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Landstar System, Inc. (NASDAQ:LSTR)

Q1 2010 Earnings Call

April 14, 2010 5:00 pm ET

Executives

Henry Gerkens – Chairman, President and CEO

Jim Gattoni – VP and CFO

Pat O’Malley – Co-COO

Jim Handoush – Co-COO

Analysts

Analyst for Justin Yagerman – Deutsche Bank

Jon Langenfeld – Robert W. Baird & Co.

Ed Wolfe – Wolfe Research

Todd Fowler – Keybanc Capital Markets

Tom Wadewitz – JP Morgan

Chris Ceraso – Credit Suisse

John Barnes – RBC Capital Markets

Matt Brooklier – Piper Jaffray

David Campbell – Thompson Davis

Chas Jones – Morgan Keegan

Neal Deaton – BB&T Capital Markets

Operator

Welcome to the Landstar System, Inc. first quarter 2010 earnings release conference call. (Operator Instructions) Joining us today from Landstar are Henry Gerkens, Chairman, President and CEO; Jim Gattoni, Vice President and Chief Financial Officer; Pat O’Malley, Co-Chief Operating Officer and Jim Handoush, 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 2010 first quarter earnings conference call. This conference call will be limited to no more than one hour. Please limit your questions to no more than two questions each when the question-and-answer period begins.

Before I begin, let me read the following statement. The following is a Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts are forward-looking statements.

During this conference call, I and the other members of Landstar’s management team 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 2009 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 2010 first quarter was a very, very good quarter for Landstar and a great start to 2010. The freight environment is markedly better than one year ago. The improved environment and our 2009 strategic initiatives are certainly starting to pay dividends.

In our 2010 first quarter mid-quarter update call I stated I expected consolidated revenue for the 2010 first quarter from the 2009 first quarter to increase in a range of 10-13%. I also stated I anticipated earnings per diluted share for the 2010 first quarter over the 2009 first quarter to increase in a range of 15-20%. The actual first quarter 2010 over first quarter 2009 revenue increase was approximately 17%. Earnings per diluted share for the 2010 first quarter was $0.34 per share, a 26% increase over the earnings per diluted share reported in the 2009 first quarter and $0.02 per diluted share above the upper end of our updated earnings guidance.

First let’s talk a little bit about first quarter revenues. Not only did revenues increase in each month of the 2010 first quarter over each corresponding month of the prior year first quarter but those revenue increases were progressively stronger with each month. As I said on the mid-quarter update conference call January 2010 over January 2009 revenue increased 8% and February 2010 over February 2009 revenue increased 12%. The March 2010 revenue over March 2009 revenue increased an impressive 27%.

In fact, the number of loads hauled in March of 2010 was the highest number of loads hauled in any month of March in Landstar history. Quarter over prior-year quarter revenue increases were generated in most of our commodity grouping. Some of our largest quarter over prior-year quarter revenue increases were generated in our substitute line haul service offering as revenue more than doubled while automotive related revenue was up 36%. Appliances and furniture was up 11% and metal was up 21%.

From a mode perspective, overall truck transportation revenue increased 19% quarter over prior-year quarter as revenue generated through broker carriers increased 34% and revenue generated through BCOs increased 9% while revenue generated through ocean cargo carriers increased 3%. Revenue generated by our newly acquired supply chain solutions companies contributed an aggregate of $5.1 million in fee revenue in the 2010 first quarter. Although a much small number, warehousing fee revenue doubled quarter-over-quarter.

These increases were partially offset by decreased revenue hauled by air cargo carriers and the anticipated decrease in intermodal revenue due to the loss of one large intermodal agent in December. One point about our intermodal revenue decline, despite the losses of revenue generated by that one intermodal agent total intermodal revenue for the 2010 month of March was approximately equal to the total intermodal revenue generated in March of 2009. That is a very good sign.

Total truck transportation revenue represented 92% of consolidated revenue in the 2010 first quarter versus 91% in the prior year first quarter. Aggregate truck transportation load volumes for the 2010 first quarter increased 20% over the 2009 first quarter and it was 1,900 more loads hauled than in the 2009 first quarter. Additionally, the 2010 month of March was 6,500 loads higher than the number of loads hauled in the 2008 month of March, another very good sign.

