Landstar System, Inc.
Q2 2008 Earnings Call Transcript

Published: 17 Jul 2008

[Operator:]

Welcome to Landstar System, Inc. second quarter 2008 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; and Jim Handoush, President of Landstar Global Logistics. Now I would like to turn the call over to Mr. Henry Gerkens.

[Henry H. Gerkens:]

Welcome to the Landstar 2008 second quarter earnings conference call. As we did with the first quarter earnings conference call today’s call will be limited to no more than one hour and I would appreciate it if each of you would limit your questions to no more than two questions each when the questions and answer period begins. Before we start, let me read the following statement

[Jim B. Gattoni:]

Revenue increased over 10% in the second quarter of 2008 [to $698 million] compared to $633 million in the 2007 second quarter. 2008 second quarter revenue was the fourth highest quarterly revenue in Landstar’s history and if one were to exclude the revenue disaster relief services provided under the former contract between Landstar Express American and the U.S. Federal Aviation Administration, it was the highest quarterly revenue in Landstar history. Investment income was $773,000 in the 2008 quarter compared to $1.3 million in the 2007 period. The $480,000 decrease in investment income was attributable to a lower rate of return on investments held by the Insurance segment in the 2008 second quarter. Purchased transportation was 77.2% of revenue in the 2008 second quarter compared to 75.6% in the 2007 second quarter. The increase in purchased transportation, as a percent of revenue, was primarily attributable to increased rates for purchased transportation paid to third party truck brokerage carriers, rail carriers, and air and ocean carriers, and increased less-than-truckload substitute line-haul revenue hauled by truck brokerage carriers and increased revenue hauled by rail and ocean carriers, which tend to have a higher cost of purchased transportation. Commissions to agents were 7.6% of revenue in the 2008 quarter compared to 8% in the 2007 quarter. This decrease was primarily attributable to increased less-than-truckload substitute line-haul revenue and increased revenue hauled by rail and ocean carriers, all of which have a lower commission rate resulting from a lower gross profit, representing revenue less the cost of purchased transportation. Other operating costs were 1.1% of revenue in the 2008 quarter compared to 1.2% of revenue in the 2007 quarter. This decrease was primarily attributable to the effect of increased revenue, particularly truck brokerage, rail and ocean revenue, which tend to incur lower other operating costs as compared to revenue hauled by BCO independent contractors. Insurance and claims costs were 1.4% of revenue in the 2008 quarter compared to 1.9% in the 2007 quarter. This decrease was primarily attributable to a lower cost of cargo claims in the 2008 second quarter. In addition, the decrease in insurance and claims as a percentage of revenue was partially attributable to increased revenue hauled by truck brokerage carriers, rail intermodals, and ocean cargo carriers, all of which tend to have a lower claims risk profile. SG&A costs were 5% of revenue in the 2008 quarter compared to 4.9% of revenue in the 2007 quarter. This increase was primarily attributable to an increased provision for bonuses under the company’s incentive compensation plan in the 2008 second quarter and a recovery of legal fees in the 2007 second quarter, partially offset by the effective increased revenue. Depreciation and amortization was 0.7% of revenue in both the 2008 and 2007 second quarters. Interest and debt expense was approximately $1.7 million in the 2008 quarter compared to $1.1 million in the 2007 quarter. The increase in interest expense was primarily attributable to increased borrowings under the company’s senior credit facility, partially offset by lowering borrowing rates on the senior credit facility. The effective income tax rate was 38.6% in the 2008 quarter compared to 38.7% in the 2007 quarter. The decrease in the effective income tax rate was primarily attributable to lower state tax related to a shift in income apportionments amongst the states in which the company does business. Operating margin for the 2008 second quarter was 7.2% compared with 7.8% in the 2007 second quarter. The 200[8] second quarter reflects a provision for bonuses under the company’s incentive compensation plan whereas no such provision was reported in the 2007 second quarter. The provision for bonuses in the 2008 second quarter negatively impacted operating margin by 30 basis points. It should be noted that the 2008 second quarter operating income was the highest quarterly operating income in Landstar’s history if one were to exclude the operating income derived from disaster relief revenue under the FAA from any previous quarter in Landstar history. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $103 million. During the 2008 first quarter Landstar reduced long-term debt by $24 million. Capital from operations was $35 million during the 2008 first half. The company’s Board of Directors recently authorized the purchase of up to an additional 2 million shares of its common stock. Including the 734, 400 common shares available for purchase under a previously authorized share purchase program, the company is currently authorized to purchase 2,734,400 shares of common stock under its authorized share purchase programs. On June 28, 2008, shareholders equity represented 64% of total capitalization. 2008 trailing 12-month return on equity remains high at 52%. And it’s back to you, Henry.

