Landstar System, Inc. (LSTR) Q2 2013 Earnings Report, Transcript and Summary

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

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division Kelly A. Dougherty - Macquarie Research Robert H. Salmon - Deutsche Bank AG, Research Division William J. Greene - Morgan Stanley, Research Division Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division Scott H. Group - Wolfe Research, LLC Jack Atkins - Stephens Inc., Research Division Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division Matthew S. Brooklier - Longbow Research LLC David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division David P. Campbell - Thompson, Davis & Company Matthew Young - Morningstar Inc., Research Division Ryan T. Bouchard - Avondale Partners, LLC, Research Division

Good afternoon, and welcome to Landstar System Inc.'s Second Quarter 2013 Earnings Release Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, you may disconnect at this time. Joining us today from Landstar are Henry H. Gerkens, Chairman, President and CEO; Jim Gattoni, Executive Vice President and CFO; Pat O'Malley, Vice President and Chief Commercial and Marketing Officer; and Joe Beacom, Vice President and Chief Safety and Operations Officer. Now I would like to turn the call over to Mr. Henry Gerkens. Sir, you may begin.

Thanks, Dory, and good afternoon, and welcome to the Landstar 2013 Second Quarter Earnings Conference Call. [Operator Instructions] But before we begin, let me read the following statement. The following is a Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts are forward-looking statements. During this conference call, I and the other members of Landstar's management, may make certain statements containing forward-looking statements, such as statements which relate to Landstar's business objectives, plans, strategies and expectations. Such statements are, by nature, subject to uncertainties and risks including, but not limited to, the operational, financial and legal risks detailed in Landstar's Form 10-K for the 2012 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 second quarter mid-quarter update call, I stated that I anticipated that, one, revenue for the 2013 second quarter would be in a range of $660 million to $700 million; that, two, our gross profit margin would be in a range of 16% to 16.2%; that, three, our operating margin would be in a range of 44% to 46%; and that, four, diluted earnings per share would be in a range of $0.63 to $0.68 per diluted share. Actual 2013 second quarter revenue was $679 million. Our gross profit margin was 16.1%. Our operating margin was 45.7%, and diluted earnings per share was $0.66 per diluted share. All approximately at the mid-points of the revised estimated ranges. As I said in this morning's press release, despite the choppy and soft industrial and manufacturing environment, Landstar's variable cost operating model generated a very healthy 45.7% operating margin. Thus, again, demonstrating the strength of Landstar's operating model. Consolidated revenue in the 2013 second quarter was approximately $679 million, down approximately 8% from the revenue generated in the 2012 second quarter. As was the case for the 2013 first quarter, compared to the 2012 first quarter, the decrease was largely driven by decreased revenue in certain of Landstar's industrial-based accounts. Additionally, as I anticipated and stated in a prior conference call, total revenue generated from new agent additions continued to be below our historical new agent revenue run rate of between 3% and 6% of revenue, and only represented 2.2% of total revenue to 2013 second quarter, the same as in the 2013 first quarter. On the positive side of that number, however, the dollar amount of new agent revenue increased 10% over the dollar amount of new agent revenue in the 2013 first quarter. From a service offering standpoint, total revenue from truck transportation for the 2013 second quarter declined 8% from the 2012 second quarter. The decline was from an approximate 5% decrease in load volume and an approximate 3% decrease in revenue per load. Total revenue generated through our un-sided platform equipment service offering in the 2013 second quarter declined 12% compared to the 2012 second quarter, 5% due to lower load volume and 7% due to lower revenue per load. Total revenue generated through our van equipment service offering was 6% lower in the 2013 second quarter versus the 2012 second quarter, due primarily to a 5% decrease in load volume. Total revenue generated from rail intermodal service declined 1% in the 2013 second quarter over the 2012 second quarter. While total revenue generated through ocean cargo and air cargo providers increased 7% quarter-over-quarter. As it relates to truck capacity, we ended the 2013 second quarter with a total truck capacity base of 39,948 carriers, compared to 36,293 at the end of the 2012 second quarter and 39,622 at the end of the fiscal 2013 first quarter. As an update, over 2,200 electronic onboard recorders have either been ordered or installed on our BCO capacity base. Before I turn it over to Jim for his financial review, Pat O'Malley and Joe Beacom are going to add a little more color to the second quarter performance from an operating standpoint. Pat?

