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Executives

Henry H. Gerkens – President, Chief Executive Officer & Director

James B. Gattoni – Vice President, Chief Financial Officer

Patrick J. O’Malley – Vice President, Co-Chief Operating Officer

Jim M. Handoush – Vice President Co-Chief Operating Officer

Analysts

Edward Wolfe – Wolfe Research LLC

Analyst for Justin Yagerman – Deutsche Bank Securities

Thomas Wadewitz – JP Morgan

Alex Brand – Stephens Inc.

Jon Langenfeld – Robert W. Baird & Co., Inc.

Todd Fowler – Keybanc Capital Markets

Nate Brochmann – William Blair & Co.

Donald Broughton – Avondale Partners

Tom Albrecht – BB&T Capital Markets

Landstar System Inc. (LSTR) Q3 2009 Earnings Call October 14, 2009 5:00 PM ET

Operator

Welcome to the Landstar System, Inc. third quarter 2009 earnings release conference call. (Operator Instructions) Joining us today from Landstar are Henry Gerkens, President and Chief Executive Officer; Jim Gattoni, Vice President and Chief Financial Officer; Pat O’Malley, Vice President Co-Chief Operating Officer and Jim Handoush, Vice President and Co-Chief Operating Officer.

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

Henry Gerkens

Thanks. Good afternoon and welcome to the Landstar 2009 third quarter earnings conference call. As in the past quarterly conference calls, today’s call will be limited to no more than one hour and again I would appreciate it if you would limit your questions to no more than two questions each when the question and answer period begins. My opening comments will be limited so we can get to all the questions.

Before I start, 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 10K for the 2008 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.

During our 2009 third quarter mid-quarter update conference call I stated that I anticipated the revenue decline in the 2009 third quarter versus the 2008 third quarter excluding bus evacuation revenue would be slightly less of a revenue decline compared to the revenue decline experienced in the 2009 second quarter versus the 2008 second quarter. Actual revenue for 2009’s third quarter was pretty much what we had anticipated. Additionally in our mid quarter update call I stated that earnings per diluted share for the 2009 third quarter should be in a range of $0.35 to $0.40 per share. I am pleased to report that the diluted earnings per share was at the upper end of our earnings guidance at $0.39 per diluted share.

Let me talk a bit about our third quarter revenue performance. Revenue haul by BCO represented 58% of total consolidated revenue in the 2009 third quarter versus 51% in the 2008 third quarter. Truck brokerage revenue was 33% of consolidated revenue in the 2009 third quarter versus 38% in the 2008 third quarter. Revenue generated through rail, ocean and air cargo carriers represented 6% of consolidated revenue in the 2009 third quarter and 7% in the 2008 third quarter.

Included in the 2008 third quarter was approximately $27.6 million of revenue from bus evacuation services. Also included in the 2009 third quarter revenue was approximately $3.7 million of freight under management fee revenue generated from NLM which was acquired by Landstar at the beginning of the third quarter. 2009 over 2008 quarterly revenue declines were experienced in a wide array of accounts and sectors. Large revenue declines were seen in our business with the United States government, down 44%, in the machinery sector down 43% and in our substitute line haul service offering, down 36%.

However, total automotive revenue in the 2009 third quarter over the 2008 third quarter was up 1% largely due to the fee revenue generated at NLM. Generally, load volumes have stabilized and pricing is beginning to show signs of stabilization. As I said in the third quarter mid-quarter update, the worst appears to be over. Both the load volume and revenue per load trends in our truck transportation business are improving.

If you look back to each of the 2009 quarters, the load volume decline in the 2009 first quarter versus the 2008 first quarter was 16%. It was 15% in the 2009 second quarter versus the 2008 second quarter and was 10% in the 2009 third quarter versus the 2008 third quarter. Sequentially, load volumes increased approximately 1% in the 2009 third quarter over the 2009 second quarter compared to a 5% decline in the 2008 third quarter versus the 2008 second quarter.

