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Landstar System, Inc. (NASDAQ:LSTR)

JPMorgan Aviation, Transportation and Defense Conference

March 06, 2013 10:25 am ET

Executives

Henry H. Gerkens - Chairman, Chief Executive Officer, President, Member of Safety & Risk Committee and Member of Strategic Planning Committee

James B. Gattoni - Vice President & Chief Financial Officer

Analysts

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Henry H. Gerkens

Good morning. I was told to start when that thing starts ticking. Tom's not here. So my name is Henry Gerkens, Chairman, President and Chief Executive Officer of Landstar System Inc. Here with me today is Executive Vice President and Chief Financial Officer, Jim Gattoni.

Let me first move through the Safe Harbor statement. Take a little bit of look at that. I start every Landstar presentation -- and there's Tom. I start every Landstar presentation off with our model definition. And keywords to the model definition are safety, we're going talk about safety later on in the presentation, but network. Network of agents, third-party capacity owners and employees is how we do our business. Landstar owns no power equipment. We utilize third-party capacity exclusively, operate primarily in the truckload business and we provide a lot of different services that comprise what Landstar does. But anyway, network of agents, third-party capacity owners and employees. Agents are our sales force. Capacity, we're going to talk about business capacity owners, a term we coined, and brokerage carriers.

Services Landstar provides, as I said, predominantly truckload, but we provide a lot of other services also. And you can see the traditional truckload services on the one side of the chart there. Back in 2009, we made 2 acquisitions, which really got us into the, what I'm going to call, the supply chain services. But we like to think of ourselves as a one-stop solution. Again, we grew up in the trucking industry. 90-somewhat percent of our revenue is truck-related, but we do provide air, ocean, rail, some warehousing. And as I said, we now provide supply chain solutions, where we basically are managing the information. And by managing the information, we hope to create more loading opportunities for our agent base.

These are the industries that we serve. And you can see it's a pretty diverse sector. 35% of our business is flatbed, flatbed-related accounts. We have over 25,000 different bill-to accounts. Our top 25 customers account for about 28% of our revenue. Our top 100 account for 44%, so it's, again, it's a highly diversified revenue base, with no one customer exceeding 5% of our revenue. We're very big in, what I'm going to say, the secondary and tertiary markets. We're irregular route, nonroutine-type business. Not a lot of defined line of business, so we do have some defined line of business. So we don't run into the, very often, the big names that you're familiar with, whether it be Hunt or Werner or any of those guys. They are more highly concentrated as far as their customer base. And really, a more defined line of business because they own the tractor and they, basically -- their objective is asset utilization.

Talk about our capacity. We grew up, and I've been here since 1988 when Landstar was formed. We grew up as really an owner-operator company. Business capacity owner, it's a term we coined. We believe we have the best drivers, best in class. We pay them a percentage of revenue. I'm going to get into that later on, but that makes it, I think, a very, very different business model, when you look at other people who run owner operators.

When you think about our business capacity owner, average age is about 52 years old. He's been a company employee driver, where he was paid on a mileage base system. Really, the only way he made more miles, made more money was to drive more miles. He was really, really told what to do and where to go. Doesn't have his own choice. At some point in time, if he liked what he was doing, he probably got into his own tractor and maybe was financed into that tractor by the company that he was driving with. Probably given an increase in the mileage rate of pay. But again, the only way he was going to make more money is to basically drive more miles. He's almost treated like an employee. As opposed to the Landstar System, where he gets paid a percentage of revenue. We don't tell him what to do, where to go. In fact, if he doesn't want to do anything, he doesn't have to do anything. All right? Well our job is to put loads in the system. Our agent, and I'm going to talk our agents, has the responsibility to make sure the load is covered. And we're going to talk about how wide and how large our capacity is when you combine that with our broker carrier account. But the difference between a broker carrier in a BCO is that a broker carrier has its own authority. He can haul for anybody. A BCO is riding under Landstar's authority, or DOT authority. Therefore, he's exclusive to Landstar, although those leases are cancelable within a 7-day period.

