Landstar System, Inc.
Q4 2007 Earnings Call Transcript

Published: 1 Feb 2008

[Operator:]

Good afternoon and welcome to Landstar System, Inc. year end 2007 earnings release conference call. (Operator Instructions) Joining us today from Landstar are Henry Gerkens, President and Chief Executive Officer; Jim Gattoni, Vice President and Chief Financial Officer; Pat O’Malley, President, Landstar Carrier Group; Jim Handoush, President, Landstar Global Logistics. Now, I would like to turn the call over to Mr. Henry Gerkens. Sir, you may begin.

[Henry H. Gerkens:]

Thank you, Terry and good afternoon and welcome to the Landstar 2007 fourth quarter and year end earnings conference call. Before we begin, let me read the following statement

[Jim Gattoni:]

Thank you, Henry. Revenue in the fourth quarter of 2007 was $643 million which included $2 million of revenue generated under Landstar Express America’s contract with the Federal Aviation Administration compared to $611 million in the 2006 fourth quarter which included $15 million of revenue generated under the FAA contract. Exclusive of FAA revenue in the 2007 and 2006 fourth quarters, revenue generated in 2007 fourth quarter was over 7% above revenue in the prior year quarter. Investment income was approximately $1.2 million in the 2007 quarter compared to $1.7 million in the 2006 period. The $417,000 decrease in investment income was attributable to a decrease in assets available for investment at the insurance segment during the 2007 fourth quarter. Purchase transportation was 76.1% of revenue in the 2007 fourth quarter compared to 75.3% in the 2006 fourth quarter. Excluding revenue and purchase transportation costs under the FAA contract, purchase transportation was 76.3% of revenue in the 2007 fourth quarter compared to 75.9% of transportation revenue in the 2006 fourth quarter. The increase in purchase transportation as a percentage of revenue, excluding revenue in purchase transportation provided under the FAA contract, was primarily attributable to increased revenue at the Global Logistics segment, primarily from growth in less than truckload subs to line haul revenue held by truck brokerage carriers which tend to have a higher cost of purchase transportation. Commissions to agents were 8.1% of revenue in the 2007 quarter compared to 8.2% in the 2006 quarter. The decrease in commissions to agents as a percentage of revenue was primarily attributable to lower gross profit, revenue less the cost of purchase transportation at the Global Logistics segment. Other operating costs were 1.2% of revenue in the 2007 quarter, down from 1.4% in the 2006 quarter. The decrease was primarily attributable to trailer rental costs incurred during the 2006 quarter in support of transportation services provided under the FAA contract and the continuing transition from trailers rented from third party trailer vendors on a percentage of revenue basis to company-owned trailers. Insurance and claim costs were 1.7% of revenue in the 2007 quarter compared to 1.5% in the 2006 quarter. The increase in insurance and claims as a percentage of revenue was primarily attributable to increased frequency and severity of accidents in the 2007 fourth quarter compared to the 2006 fourth quarter. Selling, general and administrative costs were 4.7% of revenue in the 2007 quarter compared to 5.1% of revenue in the 2006 quarter. The decrease in selling, general and administrative costs as a percent of revenue was primarily attributable to the effect of increased revenue and a lower provision for bonuses under the company’s incentive compensation plans. Depreciation and amortization was 0.8% of revenue in the 2007 quarter compared to 0.7% in the 2006 quarter. The increase was primarily due to increased depreciation for company-provided trailer equipment. Interest and debt expense was approximately $2.2 million in the 2007 quarter compared to $1.9 million in the 2006 quarter. The increase in interest expense was primarily attributable to an increase in capital lease obligations for trailing equipment. The overall effective income tax rate was 37.5% in 2007 quarter compared to 38.7% in the 2006 quarter. The decrease in the effective income tax rate was primarily attributable to state tax planning strategies and unrecognized tax benefits for uncertain tax positions that were recognized in the 2007 fourth quarter that had reached the statute of limitations. Net income in the 2007 fourth quarter was $29 million, or $0.54 per diluted share, compared to $28.7 million or $0.50 per diluted share in the 2006 quarter. It should be noted that the 2006 fourth quarter results were favorably impacted by $0.03 per diluted share attributable to revenue related to disaster relief services provided under the FAA contract. Excluding the effect of the revenue attributable to the FAA contract, diluted earnings per share increased over 12% in the 2007 fourth quarter compared to prior year. Operating margin for the 2007 fourth quarter was 7.6% compared to 8% in the 2006 fourth quarter. Excluding the revenue and operating income generated under the FAA contract in the 2007 and 2006 fourth quarters, operating margin was 7.5% and 7.7% respectively. The decrease in operating margin excluding the revenue cost attributable to the FAA contract was primarily attributable to revenue growth with Landstar Global Logistics, which tends to have a lower operating margin. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $84 million and long-term debt of $142 million. During the fourth quarter, we purchased approximately 1.3 million shares of common stock at a cost of $50 million, bringing the total number of common shares purchased in 2007 to approximately 4.1 million shares at a total cost of $177 million in the fiscal year end of 2007. The company has authorized the purchase of an additional 734,000 shares of common stock under its most recently authorized share purchase program. Shareholders’ equity represents 52% in total capitalization at the end of 2007. 2007 return on equity remained high at 51%. Back to you, Henry.