Thank you, Henry, and good afternoon. Henry talked about the performance of our Platform business. Transportation demand for core industrials around agriculture, forestry and mining remain muted while alternative energy prices have gained momentum. Several customers have presented bid opportunities for projects commencing later in the year and 2014. In spite of the anticipated pickup in demand, pricing in the heavy-specialized segment remains below the previous year. As we've mentioned, the barriers to entry into the heavy-specialized segment are significant. Cost of equipment, operator qualification and operational knowledge conspire to limit competition. Currently, approximately 37% of Landstar's truck transportation revenue is generated using un-sided platform equipment. During the 2013 first quarter earnings call, we provided detail around our LTL initiative. Although Landstar has historically participated, to a small degree, in the LTL market, beginning in August 2011, we increased our emphasis on this service offering by implementing an easy-to-use capacity procurement tool, established standard rates with LTL carriers and worked with our agents to identify customer opportunities. Early in the 2013 second quarter, one of Landstar's customers decided to manage their transportation business in-house. Landstar had formerly managed the customer's domestic transportation. This action adversely affected our LTL business and volumes decreased 2% quarter-over-quarter. We remain confident in our ability to grow this segment. We continue to add quality carriers to our base of capacity providers, more agents are selling this service, and the number of customers that request account specific pricing is increasing. As we mentioned, most of our sales staff, and many agents, have a background in LTL and are comfortable selling this product. From the perspective of the LTL carrier base, Landstar's business model, diverse agent population and large customer base represents an attractive variable cost sales channel. In addition, virtually every existing Landstar truckload customer has some LTL business. This gives Landstar and our agents an additional revenue stream inside our existing account base. Our available load trends have been improving. In order to attract capacity and cover their shipments, Landstar agents typically use our proprietary load board to post their available freight. The underlying technology enables our agents and capacity providers to quickly identify those shipments that meet their approval, commit to the shipment and move the load. Landstar tracks the number of loads that are available each day. For most of the first half of this year, available load levels were well below 2012. The number of available shipments in July is trending higher than any other time since we started recording this data in 2006. In general, the number of available loads reflects a pattern of loading opportunities. And finally, for our new agents -- as a reminder, new agent is considered -- in the 2013 second quarter, represents an agent who had contracted with Landstar after April 1, 2012. As Henry stated, new agent revenue in the 2013 second quarter was 2.2% of revenue, below the historic range of 3% to 6%. We believe the challenges for small, independent brokers are many and difficult to solve without outside support. Whether it's access to capital, cash flow, tight capacity, inferior systems or assorted October 1, 2013, mandates under the MAP 21st Century Act. This segment of the population is fertile ground to recruit productive new agents. We continue to do a good job of exceeding our pipeline with quality new agent prospects. Although the number of new agents added in the second quarter of 2013 declined slightly year-over-year, the average revenue per new agent per week is near an all-time high and approximately 19% greater than the previous year. We believe that our recruiting strategies, business environment and systems will help us maintain momentum in adding productive new agents through the balance of the year. Joe?

Thanks, Joe. I'll move on and cover various financial information included in our second quarter release. Gross profit, representing revenue less the cost of purchase transportation and commissions to agents, was $109.2 million or 16.1% of revenue in the 2013 second quarter, compared to $116.7 million or 15.9% of revenue in the 2012 second quarter. The decrease in gross profit was generally due to lower revenue hauled on un-sided platform equipment in the 2013 second quarter compared to the 2012 second quarter, partially offset by an increased gross profit margin. The cost of purchased transportation was 76% of revenue in the 2013 second quarter, compared to 76.5% in the 2012 second quarter. Revenue contributed by truck brokerage carriers, which has a higher rate of purchased transportation, was 41% of revenue in the 2013 second quarter and 42% of revenue in the 2012 second quarter. The rate of purchased transportation paid to truck brokerage carriers in the 2013 second quarter was 80 basis points lower than the rate paid in the 2012 second quarter. Commissions to agents was 7.9% of revenue in the 2013 second quarter, compared to 7.7% of revenue in the 2012 second quarter. The increase in the rate of commission paid to agents was primarily due to the increase in net revenue, representing revenue less the cost of purchased transportation on truck brokerage revenue. Other operating costs were 3.8% of gross profit in the 2013 quarter, compared to 4% in the 2012 quarter. This decrease was primarily attributable to lower maintenance costs on company-owned trailing equipment compared to the 2012 second quarter, as we replaced older trailing equipment with new equipment. Included in other operating costs were gains on sales of trailing equipment of $1.7 million and $1.8 million in the 2013 and 2014 second quarters, respectively. Insurance and claims costs were 10.9% of gross profit in the 2013 quarter, compared to 8% in the 2012 quarter. The increase in insurance and claims, as a percentage of gross profit, was primarily due to unfavorable development of prior year claims of $2.3 million that was primarily attributable to one claim in the 2013 second quarter. Also, insurance and claims expense was 3.5% of BCO revenue in the 2013 second quarter, compared to a low 2.5% in the 2012 second quarter. Historically, average insurance and claims expense, as a percent of BCO revenue, was 3.3% over the previous 5 years. Selling, general and administrative costs were 32.7% of gross profit in the 2013 second quarter and 32.3% of gross profit in the 2012 second quarter. The increase in selling, general and administrative costs, as a percent of gross profit, was primarily attributed to lower gross profit in the 2013 period and costs associated with the company's annual agent meeting which was held during the second quarter of 2013 but held in the first quarter of 2012, partially offset by a decrease for provision for bonuses under the company's incentive compensation program in the 2013 second quarter, as the company has not achieved target operating results in the 2013 period. Depreciation and amortization was 7.2% of gross profit in the 2013 second quarter, compared to 5.7% in the 2012 second quarter. This decrease was due to the effect of lower gross profit in the 2013 second quarter and increased depreciation of trailing equipment as we replaced older, fully depreciated equipment with new equipment. Investment income was $371,000 in the 2013 quarter compared to $405,000 in the 2012 period. The effective income tax rate was 38.1% in the 2013 second quarter, compared to 38.2% in 2012 second quarter. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $102 million. 2013 second quarter year-to-date cash flow from operations was $85 million. During the 2013 second quarter, Landstar purchased 884,000 shares of its common stock at a total cost of $46.6 million. Currently, these are 1.1 million shares available for purchase under the previously authorized purchase program. Cash capital expenditures was $2.7 million in the 2013 first half. Trailing 12-month return on average shareholders equity was 33%, and trailing 12-month return on invested capital, representing net income divided by the sum of average equity plus average debt, was 25%. On July 29, 2013, shareholders equity represented 77% of total capitalization. And back to you, Henry.