Truck transportation revenue per load was $1,457 in the 2010 first quarter versus $1,479 in the 2009 first quarter. However, revenue per load in March of 2010 was 3% better than revenue per load in March of 2009; yet another good sign. Our agent location count at the end of 2010 first quarter was 1,372 compared to 1,366 at the end of the 2009 quarter. Additionally, during the 2010 first quarter we added four agents who had a prior revenue run rate of at least $1 million. Agent revenue from all new agent locations added over the past year amounted to $19.3 million in the 2010 first quarter.

As I have said before, the Landstar team did an excellent job during 2009 in adding new, quality, productive agents to our system. Our pipeline of prospective new agents remains deep. In addition, we continued to make great progress in agent acceptance and customer awareness regarding all Landstar service offerings from our traditional truckload services to our intermodal services to our international services to our warehousing services to complete supply chain solutions.

From a profit and loss standpoint, operating income in the 2010 first quarter increased 19% over the 2009 first quarter. Operating margin was 5.2% in the 2010 first quarter compared to 5.1% in the 2009 first quarter. It should be noted there was no accrual for bonus payments in the 2009 SG&A amounts whereas 2010 included an accrual of approximately $2.4 million for anticipated bonus payments.

Jim?

Jim Gattoni

Thanks Henry. Investment income was $285,000 in the 2010 quarter compared to $425,000 in the 2009 period. The $140,000 decrease in investment income was due to a lower amount of investments held by the insurance segment during the 2010 first quarter.

Purchased transportation was 76.1% of revenue in the 2010 first quarter compared to 74.9% in the 2009 first quarter. The increase in purchased transportation as a percent of revenue was primarily due to increased less than truckload substitute line haul revenue which tends to have a higher cost of purchased transportation and increased rates paid for purchased transportation to truck brokerage carriers. Commissions to agents were 7.4% of revenue in the 2010 quarter compared to 8.2% in the 2009 quarter. This decrease was primarily due to decreased gross profit representing revenue less cost of purchased transportation and revenue hauled by truck brokerage carriers.

Other operating costs were 1.4% of revenue in the 2010 quarter compared to 1.6% in the 2009 quarter. The decrease was attributable to the impact of increased revenue and [poor] rental costs for trailing equipment partially offset by $832,000 of other operating costs incurred in the 2010 first quarter by the recently acquired companies.

Insurance and claims costs were 2.2% of revenue in the 2010 quarter compared with 1.9% in the 2009 quarter. The increase in insurance and claims as a percent of revenue was primarily due to increased severity and frequency of commercial trucking claims generally from adverse weather conditions in the 2010 first quarter compared to the 2009 first quarter and increased cost of cargo planes in the 2010 first quarter.

Selling, general and administrative costs were 6.7% of revenue in the 2010 quarter compared to 7.3% of revenue in the 2009 quarter. Selling, general and administrative costs of $36.8 million in the 2010 first quarter included $3.9 million of costs incurred by the entities acquired in the 2009 third quarter. Excluding selling, general and administrative costs and fee revenue of the acquired companies in the 2010 first quarter, selling, general and administrative costs were 6.1% of revenue in the 2010 first quarter. The decrease in selling, general and administrative costs as a percent of revenue excluding the fee revenue and costs incurred by the acquired companies was primarily due to the effect of increased revenue and lower customer bad debt in the 2010 first quarter partially offset by the provision for bonuses under the company’s incentive compensation programs in the 2010 first quarter.

Depreciation and amortization was 1.1% of revenue in the 2010 first quarter compared to 1.2% in the 2009 first quarter. This decrease was primarily due to the effect of increased revenue. Interest and debt expense was $854,000 in the 2010 quarter compared to $1.2 million in the 2009 quarter. The decrease in interest expense was primarily due to lower active borrowings under the company’s senior credit facility and lower capital lease obligations during the 2010 first quarter. The effective income tax rate was 38.2% in the 2010 quarter compared to 38.4% in the 2009 quarter.

Looking at our balance sheet we ended the quarter with cash and short-term investments of $107 million. Cash flow from operations was $24 million during the 2010 first quarter and at March 27, 2010 shareholder’s equity represented 72% of total capitalization.

Henry Gerkens

Thanks Jim. I am very excited and confident as we move into the 2010 second quarter. An improving economy and tightening capacity coupled with the strategic actions initiated in 2009 bode well for Landstar’s future growth.