Revenue per load with respect to truck transportation declined 8% in the 2009 first quarter versus the 2008 first quarter, 16% in the 2009 second quarter versus the 2008 second quarter and 22% in the 2009 third quarter versus the 2008 third quarter. However, sequentially the revenue per load decreased approximately 3% in the 2009 second quarter from the 2009 first quarter while the 2009 third quarter revenue per load amount was approximately equal to the second quarter amount. It also should be noted that the revenue per load amounts include the effect of fuel surcharges as it relates to revenue hauled by broker carriers.

Fuel surcharges included in truck transportation revenue in the 2009 third quarter were approximately $12 million versus approximately $42 million in 2008. As everyone remembers, fuel prices fell rather dramatically in the 2008 fourth quarter.

Landstar continued to sign on productive new agents in the 2009 third quarter. Our agent location count at the end of both the 2009 and 2008 third quarters was 1,403. Agents added in 2008 and 2009 contributed approximately $18 million in new revenue to the 2009 third quarter. Additionally, during the 2009 third quarter we added another 9 agents who had a prior revenue run rate of approximately at least $1 million each. Since the beginning of the 2008 fourth quarter we have now added 46 such new agents. During 2009 we have replaced nonproductive, low revenue producing agents with quality, revenue producing agents. Our pipeline of prospective new agents remains very strong.

From a P&L standpoint, Landstar’s net margin increased to 17.7% from 14.8% in the prior year. Landstar’s operating model coupled with the cost reduction programs instituted at the beginning of the year contributed to a very solid operating performance in a very challenging operating environment.

As it relates to our cost reduction programs, SG&A expenses were approximately 14% lower than the prior year’s quarter if one were to exclude the $3.3 million of SG&A costs related to the acquired companies. Overall, operating profit margin was 6.5% and as I said before diluted earnings per share was $0.39 per share.

Our balance sheet remains strong. We ended the quarter with approximately $93 million in cash and marketable securities. We have reduced long-term debt including current maturities by approximately $61 million from the end of the 2008 fourth quarter. So far during 2009 we have purchased 960,000 shares of Landstar stock under the company’s authorized stock purchase program at an aggregate approximate cost of $31.7 million. In short, Landstar’s financial position continues to remain very, very strong.

I’m going to turn it over to Jim now for his financial review.

James Gattoni

Thanks Henry. Henry has already discussed revenue for the 2009 third quarter and I will cover the various other financial information included in our third quarter release.

Investment income of $279,000 in the 2009 quarter compared to $817,000 in the 2008 period. The $538,000 decrease in investment income was attributable to a lower rate of return on investments held by the insurance segment in the 2009 third quarter.

Purchase transportation was 74.4% of revenue in the 2009 third quarter compared to 77.8% in the 2008 period. The decrease in purchase transportation as a percent of revenue was attributable to decreased rates in purchased transportation paid to third-party truck brokerage carriers which was due to excess truck capacity and lower fuel prices and decreased [less] truck load substitute line haul revenue hauled by truck brokerage carriers which tend to have a higher cost of purchased transportation.

Also, the 2008 third quarter included $27.6 million of revenue from bus capacity provided for evacuation assistance related to storms that impacted the Gulf Coast. This bus revenue had a higher cost of purchased cost of transportation than Landstar’s typical transportation business.

Commissions to agents were 7.9% of revenue in the 2009 quarter compared to 7.4% in the 2008 quarter. This increase was primarily due to increased gross profit, representing revenue less the cost of purchased transportation on revenue hauled by truck brokerage carriers.

Other operating costs were 1.4% of revenue in the 2009 quarter compared to 0.9% in the 2008 quarter. This increase was primarily attributable to $870,000 of other operating costs incurred by the acquired companies in the 2009 third quarter and the effect of decreased revenues. Insurance and claims were 2% of revenue in the 2009 quarter compared to 1.1% in the 2008 quarter. This increase was primarily due to a higher favorable development of claims in the 2008 third quarter compared to the 2009 quarter.

Selling, general and administrative costs were 6.6% of revenue in the 2009 quarter compared to 4.7% of revenue in the 2008 quarter. Selling, general and administrative costs of $33.1 million in the 2009 quarter included $3.3 million of costs incurred by the acquired companies. Excluding selling, general and administrative costs of the acquired companies from the 2009 third quarter, selling, general and administrative costs were $4.7 million or 14% less than the 2008 third quarter and consistent with our prior projections.