Thanks, Jim, Pat and Joe. Through the first several weeks of the 2013 third quarter, excluding the week that included the extended July 4 holiday, we have seen improved truckload volume and revenue per load trends. Although total revenue still lags that of the 2012 prior year comparable period, the trend is better, which I believe signals we have bounced off the bottom. It is still very early in the quarter and the U.S. industrial production forecast for the balance of the year remains soft. However, I am encouraged by the recent trends in load count, the current average revenue per load amount and our new agent revenue potential. Considering the improving trends and counterbalancing that with the soft U.S. industrial production outlook, I currently anticipate 2013 third quarter consolidated revenue to be in a range of $670 million to $715 million, an operating margin of 46% to 48%, and diluted earnings per share in a range of $0.67 to $0.72 per diluted share. It should be noted that the previously mentioned estimated ranges of operating margin and diluted earnings per share for the 2013 third quarter were estimated including the same level of insurance and claims expense, as a percentage of BCO revenue, as incurred in the 2013 second quarter. Dory, in a minute I'm going to open it up for questions. And I hope everybody appreciated the sort of change in format, giving everybody a little bit, I think, insight into some of the operational and revenue. And I'm actually going to let Joe, Pat and, obviously, Jim handle most of the questions. And with that, Dory, we can basically start.

[Operator Instructions] Our first question today comes from Todd Fowler with KeyBanc Capital Markets.

Henry, I think maybe this is a question for Pat. I'm curious how much, if any, wind energy revenue there was in the second quarter and then what you had factored in for the third quarter.

I can't tell you, Todd, how much wind business was in the second quarter, and I can't tell you what we factored in to the third quarter. As I mentioned in my remarks, we see some of that building, in terms of projects that are coming in, that we're bidding on. But at this time, I wouldn't want to estimate what the third quarter is going to be.

Todd, just a comment. I mean, I quoted before, the #1 customer in that particular category. And in the third quarter, I mean, that was down about 56% quarter-over-quarter, which accounted for much of the flatbed heavy haul decline. And I don't know if that gives you any color. Obviously, as Pat said, what that customer has told us, things should be picking up in the third quarter.

I guess maybe, Henry, let me ask it this way. It doesn't sound like there was much contribution from wind in the second quarter. The comments about the momentum with wind and what you're seeing on the bid side, is that expected to come in, in the third quarter? Is that something that we should expect later into the fourth quarter and into '14?

I would expect, Todd, the majority of that to be late third quarter, some fourth quarter, then 2014.

And so, what's in the guidance, the revenue guidance? It doesn't sound like there's a lot in there from contribution on the wind side.

That's correct, and weather will really determine a lot of what the fourth quarter is like.

Got it. Okay, that's very helpful. And then the follow-up one that I had. This is probably for Jim. On the SG&A side, I guess if I back out the $2 million for the agent convention, that gets me to about a $34 million run rate for the quarter. Is that a good placeholder for the rest of the year based on planned incentive compensation levels?

Yes.

Our next question comes from Kelly Dougherty with Macquarie.

You mentioned you see improving trends but then the revenue guidance suggests revenue could be down more than 6% at the one end. Can you help us think about that, whether you're just seeing a decelerating pace or how you think about load volumes and revenue as we move through the rest of the quarter?