[Henry H. Gerkens:]

I remain excited about the back half of 2008. Our ability to execute on our existing revenue opportunities should enable us to continue to generate increased revenue. Our agent pipeline remains full and our core revenue growth strategies remain the same. And they are

[Operator:]

(Operator Instructions) Your first question comes from Justin Yagerman - Wachovia Capital Markets.

[Justin Yagerman:]

My first question is looking at the quarter as a whole, I would be very curious to find out how much of the quarter was done in June. Our sense from our channel checks has been that June was an exceptionally strong month and that’s really when the capacity started to tighten, spot pricing got a bit tighter and I would be curious to get a sense from you how that moved through the quarter, and I guess how that’s progressing now that we’re in July.

[Henry H. Gerkens:]

Well, I will start at the back end. July, historically, the first couple of weeks is very slow. So I really can’t take much out of what occurs in the first two weeks. You’ve obviously got plant shut downs and things going on so it’s hard to make any value judgment from what happens in the first two weeks in July. I think that’s pretty consistent with what we’ve seen in other Julys. But as we worked through the second quarter I think we saw a gradual build starting in May, but June clearly was a very strong month. As I’ve said at the mid-quarter update, flatbed capacity has been tight all along and van capacity started to get tight in June. So, in general, as far as the progression of the quarter I think that’s what occurred. I think if historically you look back as far as how the quarters went, again, it’s starting in mid-May and closing up in June, historically is strong. And I think people are thinking it was stronger than normal because we have been so used to the weaker environment. But, yeah, it was strong.

[Justin Yagerman:]

And focusing on the broker division, when you look, obviously purchased trans went up, when you look at just the broker division, how would you compare the gross margin in that division to how you would have expected it to react, and from a capacity standpoint is it taking you longer to cover loads in the broker division? And how are you doing at sourcing the capacity that you need on that end of the business?

[Henry H. Gerkens:]

Well, clearly it is more expensive to, or had been more expensive in June and May, to get a truck. Trucks weren’t, unless the pricing was right, they didn’t want the haul. So the gross margin was hard because we were paying more for the truck. On the other hand, we were able to basically get price increases and you can see from the revenue per load numbers, pricing was pretty strong. If I looked at what I would consider our net margin, which would be revenue less PT and commissions, because the way we work on the truck brokerage carriers, if we pay more for the truck that’s taking less from the broker. Overall, when we were down about 1/10. Where we got really hurt, if you will, if you want to use that term, on the net margin piece was in the ocean carriers. In the quarter last year that was 8.8; it was down to 6.1 this particular quarter. So, you had a mixture. We clearly paid more for purchased transportation. I think we did a pretty good job getting pricing up there. Clearly in the brokerage piece you had a little bit of fuel surcharge, which was hard for us to break out. At least 3% we think was attributable to the fuel surcharge in the brokerage piece, probably more because some of that just gets built in. And then again, I don’t know how much of that I got back, if we actually made any money on that, when we bought the purchased transportation. It’s an interesting environment in the fact that capacity was tight and it presented some pricing opportunities and I think we took advantage of that.

[Justin Yagerman:]

Do you have that net margin for the truck division?

[Henry H. Gerkens:]

If I looked at the brokerage carriers, that was 7.3 down to 7.2, and that is a net margin, against revenue less PT and commissions. If I looked at the ocean cargo carriers, that was 8.8, down to 6.1. And if I looked at BCOs, that was 20.9 in 2007 down to 20.3, and you need to understand with the BCO piece, on the flatbed heavy-haul stuff, you’ve got a lot of assessorials that pay 90%. Although the revenue is up it’s a negative impact on your net margin.