There was no provision for bonuses included in the 2009 third quarter as management does not currently anticipate achieving bonus targets. Depreciation and amortization was 1.2% of revenue in the 2009 third quarter compared to 0.7% in the 2008 third quarter. This increase was primarily due to the effect of decreased revenue, increased depreciation on company [trailing] equipment and amortization of intangible assets attributed to the acquired companies.

Interest and debt expense was $957,000 in the 2009 quarter compared to $1.8 million in the 2008 quarter. The decrease in interest expense was primarily attributable to lower interest rates and lower borrowings outstanding on the company’s senior credit facility during the 2009 third quarter.

The effective income tax rate was 37.4% in the 2009 quarter compared to 38% in the 2008 quarter. The decrease in the effective income tax rate was primarily attributable to the recognition of benefits for several uncertain tax positions that have reached the statute of limitations in the 2009 third quarter.

The non-controlling interest as presented on the income statement is comprised of the losses of the 25% interest currently held by one of the previous shareholders of one of the acquired companies. The $214,000 represents the allocation of the 25% of the losses of the 2009 third quarter to the non-controlling interest.

Looking at our balance sheet we ended the quarter with cash and short-term investments of $93 million. Cash flow from operations was $125 million during the 2009 39-week period. At September 26, 2009 shareholders equity represented 78% of total capitalization.

Just to make a brief comment on the companies acquired at the beginning of the 2009 third quarter, as anticipated these strategic acquisitions did not have a material effect on revenue or earnings for the 2009 third quarter and we continue to expect that the acquired companies will not have a material effect on revenue or earnings in the 2009 fourth quarter.

Back to you Henry.

Henry Gerkens

Our 2009 fourth quarter over 2008 fourth quarter revenue comparisons should be easier than the prior 2009 quarterly comparisons. I anticipate a fourth quarter freight environment with stable demand and no further degradation in price. As such I believe our fourth quarter overall consolidated revenue amount will be similar to that generated in the 2009 third quarter.

Additionally, diluted earnings per share for the 2009 fourth quarter should be in a range of $0.37 to $0.42 per share. During 2009 we have added new, quality, productive agents, acquired two freight under management technology based companies and adjusted our organizational structure to better position ourselves in a market place as a one-stop shop for all of a customer’s transportation needs. I am excited about the future and have much confidence in our direction as the economy begins a slow recovery.

With that we will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Edward Wolfe – Wolfe Research LLC.

Edward Wolfe – Wolfe Research LLC

Can we get some cash flow information? Can you give us a sense of cash from operations and CapEx in the quarter and was the $32 million spent on the acquisitions in the quarter?

James Gattoni

The $125 million was the year-to-date and I believe it was $106 million through the second quarter so I believe it was $19 million on cash from ops.

Edward Wolfe – Wolfe Research LLC

What was working against that cash flow? It seems like a lower than normal number. Was there a swing in something or working capital?

James Gattoni

I think what you have is going back to really normal because in the downturn in the first six months of the year you are collecting a lot of receivables whereas you are not paying out because of the downturn. I would expect it might be a little lower than a typical run rate for a quarter but it is not that significantly much lower than what a normal run rate would be. Our cash flow is pretty close to our net income, our free cash flow.

Edward Wolfe – Wolfe Research LLC

Was $32 million the amount paid out for the acquisition that was all in the quarter?

James Gattoni

Yes. Acquisitions plus assumption of other liabilities which we paid off. That is right.

Edward Wolfe – Wolfe Research LLC

On the cash flow side of things, is $32 million for acquisitions kind of the way you view the world going forward give or take or is this an aberration relative to the last couple of quarters because it is a big number?

Henry Gerkens

I don’t think it is a big number at all. I think what we anticipate from gaining from these acquisitions I think in my opinion we did a fine job as far as this. We are looking for when we look at an acquisition as you well know we don’t literally acquire and go out and look at companies all that much. It is very difficult to integrate into our organization. We tend to build our company as I said before brick by brick. These acquisitions are technology based. One being a startup company and what we liked about this is the technology it has to offer. NLM on the other hand has been around for a number of years. I think we got them at the bottom of the market timing from our perspective. I think they were historically very big in the automotive industry and as that industry recovers we think that is a pretty big win for us. In addition their technology just plays very nicely into our wide range of accounts that we have so I think we actually expand their total business.