I think what I've given out there is a pretty wide range. I think we did, and Jim, correct me if I'm wrong, about $720 million last year in the third quarter.

$717 million.

$717 million. So the upper range, the upper end of that range is pretty much on target there. You've got to factor in -- and I'm a little bit gun shy because the U.S. forecast for industrial production, clearly, is declining. If you looked at those production forecasts back in March and look at them now in July, they've gone south. So I've got to counterbalance, as I said in my comments, what we're currently seeing with what is projected to be seen. So I don't want to get ahead of myself. Jim, you want to say something?

Yes, Kelly, if you look at the last 5, 6 years, sequentially, third quarter over second quarter has been either 2% over third quarter -- 2% over the second quarter or 2% behind the second quarter. So it's a very consistent quarter-over-quarter comparing the sequential. If you look at the mid-point of our range, we're seeing the mid-point 2% over what we did in the second quarter, really, that's kind of how you look at it. So we are building a little bit better third quarter sequentially than the second quarter, as you've seen historically.

Okay, that's helpful. And then maybe can you just help us think about the impact on your revenue of some of the more favorable manufacturing reports that have come out recently? Granted they're lower than they were earlier in the year but they're starting to tick up a little bit higher than expectations. So have you started to see that in your results? Is that what you were talking about? Or maybe, if not, is there any kind of lag that we can think about before you start to see that increased activity?

No. The one that's fresh in my mind is Caterpillar's report, which wasn't too favorable, as far as I recall. No. Look, as I said before, those revenue projections are based on the trends we're currently seeing, which clearly are better than what we've been experiencing when you look at the daily comparable periods, and that's a clear positive sign. On the other hand, the forecasts out there are just not very good. And when I look at flatbed heavy-specialized, Transport Topics just put out the top 100 carrier thing, and we're clearly ranked #1 in specialized and flatbed by, quite frankly, a wide margin over #2. And when that segment goes through a cyclical downturn, which is what we've had, that's going to impact us more so than probably any other carrier. So that's what we're feeling. On the other hand we believe it's bounced off at the bottom and we're starting an upward climb. Pat, you want to...

Kelly, one of the things that we look at is the number of quotes that we're making in our platform business. And if you look at through the first 2 quarters, quotes year-over-year were behind. In July, the quotes that we're doing are up about 7.5% compared to 2012. So that could be people rebuilding their supply chains, that could be the fact that they're anticipating some business and we're currently quoting on it. If you think about it from quote to move, depending upon what they're manufacturing, there could be 30, 60 days between them. So that's one item that we look at that says, hey, maybe this is building. But we haven't seen evidence of it right at this point. We're largely spot business on that side, and we just haven't seen it.

Our next question comes from Justin Yagerman with Deutsche Bank.

Henry, actually it's Rob Salmon on for Justin. Henry, we had seen that one of the larger competitors in the heavy flatbed specialized segment had recently completed a restructuring in early July. Have you guys seen any sort of benefit from some of the noise that may have been going around, either from a BCO perspective or from a customer perspective, as a result of that reorganization?

No, but I'm looking at my guys to help me out here.

We're not seeing any -- from a recruiting standpoint, I mean, things are pretty stable, but nothing specific to anybody leaving one competitor coming over here that we've noticed.

From the revenue generation side, Rob, we haven't seen customers flocking to us saying that there were some problem with a provider that had been servicing that account.

Okay, that's helpful. I think it was more on the financial side, where that had taken place. With regard to my follow-up, Landstar has obviously been doing a really good job of growing its active broker carrier capacity, but we have seen the productivity slip a little bit. It was about 8 loads per truck this year, down from about 9 last year, and it's been down for about 3 consecutive quarters. What do you think is constraining the productivity on the broker fleet? Is this more of a demand issue or the regulatory changes or is this kind of pricing mismatch? Any color will be helpful.

On the BCO front, I think we said earlier in the call that the number of available loads in the system had lagged 2012, and I think that's probably the biggest impact driver to utilization on the BCO side. That would be my guess.

I would just add, as far as productivity per broker carrier, I mean, loads are out there. People haul what they want to haul. We don't actively manage that.

No.

Our next question comes from William Greene with Morgan Stanley.

Henry, I wanted to ask a little bit of a follow-up to the sort of discussion you were having before, and it really hinges on this sort of trade-off between kind of growth, but also the margin or the returns. And so one of the challenges we have when we talk about Landstar with investors, right, is that the growth has been disappointing. But that comment fails to recognize where the margins and returns are. So I don't know what the macro is going to do going forward, but if we sort of sit in this tepid kind of environment, do you sort of feel a need that you have to do something to grow faster? Or do you sort of feel like, no, look, this is a company built for when the economy comes back, and really, what we have to focus on here is maintaining these margins and these returns at these levels and growth will do what it's going to do? How do you think about that trade-off?