[Operator:]

Your next question comes from Thomas Wadewitz - JP Morgan.

[Thomas Wadewitz:]

Can you give us some further perspective on the big move up in revenue per load in both brokerage and some other areas, and it sounds like a bit of that is fuel surcharge. But what else is driving that in looking forward and do you think that trend is likely to continue.

[Henry H. Gerkens:]

You’ve got a couple of things. Your mix starts to change when you’re dealing with flatbed and heavy haul and that’s just a higher pricing environment. From a brokerage side. It was taking more dollars to buy that truck. And that’s just what I was. The fuel surcharge, as you well know, from a BCO standpoint, which is 54% of our revenue, is excluded from the revenue so it had no impact whatsoever, the 54% of our revenue. On the 38% that was generated through brokerage carriers, as I said, we can measure approximately 3% was fuel surcharge but the other stuff was not broken out so it’s hard for us to tell how much was fuel surcharge versus pure price increase. But we’ve been very successful as far as going back to the customer and getting price increases and improving our freight quality, if you will, because again, that’s what it’s taking to get the truck, on the brokerage side.

[Thomas Wadewitz:]

So do you clearly think starting about in June, perhaps starting in May, if you look forward, do you think it’s going to tighten a lot further in the third quarter or fourth quarter or do you think you’ve seen that tightening and you work with that. And in terms of that, are there risks that the margin on the brokerage side would come under meaningfully more pressure in second half and how would we look at that.

[Henry H. Gerkens:]

My personal belief is I think you will probably see some loosening, if you will, in July but I think that would be normal. I think in general the same economics that exists out there, you’ve got fluctuating fuel prices, and I think that has driven a bunch of capacity out of the market place, so I think as you move into the more heavier times, September, late August, our feel is you will see the same type of phenomena. We continue to have good pricing with heavy haul and some other accounts. We really believe that the third quarter is going to be very similar to what we’ve experienced in the second quarter. Now, should that not happen, which I think is your question, is it going to be more pressure on margins if capacity is not as tight, I’ve got to tell you I would probably pay less for the truck in which case my margins might expand to some degree. So back to my comment about our model adapts very well to the changing environment.

[Thomas Wadewitz:]

I think I meant it the other way in terms of if capacity got meaningfully tighter, would that hurt you on the margin side.

[Henry H. Gerkens:]

Well, yes. If capacity gets tighter, then you’re absolutely correct, that means we’re going to basically be paying more for capacity. What we have to do is go back out to our customer base and say if you want this truck it’s going to cost you more. And that’s what we did in the quarter. And it depends on our mix of revenue. As far as where all that occurs. We had more brokerage than we had in last year’s second quarter. If you followed the comments, also, we had a very big increase in the substitute line-haul business and by its nature that’s a very small margin business. But again, when you look at the margins, factoring in the bonus accrual at 7.2 and 30 basis points of dealing with the bonus accrual, pretty impressive margin considering the environment we’re dealing with. And you’ve got to remember what I’ve always said

[Operator:]

Your next question comes from Edward Wolfe - Wolfe Research.

[Edward Wolfe:]

Just a follow-up on Tom’s question. Are you really happy with the margins here? You’ve had now six quarters in a row of accelerating revenue every quarter, but the margin has gotten worse for four quarters in a row and operating income is flattish for the fourth year in a row now. When do you start to really leverage that revenue? When should we think about that?

[Henry H. Gerkens:]

Again, I think you need to look at it, I’ve said many times and you’ve heard me say, I’m not going to predict which quarter, I can’t predict which quarter that we’re going to basically generate that full percentage point gain, but that’s over a five-year continuum and again, if you go back in our time frame, in our history, you will see that. The fact that we generated record operating income I think is very important. You’ve got to look a the mix of the revenue. When you have a lot of substitute line-haul business that you’ve put in that basically replace some of the automotive business that went away, if you will, and I don’t expect that to come back, that had a slight squeeze on the margin. So I will repeat, over a continuum of time you are going to see that margin increase. 7.5%, I think, if you added back on an apples-to-apples basis is a pretty good margin. Considering the environment we’re operating in. You’ve got to consider the environment you’re operating in.

[Edward Wolfe:]

It felt like you had a pretty good June, it sounded like from everything. And certainly the yields were up.