[Henry H. Gerkens:]

Thanks, Jim. As you all know, the first quarter of any year is typically Landstar’s slowest quarter with the first month-and-a-half the slowest within the first quarter. All that being said, Landstar is off to a very good start in 2008. Revenue trends at Landstar Global Logistics and at the carrier group experienced in the 2007 fourth quarter have continued thus far into 2008. I said last year that I expected 2007 to be a challenging year. Although 2008 will not be without its challenges, I think the worst could be over from a freight demand perspective for Landstar. From Landstar’s perspective, our 2008 quarter-over-quarter revenue comparisons should be easier. Additionally, we have very little FAA revenue in the 2007 revenue numbers. We are forecasting none in 2008. We are coming off a very strong finish to 2007 and a strong start to begin 2008. We have several new initiatives that we believe will increase our revenue opportunities. In addition, our agent pipeline remains full. I am very confident as we move into 2008 that we have the right team and strategy in place to continue to grow our revenue base and to continue to take market share. Based on my current outlook, I would anticipate Landstar revenue for the first quarter of 2008 to increase in a mid to upper single-digit range over the revenue generated in the 2007 first quarter. I anticipate revenue for the 2008 full year over the 2007 full year to increase in an upper single to low double-digit range. Based upon the above revenue forecast, I would anticipate diluted earnings per share to be in a range of $0.41 to $0.46 for the 2008 first quarter and $2 to $2.25 for the full 2008 fiscal year. That ends our prepared comments. With that, we can open it up to questions, Teri.

[Operator:]

Our first question comes from Tom Wadewitz – JP Morgan.

[Tom Wadewitz:]

Maybe you could go into a little further detail what it is that you see that seems to give you a lot of confidence, or at least some confidence that the market’s improving?

[Henry H. Gerkens:]

I think what we are seeing right now is increased revenue from some existing accounts from agents that we brought over. I mentioned we have some very, very big weakness in certain accounts. I mentioned automotive-related was down 17%. To offset that, we obviously are doing something right in taking additional market share. When I look at pricing from the van sector, the van pricing has literally, in our opinion, stabilized and we are not having these huge declines as we had. Volumes are still a little bit light based on our revenue mix, but we continue to have a very strong platform operation with platform increasing in the fourth quarter over 11% and we see that continuing into the first quarter. Again, it’s our drive I think to take market share and I do believe that things, when you look at where we were last year in the first quarter, just aren’t the same way. I think at certain points in time things, I believe, do bottom. I’m not calling a bottom but I think when you look at what the Fed has done recently, I think that when you get in the back half of this year, I think we’ve got to be pretty close to a bottom. So I just see a lot of positive things happening.

[Tom Wadewitz:]

Do you think more of the optimism is driven by a different mix of customers so your agents have probably focused hard on getting new customers and maybe have a little better business outlook? Do you think it’s more that the market’s kind of bottomed?

[Henry H. Gerkens:]

I think clearly we’ve done a very good job as far as taking some market share. When you look at the Global Logistics numbers as far as some of those increases and some of the modes again, albeit some of the numbers are small but we took out some pretty substantial growth in Landstar Global Logistics. That represents really new business and increased account penetration, which is really one of the initiatives that we’re going to go through this year. What we believe is that our existing customer base there’s more revenue that is available for us to take and more business for us to take. So that’s one of the initiatives we have going forward. It’s a combination. We’ve worked pretty hard as far as to offset some of the declines in business that we normally did with Weatherby with other transportation companies or in the automotive segment or in the housing segment. So we’re pretty pleased with just the execution of taking market share, which is what we’ve done this year.

[Tom Wadewitz:]

On the Global Logistics side, the margin had some pretty substantial improvement, the operating margin after running at a somewhat lower level for a few quarters. Can you give us some thoughts on what the key drivers were there? And if that’s a good indication of maybe how the margin does in 2008?

[Henry H. Gerkens:]

I think you’ve got a couple of things you’ve got to look at. When I look at the fourth quarter specifically from Landstar Global Logistics, you had a 20% increase. So any time you get that type of revenue increase over relatively fixed G&A you’re going to have an improved margin and that just goes hand in hand with our overall business model. In addition to that, we’ve talked many times this year that we had set targets for operating income and EPS which we didn’t make this year. So therefore, you don’t have that accrual for bonuses as Jim mentioned in the numbers, so that has obviously a positive impact, which next year hopefully we have that accrual in those numbers. But again, I think that the key take away point here is the bulk of the increase is coming from the fact that we poured a 20% increased over that relatively fixed overhead base.

[Jim M. Handoush:]

You hit right on it. I think it is basically the revenue growth objective of the Global Logistics Group to pour more revenue on top of those fixed costs. The Global Logistics also had a slightly lower carrier cost in the fourth quarter than they had in the prior year, so there’s a slight margin improvement from that also.

[Tom Wadewitz:]

So when we look at 2008, should we think about a 4%, 4.5% type of operating margins for Global Logistics?

[Henry H. Gerkens:]

I think you have a couple of things that are going to occur in 2008. As we move into 2008, we are going to basically restructure the expedited truck division of that and move that into the carrier group, thereby putting the trucks with the trucks, we think will have better opportunities. So, I think it basically will take some of that margin out of Global Logistics and you’ll see that go back into the carrier group because I think from a strategic standpoint, we want the trucks to be managed by the people who manage the trucks. I think you’ll see that. I think the way you should look at Landstar is look at the overall margin and that’s the way I think I would in looking in how to model Landstar is to looking at the overall margin and try to model it that way.

[Tom Wadewitz:]

Any thoughts on the way the supply side might be changing? I know sometimes it’s hard to gauge, but any thoughts on whether you’re seeing capacity come out of the market or what your sense is on that, I guess maybe from the look from the brokerage side?

[Henry H. Gerkens:]

Overall comment, we’ve just finished what we call BCO Appreciation Days where we had a lot of our BCOs here and we have a three-day event for those individuals and we also have vendor event set up. A lot of those vendors that were here that deal with trucking companies and deal with small business guys, people here from truck stops, for example, what they’re telling us is that they’re starting to see and they anticipate some exits from the marketplace. Now obviously I’ve heard what Warner and severally of the other big guys are doing as far as cutting back. We haven’t seen any large exodus. I mean we have capacity available for us. I believe that’s going to happen, Tom. I don’t have any major evidence that it’s happened on any large scale, but I believe that will happen during the first quarter, that you’ll see some more exits from the system.

