Landstar System, Inc. (LSTR) Q2 2012 Earnings Report, Transcript and Summary

Henry H. Gerkens - Chairman of the Board, Chief Executive Officer, President, Member of Safety & Risk Committee, Member of Strategic Planning Committee, Chief Executive Officer of Landstar System Holdings Inc, President of Landstar System Holdings Inc and Director of Landstar System Holdings Inc James B. Gattoni - Chief Financial Officer, Principal Accounting Officer and Vice President Joseph J. Beacom - Chief Safety & Operations Officer and Vice President Pat O'Malley - President-Landstar Carrier Group

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division William J. Greene - Morgan Stanley, Research Division Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division Justin B. Yagerman - Deutsche Bank AG, Research Division Christopher J. Ceraso - Crédit Suisse AG, Research Division H. Peter Nesvold - Jefferies & Company, Inc., Research Division Nathan Brochmann - William Blair & Company L.L.C., Research Division Edward M. Wolfe - Wolfe Trahan & Co. Thomas S. Albrecht - BB&T Capital Markets, Research Division Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division Ryan T. Bouchard - Avondale Partners, LLC, Research Division David P. Campbell - Thompson, Davis & Company Matthew Young - Morningstar Inc., Research Division Jack Waldo - Stephens Inc., Research Division Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Good afternoon, and welcome to Landstar System Inc. Second Quarter 2012 Earnings Release Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, please disconnect at this time. Joining us today 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, Cherry, and good afternoon, and welcome to the Landstar 2012 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 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 2011 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 2012 second quarter was another outstanding quarter for Landstar and resulted in record second quarter revenue, record second quarter operating income, record second quarter operating margin and record second quarter diluted earnings per share. Our ability to find the appropriate solutions for customers continues to drive our growth and profit and will be the driver of future growth and profit. In our 2012 second quarter mid-quarter update call, I reiterated our range of earnings per diluted share guidance of $0.71 to $0.76 per diluted share. Actual earnings per diluted share for the 2012 second quarter was $0.76, a 23% increase over the earnings per diluted share reported in the 2011…

Thank you, Henry. Henry has already discussed certain information regarding the 2012 second quarter. I'll cover various other financial information, including our second quarter release. Gross profit, representing revenue, less the cost of purchased transportation and commissions to agents increased 5% over the 2011 second quarter to a second quarter record of $116.7 million, which was 15.9% of revenue in the 2012 quarter compared to $111.6 million or 16.5% of revenue in the 2011 quarter. The decrease in gross profit margin to 15.9% in the 2012 second quarter compared to the 16.5% in the 2011 second quarter was primarily due to a change in mix as revenue contributed to truck brokerage grew to 42% of revenue in the 2012 second quarter compared to 38% in the 2011 second quarter. The cost of purchased transportation was 76.5% of revenue in the 2012 second quarter compared to 75.5% in the 2011 second quarter. This increase was primarily due to an increase in the percentage of revenue contributed to truck brokerage, which has a higher rate of purchased transportation and a 30-basis point increase in the rate of purchased transportation paid to truck broker carriers. Commission to agents was 7.7% of revenue in the 2012 second quarter compared to 8% in the 2011 second quarter. The decrease in commissions to agents as a percent of revenue was primarily due to the increased rate of purchased transportation paid to truck brokerage carriers. Other operating costs were 4% of gross profit in 2012 quarter compared to 6.9% in the 2011 quarter. This decrease was primarily due to the effect of increased gross profit. Gains on sales of trailing equipment in the 2012 quarter, a decreased provision for bad debts on contractor and agents receivables and lower maintenance cost on company-owned trailing equipment compared to the…

Thanks, Jim. My message for the balance of the year remains the same. As I have said before, I believe the economy will move along in an upward direction but at a very slow gradual pace. I expect Landstar to continue to take advantage of its market position and increase revenue by one, coupling its technology be superior service through its solutions-oriented approach to customers; two, attracting new, quality productive agent locations; and three, continuing to penetrate its existing accounts with its wide array of service offerings. Considering the sluggish environment, our increased load volume in the first half of 2012 indicates to me we are executing very well and taking market share. I believe we will continue to gain market share throughout the year no matter what the operating environment. I anticipate pricing in the van market to be flattish, and flatbed pricing to remain relatively strong. Our dominance in that marketplace will continue to benefit Landstar for the balance of the year. Right now, I anticipate the 2012 third quarter operating environment to be very similar to the 2012 second quarter operating environment. Given the above assumptions, I would therefore anticipate our 2012 third quarter revenue over the 2011 third quarter revenue to increase in the 7% to 10% range. I would anticipate gross profit dollars to increase in a range of 5% to 7% in the 2012 third quarter over the 2011 third quarter, and diluted earnings per share in the 2012 third quarter to be in a range of $0.71 to $0.75 per share. And with that, Cherry, I will turn it over for questions.

[Operator Instructions] Your first question comes from Jason Seidl, Dahlman Rose. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: Quick question. Can you talk a little bit about the market for growing the BCOs and attracting new guys going forward? I mean, we've obviously seen some people with company drivers have to take pay up? Has it gotten more difficult? Or what are you seeing out there?