We are pretty pleased with everything. Getting back to your question, the $32 million I think was a fair price and I think we did very well with those.

Edward Wolfe – Wolfe Research LLC

I was asking about the $32 million of share repurchases. Is that a fair way of thinking about it? Normally that is normal but recently it is not.

Henry Gerkens

You let me go on all that time and you were talking about share repurchases. Again, getting back to our business model that is part of our model. The opportunity presented itself and we bought shares back. It depends. It could be more or it could be less. We try to be opportunistic.

Edward Wolfe – Wolfe Research LLC

Is it fair to say you went from two in the quarter before to 32 and the answer is probably somewhere in between that but closer to 32?

Henry Gerkens

The quarter before was low. Again, I think you have to look back quarter-over-quarter. Nothing evenly spread but if I look at the second quarter specifically it was really because we were in the process of doing those acquisitions and we really didn’t think it was appropriate to go out and buy our stock.

Operator

The next question comes from the line of Analyst for Justin Yagerman – Deutsche Bank Securities.

Analyst for Justin Yagerman – Deutsche Bank Securities

From a macro standpoint, you mentioned in your last couple of releases that the worst is probably behind us and now things are actually moving off the bottom. Could you give a little more color on that whether that is demand, pricing or [total] and whether or not we are seeing any regional pockets of strength maybe out on the West Coast?

Henry Gerkens

Again, I think from a general standpoint what I tried to go through by going quarter by quarter by quarter I think what you have started to see is when you look at it comparatively our load volume declines have decelerated if you will. 16%, 15%, 10%. If you look on a sequential basis volumes are starting to pick up. First quarter versus second quarter we had a 5% decline. In the third quarter versus second quarter volumes picked up 1%.

It is pretty broad based and as it relates to price you have the same thing going on. We had pretty substantial declines in price on a revenue per load basis but when you track it back sequentially, pricing was flat generally from the second quarter to the third quarter and the first couple of weeks, albeit it is only 2.5 weeks into the quarter here, I have even more of a sequential improvement actually.

Things are moving in the right direction both from a volume standpoint as demand starts to pick up you are starting to see the corresponding pick up in price. We feel a little bit better. I think as you well know as you go into the fourth quarter the fourth quarter has given us a couple of head fakes the last couple of years. So we are a little bit cautious and as I said I am cautiously optimistic but the economy is slowly recovering. As far as pockets I think Jim or Pat, are there any pockets that you…

Jim Handoush

He had mentioned West Coast. There is some tightening capacity in the West Coast.

Analyst for Justin Yagerman – Deutsche Bank Securities

That kind of leads me to my next question as to whether maybe this is anecdotal but noticing any banks being less lenient with some of the mom and pop operators out there and I guess further tighten capacity? Maybe more in a broad sense I think you mentioned it was getting tighter out west. Any color you can shed there?

Henry Gerkens

I haven’t seen any increase in bankruptcies. I don’t track that data. I know Mr. Broughton has that data but I don’t know if there is any increase in that activity. I do see where there is a pickup in demand which believe me we still have a lot of capacity out there but it is sort of stabilizing pricing at this point in time. Again, I couldn’t give you any evidence one way or the other on that.

Analyst for Justin Yagerman – Deutsche Bank Securities

Lastly, can you go through pricing and volumes on a month by month basis throughout the quarter?

Henry Gerkens

I think I basically gave that on a quarter basis. That might be better served as far as talking to Jim but we don’t normally give the month to month volumes and that stuff. That is going to take awhile and I don’t want to take up questions on just coming through with numbers if you will.

Operator

The next question comes from the line of Thomas Wadewitz – JP Morgan.

Thomas Wadewitz – JP Morgan

You have got some optimism on stability and maybe a little bit of sequential improvement. What parts of the economy or what customer segments are picking up and how much enthusiasm do you have about some follow through on that?

