorry, sub line haul and 37,000 last year. Jon Langenfeld - Robert W. Baird & Co. Incorporated: 37,000 versus 8,000, perfect. And then, Henry, how do you think about -- you made the comment, I don't know, a couple of months ago about the need to step up the BCO recruiting and clearly that takes some time to play out. But you came in here in the second quarter similar to where you ended the first quarter and it's still down a little bit last year. But how do you assess your success kind of reemphasizing that area and how long does that take to play out until we can see some of that success there?

Well, if you refer back to my mid-quarter update call for the second quarter, I believe I made the statement that we were down 44 BCOs from the end of the first quarter for the first 2 weeks moving into the quarter, and we had run at that point in time 6 consecutive weeks of positive BCO growth. So I think the way to look at our success in the second quarter and I'll just -- specifically a couple of things we're doing, success in the second quarter is from that 44 down from the first quarter where we have now gone, so it's actually a lot better than even the numbers quarter-over-quarter we anticipate because we started the quarter down 44 in the first 2 weeks, if you recall that. We've got to reemphasize the advertising program. We've reinitiated a -- what I'm going to call a bonus type bounty program, where we're going to pay some money to some agents who are recruiting. There is -- we've revamped, if you will, and restructured some of the recruiting areas. I mean, one of the things that I've always said is that I want to grow both BCOs and broker carriers. In order for Landstar to reach revenue heights, I clearly need to have broker carriers. We've been very successful in doing that in our brokerage. I think business speaks for itself. I think what happened over time is maybe we have put a little bit more emphasis on that and sort of, not that we put the BCO thing in the background, but I think the concentration has been on more brokers. So what we've done is sort of level the playing field and the fact that we specifically outlined who's doing what versus -- and specifically allocated BCO functionality as far as from recruiting and some other things. And I think you're starting to see that pay off. Joe can comment on that. Joe, you want to add anything?

Yes, I just -- Henry described it right. We've taken the whole process apart from recruiting through qualification and to retention and just trying to refocus and reconcentrate on a lot of those component parts to make sure that the experience and what we're doing to get our message out is what we want it to be and we have tweaked it a little bit. We think we have, obviously, a very good platform. We're all owner operator, the freedom, the pass-through of fuel surcharge at 100%, all those things play to our hand. When capacity is tight and life is good somewhere else, owner operators tend not to switch as readily. And if you look back historically, the first 6 months of the year is typically not a BCO growth time of the year, but we are happy with some of the progress we've made internally. And then 9 of the 13 weeks in the second quarter were positive BCO add weeks. So I think that's a nice trend, and we'll see where it goes from here. Jon Langenfeld - Robert W. Baird & Co. Incorporated: Okay, good. Good color. On the acquisition side, anything on that front? And even dovetailing the last question, is there anything you would look at or have looked at to try to accelerate the BCO capacity side?

No. Yes, what we typically would do when we've looked at owner operator-based companies, typically we wouldn't qualify almost, I want to say, 60% of their capacity because again our qualification standards are a little bit high and we're not going to take anybody on that might cause us a problem and that was even before CSA. So I mean, we haven't changed our safety standards. We would continue to look for the most qualified, best BCO out there. And if you are a BCO that can qualify with Landstar, I don't see why he would want to basically haul for anybody else because I think we offer the best programs, the most freedom. But again, we are very particular as far as what BCO we bring on board. Jon Langenfeld - Robert W. Baird & Co. Incorporated: Great. And then the last question on the supply chain side. I know you had a couple of customers, large electronics customer that you're piloting some of the supply chain solutions. How long, when you get one of these customers in the door, to start piloting? And how long until it plays out that they're using a substantial part of the services in their network?

Well, that's an interesting question without commenting on who that customer was. Our agent did receive a recognition from that particular customer as one of his better supply chain suppliers. It takes a little bit of time. I mean, the lead time is longer. We have benefited from some increased freight as was mentioned before by, I believe, Pat. But again, as I've said, we have only scratched the surface. The tools we have are very powerful. We've made some organizational changes. I think as you well know at the beginning of this year and some other things with A3i and NLM to basically melt the cultures and we're well on our way to making these things work very nicely.

Your next question comes from the line of Tom Wadewitz, JPMC. Thomas Wadewitz - JP Morgan Chase & Co: I don't think that you mentioned this. If you did already, I apologize. But what does the progression look like through the quarter in terms of BCO revenue per load by month? And also, what the loads per -- load growth would have been by month?