[Henry H. Gerkens:]

We had a good quarter, quite frankly.

[Edward Wolfe:]

The $0.03 for the incentive comps, will that continue or is that kind of one-quarter event.

[Henry H. Gerkens:]

As I said, we’re looking at, we think $0.02 in the third quarter. Obviously it is our objective to meet our goals and therefore those accruals will hopefully continue.

[Edward Wolfe:]

So as I look at it, the guidance calls for very similar to what you did in the second quarter.

[Henry H. Gerkens:]

Exactly right. In fact, in the second quarter I said that the guidance included $0.02 and the number came out to be $0.03. The guidance going into the third quarter also includes an approximate $0.02 of charges related to the bonus accrual.

[Edward Wolfe:]

Is there any benefit from all the flood stuff that’s going on in the Midwest? Is there any need for capacity right now and the fact that FEMA was just awarded a big grant that Congress passed, does that give any opportunity in the second half?

[Henry H. Gerkens:]

Well, it gives an opportunity. First of all, the floods in the Midwest, we did very little business. We did some business through FEMA but really nothing to really even make mention of. We did a couple of loads, as I recall, for a water distributor that had contracted through FEMA and we hauled that. But clearly, it’s nothing like anything that occurred in Katrina and any of those hurricanes. Now, what happens now that we’re in hurricane season and what happens with that, there’s always opportunity.

[Operator:]

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

[Thomas Albrecht:]

Do you have your rate per mile for the dry and flatbed divisions? I think you gave that last quarter verbally.

[Henry H. Gerkens:]

On the flat side I’ve got $2.66 versus $2.36. And on the van side I’ve got $1.85 versus $1.83.

[Thomas Albrecht:]

And that flat is ex-fuel, right?

[Jim B. Gattoni:]

Not necessarily, there is a component of brokerage in there that will have fuel in it.

[Thomas Albrecht:]

And just conceptually what goes on in brokerage, when you’re having trouble getting coverage for a load, I realize there is a small period where you may eat it out of your gross profit. But how quickly can you convince the shipper, then, that you need more in the loads if you are expected to continue to move these on a timely basis. Can you talk about that process a little bit?

[Pat O'Malley:]

Tom, I think that what’s important [inaudible] market place, they recognize that when capacity starts getting tight and they can recognize, also, when the demands from the customer are changing. Maybe they will hear from a customer that they haven’t heard from for quite a while. And that’s the timing in the market place that we have to get better at, or improve on, and it goes all the way back to Tom’s question, we have to offset cost and purchase transportation with rate increases. And we do that with great regularity in some locations and in some locations we need to improve.

[Thomas Albrecht:]

So it’s dynamics but there’s no silver bullet answer, per se. Did I hear you correctly, Henry, you thought that of the 24% revenue per load increase at brokerage, that maybe 3% was just higher fuel surcharges and the rest was all the other things, the rate, the mix issues, etc.?

[Henry H. Gerkens:]

Our overall revenue increase was 10%. We estimate, based on stuff we know, that at least 3% of that 10% was broker fuel surcharge, hung up in the brokers line. On the 24% increase in the rate per loaded brokerage, it looks about 10%-12% of that increase is fuel.

[Thomas Albrecht:]

That makes more sense. And then I was a little surprised, I know you mentioned that the declining load volumes within automotive and that, but given your unique brokerage offerings that you have, focused on flatbed and industrial, I was still surprised that the load growth was down almost 3%. I would think that you would compete in a less crowded space, compared to maybe the C.H. Robinsons of the world, or so much of that is food and brokerage.

[Henry H. Gerkens:]

I think the one issue that we had, and I’m not going to mention accounts, but automotive load volume was down about 22%. And that’s large. That is very, very large. And then there was one other account was down 10,000 loads. So, when you couple that in, that’s what I’m saying, it was really caused by those two things. Otherwise, I don’t like picking and choosing because we’ve got to replace things to get back where we were, I think was pretty impressive.

[Thomas Albrecht:]

Automotive, either as a percentage of the total or brokerage, however you want to share with us, what is the latest percentage, roughly, that you’ve got there?

[Henry H. Gerkens:]

I think we’re down about 7% right now.