From a short-term perspective assuming the current trends we have experienced continue I would anticipate 2010 second quarter revenue to increase over the second quarter 2009 revenue in an upper teen to low 20% range. Given that revenue estimate I would expect diluted earnings per share for the 2010 second quarter to be in a range of $0.44 to $0.49 per share which would represent a 26-40% increase over the 2009 second quarter diluted earnings per share amount.

From a longer-term perspective I believe Landstar has positioned itself to take advantage of all opportunities. The consolidation of the carrier group and global logistics field and administrative organizations, the 2009 acquisitions of our supply chain solution companies and our refocused marketing and sales efforts should provide the platform for continued future growth. In addition, these strategic moves should only augment our ability to recruit new agents.

To repeat, our 3-5 year goals are to achieve a cumulative average revenue growth rate in a mid teen range; to increase annual operating margins and to grow diluted earnings per share at a slightly higher rate than the rate of revenue increase. I believe Landstar is very well positioned to accomplish these goals. With that, operator, we can open it up for questions.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Analyst for Justin Yagerman – Deutsche Bank.

Analyst for Justin Yagerman – Deutsche Bank

You had indicated that you had seen some solid supply chain revenue in the first quarter. Can you give us a little bit more visibility in terms of what was that revenue and if you have any update in terms of contracts you are looking to target?

Henry Gerkens

The revenue was generated, remember we have two supply chain solutions companies; one NLM and one A3i. The revenue was generated all through NLM and that was largely some of the automotive companies and a few others. As far as A3i we do have a number of items we are working on currently and we do expect A3i to generate some revenue in the second quarter.

Analyst for Justin Yagerman – Deutsche Bank

With the NLM are you also seeing some crossover now in terms of it driving load growth through your broader Landstar and BCO count?

Henry Gerkens

I think we are starting to see some of that. In fact we just completed a project where there is going to be complete integration where the agents are going to be able to basically have access to the NLM system to create additional capacity sourcing for them. In fact that is scheduled to go live next week.

Analyst for Justin Yagerman – Deutsche Bank

You had briefly mentioned the substitute line haul business you grew revenue substantially. Can you give us a sense how that is trending thus far in April and also if that was driven just by increased business overall with your underlying customers or were you able to kind of find some new customers in that segment?

Henry Gerkens

It really is increased business with our existing customer base that we provide that service for. As it relates to how we see that in April it still remains strong. It probably is a little bit lighter than what we saw in March but still pretty strong compared to the prior year.

Operator

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

Jon Langenfeld – Robert W. Baird & Co.

From the customer’s perspective are they starting to approach you yet with solutions and questions about the rates? Not being able to find capacity. Are you seeing that? How are you managing or how are you helping the agents realize that it is time to get out there and increase the rates?

Henry Gerkens

Very good question. What you have is the capacity basically saying I want more and the customer saying wait a minute, I’m not sure I want to give you more. I think it is a matter of time before that dynamic changes where customers are going to start to basically give in and as we have said our revenue per load, again off a small base is up 3%.

Pat O'Malley

Clearly customers anecdotally I can tell you some customers rushed out and some got bidding that they are doing in the summer and doing it now because they think that capacity is going to be tight and they think they can get more favorable pricing today. We have had customers come to us asking us to move additional freight. I can think of two examples where they have come to us and said forget about what the old pricing is, what is the price that it is going to take to get equipment today? It is primarily on the platform side.

The things about our agents they are closest to the action. They are getting feedback from the capacity on a daily basis about what it is going to take to move the load so they are probably closer to the pricing than anybody is. They know what it is going to take to move it and they communicate that back to the customer.

Jon Langenfeld – Robert W. Baird & Co.

With regards to nonvariable costs, costs that maybe have more of a stair step function to them, we have the incentive comp. Anything else we should be thinking about on that front?

Jim Gattoni

Not necessarily. You just have to remember for the first two quarters this year we have the acquired company G&A rolling through but other than that I can’t really think of much that is unusual other than the incentive comp.

Operator

The next question comes from the line of Ed Wolfe – Wolfe Research.

Ed Wolfe – Wolfe Research

Can you talk a little bit to why the truck brokerage revenue per load is up more than the BCO, up 5 and change and the BCO is down 6?

Henry Gerkens

My guess is it is fuel surcharge. We are checking on it.

Ed Wolfe – Wolfe Research

I know that is part of it but it seems like an awful lot for just fuel to have one up 5 and one down 6 basically. Then I guess the same question would be trying to understand you have the numbers for March. I think the equivalent is 1,447 was the quarter for BCO’s revenue per load and what was that number like in March? For truck it was 1,471 for the quarter. What was that like for March?