Henry Gerkens

Actually I am pretty positive about a lot of fronts. I think you are going to start to see a lot of an impact on our new agent additions we have all during the year. I think from all of our sectors you started to see a little bit of improvement except maybe the U.S. government which continues to decline but I will have Pat answer that. Recently I think we have had some pick up with that.

Generally when I made the comment generally we are declines in a wide array of sectors when I look at where things are picking up it actually is spread across that same sort of instead of having a 25% decline it is a 20% decline to give you an example. We are seeing it in a lot of different sectors. The one sector that turned positive quarter-over-quarter as I said before was automotive. That is probably the first time I have seen that trend in a couple of years.

You had cash for clunkers. I think we clearly strategically with the NLM acquisition I think that is going to help. I think NLM is going to add further fee revenue if you will as we get other customers on board. The A3i acquisition which by the way is our 75% owned company. The owner retained 25% and that is the non-controlling interest that Jim related before. I think that is going to be a huge win for us as we move forward from a customer supply chain segment. I can’t pick out anything specific. Pat do you have anything?

Patrick O'Malley

Moving through the quarter as you got towards the end of the third quarter the government revenue stabilized and actually improved compared to how it was earlier in the quarter. Henry has mentioned automotive and absolutely correct it is broad based. It is a couple of shipments here from this customer and a couple of shipments from this customer. So it is spread across the landscape of business.

Thomas Wadewitz – JP Morgan

Maybe if you could comment on pricing as well. I guess you tend to be more driven by spot pricing just because of the nature of your model. How much confidence do you think pricing will have some follow through in terms of some stability and hopefully improvement? Or do you think maybe a little bit of the spot market tightening is temporary and related to seasonal factors?

Henry Gerkens

As I said before, seasonal factors I am a little bit leery about calling anything seasonal over the last couple of years because as I said before we have seen a few head fakes. As I described, sequentially we were flat overall. If I looked at the first 2.5 weeks actually in our traditional truck business and our 3[PL] business if you will, pricing is up in both of those over the September quarter.

So the trend continues to move up in both volume and price. That is a good thing. I think as you get back into the November period and December period because again I think last year and in other years the end of the year tended to be a little bit different. I don’t know if you can extrapolate that but right now things feel pretty good.

Operator

The next question comes from the line of Alex Brand – Stephens Inc.

Alex Brand – Stephens Inc.

I was wondering, I think last quarter you had talked about dry van trends in the quarter relative to flats. I was wondering if you could comment on that again and maybe tie that into any trends where you are seeing loads particularly improve in certain sectors or in industry segments there.

Patrick O'Malley

We can look at this two ways; demand or spot requests for trailers at our customer locations in the third quarter was up over the third quarter of 2008 and the spot requests came into Landstar for new customer locations so it wasn’t necessarily out existing customers that were growing their business with Landstar but it was new customers we identified either through agent additions, national account sales calls or agent assist calls.

Alex Brand – Stephens Inc.

Flats?

Patrick O'Malley

Flats have continued to kind of be the same throughout the balance of the year.

Alex Brand – Stephens Inc.

What percentage of the business is flats currently?

Patrick O'Malley

It was 35% in the quarter?

Alex Brand – Stephens Inc.

While he is doing that can I clarify acquisitions you said they added $3.3 million to SG&A but to the bottom line it was zero so there was enough revenue to…

James Gattoni

Yes, actually there was a slight profit but if you recall off the top you had 3.7 of fee revenue and the SG&A is 3.3 and then you have to remember the costs if you look at that non-controlling interest that was $214,000 loss which was added back, the A3i acquisition generated a loss in the quarter whereas the NLM acquisition actually generated the profit. So when you combine the two it netted to a very small profit if that helps you out.

Patrick O'Malley

Flats was 33% in the quarter.

Operator

The next question comes from the line of Jon Langenfeld – Robert W. Baird & Co., Inc.

Jon Langenfeld – Robert W. Baird & Co., Inc.

You talked about the 46 agents that were $1 million agents year-to-date. How does that compare to maybe 2008 and what would a typical year look like if there is such a thing?