I'll turn it over to Joe in a second. Or Joe, go ahead, I promised my guys, again, I was going to let them try to answer the questions. You know I like to talk a lot, so I'm going to let Joe take it right from the beginning.

Thanks, Henry. Jason, I think the Landstar model continues to be attractive for BCOs coming in the door. It has been. We've seen, as you noticed, a growth in the quarter of 134 BCOs since the beginning of the first quarter. The attractiveness of the percentage pay, the passthrough on fuel surcharge and the LCAPP that program continues to be strong. And the interest from perspective BCOs continues to be pretty strong. What we have decided to do is implement an on-board reporter requirement for new BCOs who are coming on or entering applications after August 1st. What that does to the end of the remote number remains to be seen. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: Have you guys decided to do anything in terms of percentage pay or have you kept that the same?

We kept our compensation the same. I will add that the onboard recorder -- Landstar is going to pick up the costs to the recorder for all new BCOs. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: Okay. And you don't anticipate having to do anything with the percentage pay going forward if...

I think the quality of our freight really takes care of that. If you look at the percentage pay model, the quality, the freight, and the system and the pricing that we're able to obtain from the customer, really, I think is an advantage to us and will continue to be advantage to us going forward.

Jason, I've been here since 1988, start of Landstar, and our percentage pay literally has been virtually the same since that time. We've not moved that up or down. I don't anticipate moving that up or down quite frankly. I think the advantages of a percentage pay systems speak for themselves, our general rates are higher than I think most competition out there. And the fact that we pay a percentage of our revenue to our BCO, they develop that loyalty to Landstar and that ties into really, I think, some of the things that -- a lot of things we offer. I mean our objective is to make our BCOs successful because if he's successful as a businessman, guess what, that Landstar is successful. So that's been our business model. We don't plan on changing that, and at least -- I think I answered your question. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: No, it does. And real quickly, on the flatbed side, obviously, you said strength throughout the remainder of the year. Can you talk about some of the end markets that flatbed serves and where you've seen the strength?

Pat?

Power Generation, Jason, whether that's traditional Power Generation sources or alternative energy, if you look at mining and that kind of business, that's kind of where it's coming from. Machinery is a big part of that platform business, and we anticipate that continuing throughout the balance of the year. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: So still nothing -- or you guys do very little housing-related stuff. But you do do a tiny bit, you haven't seen any uptick at all there?

No. And we traditionally haven't done a lot of housing agenda. Housing picks up, it may suck some capacity out of the marketplace and improve pricing, but we don't see the increase in the housing.

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

Henry, or maybe for Jim, I just want to make sure I understand, if I look at the insurance and claims, and if I look at the commissions to agents as a percent of revenue, if I understand the comments right, as long as the mix stays where it is right now, the increase in the brokerage revenue relative to the BCOs, we should see similar percentages for the commissions to agents and insurance. Is that a fair statement or a fair way to think about it?

From the commission standpoint, yes, that would be a fair way to look at it. But with the volatility insurance, you can use that, but it's a volatile in that line because we are subject to accidents and they're unfortunate, but...

Yes, and I guess I was assuming, obviously, no unusual accidents or no severe accidents.

Todd, the way I look at it, 90-something percent of the claim lines is really related to BCOs. So you just really look at -- what I try to do is just watch -- you look at how much revenues the BCOs are riding on, and historically, if you do it that way, you're 3% to 3.5% in that revenue.

Okay. And then just as a follow-up with that. Jim, I mean there was nothing unusual here in the quarter then when you think about them, within insurance line item, that's a relatively clean number, at least just a good quarter, nothing unusual from a severity or frequency.

Generally, a very safe quarter. If you compare it to last year, last year, we had a claim that appears -- we look at it at layers, there's the [indiscernible] dollars, and then there's the 4 echelon. Last year, we had a claim peer set, 4 echelon layer in that $13 million number. All right. So it's really just a good severity quarter.

But yes, and getting back to your point though, as your percentage of revenue increases as far as brokerage, the percentage of insurance and claim as it relates to percentage of gross profit or revenue obviously, it's going to be -- that's going to drive it down with the more brokerage we have.

And in the same thing with commissions to agents because if there's some margin compression on the PT line, the agents absorb some of that. That's the right way to think about that too?

Yes.

And then the follow-up one that I had -- Henry, I don't remember if you made this comment or if Jim made it, but in the prepared remarks, there was a comment that there was a 30-basis point increase paid for broker capacity. Did you have a same number on what the increase would have been from your customers? I mean, so essentially, were you able to get 100 basis points more and or was what you're getting from your customers, was that down a little bit on the rate [ph]? I'm just trying to get a sense of what the magnitude of the customer rate increase was relative to what you paid out to the brokers?

That's hard to measure. I mean, on pricing, we said from the van's standpoint, pricing in the quarter was flat. We said from the flatbed or the revenue per load number, I should say, the revenue per load on the platform equipment was up 7%. But I wouldn't be able to carve that down as far as that 30 basis points, what that equated to in price. The fact of the matter is price was up to a certain degree. I just don't have it. I mean, I don't think we really can capture that right now.

Can you look at on the broker side, was there a squeeze year-over-year based on what happened with capacity and what you were seeing on the rate side?