Jim Gattoni

To answer the first question, the rate per load on brokerage was over 5% compared to prior year’s quarter. 2% if you take out fuel.

Ed Wolfe – Wolfe Research

So it would have been up 2% and BCO still would have been down 6 so I guess still the question why is one going up faster than the other so much?

Jim Gattoni

Brokers haul a higher percentage of flatbed than they do a van. BCOs haul a higher percentage of the van business than they do flatbeds. Brokers are on the flatbed sides which is where you are seeing the capacity pressure.

Ed Wolfe – Wolfe Research

So rates are going up faster in flatbed than in dry van is what you are saying?

Jim Gattoni

It is a mix, yes.

Ed Wolfe – Wolfe Research

What is the difference in the mix in the BCO versus the brokerage dry van to flat roughly?

Jim Gattoni

Van side BCOs are hauling about 80% of it. On the flat side it is about 60%.

Ed Wolfe – Wolfe Research

I am confused by the answer. Who is hauling 80?

Jim Gattoni

BCO’s are hauling 80% of the vans and BCO’s are hauling 60% of the flats.

Ed Wolfe – Wolfe Research

Do you have the numbers for March? The revenue per load by BCO and truck brokerage?

Jim Gattoni

Can you repeat that question?

Ed Wolfe – Wolfe Research

The total revenue per load as you reported it for the full quarter was 1,447 for BCO and 1,477 for truck brokerage. I am trying to figure out what those same numbers look like just for the month of March. Kind of the directional move here in yield.

Jim Gattoni

I got you. The BCO was 1,468 in March.

Ed Wolfe – Wolfe Research

Do you have the same for the brokers?

Jim Gattoni

1,479.

Ed Wolfe – Wolfe Research

When you think about leverage on the operating margin in your guidance longer-term you talk about mid double digit revenue growth and some margin improvement. How soon until we see that margin improvement? Should we see it assuming the mid-20% revenue growth for second quarter? I am assuming at the higher end of the range you do start to see some margin improvement and where does that leverage come from?

Henry Gerkens

Our model hasn’t changed. The leverage comes from not adding SG&A costs. We have had, when you pour a bunch of revenue over the fixed SG&A costs we have and you have some things masking it this year because you don’t have comparability as far as the bonus accruals. The fact of the matter is you don’t have to add a lot of people and you start growing revenue. In addition to that as the supply chain solutions companies take off you have a much higher margin on that piece that will fall to the bottom line.

From a longer-term perspective we are pretty confident we are going to be able to grow margins. In addition to that I think you are going to start to see that, it was 5.2 versus 5.1 in the first quarter but you will see again an expansion of margins in the second quarter.

Ed Wolfe – Wolfe Research

So you think we can get beyond the 7.7 we had in 2005 at the last peak?

Henry Gerkens

I always answer that question the same way. My objective is to go as best we can and as we go down the road it depends on where the supply chain solution comes in. Yes, our objective would be to be at a higher margin than that. Yes.

Ed Wolfe – Wolfe Research

What is the timeframe to get there?

Henry Gerkens

Now I wish I had a crystal ball. I don’t have that answer.

Operator

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

Todd Fowler – Keybanc Capital Markets

Can you talk a little bit about your conviction in the second quarter guidance? I know for the past couple of quarters there has been a lot of volatility in weekly results and monthly results and I think the way you have approached laying out your guidance at the start of the quarter was to be relatively conservative and come in line with that and if things pick up obviously you have a little bit of upside.

That looks kind of what you have laid out here for the second quarter. It seems like you have some conviction that things are going to continue with where we have been in March and where we are trending in April. Can you talk about where that stems from and then what would your expectation be or what is baked into that guidance that things continue to sequentially improve where we are at in April right now into May and June and kind of magnitude of strength you are anticipating as we get into the summer months?

Henry Gerkens

If you take it back March over March is a 27% increase. Each month is incrementally a larger increase. Based on what we see based on talking to agents and based on what is happening as far as what is going out when they are talking to their field guys. Based on talking to customers. Based on every statistic that I look at. Things are just picking up. I know what we did last year as far as setting the stage for 2010. I am just pretty confident that we are going to hit those numbers.

Todd Fowler – Keybanc Capital Markets

If we see a sequential improvement in May like we are seeing in March over February do you feel there is still upside to where you guided right now for the second quarter?