I clearly didn't mention that, but Jim has those numbers.

I do have those numbers.

I think you probably should be giving it without the sub line haul, probably would be more appropriate. Thomas Wadewitz - JP Morgan Chase & Co: Yes, right, it would be more meaningful x the sub line haul.

Yes, and this is just the BCO and I'm looking -- it was -- you were looking for the percentage increase or rates? I forget which one to give you, or both. Thomas Wadewitz - JP Morgan Chase & Co: That percentage increase, but if you want to give us -- however you want to present it, but it's percentage increase is what I'm interested in.

Here's April, May, June BCO only, okay, it was 1,691, 1,719 and 1,750 for 2011. That's per load thousand to thousand dollars, obviously. Prior year was 1,459, 1,554 and 1,620. That's BCO only, no fuel in there. Thomas Wadewitz - JP Morgan Chase & Co: Okay. And what did the load counts look like? I guess you just do BCO as well. I'm trying to get -- I mean, I guess that -- it seems like generally the carrier is the asset base guys or if you like to call them company iron guys, Henry, they saw the tighter market in June, stronger market in June it's kind of what -- is that what you saw play out as well and do you have any thoughts on July?

Well, I think what we saw was that you saw a little bit of a slowdown of moderation in -- and I think I mentioned it in my comments, from an overall macro perspective, forgetting about whether it's BCO or brokerage or whatever, you had a sort of a slowdown or -- in May, in mid-May to early June and then you sort of started to see things pick back up again. Now that, again, is normal seasonality at the end of June. But again, I think it picked up a little bit more than maybe we had anticipated in June. And as we move into July, again July is historically -- the first several weeks of July is historically a very slow period. On the other hand, it has been pretty much on par with what we anticipated. So again, it just leads me to believe based on what we see currently that it's -- the third quarter is tracking pretty much on trend with where we anticipated, which historically is very much like the second quarter x any disaster relief type work that we've had in the past. If that helps out, Tom, are you following? Thomas Wadewitz - JP Morgan Chase & Co: Yes. Yes, sure, that makes sense. What's the key to transition to seeing some -- I guess, and again, the numbers I see in the model are kind of diluted by the sub line haul business. But if you look out and given the kind of modest growth in the economy and I guess you would lap most of the sub line haul headwind in like fourth quarter, just trying to get a sense of when you think...

Yes, in the fourth quarter, you will have lapped it. You'll have -- July and August, you'll have your typical -- it starts to ease a little bit. It starts to ease a lot towards the end of September. Thus when I gave you that number, 65% of the loss. And then again, the fourth quarter is pretty much apples to apples. I mean, you have to look specifically by October. You might have a little bit more in there, but it's pretty much apples to apples. Thomas Wadewitz - JP Morgan Chase & Co: And the apples-to-apples number in this quarter, if you take out the sub line haul, what was the load growth?

Well, I think I gave you -- from substitute line haul, I gave you -- this quarter you want? Thomas Wadewitz - JP Morgan Chase & Co: Yes, whether BCO and brokerage combined or whatever is the most meaningful way to look at it.

Again, I don't want to get into too much detail. Jim, I don't know how far you want to get into these numbers for this one. Thomas Wadewitz - JP Morgan Chase & Co: I think I'm set on that. You gave us what the B -- you gave us what the sub line haul was last year and this year, so I think I'm all set. I'm all set with that.

Your next question comes from the line of Todd Fowler, KeyBanc Capital Markets.

I wanted to go back to the SG&A line item here in the quarter. Looking at it sequentially on an absolute dollar basis versus the first quarter, it did come down. I think in the first quarter is when you have your agent event. I wanted to make sure that was the case. And then thinking about it going forward, really should it run at kind of this $36 million rate for the back half of the year. Is there anything else that we need to think about as an absolute run rate for SG&A dollars?

Well, the only true variable -- and I shouldn't say the only, because you never know when those litigation or something's going to pop, not that I'm aware of any, but with the real variable in there is really just the incentive comps, right? So if we're going to blow targets away, you're going to see incentive comps up. If we're not, then it's going to come down. Other than that, SG&A is very consistent quarter-over-quarter.

Okay, so where it is in the second quarter is kind of a clean number at your current run rate from a bonus standpoint?

Yes, and I think that's an important factor for everybody to understand that. You can't look at SG&A sequentially because you do have -- as everybody I think realizes now, you've got the -- our annual convention in the first quarter.

