Oct 15, 2008
Executives
Henry Gerkins – President and Chief Executive Officer Jim Gattoni – Vice-President, Chief Financial Officer
Analysts
Justin Yagerman – Wachovia Securities Jon Langenfeld – Robert W. Baird Tom Wadewitz – J.P.
Morgan Edward Wolfe – Wolfe Research David Campbell – Thompson, David & Co. John Barnes – BB&T Capital Markets Chris Ceraso – Credit Suisse John Larkin – Stifel Nicolaus Tom Albrecht – Stephens Inc.
Todd Tyler – KeyBanc Capital Markets
Operator
Welcome to Landstar System, Inc. third quarter 2008 earnings release conference call.
(Operator Instructions) Joining us today from Landstar are Henry Gerkins, President and Chief Executive Officer, Jim Gattoni, Vice-President and Chief Financial Officer, Pat O'Malley, President, Landstar Carrier Group, Jim Handoush, Landstar Global Logistics. Now, I would like to turn the call over to Mr.
Henry Gerkins.
Henry Gerkins
As with the recent quarterly earnings conference call, today's call will be limited to no more than one hour and I would appreciate it if you would limit your questions to no more than two questions each when the question and answer period begins. Let me read the following statement.
The following is a Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts are forward-looking statements.
During this conference call, I and other members of Landstar's management may make certain statements containing forward-looking statements such as statements which relate to Landstar's business objectives, plans, strategies and expectations. Such statements are by nature subject to uncertainties and risks including but not limited to the operation, financial and legal risks detailed in Landstar's Form 10-K for the 2007 fiscal year described in the section, risk factors and other SEC filings from time to time.
These risks and uncertainties could cause actual results or events to differ materially from historical results from those anticipated. Investors should not place undue reliance on such forward-looking statements and Landstar undertakes no obligation to publicly update or revise any forward-looking statements.
During our 2008 second quarter earnings conference call, I stated that I anticipated that revenue would increase in the third quarter of 2008 over the third quarter of 2007 in a high single digit to low double digit range, and that diluted earnings per share for the third quarter of 2008 would be in a range of $0.54 to $0.60 per share. In our mid-quarter update call I tightened that revenue guidance to a 10% to 13% range and reiterated the diluted earnings per share guidance.
Total Landstar revenue was $733 million in the 2008 third quarter, an increase of 15% over the 2007 third quarter. It was the highest third quarter revenue in Landstar history.
Excluding the revenue generated from bus evacuation services for the 2008 hurricanes, revenue increased 11% quarter over quarter. Diluted earnings per share was $0.62 per share and $0.59 per share excluding the net income from the revenue generated from the bus evacuation services.
Landstar once again, had a very, very good quarter in this ever changing freight environment. Let me review what has occurred in the market place.
As I stated before, in 2007 and early 2008, we were dealing with a market that had excess capacity which resulted in downward pressure on price. Due to increased fuel prices and low freight demand, certain large carriers permanently reduced the size of their company fleets and many small carriers and single owner operators exited the market place causing somewhat of a reversal in capacity and the pricing environment.
Capacity tightened in the second quarter of 2008 as demand increased and carriers had increased pricing power. Landstar experienced the same trend through the month of July.
July 2008 revenue increased 13% over July 2007 revenue. However, during the month of August we experienced a slower rate of growth as August 2008 revenue increased 9% over August 2007.
September freight demand in the final weeks of the month was weaker than we anticipated and available to capacity appeared to have increased primarily in the van arena. In addition, fuel prices came down rather rapidly towards the end of the third quarter and into the fourth quarter.
I will talk more about what I see in the fourth quarter a bit later. From an earnings standpoint, diluted earnings per share in the 2008 third quarter increased 15% over the 2007 third quarter.
Again, it is important to recognize that the 2007 diluted earnings per share number for the third quarter included no accrual for bonus payments. With a bonus accrual in the 2008 third quarter amounted to approximately $0.03 per diluted share.
Additionally, the third quarter of 2008 included income of approximately $0.03 per diluted share from the bus evacuation services. Again, we had a very successful third quarter and we overcame the continued weakness in some of the same sectors that have been weak for some time now, namely the automotive sector and housing related accounts.
Increased revenue per load, new revenue from agent additions and increased account penetration were all contributing factors to our successful third quarter results. Our account base remains highly diversified.