We have major contracts with the rails. We have major -- with all the rails, air cargo carriers, ocean cargo carriers. And as I said, we have a network of warehouse capacity providers that if a customer needs warehousing services, we can do that. We don't own the warehouse. We don't guarantee the space in the warehouse. It's a very small piece of our business. We get paid a percentage if that customer wants, as does our agent. The broker carrier gets paid moving back up that chart on a negotiated rate basis. And I'm going to talk about how that all works a little bit later on. But again, business capacity owner, broker carrier. If you look at our capacity account, you can see over the years, we have improved that. If you look back to December of 2009, we had 32,600 -- or 32,700 as far as total capacity providers. We've got 39 -- almost 40,000 capacity providers right now. Again, if you're a small business operator or a pure play, we don't have any company of our own [ph]. We don't favor company trucks, and this is the company you really want to lease onto and, actually, drive for. Because our objective is to provide loading opportunities for the capacity out there. And my -- I've always believed that the more loading opportunities you put in the system, the more capacity I'll attract.

We had -- speaking of BCO's, by the way, we had a low turnover rate last year of 23.8%. That's pretty low. And if you actually stripped out the first year, that's about half of that turnover of the first year. And why? Because when a person moves on to Landstar, what happens is he's usually coming over from a mileage pace -- paid system, where he's got a dispatcher that tells him what to do and where to go. Under the Landstar System, all these loads are out on the Internet. And he selects his own loads. He determines where to go and what he wants to do. A lot of guys are -- and then you're really running your own business. A lot of guys really can't do that. So that's why that first year is where you've got the majority of that turnover, of that 23.8% that I mentioned.

And again, for a BCO account, about 97% of our guys have one truck or less. Again, it's his own business. We think he's the safest fleet out there because, again, that's his business. And if he gets into an accident, he potentially is out of business.

If you look over the years, you can see how Landstar's revenue is sort of similar to when you look at the air, ocean, warehousing that's remained rather flat as far as the total percent of revenue. But you can see from where our growth is coming from, the brokerage piece is becoming a bigger and bigger part. And why is that? It's because there's only x amount of owner operators out there. The universe has been described to me as maybe 200,000, a little bit less. And there's only so many that can actually qualify onto Landstar's system. So if we were going to grow our revenue, we had to go into a, again, staying with that nonasset based theme, brokerage. And so it's logical that you would see it become more and more of a part of our business. And right now, if you look at last year's numbers, 50% was generated through BCOs and 43% was generated through broker carriers. I don't have any set percentage. My whole objective is I want to move product from point A to point B. And whatever -- as long as I can get there, I mean, our system works as follows. An agent puts the load into the -- into our system, and that load has all the characteristics in it as far as type of equipment, destination, pick up time, all the appropriate information. It goes to 2 boards. One is an internal password-protected board accessed only by our BCOs. The other goes out to a public board, which could be accessed by potential broker carriers or our broker carriers. It's first come first served. The difference being the pricing will go to the BCO because he gets paid on a percentage basis, he's exclusive to Landstar. So we put the pricing there, whereas the broker carrier is on a negotiated rate basis. So we don't give them the price because that price is going to be negotiated. So in theory, the BCO really has the first choice. And he makes that selection. Capacity makes that selection.

The agent, on the other hand, who's taking that order in from the customer, he doesn't get paid unless that load is moved. So he's basically going to make sure that, that load gets moved. And let's say there's something that's in the system that didn't get picked up right away, he's going to go into another system that we have all available trucks because we know where a truck's empty. He's then going to reach out electronically to a truck to say, "Hey, I -- maybe I'll go in for a -- give me all the trucks that are load within a 50-mile radius of this pickup point." And then he'll get the truck to call him in or, perhaps, maybe it's priced incorrectly and then he's got to go back to the customer and adjust the price if it's not being picked up. But again, the key is, he doesn't get paid unless the load is moved. So that's what he does. Goes out, solicits revenue and makes sure that, that loads gets covered. And again, if you think about everything we've just talked about, it really gets to the entrepreneurial spirit of America. I mean, that's what we do. We're the home of basically a lot of small business. And that's exactly how Landstar has operated for years.