Okay, good. And then, Henry, you didn't provide quantitative earnings guidance here in the third quarter. And I'm just curious, I think it's very clear on how you're thinking about the third quarter versus the second quarter, but my impression would be that you're going to have still probably some acceleration in rate as you get some new pricing coming in. It does sound like there's going to be some seasonality with volumes. Is the right way to think about the earnings progression that the third quarter starts kind of at the $0.62 here in the second quarter and then depending on how strong the economy is or how soft it is, it moves off of that?

No, I don't think I said any of that. I think what I said is that it's going to be very consistent with what we have seen in the third quarter -- second quarter and whatever conclusion you want to draw, you can draw your own conclusion, but I clearly didn't state that. I think what we're saying is that what we see currently and what historic trends have been is that the third quarter and the second quarter look very similar and therefore, I have no reason to believe that they wouldn't act the same this year, given -- unless there's something unusual that occurs.

Fair enough. I guess I was trying to put some words in your mouth. So the last one that I have, I'm just curious, you did have the commentary and I know you've talked a little bit about this, but I think that you said that during the second quarter, there was some spottiness or some choppiness in freight activity. I'm just curious if you have some color and maybe it's a question for Pat, geographically or you've got a pretty wide diversity of freight that you move. If you can talk a little bit about where you saw some of the weakness or some of the areas that were stronger? Patrick O’Malley: Todd, I couldn't tell you any specific areas where there was weakness as I sit here today. I couldn't give you that.

I think, Todd, when we look at it, we get daily reports, load reports, and I think from the choppiness what you do is, one day, you can see it positive, a certain percent, the next day, it's a little bit off percent. I think that was the choppiness, I think we're referring to, just from a daily load volume that's pumping through the system, and it wasn't really specific to a region or a commodity.

Yes, and as I said, it occurred in that May timeframe, if you will, where you had more of that, I mean, which again, I think in this economy you can probably expect some of that, but I think the positive that I take away from what we've seen is that it just -- it is moving in a northerly direction, albeit maybe not as fast as a lot of people would like it to move, me included, but it clearly is moving in a north direction.

Sure, that makes sense. And then the variability here this quarter, was it a greater amount of kind of that day-to-day variability than what you've seen maybe in the past 3 or 4 quarters?

In that timeframe, there was more variability, as I said, and then towards the back half of June, it seemed to pick up a little bit. And so I mean, but right now, as I said, what we're seeing so far and it's early into the third quarter, it's pretty much what we had anticipated. I don't see any big -- any changes. It's been pretty consistent.

Your next question comes from the line of Nate Brochmann, William Blair & Company. Nathan Brochmann - William Blair & Company L.L.C.: Henry, I wanted to talk a little bit about -- I mean, clearly, you've done a good job with the agents during the downturn and it looks like it's certainly paying off. But is there anything more to clearly the market share gains that you're getting right now. I mean, your growth is definitely starting to hum along when you take out the substitute line haul business. I wanted to talk a little bit more in terms of, if there's a little bit more behind that in addition to the gradual economic recovery.

Pat, do you want to answer that? Patrick O’Malley: Well, Nate, I think we're continuing to look at each one of our agent locations and our corporate sales group. If you look at the some of the things that we've just done recently from a restructuring here at Landstar, we're trying to sort of, what I'll call harmonize the efforts of our corporate sales group, along with the talents that reside in each one of our agent locations. And how can we bring those 2 together? So as we identify accounts that require the expertise of a heavy haul agent, then we're going to try and marry those 2 people up so that we can exploit the opportunity of that account better as opposed to bringing in someone who doesn't have that kind of strength. So harmonizing those efforts I think will lead us to greater market share gains in those accounts that we're specifically targeting for growth.

Your next question comes from the line of Jason Seidl, Dahlman Rose. Jason Seidl - Dahlman Rose & Company, LLC: A couple of quick questions for you guys. One, sort of just pertains to the market itself. One of your drive-in competitors out there, Werner, basically was saying that they're going to need a little bit of the economy to grow much from here that sort of the tight capacity has already done what it's going to do for pricing. I was wondering if you could sort of describe your feeling about the drive-in market and then maybe describe the platform businesses for those commentary.