Total brokerage -- the gross profit margin on brokerage stayed relatively flat this year over last year, if that helps.

Your next question comes from the line of William Greene, Morgan Stanley.

Henry, I'm curious as to your view on something. We hear a lot about this competition in the brokerage space, I'm sure you've seen some of this stuff. And I'm curious if that kind of competition -- I'm sure you'll say, "well, that doesn't affect us that much in terms of Landstar's business," but that does affect the pipeline for agents? Does that make it more attractive to come to Landstar? Or is that not the way -- it's not really a factor maybe?

Look, you probably answered your own question. I -- look, there's a lot of competition, a lot of people getting into brokerage. My theory on people getting into brokerage, I mean, you saw it with the company iron guys, they wanted to be brokers because they saw what happened in 2009, so therefore you had an expansion of margins. I think right now, you've got a lot of capacity that's exited the marketplace. Capacity is being paid a premium right now. So your margins on pure brokerage can be a little bit squeezed from an agent standpoint. My whole philosophy has been is that we have, over 36,000 relationships with various carriers, what attracts agents to Landstar when you think about it is the ability to access capacity. And I have that available. So the fact that I also don't have any internal revenue where I'm going to keep it from someone and I share it, if you will, not share it, but basically it's -- I don't have any in-house revenue. Again, I said it before, what makes -- if I can make our capacity successful, that's going to make Landstar successful, I also need to make our agents successful. So if I can provide more capacity for our agents, that's going to make him successful. So I think Landstar is more of a pure play -- where I don't have any external or internal business that I keep for ourselves. Everything is either agent based or it's driven by third-party capacity. I think that makes Landstar pretty unique. And the fact that we built up this loyalty, and when you look at our 504 agents that did over $1 million, I don't lose any of those people. We're very few. Because once you're here with Landstar, they understand the benefits with Landstar. So I don't think it's a direct issue with Landstar as far as all these other people trying to get into brokerage. Because again, I think, Landstar's operations are wholly different and we deal with entrepreneurs. I'm not looking to -- you've got other start-up companies, for example, that are trying to roll up various companies. I mean, that's not Landstar's model. That's employee-based. I mean, again, this is entrepreneur. Pat, you got any comments on that?

Well, you might think, certainly, to the extent that there are people that are engaged in the brokerage business that creates a pool of people that may be interested in the Landstar solution, whether they're currently in another system or they're a small broker on their own, we have unparalleled systems, scale and support that we can help them grow their business. So if you're a small broker, $2 million, $3 million, $4 million broker out there, the surety bond, just kind of hanging over your head, there's going to be an increase on that, that can bring some uncertainty. And then if we could bring the systems to you to help you source that capacity better, faster, easier, smarter, then ultimately, you're going to be able to win. And to the extent you're going to compete with people like Landstar that are sourcing capacity better, faster, easier and smarter, you're going to lose. So we think the uncertain times, Landstar is a certain bet. So clearly, more people are involved in the brokerage business that are independent brokers or in other systems, we think that, that kind of echos your thesis creates a pool of potential agents for Landstar.

Yes, that makes a lot of sense. That's what I was going to add. Okay, great. Just a separate question. I want a clarification on something you mentioned earlier, which is sort of the end markets. Is shale and shale gas and shale play not a big deal at all for flatbed?

William, not particularly for Landstar. Now clearly, there's pumps and pipes and that sort of thing that are going to the Shale. But it has not been a particularly large segment of Landstar's business.

So just taking that then, when you look at kind of the commentary about the balance of supply and demand in flatbed versus dry van, do you think the relatively better sort of tightness, if you will, in flatbed is a cyclical outcome? Or is that more structural? Is there something more about that market that just makes it just frankly better if you're in your position?

I think it's structural. Because if you think about the barriers to entry, William, they're pretty significant. You're not going to go deliver load of groceries this morning and then one of these oversized pumps this afternoon. So just answering from a capacity operator standpoint, from a cost of equipment standpoint, there's a significant barrier to entry. And then, how are you going to get the customers? And then we think that there's a real kind of effect to the structural thing. Customers aren't calling 1-800-Find-Me-a-Truck-Broker for this. They're looking for people that have the expertise and the experience to do this. And we think that the agent model really gives us a leg-up in that respect.

Your next question comes from Justin Yagerman, Deutsche Bank. We'll go ahead and move on at this time. Your next question will come from the line Tom Wadewitz, JPMorgan. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Henry, maybe follow-up a little bit further on the kind of verticals that matter and how they're affecting the supply-demand dynamic here. You said, in response to the prior question, you don't do a lot directly in the fracking area. But do you think broader flatbed does? And I mean you've had weakening in drill, dry gas drilling areas. And it does seem like you've seen some deceleration in the tightness of flatbed. Is it fair to think that there's some relationship? Or I guess you're saying it's not only a relationship for Landstar, it's not a relationship for flatbed in general?