[Operator:]

Your next question comes from David Ross - Stifel Nicolaus.

[David Ross:]

Question on the cash, it seems to be you’re up in this area of purchase program, increase in dividend. Any look at acquisitions? I know logistics and supply chain side is one you’ve been looking to grow. Any non-asset based logistic acquisitions out there you might be looking at or is that an area you’re thinking of growing?

[Henry H. Gerkens:]

We would consider that. There is nothing we are looking at right now.

[David Ross:]

And the FAA contract status, I think in your comments you said four more contracts with the FAA. Is that still tied up, operating under the old contract? Any new word there?

[Henry H. Gerkens:]

No. Again, there’s not a new contract that I’m aware of that has been put out for bid. Our indication is that the contract will be sublet by or let out by FEMA as opposed to the FAA, but I think right now with a potential change in the administration I think they’re just going to wait and see what occurs with the whole thing.

[Operator:]

Your next question comes from Matthew Troy - Citigroup.

[Matthew Troy:]

Question on the rail and ocean side, I think it accounts for something close to 6% or 7% of your revenues. But if I look at your release for the first half of the year, it’s accounting for roughly 20% of your revenue growth on absolute dollars. Just wondering if you could talk about what’s driving some of that growth since most of the focus so far has been on the trucking side, and what investments you’re making there and is that growth rate sustainable?

[Jim M. Handoush:]

On the international side I would say it is an important part of our growth as we look to add agents into our network over the last five to eight years that have international experience, both on the air and the ocean side of the business. So we’ve expanded that agent count and with that it brought obviously revenue opportunities and revenue growth in that market. And we’ve also looked to expand from an offshore perspective. We mentioned here in the first quarter that we added our first agent offshore from an international perspective. And we’re also talking to our existing agents who have account bases that obviously has international traffic, so we’re expanding their sell, which is helping with the growth in that market place.

[Matthew Troy:]

And on the international side, is it possible to break out directionally, how much of that growth is coming from the net adds on the sell side, the relationships that they bring versus your ability to cross sell or sell in with your exiting agents that are primarily domestic focused.

[Jim M. Handoush:]

I don’t have those numbers in front of me.

[Matthew Troy:]

If I think about growing that business, though, should I think about primary investment being just in head count?

[Jim M. Handoush:]

Our model is always about adding agents and we’re going to continue to do that and at the same time, as Henry outlined in strategy, it’s about expanding our business at the existing account base, so I think you will see the revenue stream come from both avenues.

[Matthew Troy:]

And similar question on the rail side. The railroads are talking about the potential for modal shift from truck to rail. They’ve been talking about it for five or ten years, but there certainly seems to be more traction on that front more recently. Are you seeing that in your business and looking at your rail growth, what would you attribute that to and what is the opportunity there.

[Jim M. Handoush:]

It’s really the same on the rail side. We’ve cone a real good job over the last three years adding intermodal agents to the network. Some of those come out of other intermodal systems, some have been agents in other intermodal networks, and some have been running their own intermodal marketing companies and haven’t seen any growth so they’ve come over to us and we have been able to expand the business with them. Also to answer your question about modal shifting. Yes, that’s something that has been talked about for the last ten years. Right now you’re talking about it because of the high fuel costs. We’re seeing some of that but our growth is really coming from the addition of new agents and the expansion of our existing agent family to the intermodal service line.

[Matthew Troy:]

Would you say that you are happy with your ability to add those agents on the international and the rail side or do you find that you’re constrained that that talent’s hard to come by these days?

[Jim M. Handoush:]

No. No. We have a strong pipeline in all modes of transportation.

[Operator:]

Your next question comes from John Barnes - BB&T Capital Markets.

[John Barnes:]

One, have you seen any meaningful churn among your carrier base on the brokerage side and can you just talk a little bit about successes and/or failures on carrier retention or improvements?

[Henry H. Gerkens:]

From the brokerage side it’s hard to determine. Our count has been around 25,000 over the last several quarters and as insurance renewals come in, we replace carriers and new carriers come in, so it’s been fairly static. There’s really no change there. From the BCO side we have had less recruits this year than we had last year. We have less deletes but when you add those two together that accounts for the decline in the business capacity owner numbers. It’s just harder to get, in our opinion, good, qualified BCOs into our system at this point and time. And I think, quite frankly, with things very difficult, I think people are actually a little bit more reluctant to look for and make a move at this point in time because they’re either going out of business or they’re just going to stay put. But we’ll see where that takes us.