Henry Gerkens

Yes there is upside. I am smiling. As I said once before thank God 2009 is over. Things are going in the right direction. Yes, there can clearly be upside.

Todd Fowler – Keybanc Capital Markets

I am not trying to get too far ahead of ourselves. I am just kind of curious as to the conviction and it looks like pretty good guidance I guess. The follow-up I have Jim I think you talked about this a little bit but looking at commissions to agents as a percent of revenue historically that has bumped around kind of the 8% level. Here during the first quarter it seems like it is around the 7.5% level. I know that mix can impact that. Can you talk a little bit more about commissions to agents as a percent of revenue and how that should trend? What impact is that here in the quarter and how should that trend throughout the year?

Jim Gattoni

Remember a lot of it has to do with how much we are paying the trucks. So I can tell you that in the first quarter excluding the substitute line haul brokerage business the true brokerage [not just] through line haul, we paced the capacity is about 210 basis points higher this year than we did last year. But remember we need to share that with the agents or the agencies since it is all agent costs.

So what happens is it drives down…PT climbs on the truck brokerage your commission goes down. So when I look at what it was in the quarter overall the PT rate then from the first quarter last year went up 1.2 and commissions went down by 0.8. So you pretty much have, it is not exactly equal because we do share in some of that tightening capacity and are paying the trucks a little bit more but a lot of it is we don’t take the exposure as much as a company who is taking for every penny they have to pay a truck extra and it goes to their bottom line. We have a share in it with the agents.

Simply said, if PT goes up, commissions come down.

Todd Fowler – Keybanc Capital Markets

A lot of that is a function of really the good strength in the loads you are moving in the brokerage piece of the business that was particularly strong and then PT would have been a little bit higher and that is really the driver of what is going on in the commission side?

Jim Gattoni

Right.

Operator

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

Tom Wadewitz – JP Morgan

I don’t know if you had indicated some of the monthly numbers in terms of change in base pricing at either BCO or brokerage or if you were willing to do that? I think you had talked about it a little bit in the past. I know one of the earlier questions asked you. Can you give some of those numbers just to give a sense of what pricing X steel did in the quarter?

Jim Gattoni

I can give you brokerage by month without fuel.

Tom Wadewitz – JP Morgan

Yeah sure that would be great.

Jim Gattoni

Without fuel it was $1,355 in January. It dipped to $1,329 in February. It was back at $1,349 in March. Now there is a lot of mix in there because you are doing flats and van mix for the brokers. I don’t have a split. I just have a total.

Tom Wadewitz – JP Morgan

Do you have a sense of what that was year-over-year?

Jim Gattoni

Yes, last March it was $1,270.

Tom Wadewitz – JP Morgan

$1,270. And February and January?

Jim Gattoni

$1,356 in January. $1,317 in February.

Tom Wadewitz – JP Morgan

Henry what is your view on the market right now in terms of both flat bed and dry van? Do you think it is essentially in balance? Do you think it is already difficult to define the capacity to cover the loads? What depending on those views what do you think happens with spot market pricing in those two markets in the next couple of months?

Henry Gerkens

I will let Pat answer that question.

Pat O'Malley

I always answer the questions. I think there is a noticeable tightening of capacity on the platform side. I don’t think there is any question about that. The jury is still out on the van capacity and there is a balance there but clearly on the platform side there is a capacity shortage. I think the fundamentals of supply and demand would state there will be some pressure and those people who want their shipments moved are going to have to increase their price. I think Jim sort of demonstrated some of that pricing with those numbers he has just given you. Clearly, clearly on the platform side there is a capacity issue.

Henry Gerkens

Our view is that as you move through the next couple of months you are going to see some increased pricing overall.

Tom Wadewitz – JP Morgan

So in the spot market you could see mid single digits or do you think it would be more than that?

Henry Gerkens

I wouldn’t want to speculate. Depending upon the geographic region, if you look at the Midwest started feeling this platform capacity shortage about mid-February. You are seeing it spread throughout the country; in the steel belt, down south. There will be some price increase. I wouldn’t want to speculate on what that would be.

Operator

The next question comes from the line of Chris Ceraso – Credit Suisse.

Chris Ceraso – Credit Suisse

You mentioned in your opening remarks how things finished up relative to your mid-quarter guidance. Can you give us a little bit of color on what changed both in terms of revenue and also on the mid-quarter call it sounded like while volume and revenue was going up you weren’t really expecting to see much of that improvement drop through but here it looks like some of it did. So maybe just some background on what changed from the mid-quarter to the end of the quarter.