Tom, this is Pat. As we mentioned, a lot of our platform business is not derived from the Bakken shale and those kinds of areas. On the other hand, there is capacity that serves those markets. Now as that capacity becomes available, we think that we've got the right mousetrap to utilize that capacity to cover freight that Landstar has from its direct customers. So yes, I mean, any decline in business in that shale exploration, I'm sure, will have some impact on platform, impossible to tell, don't know. But we don't consider that necessarily a negative for Landstar's perspective because today, if someone has 15 flatbeds and previously, 12 of them were in the shale and now today, only 8 of them, they're looking for something for those 4 trucks to do, we'll call -- they'll have to call Landstar, and we think we've got the business to help them move it. So that's how we look at it. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Okay. Yes, that's helpful. I appreciate that. And then in terms of the deceleration in pricing in the van area, what do you think is behind that? Because I think I had view that, as you would say, Henry, the company iron guys tend to put forward that there's not a lot of net capacity coming in, the Class A truck orders would certainly seem to support that idea. So do you think it's just that -- are there certain verticals that are weakening a lot? How do you -- why do you think that is that you're seeing such as deceleration in the van pricing?

Well, look, I'll let Pat follow up on that, but my -- I think in general, I think you've seen, even when you look at our volume increase is only 4%, I think there's been some deceleration. I think this is just a general macro affect that you've got some sort of soft patch here, which is no different than I think I've been saying all along. This thing isn't going to be a smooth economy and you're going to have certain points in time where things become soft. I just don't think that, that's going to maintain. I know everything's is negative again right now, so everybody's thinking in a negative light. I can tell you, from what we talk to our agents and our salespeople, that they're pretty positive as we move forward in the back half of the year. I understand how people feel, however, because that's -- all they hear is negative. But I think it's just a general soft patch that has affected the van area more so than the flatbed area. And when you think about why that is because there's a lot more equipment that came out way back when from the flatbed arena, and that made that market extremely tight. And then you had some pickup in manufacturing and whatnot. So Pat, I don't know if you want to add anything on that.

Clearly the balance, Tom, is a function more of volume decline than it is a function of new equipment in the system. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Okay. So do you think that continues in terms of July would indicate that maybe that -- will you think the van pricing is flat in the second half? Or do you think that weakness in demand points to maybe pricing even going down?

I think what I said in my comments is that our outlook at the van pricing, it will be flattish. Now whether that means slightly below or slightly above, I don't have that crystal ball. And believe, if I have the crystal ball, I'll give you the exact answer, Tom. But I don't have that. But -- so we're thinking that, that's going to just muddle along that way. And obviously, in my mind, I think there's more of a chances of things turning around than things collapsing. So I think there's more upside than downside to any of these things.

Your next question will come from the line of Justin Yagerman, Deutsche Bank.

Margins, 50.4% in the quarter, seemed well above your 45% long-term guidance. There's some help there from the insurance side. But is it time to revisit that guidance? How should we think about Landstar's structure really going forward?

I think as we move forward, and I think I've said this at the mid-quarter call and probably first quarter, and I will set out a new target as we finish this year. Yes, you're right, 50% is beyond what we said is our target. I think, again, as Jim alluded to, we had some favorable insurance developments from a pure severity standpoint. So I think that impacted that, and that not to say we're not going to continue to try to drive safe numbers. On the other hand, if brokerage continues to be this portion of our consolidated revenue or increases, what you'll see is a good effect on the insurance and claims line as a percent of total gross profit. The -- so look, we're going to drive that higher. I've said it before, our objective is to continue to drive that higher. I think the key of Landstar's operating model is the fact that the SG&A supports any level of revenue, and I don't need to add a lot of that. So the more revenue I can pour on, and then you just saw it from a dollar standpoint, we increased, from a dollar standpoint, our gross profit increased, 5%. That fell right to the bottom line. And then because of the favorable insurance -- or not the favorable, but the good experience we had, it just added to that. So the fact of the matter is, the infrastructure is there to support revenue, and now it's our job to go out and build revenue and manage cost as we historically do. And I think you'll see continuing improvement in our numbers. Now, whether we're going to hit 50% every quarter, I wouldn't want to say that.

Got it. As a good segue, I guess because the brokerage is driving some of that, so when I look at brokerage loads up in the quarter, as I think about revenue flat in the third quarter, the comp gets more difficult there. What does that number look like in your mind in terms of brokerage truck loads? Can you keep up that 16% pace? Is that thinking that you're going to continue to have an acceleration in agent count? How should we frame that up as we move into the back half of the year?

All of the above. I mean, we certainly -- we anticipate to continue to grow the brokerage piece. We have these things that we put in place that we think will help develop that. Bringing on new agents has been part of our core business philosophy. Henry talked about it in his opening remarks. So yes, we anticipate doing all of those things.

Got it. And can you talk a bit, right now, where the agent pipeline is? I think you mentioned 504 million dollar agents. How does that compare to a year ago? And what's the revenue so far this year contributed from new agents?

Obviously, the 504 million dollar agents were in 2011 because I can't really tell what our million dollar agent number is going to be until I complete 2012. That's what we have last year. I mentioned that we had $21 million of new agent revenue contributed in the second quarter of this year as far as the pipeline. I mean, we meet weekly and review pipelines as far as who is on that list, and our list continues to be as strong as ever. And I would anticipate similar numbers in the third quarter.

Okay. And lastly, you said that, obviously, the splits haven't changed, but maybe it's somewhat environmental, are you guys doing anything particularly different on the BCO recruitment side? Because I mean, the 125...