Our agent makeup. Remember, agents are very important. And a lot of people would say to me that, what's the barrier to entry and how you do business. It's not the capacity. It's that network. The interconnectivity of that network and the agent. I don't have any real revenue that's in conflict with the agent base. Everything we get, we try to push through our agents to build up that loyalty. Same thing with the capacity. Don't have any company eyes, so I'm not in conflict with that. That goes a long way. Now you look at that map and you say, "Okay. We got a lot of coverages. Predominantly, in the East. You've got a lot of coverage in the West." It's about 1,300 -- 1,200 or 1,300 locations. But the key to Landstar's success are really the, what we call, the Million Dollar Agents. And the reason I say that is because they account for about 90% of our total revenue. So when you look at Landstar's success, it's -- can I make these Million Dollar Agents more successful? In fact, if you look at back in 2009, the average Million Dollar Agent generated about $4.3 million of Landstar revenue. Last year, it was $5 million. You see, there is $750,000 up to $1 million. We got 83 guys in 2012 that are potential Million Dollar Agents. And you see the numbers 504 -- 504 , a little bit confusing. We're on a 52-, 53-week fiscal year. And 2011 was a 53 -- there was an extra week there. In addition, I think the revenue in the fourth quarter was a little bit shy of what we thought it was going to be. But again, we still finished with 504, but we have a lot of Million Dollar Agents in the pipeline. I was asked -- I get asked a question a lot about acquisitions. And well, we don't do acquisitions per se on a large scale like a lot of people. It's like a fever out there now. But the -- we had $107 million of new agent revenue that came in over the past 2 years. The year before, it was $170 million. And really, what that is, is bringing in new agents. It's sort of like -- I won't call it a mini. I mean, it's not a mini acquisition. It's not an acquisition because these guys are independent. But again, that's the way we grow our business. So we're very active as trying to bring in those small businesses that want to be part of a network if they want to grow their business. Because I can supply them with the capacity. Because what does an agent need to grow his business? He needs access to capacity. We provide that. And as I said before, what does capacity need? They need loading opportunities. So we sort of like act in between to try to put that all together.

From a financial standpoint, if you're going to understand Landstar, this is probably the most important slide I can put up there because it really gets to how Landstar's P&L works. And I divided this thing into fixed gross profit and variable gross profit. Landstar defines gross profit as revenue less agents' commissions. Because every load that's moved gets us a commission. And less purchase transportation, what I pay the tractor or truck. So if it's a BCO load, I pay a percentage of revenue. Typically, you get 75% for the truck. It's typically 8% to the agent. So what you've got is an 83% variable cost. I have 83% variable cost on $1 revenue. But if I don't have that revenue in, like 2009, for example, when you had some recessionary periods, I don't have that cost of that fixed asset to carry. But again, that's a fixed gross profit. We have 2 types of brokerage arrangements. Both -- under both, you pay the capacity and negotiated rate. Under the retention percentage, what that means is that Landstar takes a predefined percentage off the top of the freight bill. The purchase transportation is paid, and the agent gets what's left over. From Landstar's perspective, that's still a fixed gross profit.

I move down to the variable piece, and that's your typical brokerage arrangement. The one difference is you pay the negotiated rate to the transportation provider, and then we split that margin with the agent pursuant to a contract, 50-50, 60-40. Whereas the retention piece, the contract says that we'll take something off the top. And that's how it splits. And you can see in the fourth quarter last year, 59% of our revenue was generated through fixed gross profit. And 41% was variable. But that's how the Landstar business model works. And that's how the Landstar business model works.