Well, look, the platform business is -- it's just a tight market and we continue to see our consolidated revenue per load move north, and I still think you're going to see that tightness continue. And if people believe like I do that the economy will continue to move north, even though it's in a slow down direction, but it's moving north, I think what you're going to see is pricing get stronger. I mean, it has to get stronger because it's going to cost more to basically get that equipment and therefore, that's going to get reflected in pricing to the customers. So I just see an environment where -- with demand creeping up and capacity tight already, it still plays into a pretty good pricing environment. And Pat, I don't know if you want to... Patrick O’Malley: Well, Jason, I think it goes back to what I had said earlier and that is the barriers to entry on the platform side are significant. Those barriers alone are going to help drive price. I think you're seeing, as I mentioned and sketched out some of those businesses where we're seeing some -- whether it's power generation, power transmission, some exports, high commodity prices lead to an awful lot of exploration, natural gas and that sort of thing. So I think from a platform side, I would not agree with that thesis. I think you're going to continue to see some price traction there simply because the barriers to entry are so great. Jason Seidl - Dahlman Rose & Company, LLC: That's what I was looking for, sort of the differentiation between platform and drive down there.

Correct. Jason Seidl - Dahlman Rose & Company, LLC: Okay, that's great color. I guess, my next question, I apologize if you made comments on this, because I don't recall if you did. But can you talk a little bit about the revenue per load on the oceanfront? It seems to be moving around a lot. Should we expect it to be down around these levels for a while?

It moves around a lot because we don't have significant volume, all right? And I think that when we get a -- moves every once in a while, I mean, it can drive that up or down and I don't really think that's a number that -- and that's why it moves around a little bit. Pat, again...

And I guess I was asking the same thing in the air carrier because, I guess, the ocean load -- revenue for load moved down a lot then the air moved up a ton.

It's the same thing, but again I continue to point out that the numbers are starting to move in a nice direction. We are making some traction in our international business from things and I think that's the important factor. I mean, that revenue number which I didn't highlight, but the international revenue numbers is moving up very nicely broadly and as volume also, so that's important. Jason Seidl - Dahlman Rose & Company, LLC: And I guess my follow-up question is just a general one, Henry, because we've heard this from 2 railroads already talking about their views on peak season. They're saying that their customers are calling for a strong but compressed peak season. I was wondering what you're hearing and what would a strong compressed peak season sort of mean for earnings in your mind if that sort of occurred?

Well, first of all, I would probably -- a strong third quarter, yes. I mean, I personally view and I think you know that from a peak season standpoint, I don't know what a peak season is anymore. I think, I won't comment on that. I, obviously, it's a strong third quarter and growth is more than we anticipated from an economic standpoint. Obviously, that's going to bode well for Landstar, very well for Landstar. So it really just depends on what your outlook is, what we see is and what we're forecasting is moderate, sluggish type growth, capacity remains tight. And therefore, we're looking at the third quarter to be very similar to what the second quarter was.

Your next question comes from the line of Ed Wolfe, Wolfe Trahan.

Jim, when Tom asked you before for the BCO revenue per load, net of fuel, do you have a number for where July was last year?

I do.

And if you have where July is tracking today, that would be hopeful as well. And then also, can you do loads while you're getting that information? He had asked for that and then it kind of got lost in the shuffle.

I won't have the current run rate on BCO for July until we wrap up the month.

I'm trying to find the prior year. I don't think I have that, Ed.

No, I don't. Let me see, do you want to ask any other question, while we keep...

Sure. And then can you just look for loads on the BCO side and how they were in April, May and June?

On the BCO rate in July last year was 1,681.

Do you have loads? It can just be percentages if you want year-over-year.

Loads on the BCO?

Yes, please.

61,000 -- 61,300.

How did it go from April -- 61,300 was July a year ago?

Yes.

I never got April, May and June, if you gave that.

It was 68,000, 71,000 and 84,000. That was last year, hold on. 65,000, 67,000 and 79,000.

Okay. And is there any July indication there yet?

No, we're not that far into the -- I don't have an answer to July 2011.

Okay. Henry, when you talk about third quarter it looks like second quarter, are you thinking in your head earnings, are you thinking revenue, operating income and earnings, give or take? Because it seems like the revenue comps get easier, so shouldn't the revenue be a little stronger?

Revenue is going to be -- I think it's pretty similar as far as from, let's call it from an earnings standpoint. I think what you are referring to as far as comps getting easier, substitute line haul, it's an apples-to-apples comparison when you look at the fourth quarter. So I mean that's the way I would look at the fourth quarter. I think the third quarter has historically looked, again, x any disaster relief work that we've done in the past, which typically was in the third quarter. It looks very similar to the second quarter and I think that's really the way it works out. So I don't know what you want to take from that, Ed, but that's my comment.