Absolutely. I mean we've got -- we have clearly made a change in how we're approaching our advertising and recruiting. I mean, we talk a lot about brokers, even at the beginning of this call, we talked a lot about brokers. But 51% of our revenue, anywhere from 50% to 55%, and historically, BCO's revenue has driven this business and I don't want to lose sight of the fact that, that is an integral part of how Landstar operates. They are the safest guys out there. And we have reinitiated, renewed our approach to advertising, talking about the Landstar benefits of being a BCO as far as the percentage pay, as far as the all-cap program, reducing their costs, as far as the freedom to choose your own loads. I mean, there's so many advantages to being a Landstar contractor. And what we've done is just basically gone out and started to reenergize that. And you see it in advertising, in the trucking magazines and newspapers. We just recently completed our first, what we call, BCO All-Star weekend, where we had all our Million Milers and Road Stars for a 2-day event in Orlando, where we gave away the second -- a new truck, a second truck this year to 1 lucky Million Mile Safe Driver. And again, it's making that individual understand that he's successful. And I don't think, if you go back a couple of years, we sort of lost sight of the advertising and the strength of what Landstar offers in an owner operator. And all we've done is just revisited that and made that very clear. And I think that's driven a lot of our increased recruiting efforts, our retention -- our turnover rate is I think on an annualized basis, about 25%, Joe?

Yes.

So we're just pretty low. So I've said it how many times on a conference call before. I mean, if I'm an owner operator and I want to run my own business, boy, there's no better place to be than right here at Landstar.

Your next question comes from the line of Chris Ceraso of Credit Suisse. Christopher J. Ceraso - Crédit Suisse AG, Research Division: A couple of things. I'm sorry if I missed this, but what was it that drove such a big increase this quarter in brokerage relative to the increase in BCO? It was much bigger share of your business this quarter.

I think it's -- Pat, I'll answer that a little bit, but it's a combination of a lot of things. But I think when you think about what Landstar is doing as far as getting in and taking in more business, more market share, I mean, I've got about 8,000 BCOs, I've got a lot more relationships. So the more business I bring in and the more solutions that we find for our customers, you're going to -- basically, there's going to be a much higher percentage being driven by brokerage revenue. It's got to be, there's only x amount of loads that our BCOs can haul. So I think it's really a function of when you start to see revenue move up, we want to grow both, as I said many times before, but brokerage is going to grow -- it should grow at a faster clip, especially with some of the things that we're doing in regard to some of our work as far as trying to find solutions for defined lane type stuff. That just about do it?

Right on the money. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Okay. And then you spoke to this a little bit. But just typically, your margins are stronger in the back half than in the first half, and here you've hit 50% in Q2. I know that the claims are a little bit better. But is that seasonal pattern still applicable? Should we expect second half margins to be better than the first?

Yes. But that's not to say it's going to be big -- the big -- I say that with a lot of hesitation because, again, one accident, as we all know, I'm questioned many times on our insurance and whatnot, but we carry a $5 million deductible, we book them when it occurs and you have an accident, that -- where we didn't have haven't any severe accidents in the second quarter, that's the type of impact you get on the other hand. Insurance is an area where if you have an accident that's severe could impact any one in particular quarter.

The first quarter is always going to drag down the first half. Because the first quarter is always lower because we have a lower gross profit and we have a convention in the first quarter. So when you look at the half, first half, second half, the better way to look at it is second, third and fourth quarters generally look like similar margins where the first quarter is always the lighter end. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Right. That makes sense. And I'm sorry, just one other quick one. The institution of EOBR as referred from other brokerage type models that, that has the effect of scaring away some drivers because they want to try to be on a network that doesn't yet have the EOBR. Is that something that you're nervous about? Or do you have a view on that?

Well, I think Joe answered that before. Effective August 1st, again, with our BCOs, any new application we receive after August 1st, we're going to basically require an electronic onboard recorder and we'll actually take that out of our inventory and put that in that truck, so it would be basically free to the owner operator. What effect that has initially on recruiting of new BCOs? Not sure. And that's -- but I mean, that's where we are now.

Your next question will come from the line of Peter Nesvold, Jefferies. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: A question on the guidance. So with $0.76 or so this quarter, I mean, when I look over the last 5 years going from 2Q to 3Q, typically you're up $0.01 or $0.02 going from sequentially. The only exception is really 2010. This year, even the high end of the range implies $0.01 down, so I'm just -- wanted to get a sense, is that coming mostly from insurance and other operating expenses or...

I'm not going to anticipate, for example, another insurance quarter like we just had. I mean, but I think you hit the answer -- you have your answer. I mean, the second and third quarter is very similar, I think I said that. And discounting insurance, if you will, I mean you get back down to that range and the obviously, again, I don't have a crystal ball, so it's hard to forecast things. But that's how we come up with that number.

Your next question comes from the line of Nate Brochmann, William Blair & Company. Nathan Brochmann - William Blair & Company L.L.C., Research Division: Wanted to ask a little bit, in a different vein, Henry, in terms of some of the other questions that have already been asked. But obviously, you guys are winning some good market share out there. We've heard from some of the other brokers that given the supply-demand equilibrium that it's been somewhat hard to penetrate some of the larger shippers out there. Could you talk a little bit in terms of maybe the mix of the customer base that you've been able to be successful at?