So our objective is, as Jim is going to talk about later, is grow gross profit dollars. I grow gross profit dollars, my systems are already in place, I don't need any more people. So what we do is, you're going to leverage that against our relatively fixed SG&A cost. I don't care about whether the percentage of the gross profit percentage goes from 16.1% to 15.9% to 15.8%, generally, because that's usually because of mix. What I care about is the absolute dollar increase and then you take the operating income over the gross profit, and that's where you're going to get your increase in what I'm going to call your operating profit margin. And that's what we're concentrated on.

So I hope I have described this is what Landstar does. We funnel information between the capacity, the agent and our customers. So really, what Landstar does is flow information.

Said I'd talk about safety. We're very proud of our safety record. We've basically adopted the philosophy that you've got to basically attack frequency, and I think we've done it fairly well. These are million miles driven, total accident frequency, we've driven that number down over the past 5 years to 1.82. We have over 735 Million Mile Safe Drivers and, in fact, we've got 2 4 Million Mile Safe Drivers. I think probably the more measurable, and I don't have the 2012 statistics for the industry, but these are DOT recordable accidents, which basically is an accident that involves a tow away or an injury. And as you can see from this slide, our BCOs have consistently outperformed the industry year in and year out by a wide margin.

Let me talk a little bit about what we're looking at in the 2013 operating environment before I turn it over to Jim for a financial review. Look, the uncertainty in my mind continues. I know we've resolved the "fiscal cliff," we've kicked the cans down the road, I'm sure we'll kick the can down the road again. But I think there's a lot of customers out there that are basically holding back, waiting to see what's going to happen. I mean, it's logical. So I think the uncertainty continues. So I think you're going to have slow economic growth, although from Landstar's perspective, we had a very strong first half. And I think the second half was a little bit weaker. So moving into the year, I knew that the first half comps are going to be a little bit more difficult, and the second half I think is going to be a little bit easier, especially depending on, if we can get some certainty. One of the things that has been resolved, I said before, we were a very big flatbed hauler. The energy credit for wind and whatnot has been extended. Customers are starting to regear themselves up. I expect that to come back into the freight sometime in the middle of the second quarter. I think that's a positive for Landstar. Obviously, the first quarter of this year, the weather compared to the prior year has just been absolutely unbelievable. But I expect the second half to be stronger than the first. And in addition to that, if that occurs, I would anticipate that the capacity market will become tight again. And that's good for pricing. You go back to how Landstar operates its model on that fixed gross profit percentage, I want to increase the dollars. The pricing is very important. If I increase price, that falls -- that goes right to Landstar's gross profit number. And that's very important. So I think our view is that capacity will tighten, assuming the economy gains some momentum. I think it's poised to gain momentum. I do find some of the economic indicators a little bit inconsistent. I guess that's the way I would look at it. But the -- I think you're in an area of regulation, and that's going to continue, whether it be the CSA; electronic on-board recorders; the California Air Resource Board, one of my favorites; and some of the things that they put on us. I mean, we're literally in a process of replacing a lot of our van trailers. We do supply some trailers because we had a lot of drop and hook operations. I know that if you traverse in California, you basically have to have these resistant type things, sidekicks on the side. So we're actually replacing the whole fleet over the next 2 to 3 years. But that's the type of stuff that's going on, and I think that, that's going to continue.

Our objectives and our focus state the obvious here, on the first one, revenue and gross profit growth. I need revenue, obviously, to grow my gross profit. But gross profit growth is important for us for the leverage that we're going to gain. And what we got to do is improve the efficiency and productivity of all 3 constituencies, of the customer base, the agent base and the capacity. So it's technology that is our focus.