[Operator:]

Our next question comes from Ed Wolfe - Bear Stearns.

[Ed Wolfe:]

A couple different things. As a follow-up to Tom, the rail and carriers revenue group, it seems like the revenues really started to grow there again the last couple of quarters. Within that, where is it coming from? Is it the expedited truck, is it the intermodal, is it air? Where are you starting to see that growth come from?

[Jim M. Handoush:]

You’re talking about the Global Logistics Group?

[Ed Wolfe:]

Yes.

[Henry H. Gerkens:]

Well, what you’re starting to see and I think I’ve quoted those numbers in the quarter you had pretty big growth in rail and modal, you had very good growth in ocean freight and also air freight. In fact, the numbers I believe the air was up 44% without FAA, I know the rail was up 20%, and I think ocean was up like 70%. So you’re getting a lot of growth there. In addition to that, brokerage within the Global Logistics Group was also up 20%. It really is a lot of new accounts and some increased account penetration. So from the Global Logistics standpoint, it was pretty much spectrum to spectrum, end to end, whereas when you analyze the carrier group, clearly you had big increases from the platform side which offset some revenue declines in the van side.

[Ed Wolfe:]

In terms of the comment that you feel like demand is behind you and the comps are getting easier, are there any parts of the country or any types of customers particularly that are feeling like they’re picking up or have bottomed, and are there some that are lagging and still feel pretty lousy?

[Henry H. Gerkens:]

I’ll tell you, the lousy ones are easy to identify. The automotive is just not very strong. They’ve announced production cutbacks this year, so I expect that to be a continued weakness. I don’t expect our housing-related accounts to pick up, although towards the back end depending on when these interest rates take hold and other things take hold, there’s probably a bottom there somewhere. The fact that I think there’s a bottom approaching gives me a lot of confidence. But what gives me more confidence is the fact that what we’re doing currently. I mean, I don’t expect, for example, some of the stuff we’re doing in the platform arena that is going to continue and that is going strong in the first quarter, some of the power generation stuff we’re doing. So I’ve got a lot of confidence built that we have built and taken and brought in some new customers, increased account penetration that has carried us through. When this bottom occurs and when the normal customers come back to normal volumes, if you will, I think we’re just sitting pretty good for the back half of 2008 and 2009.

[Ed Wolfe:]

I’m not going to argue with you on that. How about by region? Are there certain regions that are feeling better or worse relative to each other?

[Pat O’Malley:]

Well I think what Henry said, if you think back to the power generation and some of the alternative energy products that are out there and where that’s taking place, largely out west we’ve seen some significant growth out there but I don’t know that it’s region specific as much as it is account specific in some of the things we’ve done relative to that. When you think about taking market share, there’s really two ways of doing that and that is offering greater product lines across your existing customers or going into new customers and taking business from someone else. We’re doing both those things.

[Jim M. Handoush:]

I agree with Pat. I don’t see much variance from a regional standpoint. A lot of it has to do with the agents we’ve brought on where they happen to be in the marketplace and the accounts they bring with them. So as we look at the fourth quarter, there was solid growth across all regions.

[Ed Wolfe:]

Henry, I’ve got to ask you about the guidance. I look at the guidance and first of all for the quarter, you have less revenue growth than for the full year; the comps aren’t particularly all that different. I’m wondering why the expectation for revenue to grow faster in the rest of the year? Second, your earnings based on 200 to 220 you’ve got a range of minus two to positive eight when you’ve given a range of high single to low double-digit for revenue. Why do you have less earnings growth than revenue growth?

[Henry H. Gerkens:]

Well, two things. One, from a revenue standpoint, Ed, it sort of ties to my comments I gave you. I do expect things to start to pick up in back half of the year so I feel a little bit stronger as we move towards the back. The first quarter as I said before is typically our slowest. I think there will be a bigger revenue contribution in the back half of the year so that is the reason for that comment. As far as the $2 to $2.25 which is our year-end range, depending on where the numbers actually come out we do hope we’re going to have a bonus accrual in this year’s numbers so I think that plays into that and that’s where the numbers basically come out in our view.

[Ed Wolfe:]

I’m guessing you gave bonus accruals back when you were growing earnings a lot faster then revenue back in ‘03,’04,’05 kind of years. What kind of percentage had you paid out your accruals?

[Henry H. Gerkens:]

The bonus?

[Ed Wolfe:]

Yes.

[Henry H. Gerkens:]

The bonus program works on a quarterly basis but obviously if you’re missing your targets you don’t accrue it.

[Ed Wolfe:]

What are the targets?

[Henry H. Gerkens:]

Certain people get paid bonuses on a quarterly basis, certain people get paid on an annual basis. It depends on what target you’re talking about, operating income, earnings per share or revenue targets. This year, as I said before, we didn’t hit on all cylinders on that. We had much higher expectations as we moved into when the budgets were prepared for 2007 really in August of 2006 and we all know what happened in the back half of ‘06. So we worked hard but the numbers didn’t materialize. But yes it sort of ties into our whole model too I mean if you have got a variable cost model and when you think about our bonus program, it is a variable cost bonus program. I mean you have got to basically achieve your targets to get that. So we fully anticipate that we will achieve those bonuses next year.

[Ed Wolfe:]

Are the ‘08 bonuses based mostly on earnings, revenue?

[Henry H. Gerkens:]

A combination of three, Ed. It’s depending on what position and what you are in charge of. The compensation programs are structured, as I said, based on the position, on operating income, on earnings per share, if you’re a revenue person out in the field you’ve got those targets plus a revenue target. Then you have other targets that deal with options and other things.