Nate, this is Pat. I think that the mix of the customer base remains fairly consistent. I can tell you that we continue to take, as Henry talked about in his opening remarks, penetrating our existing customers with new solutions, bringing on new customers. There's nothing material that I could point to and say, "Oh, this is emphatically where we've taken some market share." Clearly, every new agent we bring on is automatic market share, it's the business that we previously had. But I couldn't point to a specific account and say, "Okay, here's where we really capitalized on taking some market share." Nathan Brochmann - William Blair & Company L.L.C., Research Division: But I mean, do you think that your agents are gaining a little bit of penetration in terms of the extra 1% or 2% of a freight lane? Or is it with completely new customers and new areas?

Nate, it's both. It's both. Nathan Brochmann - William Blair & Company L.L.C., Research Division: Okay. And then just, Henry, I mean, you've been one of the few to express decent optimism going forward and not just letting some recent deceleration cloud that. Is there anything specific, and I know you don't have an exact crystal ball, so I won't you hold to it, but is there anything that you could really point to in terms of what gives you that enthusiasm?

Well, I think it's what we are hearing from our field, all right? And what our customers are telling our field offices and how that gets relayed. I mean, because we talk about that all the time. There's so much negativism out there when you listen to whether it's CNBC or listen to any of them. And by the way, my thesis has been the same, virtually, for the whole year. I've never said that this was going to be a robust economy. I said this is going to be moving along at a snail space, sluggish. And I even said, you'll have some spots where maybe it appears that things are going the other direction. But I think generally, you're going to move in a northerly direction. And I think there's more upside than downside. And that's based on what the intelligence we're getting is from the field, and that's where it comes from.

Your next question comes from the line of Ed Wolfe, Wolfe Trahan. Edward M. Wolfe - Wolfe Trahan & Co.: Can you talk a little bit about your plans on the share buyback side? It's been a couple of quarters now. You've been de-leveraging the model quite a bit. When do you plan to get a little bit more aggressive on the share buyback?

Well, I think recently shown in the press release that the board authorized an additional 2 million shares to be bought back. We did buy about 300,000 shares in the quarter. So we've got a lot of shares, basically, that we can deal with at this point in time. And it really -- I mean I don't have -- and it's hard to answer that question because I don't have a specific plan that 2 days from now I'm going to basically go and buy 2 million shares. It will be as we normally do on being opportunistic. The fact of the matter is I've got the shares out there at this point in time to purchase. And as you well know, Ed, you followed us for a long time, that has been part of our model for a long time, and you really can't point to a specific timeframe other than, maybe, 2005 or I should say 2006, 2007, with all the money we got from the FAA stuff that we really had some exorbitant share purchase. But it's been pretty consistent, and it's varied from when we've done it. So I mean, will we utilize and buy those 2 million shares back? Yes. The timing of which is -- I don't have a specific timeframe. Edward M. Wolfe - Wolfe Trahan & Co.: Okay. It feels like the last year and a half or so, you've been a little less aggressive and now the balance sheet is pretty -- it's gone from 50% a couple of years ago to 30% debt ratio. But it sounds like you'll use up the 2 million as the time comes, is that the way to look at it? Can you, Jim, while we're on cash flow, just give us a couple of numbers, cash flow from ops in the quarter and CapEx?

The year was $54.8 million, so it's just got the back out the first quarter. Edward M. Wolfe - Wolfe Trahan & Co.: That's cash from ops?

Cash from ops, $54.8 million. The cash CapEx, $3 million, that's also for the year. Edward M. Wolfe - Wolfe Trahan & Co.: Okay. Appreciate that. Jim, don't want to beat the dead horse, but I just want to make sure I'm understanding this. Before, you gave in response to an answer, something about 3% to 3.5% of BCO revenue as a way to -- as good as any to kind of predict what the insurance and claims would look like? Is that right?

Yes. If you look at history -I just do it over history. Look at the last 5 years or so. Edward M. Wolfe - Wolfe Trahan & Co.: Okay. Because when I do it in the quarter, I'm getting about $11 million, and so it's not perfect but it's still right.

It's 2.5% -- like I said, our severity was very good in the quarter, so we're at 2.5% Edward M. Wolfe - Wolfe Trahan & Co.: Okay. But it's of the BCO revenue, that's what I'm looking at when you...

90% on the insurance really relates to BCO business. Edward M. Wolfe - Wolfe Trahan & Co.: Okay. I just want to make sure I'm seeing that. And then in the quarter, the other operating cost, that $4.7 million felt a little bit light. Was there anything that's a contra-expense or something that's not ongoing there?

Yes, we had our gains on sales of trailing equipment, and it's basically replacement trailers, we're not building the fleet. But there were gains in there Edward M. Wolfe - Wolfe Trahan & Co.: Lower maintenance cost also?

Plus lower maintenance cost. The biggest drop off was really the gains. Edward M. Wolfe - Wolfe Trahan & Co.: And roughly how much was that?

$1.8 million. Edward M. Wolfe - Wolfe Trahan & Co.: Okay. And so is that going to continue for another quarter or 2, do you think?