Well, that's an interesting comment. I mean, I'm not going to do something, hopefully, knee-jerk. You've seen a lot of things happen, huge multiples being paid for companies and things like that. So I think we've been fairly consistent. And when you go back to a real downturn, like you had in 2009, that actually was fertile ground for Landstar to go out and recruit agents and whatnot, and Pat has addressed, I think, some of the quality of the agents we're currently bringing in. So as certain things slow down, it actually, over the term, will benefit Landstar as you move into future years, as far as people that we get into this pipeline. I mean, our objective is, obviously, we want to grow as fast as we can, all right? But on the other hand, we're going to basically also look at profitable growth, and that's what we're trying to get to. And I think our margins, we've concentrated on trying to maintain those and I think we've done a pretty good job. I think our variable cost model works out very well. It's an interesting question, but I think in this type of environment, when things get slow, it actually helps us out, I think, going forward from an agent recruiting standpoint. And, Pat, as I said, addressed that in his particular comments. Pat, did you want to add anything to that?

Well, I think we're always trying to grow but I think and be mindful of the margins, William, and I think Henry articulated that.

I guess I'm curious what you think about the concept of maybe using those margins to, in effect, invest in the growth, right? In other words, you've already got a spread over your cost of capital that's quite good. So you could arguably invest at a lower return on capital and grow much faster if you wanted to. But it doesn't sound like that's something that you want to do because these margins and getting to these targets is kind of more critical than growth for some period.

[indiscernible] of both, Bill. I can't say one -- I mean, if I had my druthers I'd be doing everything and we'd be doing both at the same time. You try to manage that carefully. And I'm not saying, would I sacrifice some margin for some growth that, over the longer term, might benefit us? Yes, but I think you got to -- as I said before, I don't think we're going to do something that just is paying 13x, 14x for a company. And you got to remember, Landstar's business model is very unique and there's really not one like it out there when you consider the agent piece and the third-party capacity piece. And I would not destroy anything by trying to bring something in that hurts that loyalty that we've built up with our agent model, for example, or our third-party capacity base. So we've got to be very careful as far as what you'd bring in. So it's not a matter of just -- I can't just go out and do something for the sake of doing it. You've got to look at that also.

Our next question comes from Scott Schneeberger with Oppenheimer. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: First, I just wanted to follow up on Todd's question earlier. I believe you had alluded to, back at the beginning of the year, expecting about $30 million in revenue from wind. And what I inferred from how you answered that question, it sounds like part of the guidance reduction was out of that a bit. But also I inferred that, still, maybe it would just be trickling into 2014. Is it possible to clarify that a bit more?

Yes, Jim's going to clarify that. But I always like the guidance a little bit lower. We never gave guidance for the third quarter at this point in time. And I always want to remind people that. It's the estimates that are out there. This is the first time we've given revenue guidance for the third quarter. But, Jim, go ahead.

I just happen to have the wind numbers in my hand right now, and they just magically appeared. But I could tell you, second quarter wind number was about $6 million compared to last year's quarter was about $20 million. First half of this year, we're running about $10 million, and we continue to see that. I would still say that we might hit that $30 million target. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: Okay, I appreciate that clarification. Then following up on -- you'd mentioned in prepared remarks that, I believe, guidance was based on the second quarter insurance and claim level, and it sounds like you had a big one-timer in there. How should we infer? Is there potentially upside or maybe that one-timer carries over, was that fully settled? Just a little more clarification on how we think about that line.

There's always ups and downs to the claim line. But if you look at history, it's 3.3%, whether it comes from frequency, severity of current year accidents or development of claims from prior years. There's nothing to infer there. I mean, 3.3% is the average you use. Can we be higher than that? Yes. Can we go lower than that? Yes. It all depends on what happens during the quarter or any existing claims we have outstanding. This really not a lot to -- that's why we forecast it that way. There's really no better answer.

Our next question comes from Tom Wadewitz with JP Morgan. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: I wanted to see if you could start by giving us some thoughts here, on the by month volume trends in truck. I don't know if you want to give kind of combined or BCO and broker. But just wanted to get a sense of -- on the, I guess on the load side, whether it was even growth or whether the decline was kind of stable through the quarter or whether it improved.

Total truck, which includes flat van, LTL, it's all together. We were -- April, May, June, we were, compared to prior year April, May, June, it was minus 5, minus 4, minus 6. That's a load count. Minus 5, minus 4, minus 6. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Okay. And then July so far looks like what?

We're looking at daily load counts.