[Ed Wolfe:]

Should we assume that they kick in if you are at or above what you’ve given us as guidance? How do we think about that?

[Henry H. Gerkens:]

I think they kick in if it is within the guidance.

[Ed Wolfe:]

You said that the back half you kind of assume is going pick up. Is that just based on the economy, is that based on the new products, what is that based on the agents momentum? How do you think about that?

[Henry H. Gerkens:]

A combination of all of that. I think the numbers get better obviously if there is a larger improvement in the economy. I think we’ve got things working pretty nicely as far as our agent pipeline, increased account penetration as far as our existing accounts. So just based on what we see currently, it’s a combination of both of those.

[Ed Wolfe:]

Just changing gears, you guys have been buying a lot of stock these last two years and now the stock price is up quite a bit. So to keep on that pace, you’re going to have to start having to borrow quite a bit of money to do it. I’m not saying that you shouldn’t but pretty soon your equity is going to be zero and your return on equity is going to be a lot better than 50. First of all, how should we think about as the stock goes up how you’ll buy back stock and how willing you are to raise the debt ratio to get there? Not the debt ratio, maybe it’s a good question for Jim. What are the metrics you look at since debt equity doesn’t really apply here? What are the coverage ratios? How much borrowing capacity do you have? Would you use that to continue to buy stock at a much higher absolute number in order to have the same impact or do you start to scale back down where you’re buying less stock when the stock was working back in ‘03, ‘04, ‘05?

[Henry H. Gerkens:]

Let me start first and Jim you can answer those questions. Ed, it’s going to be like we’ve done for now probably 11 years as far as the buyback program. We will be opportunistic in the marketplace when that opportunity arises. Can we handle more debt? Yes. Do we have a set metric that we want to be at? No. I’ve said many times that I’m more debt averse than a lot of people only because I’ve been here since 1988 when it was just about 100% debt. So, all that being said, if there’s an opportunity to buy we would buy.

[Jim Gattoni:]

From an actual limitation standpoint, based on my current revolving credit agreement, obviously we used more free cash flow or dip into the revolver. We have a $225 million revolver credit facility. Part of that is for the letters of credit on our claims. I think it’s about $30 million. So basically availability on that revolver is about $195 million. We had borrowings at the end of the year on that about $80 million. So, again, like Henry said, there’s not a lot of limitations. Again, we could always go to the banks and probably get more money based on our three times EBITDA. We could probably fund more on the balance sheet but like Henry says, it’s more of an opportunistic approach.

[Ed Wolfe:]

That’s perfect, exactly what I was looking for. Thanks a lot for the time, guys.

[Operator:]

Our next question comes from Justin Yagerman - Wachovia Securities.

[Justin Yagerman:]

I wanted to get an idea of what the split was on revenue. You may have given this, but I might have missed it, between brokerage and BCO and the carrier group in the quarter?

[Henry H. Gerkens:]

That’s actually right on the release I think on the back page, you got that Jim?

[Jim Gattoni:]

Did you ask quarter?

[Justin Yagerman:]

Yes, the quarter and for the year.

[Henry H. Gerkens:]

Jim’s calculating the percent.

[Jim Gattoni:]

The quarter was 70% with BCO.

[Justin Yagerman:]

Yes.

[Jim Gattoni:]

The year was 71%.

[Justin Yagerman:]

One of your competitors talked about real ramp-up in volumes in their brokerage division in the fourth quarter here. I was curious if you saw a bit of that going on in the quarter for you guys and I also wanted to get a sense of if it was related to anything along the lines of the capacity pullbacks that we’ve seen from some of the asset-based players, and whether or not you think that’s attracted more and more people to come to aggregators of smaller capacity like yourselves?

[Henry H. Gerkens:]

Actually from the carrier group standpoint in the quarter our BCO revenue grew at a faster clip than our brokerage revenue. I think what’s happening and why I also feel so strong on demand, I mean I think you’ve got -- I ‘m sorry, so yes, our BCO revenue grew at a faster clip in the quarter. The total revenue was only up 3% and brokerage was up a couple million. I think BCO revenue is up about $11 million as I recall. That stands to reason, I think what had occurred there is that our agent family with demand where it was and in some of the accounts that we were not particularly strong in, BCO has hauled the revenue rather than the brokers. But I don’t see any movement one way or the other. Our available capacity has increased overall. BCO, actually was down, our number of BCOs was down due to a lot of different reasons but not that significantly and I just believe when we have revenue in the system we will attract capacity because our number one driver is revenue so I’m not worried about capacity.

[Justin Yagerman:]

Got it. Switching topics a little bit, I just wanted to get a sense, you said that you’re not expecting anything from the FAA contract in your guidance for the year. Do you have any updates on that contract? Is it being bid out again? Have you heard anything from the government?

[Henry H. Gerkens:]

That’s a good question. We got word from the FAA, DOT that they are doing a closeout of the contract so the contract has not been extended. It’s officially going to be closed out so they come in and do a little review. There is a new plan that has been put together that based on what I read of the plan or the framework it’s called -- it’s not called the plan; it used to be the plan, now it’s the framework -- it appears that it’s going to be FEMA that will be handling all of the bids for the transportation but there has been no request for proposal issued at this point in time so that’s where we are with that, Jeff. There’s no update on information other than the contract has not been extended, there is no contract out there, and based on my read of the national response framework is that it looks like it’s going to be FEMA that will be issuing a request for proposal. They really need to do that rather quickly because it’s February and you would think you’d want to have a contract in place with somebody for the upcoming hurricane season.

[Justin Yagerman:]

I would expect sometime within the next few months we should be hearing about a large RFP from FEMA?

[Henry H. Gerkens:]

You would think.