A lot less. It will be less. We're anticipating maybe somewhere $400,000, $500,000 into the third quarter. Edward M. Wolfe - Wolfe Trahan & Co.: Okay. And then the last question I have was regarding the onboard computers. Is the plan, Henry, that the existing BCO as grandfathered, they don't have to have it or did they already have onboard computers?

We rolled out a program for Million Milers at the All-Star weekend. We're going to gradually move into that. I mean, we're not going to force them to do that because we can't. I mean again, they're independent contractors, we're going to basically try to sell the benefits, so from our existing fleet. It will be up to them. Edward M. Wolfe - Wolfe Trahan & Co.: That makes sense. And you're going to -- and you're paying for the actual hardware and the monthly subscription fees?

Paying for the hardware. It's coming out of our inventory.

Your next question comes from the line of Tom Albrecht, BB&T. Thomas S. Albrecht - BB&T Capital Markets, Research Division: Most of my questions have been answered. I did want to ask, in the brokerage arena, I know within the BCO ranks, about 1/3 of your fleet is platform equipment. How about in the brokerage arena? Do your broker platform loads equal to about 1/3 of your loads? Or my understanding was it might even be higher than that. Do you have any sense of that?

Jim, you got that?

Flatbed revenue is about 55% BCO, 45% brokerage in the quarter. Thomas S. Albrecht - BB&T Capital Markets, Research Division: I'm sorry, say that again.

55%, 45%. 55% Landstar equipment, 45% broker. Thomas S. Albrecht - BB&T Capital Markets, Research Division: But I mean on the actual loads of the broker, do you know if their flatbed versus dry van? I guess that's what I'm getting at.

The question is of our flatbed revenue, how much is brokerage? Thomas S. Albrecht - BB&T Capital Markets, Research Division: Or loads. It might be easier to just look at loads, just how much would be a load that gets moved by a piece of platform equipment.

About 30% of brokerage is going on on-side of the platform. Thomas S. Albrecht - BB&T Capital Markets, Research Division: 30%?

Yes, of the brokerage, loads on-side of the platform.

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

Just one housekeeping and then one bigger picture. Housekeeping, what was supply chain solution revenue in the quarter?

$5 million.

And then so CSA basic question. Can you remind us how you incorporate CSA basics course into your carrier selection? And I'm thinking about this in the context of increased brokered freight, and also the new FMCSA guidelines on how to use basic scores.

Anthony, this is Joe. What we have done, and we did it -- we started actually last March, we get the download, the basics for all the carriers in our improved database on a daily basis. And what we've done is set thresholds internally, and I don't have the numbers or where we set the percentages off the top my head. But what we've got is set standards internally as to what we'll accept to be able to be a qualifying carrier, assuming that you don't already have a safety rating. So if you have a satisfactory safety rating, that takes precedence, but if you are unrated, then we bounce it against where our standards are on the basics as to what percentile ranking you have in each of the public basics.

Any changes after this recent FMCSA announcement?

No. We are, right now, not anticipating any changes.

Your next question comes from the line of Ben Hartford of Baird. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Wanted to know, Henry, I guess, or Jim, if there has been an inflection if you normalize for the severity on the insurance and claims side. There's been an upward inflection in the rates pay of the insurance and claims side. Anything noticed in the second quarter that would portend the back half of the year?

Increase in insurance rates? Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Yes.

Any insurance rates that's going to affect the back half of the year?

No, not significant. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then lastly, on the retention side of agents, I know we talked about the attractiveness of the Landstar platform, but certainly, you have some larger competitors that have gotten interested in the agent model and the environments is more competitive generally. Any more money or efforts spent on retaining the agents that you do have and keeping them within the model?

Look. I think I said this many times before. The advantages of the Landstar model are second to none. And we have more people wanting to get into the Landstar model on our list as I said before, than I think people who would be very foolish to just leave. I mean our turnover on our agents that do over $1 million, as I said before, is very, very small. You've got to be very careful as far as what you pay. A lot of people can get squeezed on margins when they offer splits to agents that you just kind of make any money on or very little money on. And when you start going down that road, you start to get into a little bit of a problem.

Your next question comes from the line of Ryan Bouchard, Avondale Partners.

I was just wondering, I know you said the brokerage gross margins were flat year-over-year in the quarter. Are you guys seeing any compression in July?

I don't have that data available from a gross margin standpoint on a -- that detail at this point, so I can't answer it. I don't know.

Okay. What about throughout the quarter, were they pretty stable, like flat all quarter long? Or they start higher and then compress? Do you know about that?

Jim is going to check. I'm going to say that if anything, it probably was more stable, maybe, to the little bit of a downside in June. June was a little bit soft. I just -- but Jim's checking the numbers on a trended basis.

Okay. Maybe while he's looking into that, my last question. I know that you guys are putting some money into advertising and trying to recruit more BCOs, and it was up 134 in the second quarter. Do you know how the July is trending so far? Or is it kind of on that same run rate? Or has it slowed down a little bit? Or is it picking peaking up?

It's not slowed down. We're up about 40 BCOs in July so far. So no. The in-the-door number continues to look good.