Henry Gerkens

Dropped through meaning…dropped to the bottom line?

Chris Ceraso – Credit Suisse

Yes. It sounded like at the mid-quarter you took your revenue and your volume expectations up but didn’t change your EPS.

Henry Gerkens

I think we did increase that EPS. I think we moved it up to the top. Clearly we thought there would be a [fall through] to the bottom line. It is just the way our model works. I think what changed is revenue just got stronger. It was stronger in a lot of different categories. Our mid-quarter update as I recall was March 1 and we had just started the month of March, if you will, and I think I was pretty confident at that point in time although a little bit cautious because March does make the quarter. Typically January and February are the slower parts of the months. We had one of our largest loading days of the year, or the largest loading day of the year in March. I couldn’t point to one sector although substitute line haul was strong. Automotive was strong. I mentioned furniture and appliances. Consumer products was strong. We did some special work for one of our clients.

Everything just picked up at a more dramatic pace. When you think about the first quarter and mid-quarter update January was 8% over and February was 12% over. But in March it was a 27% increase. It was just a big month. What we see going on in April those trends as far as increasing it is more of the same.

Chris Ceraso – Credit Suisse

Can you comment on the truckload price spot versus contract? Are you starting to see contract prices move up? We know spot prices are going up but what is happening with contracts?

Pat O'Malley

As we complete bids on new business we take into consideration the tightening capacity and price it accordingly.

Chris Ceraso – Credit Suisse

Can you give us some numbers and background? Where are contract rates coming in relative to where spot rates are?

Henry Gerkens

I think as Pat said, people are trying to come in for contract renewals now and asking to hold price because they are anticipating what is going to happen. Spot rate market from a flat bed standpoint as Pat said is dramatically higher and really drove the 3% increase overall that we had in the truckload transportation. The vans, as I think Jim eluded to are flat. We haven’t seen the tightening capacity there but we anticipate that is going to happen. We are just pretty bullish as far as generally what the volume is going to look like. I think that at a certain point in time pricing overall is going to go up. We are starting to look at that now.

Operator

The next question comes from the line of John Barnes – RBC Capital Markets.

John Barnes – RBC Capital Markets

I am kind of curious as you look at your revenue in the first quarter and your customer base specifically did the revenue increase come from new types of customers? Was there a big mix shift in your business? Could we see even further revenue growth as maybe more of your traditional customer base comes back? You actually highlighted the first increase in revenue growth from third-party capacity providers and that type of thing. Have you seen a little bit of a shift in your customer base?

Henry Gerkens

As I said, the business we did with our substitute line haul which is really an indication I think of the overall economy and the overall market if you will doubled. So we did a lot of work for those customers. Obviously with the agents we brought on last year that is all new business for Landstar and that was $19 million. You headed right. It is very similar to what we went through a number of years ago when customers weren’t shipping but we went out and we basically found a whole bunch of new agents.

What is going to happen is you will have the effect of the new agents and as the economy starts to pick up it is almost a doubling up of effect. That is what leads us to believe or me to believe and be how confident I am in these numbers we gave. It is just I think right now we are going on all cylinders.

John Barnes – RBC Capital Markets

I don’t want to push you too far outside your comfort level and I know some guys have already asked the question about upside to your earnings guidance but as you look at how this year should progress you have fairly easy comps at least for the first three quarters and maybe for all four quarters. Do you see anything on the horizon now that says hey we are just benefiting from the super easy comps in the first half and things are going to get a lot more difficult for us in the back half? Or at this point do you just feel like this is the beginning of some kind of sustainable recovery?

Henry Gerkens

A lot of thoughts embedded in that. Clearly the fourth quarter of last year things started to pick up a little bit but I think as we progress through the year we are pretty confident as far as what we have done. Again, I don’t have that crystal ball. Something could happen. You have a lot of things that are going to happen potentially. I don’t know what the administration is going to do, for example. That always scares me.

There are a lot of things out there I think are tentative and I have sort of backed away from full-year guidance again because I just don’t know. To me that is the big unknown, what legislation, regulation, control or whatever you want to call it might come down from the administration in which case could affect numbers. Right now we are feeling pretty comfortable as far as what we did, what we are doing and what we can control. Absent any of those unforeseen things and the economy continues we are positioned very well. I am fully comfortable and confident as far as what we have going.