[Justin Yagerman:]

We’ll keep posted on that. Just bigger picture, I wanted to get a sense, your guidance and your comments alluded to this and I think you were hitting on some of it with Ed, but thinking about next five years of growth and how you see Landstar developing, are we to think about the company as kind of a mid to high single-digit revenue grower and low double-digit EPS grower? Is that what you’re targeting, or do you think there are initiatives that you could break out again and see your bottom line start to really expand the way it did?

[Henry H. Gerkens:]

I think over a continuum of time, and I’ve said this before, I think what we’re looking to be is a low-teen revenue grower and our EPS growing at a faster pace. I mean we’ve got a lot of different initiatives that we’re looking at. We’ve talked many times about taking this company and bringing in offshore agents. One of the things that we’re going to do this year and I’ve alluded to already is increased account penetration. We think there is just a lot of revenue that we’re leaving on the table. We should not be going in only as a truckload sell. We have a complete array of different service offerings that we need to continue to educate. I think you saw a little bit of that come to fruition with our Global Logistics Group, if I can move the carrier group agents into that type of thought process also I think we have a very good plan of attack. So if you’re asking me longer-term strategic, I think our revenue growth targets would be in the low teens, if you will, from a revenue perspective and our EPS to grow at a faster clip than that.

[Justin Yagerman:]

But just taking the high end of the guidance, it implies 13% EPS growth. So is that colored by the uncertainty in the economy right now? Would you characterize that as fairly a conservative range, and if things start to pick up in the back half of this year, you’d be biased and probably see an upward revision to that?

[Henry H. Gerkens:]

Well depending on the economy, I’d be biased to go upwards or downwards, depending on how things occur. Obviously if the economy picks up -- and I believe that it will, to a certain degree -- we’re coming off 2007 that was a very difficult year. So I think, given that, I think you would tend to be a little bit more cautious, if you will.

[Justin Yagerman:]

Okay, that’s definitely fair. Jim, one quick follow up on tax rate. It’s a little lower in the quarter, I’m imagining that’s some FIN 48 catch up. We’ve seen that from a lot of companies this quarter. How should we think about that going forward and is there anything that should shift things up here?

[Jim M. Handoush:]

I think we’ll hold at a 38.5, give or take it will be around that rate. If you look at the full year rate of ‘07, we were 38.4. That pickup is really to catch up the year to the 38, that’s how we got to the 38.4 for the year. That was basically those uncertain tax positions hit their statute of limitations and rolled off in the fourth quarter.

[Operator:]

Our next question comes from Jon Langenfeld - Robert W. Baird.

[Jon Langenfeld:]

On the international side, what percent of revenue would you consider international? And then what’s in that? Are we talking just air and ocean, or are we also talking cross border North America?

[Henry H. Gerkens:]

Well, if you looked at cross border North America, Canada, that’s about a $200 million to $220 million play. International, as far as what’s our ocean and air? Or do you have the international lanes broke down? I might add we signed our first offshore agency, a Brazil agency, in fact we signed them yesterday.

[Jim Gattoni:]

The non-Canada, Mexico cross border is somewhere south of 5%.

[Jon Langenfeld:]

Okay. All right and I’m assuming the growth you’ve seen, because you’ve talked about that now for the last two or three quarters that you’ve had increased emphasis in terms of bringing that to the marketplace. I know you’ve been to Europe and China to talk about the model. Should we expect more agents to come on?

[Henry H. Gerkens:]

John, you know Landstar very well and you know what we try to do is do things on a pace that we make sure that we understand what we’re doing. One of the things that we’re looking at right now is what kind of infrastructure I need to set up to make sure this happens correctly. We opened in the fourth quarter Landstar Canada, Inc. That is an entity. Again, we’re working on the infrastructure setup on that and hopefully, that will have some impact in the back half of the year. But we’re looking at as we move through this year, I hope, if we’re doing our things correctly, you’ll see more and more of the announcement I just made before as far as bringing on an international agent. But the big thing right now is from a legal standpoint, infrastructure standpoint and that’s what we’re working on.

[Jon Langenfeld:]

Canada may be one example and then international agents the second example. When you think of the costs of bringing these individuals on, is it meaningful? I mean international could have some system implications longer term?

[Henry H. Gerkens:]

Well that’s exactly the infrastructure issue we’re working on now. I think, like anything else, if you’re going to do something, you’ve got to spend some money if you’re going to increase your revenue, you also got to investment spend, so we’re looking at all of that.

[Jon Langenfeld:]

What would you say the sentiment, I don’t know if you’ve taken their temperature lately, but what’s the sentiment of the agents?

[Henry H. Gerkens:]

In what regard?

[Jon Langenfeld:]

I mean they’ve been through a very tough environment, right? It seems like they got caught off guard a little bit maybe the first half of the year, the second half of the year, they got a lot of momentum back and started gaining scale and business and now you’re kind of ahead of 2008 where the press headlines are relatively negative. What’s their outlook on the business?

[Henry H. Gerkens:]

Well, yes it’s pretty interesting because we had 495 million-dollar agents this year despite everything that occurred in 2007 and some of the comments you just made. I mean, that agent base grew by five and those agents account for 91%, 92% of the total Landstar consolidated business. So our guys who want to be true businessmen find a way to get things done and increase their revenue, and they did. If you analyze the agent locations, for example, from the end of the third quarter to the end of the year, we actually had a decline in the agent locations. That was really predicated on what we did is we went out and we hadn’t really updated our agent agreements in a long time and in fact, other than through addendums but we sent out all new agent contracts and had people sign the contracts. What we were able to see is to really focus more on those really unproductive agents so we had really more of a purging of some of these agent locations in the fourth quarter. But the key is that we improved and increased our million-dollar agents because those are the guys that are going to be your business guys who find ways to get things done. That to me is critical. So it’s always been about bringing in new productive agent locations and growing them to be million-dollar agents. I think we’ve got a great pipeline and we think, as I said, we think next year is going to be a pretty good year.