If you look further down, so what is our revenue and growth strategy? Well, grow new productive quality agent locations. I mentioned before that over the past 2 years, $107 million of new agent revenue. Prior to that, it was $170 million. Again, we're going to continue to move in that direction. I think a couple of things that we're looking at also that potentially might have some play is we've run across a few small businesses that don't really want to be part of -- and they just want to get out of the business. I've got those 500 Million Dollar Agents that are good business guys, so maybe we can basically agent finance that acquisition through him and basically increase and so take that guy in. Not a new agency, but be part of an existing agency. And look, we'll look at outright acquisitions. But it's got to be -- for Landstar to buy a company, it's got to fit pretty nicely. We have a very unique business model, there's not one like it out there. So we would look at acquisitions, but our track record has been that we've really moved away from. That's not to say we wouldn't if something came across that made sense. And obviously, we need to continue to augment our capacity base. I think the companies that can access capacity are going to win in the long term. And I think we have an advantage because we have a lot of revenue in the system that I think capacity will be attractive for Landstar.

From a technology base, I think we've touched upon some of this stuff. I will touch a little bit on the Managed Solutions piece. The ACG is a acronym for the Agent Capacity Gateway. It was developed from the technology acquisitions we did in 2009, and it really is an agent application that improves their ability to source capacity. And then the Total Logistics Solution, TLS, is another solution that provides additional loading opportunities for our capacity in addition to managing the freight of a customer, as I said before. So moving in that direction.

From a financial objective, our objective is to grow gross profit dollars in the mid-single-digit range. Again, I put the term mix up there because the percentage can be deceiving. If the percentage moves down, it's more than likely due to mix as far as one brokerage versus BCO or heavy hauler versus something else. We set a goal a number of years ago to be at a 45% operating margin within a 3- to 5-year time frame. We hit that. Our next goal in the next 5 years is to be a 50% operating margin. And the way we get there is basically take that increase that you get in gross profit dollars and drop at least 70% of that back down to the bottom line, thereby leveraging the whole thing. We've historically grown our earnings per diluted share, except for maybe 2009, which was a difficult year for a lot of people. And we've been buying back our stock, which I think Jim is probably going to talk to in a little bit, at a pretty good clip since 1997, and Jim will get into that. And with that, I'll bring up Jim.

James B. Gattoni

Thanks, Henry. The slide you have up there is some financial information for the years of 2012, 2011 and 2010. It includes the revenue gross profit, operating income and diluted earnings per share. Revenue for Landstar's 92% truckload U.S, cross-border Canada, cross-border Mexico. So the primary driver of the business is really truckload North America. It's what we drive. What we do is we track on the truckload as we look at revenue per load and the number of loads. And we see that daily, so we can kind of track where the business is going. But those are the key metrics.

Moving over to gross profit. We have the gross profit dollars. You can see we did 400 -- $45 million dollars of gross profit on a 16% gross profit margin in 2012. Our gross profit, it's -- the revenue and the costs to get the gross profit, the costs are 100% variable. If we don't have a dollar transportation revenue, we don't have a dollar transportation cost and we have no agent commissions. To get the gross profit, you take your revenue, less what we pay the capacity, less what we pay our agents. Capacity doesn't get paid unless we move a load of freight, and an agent doesn't get paid unless we move a load of freight. So it's 100% variable passed through to the gross profit line.

As you can see, we move -- we grew gross profit in the 2012 over 2011 by about $14 million. Moving down to operating income and operating margin. Operating income is gross profit less our infrastructure costs and insurance costs. So it's our SG&A. You take out the SG&A costs, which is about 65% headcount. We have insurance. We're self-insured up to $5 million per occurrence on an accident involving one of our capacity providers. You have some depreciation and some other operating costs. But like Henry said, the goal of Landstar really is to push through -- for every incremental dollar of gross profit growth in any given year, we want to push 70% of that down into operating income. And if you look back on the last 10 years, we've actually accomplished that. It's not a very difficult goal to get to because like I said, our infrastructure is built.

If you look to see, we did in 2012, we actually pushed over 100% of the gross profit dollar growth due to operating income, and we did the same thing in 2011. For example, we grew $14 million of gross profit in 2012, and end up growing the operating income by $22 million. But that's the way the model should work. The more gross profit we can put on top of the model, the more gross profit will pass through to operating income. What we say is, with 70% of that pushing through to operating income is the way to give back to shareholders. So the infrastructure is built, and that's kind of how we try and manage the business. And from an EPS standpoint, it generally grows faster than operating income because we buy -- part of the business model, we've been buying shares back since 1997. And I'll show you the chart in a second.