Operator

The next question comes from the line of Matt Brooklier – Piper Jaffray.

Matt Brooklier – Piper Jaffray

I think you talked about it earlier in your prepared comments but I wanted to get a little bit more color on your intermodal volumes in the first quarter. It sounds like you had an agent leave. I am wondering when that agent left, how many volumes of intermodal load he took with him? I am just trying to get a better sense because we know intermodal volumes have propped up pretty healthily.

Henry Gerkens

It was, and you can correct me if I am wrong but it was our largest intermodal player. That person left in December and I am not going to comment anymore on that because we do have some litigation with that individual so we will leave that aside. My point being on the intermodal front if you looked at the month of March alone when you looked at numbers in March of last year which includes that Agent’s revenue and not there this year they were virtually equal so that tells me that things are picking up from that front also which ties into what you are seeing. We are confident in that also.

Matt Brooklier – Piper Jaffray

Can you talk about the load counts in first quarter 2010 versus first quarter 2009 X that agent?

Henry Gerkens

I am not going to go into X that agent. I am going to back away from talking about anything to do about that agent. I don’t want to indicate what those were.

Matt Brooklier – Piper Jaffray

I don’t want to get you in trouble. Second, looking forward it feels like things have picked up materially. What is the CapEx budget for this year and are you starting to think about potentially having to spend more money? It feels like capacity is tight. It is tighter on the flatbed side. Do you need to go off and start purchasing more equipment to support your Class A business or any other parts of your business on the trailer side?

Henry Gerkens

Not to my knowledge. I think right now broker is a large part, I think 34% in the first quarter. If we had more orders coming in for some of the specialized equipment we wouldn’t hesitate to put those orders in. I don’t believe other than what we have in the plan….

Jim Gattoni

We are looking at replacing about 600 van trailers and maybe adding a couple of flats but there is nothing that size. The norm is maybe $18-20 million plus we just did complete the purchase of the building in March for $21 million.

Matt Brooklier – Piper Jaffray

So it sounds like you aren’t planning to add any capacity on the trailer side at this point in time despite the economy, inflection and volume growth in the first quarter?

Jim Gattoni

Right.

Operator

The next question comes from the line of David Campbell – Thompson Davis.

David Campbell – Thompson Davis

I just wanted to ask about insurance costs. You mentioned weather being a factor in the first quarter. Is that the only thing going on? Should we go back to what would be our normal second quarter insurance costs because weather shouldn’t be a problem?

Jim Gattoni

Well in general insurance costs run around 1.5-3% of our revenue historically. We closed out the quarter at 2.2%. Frequency causes severity and the weather causes frequency. That is really what we saw in the first quarter. Tough to talk about what is going to happen in the second quarter because this is insurance and accidents are unpredictable. Generally our guidance is 1.5-3% of revenue.

David Campbell – Thompson Davis

The growth in substitute line haul is that primarily less than truckload or do you do some truckload as well?

Henry Gerkens

It is all less than truckload for LTL carriers.

Operator

The next question comes from the line of Chas Jones – Morgan Keegan.

Chas Jones – Morgan Keegan

A question on the supply side. Do you think the market is healthy enough now that we have kind of shut the window on failures? Or is there an opportunity if we see fuel run up to $3.50 to still see supply coming out of the market?

Henry Gerkens

Great question and I have been so wrong over the last two years on capacity and things like that I venture to take a guess. If fuel were to run up I think that could cause some problems for some carriers that are weak right now. That would be my answer.

Pat O'Malley

No question about it there would be some impact.

Chas Jones – Morgan Keegan

I wouldn’t think within a couple of months that all of these zombie trucking companies become healthy. It just kind of begs the question if supply and demand are kind of in balance and there is still an opportunity for supply to come out the healthier carriers could really see some significant pricing increase.

Henry Gerkens

Clearly over the next, depending on where fuel goes, depending on the implementation of CSA 2010 when that actually takes hold I think that is actually going to drive some of the capacity out of the marketplace and I think that has been pushed back to later on or early on next year. All of those factors I think within a year I think potentially causes capacity to come out if fuel goes up also.

Chas Jones – Morgan Keegan

My follow-up, anything to report on the contract pipeline at A3i?