[Jon Langenfeld:]

The last thing just on the operating margin. If I look back to early 2000, how you came out of this, your margin was flattish for a year or two and some of that is the incentive comp picking up. You’re going to have a little bit of that in front of you for a year or so. You’ve got the mix of business changing. I’m assuming a lot of that’s going to pressure the reported margin, not the profit level but the reported margin. So should we think about this in kind of a similar fashion that your margins probably move sideways here for a while before they move higher?

[Henry H. Gerkens:]

There’s a lot of things that go into that and I think generally that’s a good comment to make, Jon. On the other hand, depending on the revenue growth that we can put over that fixed G&A line that obviously impacts it also. I’ve said many times, I mean, I recognize that the global logistics margins are smaller. We’ve got things we need to do there to try to compress them but it’s like the carrier group. The more revenue I put over to that fixed overhead cost, I’m going to get more leverage. But generally, we’ve got some things that we are going to tackle this year that, as I said, we want bonus accruals to be in the numbers this year so we will just move forward with that.

[Jon Langenfeld:]

I’m assuming some of that, the intermodal or the air, the ocean, some of this is just the numbers, the accounting right? I mean you’ve got a shorter spread on the gross margin, which you don’t have a clean reporting there but how much you are making on a per load basis probably is pretty similar to what you are making on a truckload?

[Henry H. Gerkens:]

Again I think if I group the Global Logistics together I think that’s correct and the global logistics has a higher PT, period, than the carrier group, so as Global Logistics expands, that’s going to put pressure on overall consolidated margins but it’s going to drop more absolute dollars to the bottom line and that’s what we are looking to do and then as we move through that process we’ll be looking for ways to create productivity and efficiency to gain that margin back.

[Jon Langenfeld:]

Makes sense, thanks for the color.

[Operator:]

Our next question comes from John Larkin - Stifel Nicolaus.

[John Larkin:]

I just wanted to verify, when you report revenue per mile numbers in the carrier segment, there was nice growth there 3% up to $2.08, that does not include any fuel surcharge, is that correct?

[Henry H. Gerkens:]

That is correct.

[John Larkin:]

How much of that would you characterize as pure price and how much would be mix? It sounds like your mix is shifting more towards what I would call specialized and platform type business.

[Henry H. Gerkens:]

Pat, that is correct. I always like to talk about the revenue per mile, John, and you’ve heard many times it’s for freight quality and improvement in freight quality and really what you had in general was some van pricing decline, which I think went down; when I say pricing, van revenue per mile was down anywhere from 1% to 2% and the pricing on the flatbed piece was up 7% to 8% and that has a lot to do with mix as opposed to pure price increase.

[John Larkin:]

Okay this is conventional flat as opposed to heavy haul type businesses?

[Henry H. Gerkens:]

I would say it is a combination of both. I mean what really drove that number was the heavy over dimensional stuff.

[John Larkin:]

How about the pure flatbed business. How would you describe that in terms of price move year-over-year in the quarter?

[Henry H. Gerkens:]

You got that, Jim? I’m seeing if Jim has that number right. We’ll get it combined.

[Jim Gattoni:]

The pure flatbed is about 2% price increase on a rate per mile basis.

[John Larkin:]

Also, I was wondering, some of the companies that have reported so far have had a lot of luck selling intermodal in shorter haul lanes; it used to be a rule of thumb that unless it was over 750 or 1,000 that it just didn’t make economic sense. Are you finding through your application of intermodal that it is beginning to make more sense as you bring down the length of haul?

[Jim Gattoni:]

It’s something we have seen a little bit of but most of our intermodal work has really come from the added agency brought on over the last couple years and their further penetration of their intermodal services through a broader account base working with our existing Global Logistics’ agent as well as the carrier group agents. So we’ve had really great success bringing on new agents here into the fold and then really seeing their overall growth accelerate not only in the intermodal run but also in adding other services into that existing account base.

[John Larkin:]

Chances are that probably mostly traditional long haul western oriented intermodal business?

[Jim M. Handoush:]

No, it’s really across the board. I just don’t have a percentage of what is made up on the short haul basis. I mean, we have seen some of that, I just don’t have a firm number to give you.

[John Larkin:]

The only other question I have related to the growth of the existing agencies, you often talk about agency locations and in my mind, there is some number of people in each agency location and as Landstar offers more and more services and really now has a warehousing service capability, Ocean Freight Forwarding, Air Freight Forwarding, et cetera, do those agencies actually add people with that specific expertise or is there some kind of a training program to bring the existing people up to speed? How does all of that work?

[Henry H. Gerkens:]

I’ll let Jim respond a little bit, but my quick response is that the answer is yes, if you’re going to bring on that expertise that agent will normally bring on someone that will be working directly for him and actually we encourage that. Jim, go ahead.

[Jim M. Handoush:]

Usually what happens is they start working with another agent that has got that expertise until they build up a certain volume and understanding and knowledge themselves, and they go through some training internally as well. At some point in time they start to add the expertise in their office whether it’s on the sales side or the operations side. What we have seen over the last couple of years is many more multi-service offices, adding the international, adding the intermodal, adding the expedite expertise, etcetera. That is really one of our aims as we move forward, both on the carrier group side and the logistics side, is to identify those agents who really want to become multi-service agents and sell the array of services and not only in one particular product line. That interest level is much higher over the last couple of years than its been because they really recognize the fact that they have to add these services to their existing client base, one for growth and one for protection.

[John Larkin:]

That’s very helpful. When you look at your million-dollar agents, just so we can get a visual picture of what those agencies may look like, how many people typically are in that location?

[Henry H. Gerkens:]

It depends on the size. Our largest agent has how many employees?