We've got daily load counts. It's kind of hard to basically say what that is. But I will tell you, we've had days where it's positive, which we haven't seen a lot of positive days. So that's clearly a good sign. But as I said, total revenue, based on what we've seen on an accumulative basis, is still lagging what we had in July. But the trend, from a load count thing, is getting better. And the same thing with the revenue per load. So, where I can't give you a definitive answer on that, that should help you at least couch what we're trying to say here. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Right, okay. And Henry, what's your view on the market in general? It seems like we've had, I guess from the dry van or company iron guys, as you like to call them, they're pointing to, I'd say, softness in general in second quarter, both in terms of, I guess, activity and rates. I know they're not levered in necessarily the same verticals. But how would you see the market paying out? Do you think that it's relatively balanced, so if we see a little pickup, you'd see the rates come back pretty quickly, or does it feel like it's kind of weaker and it takes more time that and a bigger pickup to see the market tighten and see stronger rates?

I think, when I look at what happened at vans at Landstar, I mean, our total revenue there was down about 6%, 5% was load volume. Rates were just down a little bit, if you will. So I'm going to say, I think things are fairly balanced. And if volume were to pick up I think you would see those rates go higher, and actually, probably pretty quickly.

Our next question comes from Scott Group with Wolfe Research.

So I'm not sure if I missed this or not, but the LTL customer that you lost, can you quantify how big that is and is that in brokerage or BCO? And should we think about this kind of like the substitute line-haul LTL guy you lost a few years ago, that was a decent chunk of revenue, but pretty low margin or is this more kind of...

I don't recall the exact amount of LTL revenue, Jim will give it to you, but you're talking about $18 million to maybe $17 million. Last year $18 million, $17 million this year. You're only talking $1 million, but we were talking about just in LTL itself, all right? I mean, it really is not material, at all, to the total consolidated results. But just when you look at LTL by itself -- do you have the LTL numbers?

Yes, LTL numbers for the quarter were $19 million last year and $18 million this year.

Yes. So, I mean, it's not...

The point was just that, that one customer caused the decline.

Okay, got you, got you. Jim, I think you said that the brokerage gross margins were up 80 basis points. Can you just remind us how much they were down or what they were in second quarter a year ago? And is your sense that it's just an easy comp or is there something where the brokerage environment has just gotten a little less competitive or just better? I guess, do you think that is sustainable into the third quarter, seeing brokerage margins improve?

That was a joke, Scott, I think.

I missed what you said, sorry?

I said there's never an easy comp. And it's not the gross margin, it's the PT rates. It's what we're paying for purchase transportation, right? So this year, quarter-over-quarter, it's positive 80 basis points. Last year, it was negative 30 basis points. Was last year probably more toward the higher end of the rates you pay? Yes, if that's the question.

Do you think that's sustainable to expect improvement in the back half of the year?

Well, it depends, really, what happens to capacity, if it tightens up. It's really about supply and demand, right? And that's what drives those rates.

In addition to that, I mean, when you broker some of the specialized heavy haul stuff, you're paying a higher rate, and when you see that mix change in the second quarter, where that number goes down, that's going to drive the overall number to be more favorable. And if, in fact, that number starts to pick up, as Pat alluded to in the back half of the year, I would anticipate that purchase transportation, it'll drive that up a little bit because that's more expensive.

Our next question comes from Jack Atkins with Stephens.

Jim, just to kind of go back to your comments earlier about guidance relative to the sequential changes historically. I know you were referring to revenue, but when you look at the earnings, the average historical earnings change from the 2Q to 3Q, I think it's typically up 10% to 12%. But guidance is calling for only 2% to 10% at the low end versus the high end. So I was wondering if you could maybe walk us through the puts and takes on the earnings side to drive the high end and the low end of guidance.

Well, if you go back to '07, if you go sequentially, third quarter or first quarter, I'd take out disaster relief, you may not. Because disaster relief had significant impact, and when you compare third quarter for second quarter for certain years. And when you look at that, '07 was flat, '08 was plus 5, '09 was plus 11, '10 was minus 10, '11 was plus 3, and '12 was minus 7. Very inconsistent when you pull that stuff out. And a lot of that really, truthfully, gets driven by the volatility you have in insurance and incentive compensation programs. That's really what it comes down to, when you're driving the gross profit changes and revenue changes down to the operating income.

Okay. So then more broadly then, I guess, if you think about the low end versus the high end of the earnings guidance range, could you maybe walk us through the puts and takes as far as how you get to one versus the other?

It all has to do with the gross profit range coming off the revenue. There's not a lot of other variables in there. Like we said, we put insurance at 3.3% of BCO revenue. We discussed the SG&A number when Todd said it's about $34 million and the rest of the stuff kind of stays stable. So the high in the end is mostly driven by the gross profit performance and revenue growth.