Returns. Some of the best in the industry as a nonvariable -- as a nonasset-based variable cost business model, we generate some great returns in the industry, and these are some of the highest in the industry. This slide shows your share buybacks, our cash flow and our share purchases. And that yellow line represents our share count, outstanding share count. If we actually took this back to 1997, you would have seen 103 million shares outstanding. We would've purchased over $1 billion worth of stock, and we are sitting at about 47 million shares today. It's part of the business model. It's what we do with the excess cash flow that generate -- that's generated by the business model. There's one anomaly in here. If you look at 2005, it shows -- there's no blue cash flow line. It's because in 2005, we had a contract with the Federal Aviation Administration and it provided disaster services relief down in New Orleans for Katrina and the other storms that hit down there. And the way those contracts worked is -- worked with the government is they didn't pay us until after we completed the entire task. So although we had built $275 million in 2005, kind of ate up some of our working capital, they didn't pay us until 2006. So that's why you see the jump in the blue line in 2006. But what did we do? If you see those 2 years on the stock purchases, we bought a significant amount of stock purchases -- of stock back in those years based on that cash flow coming in the year subsequent to all that business. Other than that, the enormous -- you're looking at 50 million to 70 million of stock buybacks a year or more, and we'll continue down that path.

Like I said at the beginning, 92% of our business is truckload transportation, U.S. domestic and cross-border Canada, cross-border Mexico. So what we provide here is the -- what we look at as load count and revenue per load as it relates to that 92% of the business. The orange dot actually represents where we are today on a load count volume in January. You can see January was below prior year on a truckload volume. It was 5% below where we were in January of 2012. However, there was some weather and we also had one less full day -- work day in the month of January because, in January this year, January 1 was on a Tuesday. But last year, it was on a Sunday. So there wasn't much impact to January 1 in the prior year, but so we have a little bit of weather. There is a little bit of softness plus the number of days in January is a little bit less this year than it was last year. That kind of drove that orange dot down below the little green cross, which is prior year's revenue per load. And the reason we have spikes in March, June, September and December is because our quarters are 4-week, 4-week, 5-week months. So January has 4 weeks, February has 4 weeks, March has 5 weeks. So it's just a spike because an extra week in each one of those months.

From a revenue per load standpoint, you could see that we're just slightly below the revenue per load that we had in 2012 for January. In February, we continue to see -- be a little bit behind revenue per load, volume has kind of flattened off of last year and through March -- a couple of week -- a couple of days of March, we're still seeing our revenue per load a little bit slightly behind where it was in the prior year. So that wraps up the presentation. And we'll open for questions.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Great. Thanks, Henry. Thanks, Jim. I have 1 or 2, and then we have time for some questions from the audience. We -- yesterday, we had an afternoon where we had quite a few broker carrier presentations. We had -- I saw a couple of other public companies and then we had a panel with some private companies, Coyote, TQL, Freightquote. What do you think the impact is to your agents and to your growth from this increasing focus on truckload brokerage and what seems to be fairly viewed as probably increasing competition?

Henry H. Gerkens

Yes. I get that question a lot. I think when you look at a lot of the companies out there that are doing some of this stuff -- I don't want to mention names. But one company is buying up companies, and we've literally been in competition with people that they've bought them up before.

James B. Gattoni

I think it's pretty clear who that is. So that's [indiscernible].