[Jim M. Handoush:]

Jeff has approximately 22 employees.

[Henry H. Gerkens:]

22 employees and he runs approximately a $200 million business so you can gauge it on that John.

[John Larkin:]

Is he the one that is doing a lot of long haul LTL?

[Henry H. Gerkens:]

Yes.

[John Larkin:]

How, by the way, has that business trended here?

[Henry H. Gerkens:]

That business had some ups and downs based on who the particular customer was and purposely I’ve stayed away from talking about specific customers in this particular call but some were up, some were down.

[John Larkin:]

On the warehousing initiative it sounds like it was up wildly year over year off a small base. I thought I heard you say that you have 90 domestic markets covered with something like 132 specific relationships with warehousemen?

[Henry H. Gerkens:]

Correct.

[John Larkin:]

What percentage of the opportunity can be attacked with those 90 markets covered? Are there additional geographic areas where you need to move in or do you feel like you’re pretty much built out with your capability and now it’s just a question of selling that service?

[Henry H. Gerkens:]

Jim’s going to answer, but yes, we need to sell it now, we’re covered. Go ahead, Jim.

[Jim M. Handoush:]

Yes I think we’re covered for the most part, especially in the major markets and that’s really what the last two years have been about is building the infrastructure, laying down a capacity, bringing in the management team and at the same time we brought in some business doing that but really haven’t marketed aggressively and that’s what really 2008 is about. I’ve really started that effort in the back of 2007 and we’ve seen the pipeline of business opportunities that have been generated by our existing agents and the national accounts group really start to develop. The other thing is just brand awareness of the fact that we have that service within Landstar. So as we start to get recognized here and have some successes you’ll see that growth continue to accelerate.

[Operator:]

Our next question comes from Todd Fowler - KeyBanc Capital Markets.

[Todd Fowler:]

I’m doing well. Henry, just so I understand or just so I’m clear on where you’re turning from a volume standpoint. I think the comments in the press release state that you are seeing the continued volume growth that you saw in the Carrier Segment here in January. Does that mean that you’re seeing volumes up in that 4% to 5% range starting the year right now?

[Henry H. Gerkens:]

I think in general, that was a general comment. As I look across Landstar, the volumes that we have seen have been pretty consistent with the volumes that we ended the fourth quarter with, and this is when I say that, that’s in relation to January of any given year. Obviously, we’ve had some pretty good growth in the fourth quarter and we see that in the first quarter in January. I also mention January just again is a relatively small portion of the full year and a small portion of the quarter. March really makes the quarter, but yes, right now we’re seeing very nice volumes.

[Todd Fowler:]

So volumes are positive right now through the early part of January. I know it’s early, I’m not trying to call in the quarter, but you are seeing positive volumes?

[Henry H. Gerkens:]

Yes.

[Todd Fowler:]

From a comparison standpoint, obviously fourth quarter from a volume perspective was a pretty easy comparison. Does that change at any point through the first part of this year? I mean as far as I can see, obviously I wouldn’t know what the reported numbers are for the total quarters, but kind of on a month-by-month basis, was January an easy month, March a little bit more difficult? Or is it pretty much consistent with how the quarters were reported last year on volume growth? I guess maybe what I’m asking is there an inflection point where comps become more difficult on a monthly basis?

[Henry H. Gerkens:]

Well one of the things I’d stress is that we don’t have FAA to talk about. So hopefully next year other than if there’s something that occurs in the current year but I won’t be excluding FAA and things like that. I’m trying to understand your question. The quarter builds normally January, first part of February a little bit lighter and then towards the back half of February and March, which is really the heavy part of the first quarter. I don’t have last year’s March in front of me as far as how that finished up, but I do recall the back half of the quarter we actually saw an increase pricing environment only to find out that I believe it was in April of ‘07, in mid-April that that fell back off the table. I just don’t think that’s going to happen because I think when I look through the fourth quarter and what we’ve seen currently, it’s all been pretty consistent and the demand has been now, I’m going to say four months, again, all relative to the prior month it’s been pretty consistent. So, again, I don’t have a crystal ball as far as February and March but based on what I see and what my guys tell me, is that we’re pretty comfortable as we move forward into the quarter.

[Todd Fowler:]

That’s helpful and that’s directionally what I was looking for. Just lastly, Henry or maybe Jim, could you break out and I think you gave some of these numbers in the prepared comments. But could you go through intermodal air, ocean in the different global logistics segments and let us know what the revenue run rate was for the end of 2007 and what the growth was over 2006? Do you have that in front of you?

[Henry H. Gerkens:]

You’re looking for the revenue by mode?

[Todd Fowler:]

That’s exactly right. So, I think you said that rail was $132 million for the full year, up 9%. I was just wondering if you can give what air and ocean was on an annualized basis and then what the percent growth was.

[Jim Gattoni:]

Air was $19 million.

[Henry H. Gerkens:]

This is full year we’re talking about, right?

[Jim Gattoni:]

Yes, this is full year. Intermodal is 132; air was $19 million and that was about a 21% growth rate; ocean was $26 million, 52% growth rate.

[Todd Fowler:]

Is warehousing reported differently than the gross revenue number?

[Jim M. Handoush:]

It’s a net revenue number and it was net $172,000 for the year.

[Operator:]

Your next question comes from David Campbell - Thompson Davis and Company.

[David Campbell:]

You mentioned the agents down in fourth quarter because you purged some of the ones that weren’t productive. So, how do we figure in ‘08, how many agents would you like to add in ’08?

