Landstar System Earnings Call NUGGETS: Growing the BCOs, Insurance and Claims

On Thursday, Landstar System, Inc. (NASDAQ:LSTR) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Growing the BCOs

Jason Seidl – Dahlman Rose: Quick question, could you talk a little bit about the market for growing the BCOs and attracting new guys going forward. I mean we’ve obviously seen some people with company drivers had to take pay-up, has it gotten more difficult or what are you seeing out there?

Henry H. Gerkens – Chairman, President and CEO: I’ll turn it over to Joe in a second or Joe why don’t you go ahead. I promised my guys again I was going to let them try to answer the questions. You know I like to talk a lot, so I am going let Joe take it right from the beginning.

Joe Beacom – VP and Chief Safety & Operations Officer: Thanks Henry. Jason, again I think the Landstar model continues to be attractive for BCOs coming in the door. It has been. We’ve seen as you noticed a growth in the quarter of 134 BCOs at the end of the first quarter. The attractiveness of the percentage pay will pass through on fuel surcharge in the ELCAP programs continue to be strong. The interest from prospective BCOs continues to be pretty strong. What we have decided to do is implement an onboard recorded requirement for new BCOs who are coming on or entering applications after August 1st. What that does to the end of their own number remains to be seen.

Jason Seidl – Dahlman Rose: Have you guys decided to do anything in terms of percentage pay or have you kept that the same?

Joe Beacom – VP and Chief Safety & Operations Officer: Kept our compensation the same. I will add that the onboard recorded, Landstar is going to pick up the cost of the recorded for all new BCOs.

Jason Seidl – Dahlman Rose: And you don’t anticipate having to do anything with the percentage pay going forward?

Joe Beacom – VP and Chief Safety & Operations Officer: I think the quality of freight really takes care of that. If you look at the percentage pay model, the quality of the freight in the system and the pricing that we’re able to obtain from the customer, really I think is an advantage to us and we’ll continue to be advantage to us going forward.

Henry H. Gerkens – Chairman, President and CEO: Jason, I have been here since 1988, start of Landstar and our percentage paid literally has been virtually the same since that time. We have not moved that up or down. I don’t anticipate moving that up or down quite frankly. I think the advantages over percentage pay systems speak for themselves. Our general rates are higher than I think most competition out there and the fact that we pay a percentage of our revenue to our BCO, they develop that loyalty to Landstar and that ties them to really I think some of the things that a lot of things we offer. I mean our objective is to make our BCO successful because if he is successful as businessman, guess what? Landstar is successful. So, that’s been our business model. We don’t plan on changing that, and at least I think, I answered your question.

Jason Seidl – Dahlman Rose: It does. Real quickly on the flatbed side, obviously you said strength throughout the remainder of the year, could you talk about some of the end markets that flatbed serves and where you’ve seen the strength?

Henry H. Gerkens – Chairman, President and CEO: Pat?

Patrick O’Malley – VP and Chief Commercial & Marketing Officer: Power generation Jason whether that’s traditional power generation sources or alternative energy. If you look at the mining and that kind of business that’s kind of where it’s coming from. Machinery is a big part of that platform business and we anticipate that continuing throughout the balance of the year.

Jason Seidl – Dahlman Rose: So, still nothing or you guys do a very little housing-related stuff, but you did to a tiny bit, but you haven’t seen any uptick at all there?

Patrick O’Malley – VP and Chief Commercial & Marketing Officer: No, and we traditionally haven’t done a lot of housing. Housing picks up at May, suck some capacity out of the marketplace and improve pricing. But we don’t see the increase in housing business.

Insurance and Claims

Todd Fowler – Keybanc Capital Markets: Henry or maybe for Jim, I just want to make sure I understand if I look at the insurance and claims, and I’ve looked at the commissions to agents as a percent of revenue, if I understand the comments right, as long as the mix stays where it is right now, the increase in the brokerage revenue relative to the BCOs, we should see similar percentages for the commissions to agents and insurances. Is that a fair statement or a fair way to think about it?

Jim B. Gattoni – VP and CFO: From a commission standpoint, yeah that would be a fair way to look at it, but you know (indiscernible) insurance, you can use that but it’s a little volatile in that line because we are subject to accidents and they are unfortunate, but…

Todd Fowler – Keybanc Capital Markets: Yeah, and I guess I was assuming obviously no unusual accidents or no severe accidents…

Jim B. Gattoni – VP and CFO: The way I look at it really as 90 something percent of the claim lines really related to BCOs. So you just really look at – what I try and do is just watch – you look at how much revenue the BCOs are riding on and historically if you do it that way, you’re 3% to 3.5% of that revenue.

Todd Fowler – Keybanc Capital Markets: Okay. And then just as a follow up with that then Jim there was nothing unusual here in the quarter then when you think about that within the insurance line item. That’s a relatively clean number. It was just a good quarter, nothing unusual from a severity or frequency…

Jim B. Gattoni – VP and CFO: Generally a very safe quarter. If you compare it to last year, last year we had the claim – we look at it in layers. There’s the (indiscernible) and then there’s the (4×1). Last year we had a claim (pierce) that (4×1) layer in that $13 million. So it’s really just a good severity quarter.

Henry H. Gerkens – Chairman, President and CEO: But yeah, and getting back to your point, as your percentage of revenue increases as far brokerage, the percentage of insurance and claim as it relates to percentage of gross profit or revenue obviously is going to drive it down with the more brokerage we have.

Todd Fowler – Keybanc Capital Markets: And the same thing with commissions to agents, because if there’s some margin compression on the PT line, the agents absorb some of that. Is that that the right way to think about that too?

Henry H. Gerkens – Chairman, President and CEO: Yeah.

Todd Fowler – Keybanc Capital Markets: Okay. And then the follow-up on that I had, Henry I don’t remember if you made this comment or Jim made it, but in the prepared remarks there was a comment that there was a 30 basis point increase paid for broker capacity. Did you have a same number on what the increase would have been from your customers? So essentially, were you able to get 100 basis points more or what you were getting from your customers was that down a little bit on a (indiscernible)? I’m just trying to get a sense of what the magnitude of the customer rate increase was relative to what you paid out to the brokers.

Henry H. Gerkens – Chairman, President and CEO: Yeah, that’s hard to measure. Our pricing, we said from the van standpoint, pricing in the quarter was flat. We said from the flatbed or the revenue per load number, I should say. The revenue per load on the platform equipment was up 7%, but I wouldn’t be able to carve that down as far as that 30 basis points, what that equated to in price. The fact of the matter was price was up to a certain degree and I just don’t have that – I mean I don’t think we really can capture that right now.

Todd Fowler – Keybanc Capital Markets: Can you look at on the broker side, was there a squeeze year-over-year based on what happened with capacity and what you’re receiving on the rate side?

Patrick O’Malley – VP and Chief Commercial & Marketing Officer: The gross profit margin on brokerage stayed relatively flat this year over last year, if that helps.