Henry Gerkens

What a typical year looks like is hard to describe but that is a lot more of the [inaudible] that we would typically bring in if you will in any given year. For example, add it throughout the year if I were to look at year-to-date through this year those agents year-to-date have generated about $21 million in total and it depends on when the agents come in and that is only going to increase as you move into next year because then they cycle in a whole year.

For example, the guys who were added in the first quarter generated $2.6 million in the third quarter and they had $6.3 million year-to-date so you have those types of numbers moving forward. We are pretty, we like what we have done in that arena.

Jon Langenfeld – Robert W. Baird & Co., Inc.

Would that be 20?

Henry Gerkens

My guess is that is more than double. The quality of the agents.

Jon Langenfeld – Robert W. Baird & Co., Inc.

My second question was in terms of incentive comp. How do you think about that conceptually going into 2010? You can’t keep incentive comp zero forever but at the same time you want to incent some level of reach goal I guess. How do you think about that in an environment that basically isn’t going to grow a whole lot? Will there be opportunities for the executives and the management to make bonus next year?

Henry Gerkens

There will always be an opportunity. We are in the process of the budget process currently. The goals we put in place will have sufficient stretch that hopefully we will give adequate reward and return.

Jon Langenfeld – Robert W. Baird & Co., Inc.

The hope would be to be able to pay bonuses next year?

Henry Gerkens

Remember our bonus programs work the same way as a lot of our variable cost structure. We are going to set our bonus targets in the plan at the beginning of the year. They will be etched in stone. Once they are put in place those are the numbers. The danger, it is a very difficult environment you are coming off of. We will put together a plan that we think is appropriate and hopefully targets are obtained where people attain bonus payouts. That is just the way our program works.

James Gattoni

We dealt with this in 2007. It was the same issue. You had no bonuses in 2007 and we set targeting appropriately for 2008. We managed to hit targets in 2008. Unfortunately right now we are not hitting targets for 2009. We have been through this before and just looking at the results over those two years you can kind of get a good idea of what we do.

Operator

The next question comes from the line of Todd Fowler – Keybanc Capital Markets.

Todd Fowler – Keybanc Capital Markets

Just to be clear on the acquisition related SG&A costs in the quarter that $3.3 million are those ongoing costs related to those businesses or are any of those costs one time or non-recurring here in the quarter?

James Gattoni

No those are recurring costs. Those are purely the SG&A costs. If you recall in the second quarter I think we reported about $2.5 million of or $2 million of acquisition costs. Those were non-recurring. Those actually related to the actual doing of the acquisition if you will. The $3.3 million is the actual SG&A related to both of these companies.

Todd Fowler – Keybanc Capital Markets

So then with SG&A right now on a quarterly basis at about $33 million that is roughly a run rate to use going forward excluding any incentive comp going into 2010?

James Gattoni

Yes.

Todd Fowler – Keybanc Capital Markets

From a high level thinking about the guidance here for the fourth quarter basically you have talked about revenue being flat sequentially. The earnings guidance of 37-42 is a couple of pennies better than where it was in the third quarter. What is the best way to think about the delta with flat sequential revenue but a little bit more confidence in the earnings range? Is that because of where you came out in the quarter or is there anything else we should think about in the fourth quarter?

Henry Gerkens

I think it is where we came out in the quarter. I think Jim mentioned we would expect to continue to move forward. We have some…the tax expiration was the statute of limitations I think is going to impact that number a little bit. I think you have got on a go forward basis things look like they are improving. We will see where that all comes out.

Todd Fowler – Keybanc Capital Markets

Is there any other costs to come back in 2010? You have done a good job of taking out the costs. You have the acquisition but things can improve on a volume standpoint on a gradual basis. Do you expect anything different to happen with the cost structure getting into 2010 from where it is at right now?

Henry Gerkens

That is a good question. I think we will move forward. I think permanent things we have taken out, there are certain things we are not going to add back in. I think we would re-evaluate certain things mid-year. I.E. I will use this as an example so don’t think this one way or the other but the mid-year is one of the timeframes when we give salary reviews. If things are going well and there might be additional increases or something like that because right now we have got a freeze on so that could change. So things like that but specific costs, big costs we took out I don’t think you will see major costs added in. There might be one or two that we bring back but nothing from a material standpoint.