On the quarterly gross margin on brokerage, it was relatively flat during the quarter, with a little bit of an improvement in June. A slight improvement in June.

Light improvement. So I said it was flat, with a little bit of a decline, so I was wrong. So here you go, all right.

A very slight improvement.

Your next question comes from the line of David Campbell, Thompson, Davis Inc. David P. Campbell - Thompson, Davis & Company: Henry and Jim, I just wanted to ask, in your comments, you mentioned that the revenue growth for the second quarter, third quarter upcoming, might be 7%.

7% to 10%, I think, is what I said. David P. Campbell - Thompson, Davis & Company: 7% to 10%, right. And your gross profit margins -- your gross profit dollars may be up 5% to 7%. That seems to imply a much smaller decrease in gross profit margin year-to-year than you had in the second quarter. But that's relatively unpredictable, isn't it? Given it depends a lot on whether the -- what the mix is.

A lot depends on mix, a lot depends on pricing, a lot depends on a lot of different things. I mean, we had a 9% increase in the second quarter and a 5% increase in gross profit. I think 7% to 10% and 5% to 7%, I mean I think it's in the ballpark. I think that actually works, quite frankly.

Your next question comes from the line of Matt Young of Morningstar.

One of the large brokerage firms has been highlighting that a lack of, call it, route service failures in the balance supply and demand have perhaps reduced the incentive for some shippers to turn to brokers to renegotiate pricing, call it, contributing to the gross margin squeeze and also tempering share gains. I know you guys are in a slightly different niche, especially with the flatbed. But are you noticing similar dynamics with some customers? It doesn't sound like it.

No, Matt. To answer your question, we're not.

Okay. Are you finding that customers are at all less worried about the access to capacity than in the past? I mean I know that's one of the reasons why some shippers have turned to brokers in general, to get that access when they're worried about not getting it directly from the asset-based carriers.

I think, Matt, I think there's still some concern about available capacity, maybe not today at this moment, on this week, in this day. But I think that there's still genuine concern about capacity tightening in the back half of the year. And so they don't want to be caught as they were a couple of years ago, where they -- capacity was very tight, they were paid extraordinary sums of money to get whatever available capacity there was. So I think that they're still concerned that -- what's the future hold for capacity because there's not a lot of it coming in.

Your next one will come from Jack Waldo of Stephens Inc.

I had a question. 2 quick. The first question, just housekeeping. What were gains on sale in the second quarter over a year ago?

Gains on sale, second quarter a year ago. I think he's looking that up. What's your second question?

Question, kind of interesting watching rollout of EOBRs, and I was just curious, in your thoughts on why would you guys -- or what's behind the timing on you rolling out the EOBRs? And do you have any estimate, Henry, obviously, a rough estimate on what percentage of the industry you think currently employs them and what doesn't?

Well, I think from the EOBR standpoint, I mean the timing of our doing that is -- obviously, it has nothing to do with the recent law that's passed, because you've got time. But I think when you look at what the competition is doing from a CSA standpoint, as far as putting EOBRs in and therefore making sure that their fatigue basic goes to 0 almost immediately once they put that in, in any particular error that a guy keeping a paper log does is going to count as points against, so we're just doing an effort to basically make sure we maintain our under threshold amount, that's really all it is. All right, and Jim.

We had an insignificant loss of like $40,000.

Okay. So a $1.8 million swing year-over-year?

Yes.

It will come from Scott Schneeberger of Oppenheimer. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: I have 2 questions to ask, and both up front so you can attack them how you like. When you answered this earlier, but I think it was just on brokerage, it was flatbed percent of total mix. I'm just curious, has that -- is that moving a lot to anticipate that moving up higher and was that just brokerage, not including BCO, just a bit of a cut there? And then the other question, if that takes a moment to look up is, Henry, you announced in the beginning of -- or a part of your prepared remarks that tech is a big revenue driver differentiator. Could you just elaborate on maybe things that you're doing differently update there.

Well, it ties into some of our brokerage stuff, where we see that really impacting additional freight lanes. I've been saying, probably, now for the last 6, 7 months that what's going to happen, we believe, that our technology, as we provide solutions to customers and go into our customers and ask what -- how we can make them more efficient, what can we do to solve your problems, technology is a huge part of that. And what that technology is going to drive is increased freight, and that's where I've said over and over that you're going to really start to see how successful that technology implementations are is in the freight volume, not so much in the fees for revenue or the management fees but the freight that it's going to generate. And that's what I meant by that as far as finding and tailoring solutions for our customers to drive freight. But Jim, you've got his other question.

Yes, I'm not sure which percentage you are looking for. But 36% of revenue is platform on-sided, and 45% of flatbed is on brokerage. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: And how is that trending is, I guess is essentially where the question is going?

I don't see any change in the total revenue. Actually, I don't see any change in any of that picture, probably. I mean I think it's historically been between 30% and probably 35% of our revenue. I don't see that changing much and as far as the percentage is brokered, it's probably going to go up because of the tightness in that arena. I think that's it. And with that, any closing comments, Jim?

No.

Pat?

No.

Joe? Anybody?

No.

I just want to thank everybody for listening, and we will talk to you again on our third quarter, mid-quarter update call. Have a good rest of the afternoon. Thanks. Bye.

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