Henry H. Gerkens

Okay. You can make a comment on that. I think the models that they operate are different than our model. Most of those models, I think, are almost modeled after, I'm going to call, the CH Robinson or, again, our agent base, again, we're looking at the secondary, tertiary type guys. I think that the people that are in competition with us, if a guy starts a cold start somewhere, all right, and I'm using that term that really defines what I'm talking about. That's probably new stuff, right? I think it's much more difficult to get started on a cold start thing. But I'm not worried about competition. I mean, I think when you look at Landstar's business model and where it's been and what we provide people, I think we're unsurpassed in what we do. Robinson's model is different, all right? And I think most of the people are looking at "the Robinson-type model" because it's that agent base. I mean, if people don't want to be -- if people want to run their own business, okay, they need to come to Landstar. And as long as I can continue to attract agents and continue to attract capacity, I'm not worried about any of that stuff. I don't -- you hear a lot of even your brokerage panel, but I've heard a lot of the company iron guys talk about brokerage, especially after 2009. We're going to get into that, all right? And that's because when they looked at Robinson and what they did to the margins and whatnot and now, I don't hear as much from their standpoint because the margins are a little bit more compressed. But again, Tom, and that's probably keep this off, I've been here at Landstar a long time. I don't want to indicate my age. But I've seen the company iron guys go from talking about owner operators, talking about brokerage, in fact, there's a company called Transplace that was actually formed by the contribution of brokerages, which they thought was really good at one point in time and gave it away. So I'm not worried about that. I think we've got a pure play model, and what we do is different than I think everybody else. So, I mean, [indiscernible] welcome competition.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

It's -- I mean, it's clearly, the agent model is different from the CH Robinson model and maybe what some of these others are emulating. But if you, the company you mentioned, which I think fairly, clearly is XPO, if they...

Henry H. Gerkens

I didn't mention the company, you did.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

All right, I mentioned it, you didn't. But if they buy someone that you compete with and then they have these resources that -- technology or whatever they add or maybe a broader network access, wouldn't that make them a little tougher competitor, not necessarily in terms of attracting your agent away but in competing for a load that your agent might try to get?

Henry H. Gerkens

Look, a competition -- but again, I think -- you're assuming that with each acquisition they do that they integrated all those systems and they talk to each other, and I think that's a lot.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

It assumes they execute clearly, right?

Henry H. Gerkens

Well, and assuming they make money at some point in time, all right? So I mean, there's a lot of things that play into all of that. And -- but I'm not worried about that because I know our business model. And can we compete against those companies for a particular account? Yes. I'm sure we will. I think where the competition really comes to play is not so much from the customer standpoint but it's the capacity. Because we're all accessing or trying to access the same capacity. And what that's going to do is drive up the cost of that capacity because if you've got -- you, you, you and there's only one truck, all right? I'm going to go to the highest bidder. So I think that's where the competition and where the cost from a brokerage standpoint, I think, gets to be something that's going to happen. I'm not worried about the competition with customers. I mean, that's not -- I mean, it's a very highly fragmented business. And the reason why all of these guys are doing that is because they recognize that. So I mean, I'm not -- like I'm not worried about that.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Great. Okay. Great, that makes sense. Do we have any questions from the audience at this point? Let's start with over here, this side.

Unknown Analyst

First, you commented on the revenue per load being down modestly or slightly year-over-year through the first half of March, the first week of March. And I guess, could you just comment on why you've seen that really basically throughout the quarter? Any particular mix issues? And then from a broader standpoint, do you tend to, as someone who's not as familiar with the model, do you tend to see a lot of volatility in mix from quarter-to-quarter, year-to-year, since that revenue per load does tend to have a lot of variance?

James B. Gattoni

The mix is driven by -- we -- 35% of Landstar's business is on a flatbed, and then the other 65% of the truck business is on a van. Van business runs about $1,600 a load, current -- those are current rates, basically. And flatbeds, flatbed load generally runs $2,400 a load. So some of the softness we're seeing is due to mix. Because when you hear about where the softness is, we're talking about flatbed heavy haul business, and that's really driving part of that drop off. But I will tell you that even van's a little bit softer, but most of it's coming from mix on the flatbed side. So it's not necessarily a true pricing mechanism. It's more of a mix thing, at this point.