[John Barnes:]

I’m curious as to you’ve been very successful in recent quarters at the agent recruitment, have you seen anything there change in terms of competition for agents, recruitment, are your competitors looking for the same agents being more aggressive about terms or something like that, and do you think the growth of your agent network is sustainable for the next one to three years?

[Henry H. Gerkens:]

John, because we have had competition for a number of years as far as recruiting agents. And a lot of the people who we recruit against offer some pretty substantial packages. I think what we have been able to demonstrate, to be affiliated with the name Landstar and being part of that network, because the network is very key, and it’s our scale and it allows that individual to actually grow that business. So as I said, the agent pipeline is full. We’re concentrating on the bigger agents. We’ve been pretty successful and I think you will see continued success, especially as Jim was talking about, and one of the questions we had before, is we’re taking out looking for just different types of agents, whether it be international agents, whether it be intermodal agents. And then obviously looking and expanding our existing agent base. Just couple that with all the modes of our transportation and increased account penetration. But as far as the agent count, we think we have a sustainable growth pattern with them.

[John Barnes:]

On the share repurchase activity, on the increase in authorization, any change there in how you anticipate financing it versus the way you’ve done it historically. Do you see a higher than normal debt level even to attack it, or will it be still mostly free cash flow and debt from time to time. Is it going to be the normal use of cash?

[Henry H. Gerkens:]

There’s no change in philosophy there. I think it’s a normal use of our free cash and occasionally dipping into our revolver. There’s been no change in our philosophy going forward.

[Operator:]

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

[Todd Fowler:]

I want to be clear on the fuel issue and maybe how it’s impacting some of the comparisons. Within your gross revenue there is no fuel recorded from the BCOs. And that’s about 55% of the revenue. But the other 45% that comes from the broker carriers and the rail and everything else, there is fuel that is going to show up in the gross revenue there, is that correct?

[Henry H. Gerkens:]

That’s correct.

[Todd Fowler:]

And it’s also going to come through in the purchased transportation line. And basically it will make your net revenue margins maybe look a little bit depressed because it’s coming through at a lower margin. The same thing on basically the operating margin line as well, right?

[Henry H. Gerkens:]

That’s correct.

[Todd Fowler:]

Henry, with the automotive situation here in the second quarter, when you laid out the guidance, did they go longer than anticipated? Was it in line with your expectations? And then the same thing if you think about the rest of the year and what we’ve seen recently and what we’ve heard recently from the automotive market, any change in your thinking with the exposure, or at the least the presence, that you have in the automotive business?

[Henry H. Gerkens:]

I don’t expect any pickup and I’m not looking for any pick up. If things would pick up that would be gravy to our estimates. If there is a change in that with what happens with GM, what happens with the other two members of the Big Three, I think that would be all a plus for Landstar. But we’re not looking for a lot from the automotive sector and it’s factored into our revenue guidance of that 7%-12%.

[Todd Fowler:]

It looks like there were a few more agent additions sequentially here in the second quarter. Is there any additional ramping time with costs where as you bring some agents on you might have a little more incremental costs before they start producing revenue or is that pretty miniscule?

[Henry H. Gerkens:]

I think the cost to bring on an agent is pretty miniscule. It takes some time for them to ramp up. As I said, our pipeline is full. I think you will see some good agent additions as we move forward into the third quarter. And that obviously sets the ground work for future revenue. It takes a while for them to convert all that revenue over, but we, as I said before, are agent pipeline is full and I would be looking for some nice additions in the third quarter.

[Todd Fowler:]

It doesn’t look like there were any share buybacks in the current quarter, and is there a timing on the authorization that you have out there and what would be your anticipation for working through the share buybacks that you have authorized at this point?