[Henry H. Gerkens:]

We’re going to add, David, as many as we can. I think the key is when we bring them in and we’re going to try to do a better job as far as screening whose going to be a more productive agent, but the key on all this that we talk about is always trying to grow these agents to million-dollar agents. I think one of the more important stats I think is the growth in our same-store agents in the fourth quarter. In other words, that number continued to grow. I mean, we brought in I forget the number, but we brought in a lot of agents, we’ve deleted a lot of agents in the fourth quarter. What we did is as part of our process of setting up these new contracts, we reviewed the agents a little bit more closely and eliminated more than we probably normally would have, but it was the right decision to make because they just weren’t productive. But again, you saw key growth in the million-dollar agents, which is a very key metric for Landstar. In addition to that, the new agent revenue that we brought in was again about $27 million, I believe in the fourth quarter. So, that piece I wouldn’t read anything into.

[David Campbell:]

What percentage of the global revenues is expedited truck brokerage? I don’t have the truck brokerage.

[Henry H. Gerkens:]

You have the BCO number, right?

[David Campbell:]

I’ve just got global logistics BCOs, right?

[Henry H. Gerkens:]

Yeah, and that’s all expedited. So he needs the truck brokerage piece broken out. David, he’s looking that up. If you’ve got another question.

[David Campbell:]

Most of my other questions have been answered. So the truck brokerage is in Global Logistics?

[Henry H. Gerkens:]

Yes.

[David Campbell:]

BCO of course isn’t all expedited.

[Henry H. Gerkens:]

No, that’s what he’s breaking out. On that statistic page you have the BCO revenue in Global Logistics, that’s all expedited. Within the brokerage number there, some of that is expedited brokerage. How much is it?

[Jim M. Handoush:]

The expedited truck brokerage is about 6% of Global.

[David Campbell:]

Of Global BCO?

[Henry H. Gerkens:]

Of Global overall revenue.

[Jim Gattoni:]

On the truck brokerage.

[Operator:]

Our next question comes from Tom Albrecht - Stephens, Inc.

[Tom Albrecht:]

I believe that the percentage of your fleet that is flatbed has drifted down the last few years to 27%, 28%. In the mid ‘90s it was 34%, 35%. Given the tremendous success that you continue to enjoy there, particularly with platform equipment, does it make sense to have more of an overt push to increase that percentage of your fleet again?

[Henry H. Gerkens:]

Look, you’ve got two things working here. Normally our flatbed division, if you want to call it, our platform business, when you talk about your generic type flatbed, I mean that usually is an individual owner/operator brings his individual platform. So increasingly to quote number of trailers or flats doesn’t really make a lot of sense. We have bought some specialized equipment recently for some of the things that we’re doing for GE and some other customers that require specialized over dimensional type equipment.

[Pat O’Malley:]

Tom, if you think about the progression of an owner/operator, there’s not a lot of companies that are taking people in and making them flatbed drivers. Largely they’re coming in and they’re operating a van. We have a program here where we can help train people to be platform BCOs that’s had a lot of popularity. But ultimately you’ve got to grow your own. There’s not a lot of companies out there that people are entering the business and becoming flatbed operators.

[Tom Albrecht:]

I think over the years between 50% and 55% of the trailers overall have been provided by the operator, but would you say a greater percentage within the flatbed and platform business has been provided by that individual driver versus you at Landstar?

[Henry H. Gerkens:]

Yes.

[Tom Albrecht:]

I mean a significant difference, in other words?

[Henry H. Gerkens:]

Correct.

[Tom Albrecht:]

The percentage down 17%, was that the fourth quarter or was that the full year?

[Jim Gattoni:]

That was the fourth quarter.

[Tom Albrecht:]

Lastly, I’ve seen the cycle enough that in the current environment, even though I’m also modestly optimistic about freight as you guys are, with fuel where it is and freight still slightly questionable, I’m going to continue to model a modest decline in owner/operators. Obviously, you don’t have much window into that but doesn’t it make sense as you look at your own plans that you might factor in that this is a year with very little BCO truck growth?

[Henry H. Gerkens:]

When you look at what’s occurred at Landstar this year, we’ve actually brought in more owner/operators to become BCOs this year than we did the year before. On the other hand, and just by the nature of our business, I think I’ve said this many times that that individual who has been here more than or less than a year that’s our highest turnover percentage. So it stands to reason I’ve got a lot more deletes also. And then you’ve got another phenomenon that at the beginning of this year through the first eight months, nine months or so the freight environment and even at Landstar, was difficult and it became I think for some drivers who are older in age to say it’s time for me to retire, so we had some of that. In addition to that we had some of our expedited drivers get out of the business because that was weak in the first part of the year. So in general, yeah, I think in general your comments are right on target, I said it last mid-quarter update or in my third quarter conference call, that I expect through the first quarter you’re going to see a decline in capacity, only because people will be exiting the marketplace. I think at some point in time then you’ll get more of a tightening and you’ve seen the big guys actually just pull trucks out of the marketplace which is different. I think that’s all true.

[Operator:]

Our next question comes from Ed Wolfe - Bear Stearns.

[Ed Wolfe:]

I’ve been in the queue for a while and I apologize if somebody asked this, but just CapEx guidance?

[Jim Gattoni:]

Did you say CapEx guidance?

[Ed Wolfe:]

For ‘08. Any difference, $7 million kind of thing? How should we look at it?

[Jim Gattoni:]

We place CapEx at $5 million to $7 million.

[Ed Wolfe:]

So there’s no real estate or any kind of one-time projects that we need to worry about in terms of cash flow?

[Jim Gattoni:]

No.

[Operator:]

At this time I show no further questions. I’d like to turn it back over to you, sir, for closing comments.

[Henry H. Gerkens:]

Thank you, Teri. It’s been a rather long call. I think what I will do I think in the future conference calls is maybe limit the number of questions so we can get more people on the phone, and I apologize for not limiting that at the beginning. I hope we answered all your questions and I want to thank you for your time and I do look forward to talking to you again on March 3rd at our first quarter 2008 mid-quarter update call. Thanks very much.