Jim Handoush

[inaudible] pipeline is strong and growing. I think the alignment of our field organization and our corporate sales group and the education process we have gone through with our agent family and our employee base and it is really taking shape. That pipeline continues to grow and we are very excited about it.

Operator

The next question comes from the line of Neal Deaton – BB&T Capital Markets.

Neal Deaton – BB&T Capital Markets

One quick clarification. I believe it was asked earlier about the revenue per load. Just what they were for March? Isolating them. I believe if I heard you correctly it was 1,468 for BCO?

Jim Gattoni

Yes.

Neal Deaton – BB&T Capital Markets

The other number you gave, the 1479, was that for truck brokerage carriers?

Jim Gattoni

Yes.

Neal Deaton – BB&T Capital Markets

Overall if rates were up 3% if you look at the year-ago figures for those two groups was it pretty comparable? In other words was BCO up about 3% increase and truck brokers too? What is the split there?

Henry Gerkens

Repeat the question for Jim.

Neal Deaton – BB&T Capital Markets

Basically if the yields were up 3% in the month of March was that about the same for both BCO and truck brokerage or was one of those figures higher than the other one like disproportionately bringing up the average?

Jim Gattoni

Brokerage brought the average up. Remember they do…it is a mix thing and they do more flat.

Henry Gerkens

The question of BCO versus broker is really…the more relevant question is the split where flats were and where vans were.

Neal Deaton – BB&T Capital Markets

I remember now and you gave that figure. That explains why it is a little higher in that one group just because they have a higher concentration of flatbed?

Henry Gerkens

That’s correct.

Neal Deaton – BB&T Capital Markets

The bonus accrual number you said was $2.4 million?

Jim Gattoni

Correct.

Neal Deaton – BB&T Capital Markets

I was thinking it was going to be a bit lower than that. For some reason we were thinking it was going to be about $1.5 million per quarter.

Henry Gerkens

We are obviously anticipating better results and accounting rules would require me to accrue what I have to do on a pro rate basis.

Jim Gattoni

The run rate is $6 million a year when we hit targets [and when you see targets hit].

Neal Deaton – BB&T Capital Markets

So really it is a just a prospect of…

Henry Gerkens

Good results.

Neal Deaton – BB&T Capital Markets

More favorable outlook?

Henry Gerkens

Yes.

Operator

The next question comes from the line of Ed Wolfe – Wolfe Research.

Ed Wolfe – Wolfe Research

A quick follow-up. Can you give us some of the cash flow numbers? What was cash from operations and CapEx in the quarter?

Jim Gattoni

$24 million was cash from ops. I think we had $22 million in cash CapEx.

Ed Wolfe – Wolfe Research

That is a net number?

Jim Gattoni

No that was $22 million cash CapEx.

Henry Gerkens

Remember we had an option to buy the building at the end of year 2010 of the lease of the building we are in. That is what that represents.

Jim Gattoni

$21 million of that was the building plus $1 million of capital for IT as well.

Ed Wolfe – Wolfe Research

I am sorry if you said it already but the guidance change for the full-year yet?

Henry Gerkens

I have never given guidance for the full-year.

Ed Wolfe – Wolfe Research

Can you give some expectation for CapEx guidance for the full-year?

Jim Gattoni

Oh, CapEx guidance? The $22 million for the first quarter we had replacement equipment and maybe another $18-20 million but it is replacing existing trailing equipment.

Ed Wolfe – Wolfe Research

So all in 40 give or take for the year?

Jim Gattoni

Yes.

Ed Wolfe – Wolfe Research

Is there something net off of that if you are selling equipment or is that a good net/net number give or take?

Jim Gattoni

That is not a net. That does not include what we sell the trailers for but I don’t know what that number would be.

Operator

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

Henry Gerkens

Thanks. Maybe what I will do is go around the room and Jim Handoush do you want to add any closing comments?

Jim Handoush

Just to say that [audio fades] We are very excited about the remaining three quarters of the year.

Jim Gattoni

It is nice to be out of 2009 and what appears to be a very healthy transportation environment. I think things are really moving in the right direction. [inaudible] going in the right direction. It was just a good feeling and we will see it continue throughout the second quarter.

Henry Gerkens

With that I wish everybody a great afternoon. I want to thank everybody for tuning in and our second quarter mid-quarter update call is on May 21st at 2 p.m. Talk to you later. Thanks a lot. Bye.

Operator

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

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Source: Landstar System, Inc. Q1 2010 Earnings Call Transcript
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