Todd Fowler – Keybanc Capital Markets

Just a point of clarification and then I will turn it over, there was some talk earlier about the share repurchases during the quarter. The dollar amount for share repurchase here in the third quarter was $18 million correct? Then the $32 million…

James Gattoni

Yes. 17.9. The 31 was for the year.

Todd Fowler – Keybanc Capital Markets

The year-to-date. That is helpful.

Operator

The next question comes from the line of Nate Brochmann – William Blair & Co.

Nate Brochmann – William Blair & Co.

Just wanting to kind of dig a little deeper into the trend question a little bit. We have some great performance out of the new business brought on by the new agents. I’m just wondering what you are hearing from some of maybe the old, existing accounts in terms of whether you are seeing some volume pick up with them as well.

Patrick O'Malley

I think it is across the board. There is no specific account I could point to and saying that account is showing some signs of life or not other than the ones that Henry has already mentioned in his opening comments and we have mentioned before. I think we have done a nice job in attacking certain segments and all the producers in that segment. For example the wind energy business, the heavy haul business. We were primarily servicing one major customer last year. This year we have a cross base of providers or manufacturers in that segment. It is too broad based to kind of identify any one specific more than we have already done.

Nate Brochmann – William Blair & Co.

Also just wanting to hear a little bit more in terms of what you are hearing from your own BCO’s in terms of the pipeline. Are you getting a [longer] pipeline or are people still lining up in terms of wanting to work with Landstar? Have you seen that diminish a little bit? In terms of trying to gauge from a different angle in terms of the capacity out there.

Patrick O'Malley

In comparison, the demand into the recruiting department is up about [inaudible] percent.

Operator

The next question comes from the line of Donald Broughton – Avondale Partners.

Donald Broughton – Avondale Partners

I appreciate the plug.

Henry Gerkens

I appreciate the plug you gave us the other day.

Donald Broughton – Avondale Partners

Glad to be rewarded for my confidence. Unlike John I am not going to be as worried about your incentive comp. I know if warms your heart to have an analyst concerned about your incentive comp. I know if you make the numbers and make the rest of us rich you will get rich in the process. You have always done a great job with insurance and claims line. Recently that line has crept up just a little bit. Every single line you have done a great job. That one has crept up a little bit recently. Can you kind of give us a little bit of insight into what is driving that? Is it incidents? Is it frequency? Is it severity? What should we be modeling for on an ongoing basis?

Henry Gerkens

Let me start and Jim I will let you talk a little bit also. I think in general the first thing you have to look at is the composition of our revenue now has swung to I think it was 58% or 59% BCO versus where it was in the third quarter last year I think at probably about 51%. So the swing was in brokerage and you have less of an insurance exposure if you are more brokerage. Therefore you have some pick up there. From a frequency standpoint I believe our frequency was pretty good. It was down actually but we did have some severe accidents and then we had some movement I think in some of the case reserves up or actually down. The change from last year to this year was bigger last year than this year and we did have more severe accidents in the third quarter so that was really the rationale. If you take all three of those together that is where it comes out to be. Jim from a modeling or how should Donald think about that on a go forward basis?

Jim Handoush

The range that you look at if you look at what historically it has been you are doing between $40-48 million a year. So a $10 million number is not unusual. Last year I believe was $8.1 million in the quarter and that included a significant amount of favorable development of claims we had put up in prior periods that we had favorable experience on so they kind of came down in the third quarter. So that was kind of the prior year’s number was unusually low. I am comfortable in that number that we put up today. Last year we had favorable development there. We have been running in the low $9 million recently but when I look at our claims history the last five years it is closer to a $40-48 million range.

Donald Broughton – Avondale Partners

It is a good performance. Like I said the last few quarters it was just popped a little bit. The mix certainly explains part of it and severity does as well. If it is severity driving it we shouldn’t have a very long tail then? Your safety performance in the coming weeks and months gets back towards norm then the numbers should come down again pretty quickly right?

Jim Handoush

With insurance, you turn what can happen quickly a bump alongside of a tractor can pretty quickly turn into an under [ride]. It is unfortunate that some of the claims we had last year weren’t as severe because it was just they bounced on the tires and broke an undercarriage. That is what happens. We had some more severe, a handful of more severe accidents this year.