Unknown Analyst

All right. So you're not seeing any same-store price deterioration per se?

James B. Gattoni

Not necessarily. Van is, like I said, vans is off a little bit, and that may be an indication that it's a little bit of same-store sales. But I don't think -- I think it's mostly mix.

Henry H. Gerkens

And then just to add to what Jim said, I mean, one of the things that I mentioned also is that the, what I call, power generation, or specifically the wind turbines and blades and whatnot with that tax credit. That stuff, if you have ever seen one of these trailers that hauls this, I mean, it's pretty unique. And it's pretty long, and it commands a very, very high revenue per load. That base business, again, basically went away. So that has an impact also on the revenue per load in the first quarter, which we anticipate based on what we hear from our customers because it takes a little bit of time to ramp that back up to come back in May. I think it's when we think it's going to come back.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Other audience questions? I don't see any so I'll provide another one for you, Henry. How do you think the broader array of regulations that are coming in, we had, I guess to use your term, some of the company iron guys yesterday and the regulations come up, it seems that there is anticipation from their side that EOBR in particular would have an impact on capacity when that eventually gets put in place. I'm not sure how great an impact to hours of services if it comes in place in July. But they kind of -- CSA as well. How do you think that affects your business and also how you manage your carrier, your broker carrier base?

Henry H. Gerkens

Well, we -- from a CSA standpoint, every night, we run our carrier base up against scores. And they'll kick out if in fact, you've got something that's above threshold. So we monitor that pretty closely. Obviously, we do that with our BCOs. We are concerned with electronic on-board recorders because, again, as independent contractors and to make -- maintain that independent contractor status, I can't tell that owner operator, at least, in my opinion, that you have to put that in, all right? Because that's an independent contract, you're starting to cross that line. So what we do is, on a new guy coming onboard, I can say it's part of the whole lease in order to come in. So the new guys that we recruit are required to have an electronic on-board recorder. A funny story, we had what we call our BCO all-star weekend in July down in Orlando last year. And I got up in front of the audience, and these are all of our million milers and road stars, and started talking about electronic on-board recorders and why it's beneficial. And as soon as I made that statement, I got booed. And I said, "Well, I expected to be booed." All right? Because I don't like -- but you're viewing this all wrong. I mean, their view is that the government is basically trying to follow them all over the place. I said, "No." When you start to explain how efficient they can make them because if you get stopped on the roadside and you got a wrong date, for example, you get a point. That's just an administrative area. It has nothing to do with out of -- hours of service being out of whack or whatnot. But that's a point. I also said that when your numbers start to tick up the threshold, customers are starting to look at that and then what happens is maybe they don't business with us. Now I'm taking money out of your pocket. So I had a guy on our Safety Thursday Conference Call, which I think you're familiar with, we have that every third Thursday of the month, called up and he's a 2 Million Mile Safe Driver and he said, "Yes. Henry twisted my arm to basically put an electronic on-board recorder on. But I got to tell you it's pretty good. I just turn it on, everything's done. Turn it off." And right now, we've got and I quoted a number on our mid-quarter update, I think we got 1,250 electronic on-board recorders installed with another 350 on order. And that really is coming from either existing people who are now volunteering to put it on because, again, it's like it sells itself. Once you get the older guys, the guys that are respected in the -- in our system putting it on and they hear that, other guys start to put it on. So I think that I'm not worried about that. I think we're going to get to that. I think, from an industry standpoint, I think it could have an impact on capacity and driving people out if they can't. But on the other hand, I also think it's an opportunity for us to increase our capacity base because we can help them out on a lot of these regulations coming down the pipe. A small business owner that maybe can't comply with some of this stuff. I mentioned California with the California Air Resource Board and the things that they do as far as the types of engines and -- so I think we can add benefit and add things to the small business guy to help them through that. And I don't like to say regulation could be an advantage for us as far as increasing our capacity, but it could be.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Okay. Great. Henry and Jim, thank you very much for joining us.

Henry H. Gerkens

Thanks.

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