[Henry H. Gerkens:]

Two things. Correct, we have not executed on a share buyback in the first half of the year. Our philosophy has been that we try to be opportunistic. Buy when the stock settles in a trading range. We asked the Board to increase our authorization from the current amount, which is about 700,000, for an additional 2 million shares, so we have 2.7 million shares of dry powder in our pocket. And if you go back in our history, as I’ve said many times before, we are a proven executor of our share buyback program and there’s no reason to think that we wouldn’t continue on that execution.

[Operator:]

Your next question comes from David Campbell - Thompson, Davis & Co.

[David Campbell- Thompson:]

You talked about the flood business and the fact that you didn’t do very much of it, in the recovery in the Midwest. But what about the opportunity for revenues there in June and July, given the fact that there were all kinds of disruptions in company supply chains? I figure you might be getting some additional business from shippers looking for new ways of getting things around.

[Jim B. Gattoni:]

Clearly, David, when there are disruptions with the supply chain they are going to call upon carriers like Landstar to help. You know, fill that gap. And we saw some of that as it related to the floods and different bridges being out for the railroads. So we did see some of that.

[David Campbell- Thompson:]

Was there any benefit or was it pretty much offset by the additional costs you had to bear?

[Henry H. Gerkens:]

It was costing more for the capacity. The capacity was expensive no matter how you cut it in the second quarter, specifically. More expensive in June.

[Jim B. Gattoni:]

If you think about it, David, it’s the post-flood business with the infrastructure rebuild that we believe, from a platform perspective, we’re well positioned to take advantage of.

[Operator:]

Your next question comes from Jon Langenfeld - Robert W. Baird & Co.

[Jon Langenfeld:]

Can you talk a little bit about on the agent side, it’s a pretty dynamic market out there, things are changing pretty quickly. How does corporate help to disseminate the information of the changing market? Or do they not need to, are the agents good enough that they can basically interpret that on their own?

[Henry H. Gerkens:]

As Pat said before, our agents are in market and for them to be successful businessmen, they better understand the market that they’re in. And I think they have their pulse on what’s going on. From our standpoint, we have a pricing department. We can help verify certain things for them but generally these guys are the entrepreneurs and if the are successful, they know what is going on in that market.

[Pat O'Malley:]

Jon, we also have some technology that allows our agent family to send shipments out across the network, and determine, based upon feedback from operators, whether or not that stuff is priced right. And as Henry mentioned earlier, the agents are on a commission split as well, so to the extent they can get price increases that helps offset the higher cost of PT, if you will. And so they are loath to do so.

[Jon Langenfeld:]

And Henry, I think I know the answer to this, and people have been asking this in various different ways, but a tightening capacity environment, would you view that as a positive or a negative for Landstar. Basically meaning the scarcity of the assets, the increase in the pricing on the positive side, does that more than offset the gross margin contraction, in the brokerage business specifically?

[Henry H. Gerkens:]

I’ve always said that, what problem do you want? Do you want to have capacity with no freight to put on it, or would you rather have the freight demand, and I use those terms, and try to find the capacity? What I’m saying is I would rather have the latter problem. The problem I want to have is I’ve got freight and I want to go get the capacity, as opposed to I have the capacity and I don’t have the freight.

[Jon Langenfeld:]

And from a broader industry perspective, assuming you’re good at declaring capacity, you would rather have a scarce asset out there.

[Henry H. Gerkens:]

Exactly right.

[Operator:]

Your next question comes from Nate Brochmann - William Blair & Co.

[Nathan Brochmann:]

Just to follow-up on Jon’s question a little bit there, and we’ve been talking a lot about the capacity and pricing side, but when we look at the volume and we exclude the auto business and the lost revenue from one customer in particular, can you talk about some of the other end markets that are performing very well, in terms of either where you’re gaining some share of some additional business, or at least being able to maintain where you’re at?

[Henry H. Gerkens:]

Again, as I said, I think the biggest, in substitute line-haul business for example, recognize that the margins are thin but we’ve had some great successes in there. And you know that is a volume game. And the flatbed platform arena, the heavy ball operation. That has been a consistent performer. In fact, if I look down our list of commodities, I would say that appliances are up, automotive is way down, building products surprisingly is flat, got a new customer or two there. Chemicals is up a little bit. Government is flat. Machinery, general commodity, is up pretty big time.

[Nathan Brochmann:]

And is that in part due to the increasing export activity out of the U.S.?