Operator

The next question comes from the line of Todd Fowler – Keybanc Capital Markets.

Todd Fowler – Keybanc Capital Markets

I have a quick follow-up. I don’t want to get too much into the weeds but one number that did jump out at me here in the quarter looking at revenue per load in the air carrier segment, the air segment, the air carrier loads, that was actually up if my numbers are right about 25% on a year-over-year basis. Is there anything going on within the revenue per load in that segment or anything to think about or read into that number?

Patrick O'Malley

There is such a mix within that business. It is not as consistent. We are doing the same customer every week or year-over-year. You can land a new account or lose an account and that could drive that rate up or down depending on who the account is. There are a couple of large air charges we did in the quarter. I don’t have the exact impact on the revenue, the exact impact on a consolidated basis. We had two large air charters in the quarter.

Operator

The next question comes from the line of Tom Albrecht – BB&T Capital Markets.

Tom Albrecht – BB&T Capital Markets

I didn’t catch the number, I think you said how many million dollar agents you have added either year-to-date or since the beginning of the fourth quarter 2008? I just wanted to clarify that.

Henry Gerkens

46.

Tom Albrecht – BB&T Capital Markets

That was since the beginning of the year or the beginning of Q4 2008?

Henry Gerkens

That is the beginning of the fourth quarter last year so those fourth quarter agents beginning in this fourth quarter will cycle through a whole year.

Tom Albrecht – BB&T Capital Markets

Occasionally you will give some insight into the actual rate per mile for dry van and flat beds. I didn’t know if you have those numbers available.

James Gattoni

Rate per mile on van in the current quarter $1.61. On the flats it was $2.19 in the third quarter.

Henry Gerkens

Does that include the fuel surcharge too?

James Gattoni

That would include the fuel surcharge fees in both of those.

Tom Albrecht – BB&T Capital Markets

Do you have the year-ago number?

James Gattoni

$1.95 for vans and $2.92 for flats.

Henry Gerkens

What is the fuel component? Do you know that? As we move further into the fourth quarter from a brokerage standpoint that is going to distort it and that is why we are starting to see the revenue per load actually change as far as differential.

Tom Albrecht – BB&T Capital Markets

I was thinking a couple of quarters ago you were able to break it out with and without fuel at least partially. I realize the broker part kind of confuses everything.

James Gattoni

I don’t have it. We can actually break that out but I don’t think I’ve got that handy. We can break that out for you but we don’t have that right now.

Tom Albrecht – BB&T Capital Markets

Did you give tax rate guidance? I know you made some comments about taxes.

Jim Handoush

It is going to be around 30%, lower than the third quarter. Somewhere in the low 30% range.

Tom Albrecht – BB&T Capital Markets

30-32% somewhere in there?

Jim Handoush

That is probably safe. We just continue to have some statute of limitations on the uncertain tax positions that are rolling over. Our guidance includes about $0.01 or $0.02 for the tax on a sequential quarter basis compared to third quarter fourth quarter is probably about $0.02.

Tom Albrecht – BB&T Capital Markets

I think if I do 30% that is going to be more than a couple of pennies benefit. I don’t have the model open. You feel more bullish than your guidance and yet your tax rate would suggest with that low of a rate your guidance isn’t quite as bullish. Am I just reading too much into that?

Henry Gerkens

I think what we are saying is as we move forward the fourth quarter has always been a quarter that is a little bit unpredictable. What we are seeing is all positive at this point in time. When we get back into later in the quarter is this trend going to continue? I don’t know. We are comfortable with the guidance we have out there at this point in time.

Operator

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

James Gattoni

As we included in the earnings release I think based on the trends we have seen recently and the stability in both pricing and the volumes on a sequential basis I think we are cautiously optimistic looking out into the fourth quarter and into 2010.

Henry Gerkens

I want to thank you for dialing in. I look forward to talking to you on November 30th for our 2009 fourth quarter mid-quarter update call. Thanks and have a great afternoon and rest of the evening. Thanks. Bye.

Operator

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

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Source: Landstar System Inc. Q3 2009 (Qtr End 09/26/2009) Earnings Call Transcript
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