Landstar Systems: "Tight-Capacity Trends Will Generally Continue"

Landstar Systems (LSTR) reported earnings for the second quarter of 2008 and held a conference call to discuss earnings. LSTR is a non-asset based transportation and logistics services company with three divisions - carrier, global logistics, and insurance.

Financial Highlights

Revenue - $698 million compared to $633 million for the 2007 second quarter.
Net income -$29.8 million.
Diluted EPS - $0.56
Cash and ST Investments - $102.0 million.
Operating Margin - 7.2%
Two million share buyback authorized.
Dividend increased by 7%.

Guidance

Freight environment in the third quarter of 2008 to be similar to that of the 2008 second quarter.

Revenue for the third quarter of 2008 as compared to the third quarter of 2007 to increase in a range from the upper single to lower double digits.

Earnings for the 2008 third quarter - range of $0.54 to $0.60 per diluted share.

Management Comments

“In 2007 and early 2008 we were dealing with a market that had excess capacity, which resulted in downward pressure on price. Due to increased fuel prices and low freight demand certain large carriers permanently reduced the size of their company iron fleets and many small carriers and single-owner operators have exited the market place, causing somewhat of a reversal in the capacity and pricing environment. Capacity tightened in the second quarter and created pricing power.”

“I believe that tight-capacity trends will generally continue and result in a higher cost of purchased transportation for brokerage capacity. However, it will also result in generally a stronger pricing environment. I anticipate the weakness experienced in the automotive sector and in certain other accounts to continue into the back half of the year. However, that weakness should be offset, totally, by strength in other accounts.”

Q & A

How linear was the quarter – was strength in June?

“We saw a gradual build starting in May, but June clearly was a very strong month… July, historically, the first couple of weeks is very slow. So I really can’t take much out of what occurs in the first two weeks.”

If capacity got meaningfully tighter, would that hurt you on the margin side?

“Well, yes. If capacity gets tighter, then you’re absolutely correct, that means we’re going to basically be paying more for capacity. What we have to do is go back out to our customer base and say if you want this truck it’s going to cost you more. And that’s what we did in the quarter.”

Revenue up last few quarters but margins flat - when do you start to really leverage that revenue?

“Over a continuum of time you are going to see that margin increase. 7.5%, I think, if you added back on an apples-to-apples basis is a pretty good margin. Considering the environment we’re operating in.”

Sector specific?

“Automotive load volume was down about 22%.”

Acquisitions?

“There is nothing we are looking at right now.”