[Henry H. Gerkens:]

Yes, I think partly that’s true.

[Nathan Brochmann:]

It sounds like your outlook on the volume side is pretty stable, just like we’re hearing from a lot of other companies in our other channel checks, too, is that for sure on the volume side it’s not getting any weaker and if you’re a company like Landstar, providing multi-modal solution, you’re probably gaining some share on that, as well.

[Henry H. Gerkens:]

I don’t like to talk about the fact that automotive is down so much and we had that one account, but we grew 10% and automotive was down, which actually was a pretty high-margin business for us, that we were able to perform, I think, pretty admirably in a market that I think people found very difficult. But there are clearly opportunities out there, through increase in account penetration, through bringing on new agents, and things are going very well.

[Nathan Brochmann:]

And one additional question with that, you have mentioned before on some of the past calls, in terms of the warehouse business improving and on one hand that is nice, but the bigger part is driving more revenue through the truck load business. Are you still seeing that and how are those trends going?

[Henry H. Gerkens:]

Yes, if I look at our warehouse, and these are very small numbers. When I look at a net revenue number of approximately, in round figures, $100,00 compared to $25,000 last year in the quarter. But that brought with it about $6 million in additional transportation revenue versus $3.7 million last year, which is an increase of about 62% in transportation revenue that we got because we sold the warehouse end of that. And that actually is going to, I think, start to pick up very soon. So we are very pleased with the progress on that, at this point in time. It could be a little bit faster but we’re doing a nice job right now.

[Operator:]

Your next question is a follow-up from Tom Wadewitz - JP Morgan.

[Tom Wadewitz:]

Henry, you’ve mentioned a number of times this customer where you lost 10,000 loads. Did you actually lose the customer or was the customer’s business down sharply? And is the type of thing where two quarters from now you’re going to say that customer is back?

[Henry H. Gerkens:]

We lost that customer.

[Tom Wadewitz:]

And it’s not the type of thing that could readily come back?

[Henry H. Gerkens:]

And it’s not the type of thing I want back. I’ll just leave it at that.

[Operator:]

Your last question is a follow-up from Edward Wolfe - Wolfe Research.

[Edward Wolfe:]

It seems like the revenue and the volume, certainly the pricing and to a lesser degree the volume is not really the issue, I’m just trying to understand what’s going on in the market place and you’ve talked a couple of times about saying you’re starting to see small guys go out, pricing is firming, you felt that in June particularly. When I look at your report, though, it shows that overall truck capacity was up 4% in terms of the number of suppliers to you, and that on the truck brokerage side it was up 6%+, which is pretty much where it’s been the last two years. So it didn’t feel like you felt that reduction.

[Henry H. Gerkens:]

Again, from the brokerage side it’s hard to tell that. When I don’t get that insurance renewal in, they go off of our system. We do not follow up on that unless it’s a real major carrier that we use.

[Pat O'Malley:]

Ed that could be an approved carrier that has at one time 500 trucks and today has 100 trucks. So they remain an approved carrier but their capacity has diminished significantly.

[Edward Wolfe:]

Did you have trouble, at some points during the quarter, in finding capacity?

[Henry H. Gerkens:]

I think it was a challenge throughout the quarter to find capacity.

[Edward Wolfe:]

And in July is it still a challenge to find capacity.

[Henry H. Gerkens:]

It’s hard, as I said before, you can’t go by the first two weeks of July, which is historically very, very slow. You hit that June crunch, that last week, and then after that things slow down dramatically. And I can’t make any judgment on capacities now all of a sudden gotten looser. That just to me is intuitive because it’s where you are in the year.

[Edward Wolfe:]

I understand it’s a tricky month, but on flatbed is it tighter in July?

[Henry H. Gerkens:]

Flatbed is still tight.

[Jim B. Gattoni:]

Thanks for all the questions and thanks for being on the call. I just look forward to the next six months and watching how this year is going to finish year. It will be an exciting year.

[Henry H. Gerkens:]

Let me just close by saying something I said before, and it’s I think Landstar continues to be a consistent, proven, predictable performer in most any freight environment and I look forward to talking to everybody again on August 25 for our 2008 third quarter mid-quarter update call. And thanks and have a good afternoon and good evening.