Yes, and -- exactly right, and the gross profit piece is important because it's really mix. I mean, if you got more BCO revenue versus brokerage revenue, a lot of that stuff plays into all of that. So, I mean, but it drives from the top line to the gross profit and then the rest of the P&L is pretty easy to understand.

Sequentially, one thing is, though, that I think may be missed. Everybody's aware that we have $2.3 million in convention in the second quarter, and that's going to go away. But I think what you got to focus on is we also had $1.8 million of trailer gains in the second quarter that we only anticipate a couple hundred thousand, maybe $400,000 in the third quarter. So that's kind of a drag, right? So you got to make sure you consider that when you're looking at the third quarter projection.

Okay, okay. That makes sense. And then I guess as my follow-up, just curious if you guys could comment on hours of service changes and the impact that's having or you think it may have to the business in the third quarter and beyond.

Joe?

Our next question comes from Ben Hartford with Baird. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Jim, on the SG&A side, I know you had said that the $34 million number on a quarterly basis is a good run rate in the back half of the year. And if I look back, the past 3 years, it's averaged about $38 million on a quarterly basis, which I assume loads in an incentive comp component and the delta between that $38 million average and $34 million now is just incentive comp. But I wanted to get your perspective on that. And then maybe you could give us the number of what the incentive comp component is in 2013 and what it could have been if you had hit your targets. You see what I'm getting at?

Yes. So you're talking about a $4 million difference, most of it's incentive comp, I don't know what the rest of it is, to tell you the truth. We have ups and downs, whether it's professional fees or other things that are in there, but most of it's incentive comp. But, from a target standpoint, our bonuses are about $8 million a year. $7 million to $8 million, just use $8 million. So if we got it perfect, it would be $2 million a quarter in '13, and we haven't hit those targets through the second quarter. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Okay. So kind of looking at $2 million to $3 million a quarter and higher SG&A if we were to hit those targets and that variance is incentive comp.

That would be true. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Okay. Henry, you talked about bouncing off the bottom. Just interested in your perspective on hours of service and what we're seeing so far, and what you expect to see in terms of flatbed capacity.

Joe, I'll have you answer that question. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Okay, that's helpful. And then, Pat, maybe one last one on the new agent contributions as a percent of revenue. I think at the April event you said that, historically, it had run between 4% to 6% of revenue growth, but it could run higher. I'm wondering if that's the case this year, and if so, where is it running?

In the quarter, it's 2.2% of revenue growth, and historically, it's run anywhere between 3% to 6% of revenue growth. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: And would you expect that to normalize in the back half of '13?

I think, Henry in his comments and in my prepared remarks, we made mention of that, Ben.

Our next question comes from Matt Brooklier with Longbow Research.

Henry, you talked to directionally improving truck trends in July. I was just curious to hear if that improvement is equal across your dry van and your flatbed operations or if one of those segments is feeling a little bit better than the other.

I get daily load count reports and I don't have a split between flat and van, but -- I don't know, Pat can you add anything to that?

It's still, the platform remains softer than the van.

Okay. So, that's on the load side, what about on the pricing side? Is it similar trends?

Similar trends, correct.

Our next question comes from David Tamberrino with Stifel. David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division: I was just wondering if you could break down kind of your revenue per load decrease in truck into pricing and maybe mix and changing length of haul for the quarter.

Well, we don't really track length of haul. It's been running anywhere from 750 to 800 miles the last -- forever. But if you want to talk about -- we gave the load count variances quarter-over-quarter -- sorry, month-over-month, and like I can give you the revenue per load from a truckload standpoint. David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division: Yes, I mean, I had -- I just didn't know if, off the top of your head, if you guys had numbers or analysis around, really, if pricing was flat or down or maybe pricing was up a little bit because of the mix, revenue per load was down because you're running different materials, et cetera.

I think Pat addressed, I think, the pricing on the flatbed side, it's down a little bit. And I would say the van side is probably also sort of flattish.

Flattish. David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then just maybe a last one. How are your Million Dollar Agents trending so far through the first half of the year?

Pat?

Well, the schedule that we show you, David, is the previous year's Million Dollar Agents. And so I can tell you that we have not had any departures of Million Dollar Agents of significance. And we've added agents that have produced a million dollars already in revenue, that are new to Landstar. That schedule we show you is for the previous year.

Yes. That's hard to -- obviously, we were down in revenue the first quarter, down in revenue in the second quarter. So, obviously, we expect some falloff in our Million Dollar Agents. On the other hand, if you look at the top 5, Pat, I think, how many are up, how many are down? I think you got 2 or 3 that are up, 2 or 3 that are down.

Yes.

Our next question comes from Anthony Gallo with Wells Fargo.