Okay, we're all having -- we're all digesting it, I guess. Is all of the $54 million loss of revenue in the second quarter from substitute line haul and brokerage, or is some of that BCO?

The majority, probably 90% plus is in brokerage. It's almost all brokerage.

Okay, so as that goes away, just directionally as we go forward, we should see better revenue growth and a little bit less margin improvement. Is that directionally starting in fourth quarter how we should think about things?

Yes. Year-over-year, yes.

Yes, year-over-year. That's why I give the numbers without the substitute line haul, because the revenue increased 15% without substitute line haul. If you put all in, you only have a 5% increase. So in the fourth quarter, when you don't have the substitute line haul in the numbers, obviously what we expect is an apples-to-apples comparison. I don't have to give this excluding type of cost.

No, I got you. But the BCO loads in second quarter were down 5% and didn't have much of that. So those are still tracking negative in July, is that fair?

No, I think it's -- not sequential.

You're talking about prior year, yes, because BCO count is down. Fewer trucks, fewer loads. That's really what it is. It's just -- they can only haul so many loads in a month, so it's really driven by the amount of BCOs that we have in the system.

Okay. But if I add back the line haul to brokerage, brokerage is up 26%, 27% in revenue, but BCO is up more like 5%, 6% in revenue and down in load count. I just want to make sure I'm thinking about this right.

Yes, you got it.

Your next question comes from the line of Matt Brooklier, Piper Jaffray.

I'm not sure -- you may have provided it, but wanted to get gross yield or gross margin, whatever you call it, x substitute line haul and maybe if you could either provide the number or talk to it and then also the year ago, if you will?

Just in substitute -- we gave you the revenue numbers, it runs about 2%, so you just -- I don't have the numbers, but you could, we've given an update, so you can figure it, so you can probably just take it out.

Okay. I mean kind of 2 separate forces at work, if you will. You have substitute line haul revenue with a lower margin peeling off as we move forward, but you also have a tight capacity market where I'm assuming you're getting a little bit squeezed on the brokerage side of things. I'm just trying to get a feel for, as we move forward, the sub line haul revenue going away, but capacity is still tight. How should we think about your gross yields?

Think of it this way. The margin on the substitute line haul is 2%, okay, it's 2%. So we're going to make more money on that hauling just about anything, all right? I mean, that said, so we're substituting -- that goes away, so I lose 2% margin business. Yes, from a sequential basis on -- is brokerage going to get squeezed if capacity remains tight? Yes, but it's a lot better and a lot more money to be made than the 2% business. I mean, that's the way you got to look at it.

Okay, so substituting the substitute business, if you will, you think your gross yield sequentially get better from here, is that a fair comment?

Sequentially, I don't think so because if everything stays the same, we kind of hold our gross yields.

Okay, so you think things kind of hold steady here?

Yes.

Okay. Second question. If I look at the agent commissions and I think this is another area where the substitute line haul business going away is having an impact at 8% of the gross. Is that kind of the run rate of commissions to sales agents moving forward? And has that business changed -- or I'm sorry, has that -- the contract relationship with the agents, has that compensation structure changed at all or is it still the same?

No, no, no.

Okay, so the tick up to 8% and that's just purely a function of the sub line haul business?

Correct.

Your next question comes from the line of John Barnes, RBC Capital Markets.

Henry, I'm just curious on a couple things. One, obviously there's been a lot of discussion about how difficult to recruit owner operators, BCOs. Obviously, that market is getting tighter. I'm curious on the broker carrier side, are you starting to see any difficult in recruiting carriers? And I understand what you're saying about once you get them on, why would they ever want to drive for anybody else. But just given the number of brokers out there, are you starting to see a downtick in the difficulty in recruiting entire carriers into the system?

A couple of things. One, I think my comments as far as why they want to drive for anybody else really refers to BCOs. I mean the broker carrier clearly, he has his own authority, so he can basically fall for anybody. What we hope to provide our broker carriers is obviously better loading opportunities and I think the increase that you've seen sequentially quarter-to-quarter of I think it's a number I gave you, so let's call it about 600. It just shows that people are looking for loads to haul and as long as we can get loads out there, we're going to attract more capacity. But I'll let Joe answer that part of that question.

Yes. John, I would also -- in the release, year-over-year, we've got a little -- approximately a little over 1,000 more carriers that are actively hauling loads for us than we did before. So to answer your question, no, we're not seeing any lack of interest or it's not becoming more difficult to get carriers to line a haul for us. I think what we're doing is we have a lot of good things that they want to participate in and it's about going back through the agents and some of the new technology that we brought on with the acquisitions to actually better utilize the carriers that we already have. So no, there's not a shortage. It's just a matter of execution on better utilizing the ones that want to do business with us now. That's kind of what we're trying to work as we move forward.