I wanted to go back to Bill Greene's question, if I could. I'm kind of in agreement that the cost structure, capital returns all look quite good. But this idea of stimulating growth, in my mind, sort of comes down to either bringing in new agents or allowing each agent to do more. And you touched on the introduction of LTL as one way to get agents to do more. So maybe you could just touch on some of the things that you're doing now to try and stimulate agent growth. I know you had talked, in the past, about maybe facilitating end market acquisitions among agents. So maybe just a little color there would be helpful.

Yes, Pat, you can talk about that. I mean, we've completed one. We've got another one, and then, in fact, we've got 2 more that are being worked on.

So we've done that, Anthony, we've actually executed on that, where we've helped agents acquire smaller brokers and bring them into their business. We've also converted agents over that had their own business, as we talked about it in the opening remarks, from an agent perspective. I think it's all about providing them with the correct products to sell and then the efficient manner in which to execute that business. And so, if you look at what we're trying to accomplish, whether it's from introducing LTL -- and then the way they execute an LTL shipment is easy. It has to be, so that they can execute more shipments. And if you look at our underlying technology, whether it's procuring capacity or it's selling to customer or it's identifying what the right price is, we do an awful lot of work behind-the-scenes to help them become more efficient. Because, ultimately, what we have to be able to do is -- if they're going to grow from $10 million to $12 million and add 3 people, that's a losing proposition. On the other hand, if they're going to move from $10 million to $12 million and maintain the headcount that they have, that's incentive for the agent to do that. And I think Joe properly outlined, in his opening remarks, some of the things we're doing from a capacity sourcing standpoint to assist them in that endeavor.

Okay, that's helpful. And an unrelated question. Could you just remind us what percent of the business, right now, is military? And then I know you mentioned ag, mining, et cetera, some of the heavy equipment stuff. What percent of revenue is the heavy machinery business?

What is the DoD piece? Government. Government's 2.8%, and actually, government was down quarter-over-quarter. Part of the decrease was due to decreased government business. And what was it? Was that it, Anthony?

The machinery piece.

Machinery is 19.6%.

Our next question comes from David Campbell with Thompson, Davis & Company. David P. Campbell - Thompson, Davis & Company: I just have one question. And, Pat, I think I heard you say that agent available loads were up in July, but everyone's talking about revenues going down. I may have misinterpreted what you said.

Yes, what we talked about is that the number of available loads that are in the system are greater in July. And then we made the statement that, in general, the number of available loads reflects a pattern of loading opportunities. So the first half of the year, by and large, year-over-year, the available loads were down. But in July, that's trending favorably.

Thus, the change in our load count trends. David P. Campbell - Thompson, Davis & Company: Right. But as I said, how does that equal less revenues than a year ago?

Not all loads are picked up.

And there's pricing differences as well. Volume could remain the same, but if price is off then your revenue is going to be down. David P. Campbell - Thompson, Davis & Company: I understand that, right. Right, right, right. but it is somewhat encouraging. It sounds like it.

That's why I used the words, I am encouraged.

Our next question comes from Matt Young with Morningstar.

I know it's a small piece of the business. But just was wondering what was behind or what's been behind some of the recent growth on the air and ocean side. Is that new customers? Are you seeing decent same customer growth with ocean business and so forth?

I think, from an ocean perspective, it's a couple of accounts that we've won. And then, a lot of our business on the ocean side is project driven, we've had a couple of nice projects along those lines. And same thing on the air, we've had a few charters this year.

Okay. And just curious, have you heard any hints in the airfreight markets, among your customers, as you talk with them, have you heard any hints of improvement or stabilization in airfreight demand recently?

No, Matt.

And our final question comes from Ryan Bouchard with Avondale Partners.

I'll be quick. So you said 2,200 EOBRs on BCOs now ordered or installed. Do you know kind of what that was around the end of the first quarter?

Joe? I probably mentioned it in the first quarter.

Ballpark, roughly half maybe?

I don't have that.

Okay, that's fine. And then BCO count up 25 sequentially. Can you talk about the trend in the third quarter so far, now that we're a month in?

About 1,250, by the way. Just looked at my prepared comments. Looks like it was 1,250.

Yes, BCO count, in July, we are a net positive through the first 3 weeks. And as I said in my remarks, I mean, it's still challenging but we're making headway and moving in the right direction. And it's positive, thus far, in July.

Okay. And any closing comments from anybody here?

No.

Okay. Well, listen, I appreciate everybody dialing in. I think, as we enter the third quarter, as I said, I am encouraged. But I think you got to keep in mind, as far as what's out there from a forecast standpoint, what people who put out these forecasts. And we'll see how this all plays out. But I think as we enter the third quarter, I am much more encouraged than I was, I think, as we ended into the second quarter. So we'll talk to you on our mid-quarter update call for the third quarter. Have a good rest of the day, good Friday and a good weekend. Thanks, bye.

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