Okay, very good. And then, Henry, my last question is, now that you've seen what your model looks like without the substitute line haul, which clearly was lower margin on what you had, can you just address what the rest of the substitute line haul business looks like? I know you're talking about it being -- there's still some remnants of it in there. Is it as low margin as what you just lost, or is what's left in pretty good shape? What's filling that void, where you've got this lost business? Are you looking to fill that void with other substitute line hauls, or is it just the growth in your other core type customers?

It's really the other core type customers. We're not looking to augment that business. Obviously if there were opportunities, it's something we would look at it. I mean, I would. But we're not having any active effort to basically augment that business and really where capacity, where broker carriers are now falling for Landstar's, it's falling basically other customers freight and obviously that's at a higher margin business to us and to our agent.

Your next question comes from the line of Anthony Gallo, Wells Fargo.

You mentioned new agent revenue in the second quarter just under $26 million. Is there a number on say, a quarterly or annual basis of new revenue that you expect or would hope to see contributing from new agents, 3% to 4% of total revenue each quarter, or is there a different way to think about that? I know you're trying to recruit as you can, but just curious how to think about that. Patrick O’Malley: If you look back at history, you're going to see between 4% and 6% on the new agents. I kind of went back about 8 or 10 years or so and that's basically where it runs and we are kind of consistent in this quarter with the $25 million we put on top of the $600 million we generated. So do we have a target? Yes, we don't necessarily have a target, but that's what it runs and there's -- you'd like -- there's always the pipeline of agents at the field trying to recruit and that's a game just hasn't changed.

Great. And then you -- I know you don't speak about specific agent locations anymore, but can you just tell us directionally how you were in the second quarter? And also, of your agent pool, what percent are the $1 million agents now?

Well, it's hard to be -- I can't answer your second question, but I will tell you because I need a $1 million agent. I mean, I need -- in order to be $1 million agent, you really need to get to the end of the year. I will tell you that whereas last year, we had a number of -- or past year and a half, probably a number of very large agents that signed on that were maybe above the $5 million run rate type thing, whereas this year it's more populated with the agents that are more of a $1 million to $2 million type add-on, and in answer to your first question, the location count is up.

Your next question comes from the line of Matt Young, MorningStar.

Could you just give us a quick sense of the replacement cycle for trailing equipment and where you'd be in that cycle at this point?

Yes. 7 years. We have about 9,000 pieces of equipment that we own and we're trying to rotate them about every 7 years, so on average it will be 1,200 a year. Now there's been a couple of years where we didn't add any just for capital purposes. But in general you're thinking forward, we're doing 1,200 a year where we'll replace.

Okay. And then in terms of the cash CapEx, I think you said it was $3 million for the first...

Yes, some $2.8 million, I think, whatever the number was.

Would you expect about the same for the second half of the year?

Yes. Historically, you'll see it anywhere from $5 million to $10 million. It's mostly for IT equipment on the cash CapEx side. Now that -- when we do the trailers it's all through capital lease, so that shows into the footnotes and not on the cash flow.

Your final question will come from Chaz Jones, Morgan Keegan. Chaz Jones - Morgan Keegan & Company, Inc.: Just one quick one, a little bit of a follow-up, and you got into some of this I think with Jason. But just on the air cargo, the acceleration in loads or volume the last several quarters, could you maybe talk about that? Is that new customers, existing customers, new agents or -- just was kind of curious about that trend?

I'm going to guess that -- I'm going to let Pat answer the question, but I'm going to guess his answer is going to be all of the above, but go ahead. Patrick O’Malley: Chaz, I think a greater emphasis on new customers that we've introduced to our product offering.

I'll now turn it back over to you, sir, for closing comments.

Thanks. Does anybody here have a -- Terry, thanks. Anybody have a closing comment? Well, I want to thank everybody for dialing in. As I said before, I think Landstar is well on its way to a very good finish to the year, and we look forward to actually 2012 because I think we've got the building blocks to really take the company in a totally new direction and upward movement. So the foundation being here the -- what we've done in the past 6 consecutive quarters and we feel pretty confident at this point in time. With that, thanks, and we'll look forward to talking to you again on our third quarter mid-quarter update call. Thank you.

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