Revenue generated from business with transportation and/or logistics companies increased approximately 17% quarter over quarter primarily due to increased substitute line haul revenue with certain carriers. However, we saw a decrease in such business towards the end of the quarter as the general economy weakened.
Automotive related revenue included revenue generated through the PL's decreased 23% quarter over quarter and represented less than 6% of our total business. Our largest commodity segment continues to be machinery and equipment which represented approximately 20% of our total business in the 2008 third quarter.
Quarter over quarter it was up 33%. The primary reason for this increase is the increase in the power generation business.
We anticipate that this business will remain strong into 2009 and beyond. Again, overall, revenue increased approximately 15% quarter over quarter.
Revenue hauled by BCO's represented 51% of total consolidated revenue in the 2008 third quarter versus 55% in the 2007 third quarter. Revenue hauled by BCO's increased 6% quarter over quarter as a 2% decrease in the number of load hauled was offset by an 8% increase in the average revenue per load.
This increase in revenue per load amount was primarily due to a change in revenue mix, or as we call it, freight equality caused mostly by the increase in heavy haul platform revenue and not by a pure price increase. There was no fuel component to the BCO revenue per load amount.
Truck brokerage revenue represented approximately 38% of consolidated revenue in the 2008 third quarter versus 35% in the 2007 third quarter. Revenue hauled by truck brokerage carriers increased 22% quarter over quarter as the number of load hauled by truck brokerage carrier's declines 4% and revenue per load increased 27% quarter over quarter.
Approximately 30% of the revenue per load increase for truck brokerage revenue was due to fuel. The decline in the total number of loads hauled by BCO's and truck brokerage carriers was entirely caused by the reduction of automotive load volume and load volume in one other account.
Revenue generated through rail, ocean and air cargo carriers represented 7% of consolidated revenue in the 2008 third quarter and the 2007 third quarter. Revenue hauled by rail intermodal carriers increased 3% quarter over quarter and revenue generated by ocean cargo carriers increased 55% quarter over quarter and more than offset the decline of $2 million in revenues hauled by air cargo carriers.
Now I'll turn it over to Jim for his financial review.
Jim Gattoni
Henry's already covered revenue. I'll cover various other financial information included in the third quarter release.
Investment income was $817,000 in the 2008 quarter compared to $1.4 million in the 2007 period. The $289,000 decrease in investment income was attributable to a lower rate of return on investments held by the insurance segment in the 2008 quarter.
Purchase transportation was 77.8% of revenue in the 2008 third quarter compared to 75.9% in the 2007 third quarter. The increase in purchase transportation as a percent of revenue was primarily due to bus capacity provided for evacuation assistance related to the storms that impacted the Gulf Coast which had a higher cost of purchase transportation, increase less than truck load subs to line haul revenue hauled by truck brokerage carriers which also tends to have a higher cost of purchase transportation, and increased rates for purchase transportation paid to third party truck brokerage carriers which was partly attributable to the increased cost of fuel in the 2008 third quarter.
Commissions to agents were 7.4% of revenue in the 2008 third quarter compared to 8.1% in the 2007 quarter. Excluding the revenue related to bus capacity provided in connection with evacuation assistance, commissions to agents were 7.4% of the revenue in the 2008 third quarter.
The decrease to commissions as a percent of revenue excluding the revenue related to the evacuation assistance was primarily due to increased less than truckload subs to line haul revenue which has a lower commission rate resulting from a lower gross profit, representing the revenue less the cost of transportation, and lower gross profit on revenue by third party truck brokerage carriers. Other operating costs were .9% of revenue in the 2008 quarter compared to 1.3% in the 2007 quarter.
This decrease was primarily due to higher trailer equipment rentals in the 2007 third quarter primarily from disaster relief services provided under the former contract with the FAA and the effective increase revenue, particularly truck brokerage which tends to incur lower other operating costs as compared to revenue hauled by BCO independent contractors. Insurance and claim costs were 1.1% of revenue in the 2008 quarter compared to 1.5% in the 2007 quarter.
This decrease was primarily attributable to favorable development of prior year claims in the 2008 quarter. General administrative costs were 4.7% of revenue in the 2008 quarter compared to 4.9% of revenue in the 2007 quarter.
This decrease was attributable to the effect of increased revenue partially offset by an increase provision for bonuses under the company's incentive compensation plans in the 2008 quarter. Depreciation and amortization was 0.7% of revenue in the 2008 quarter compared to 0.8% in the 2007 quarter primarily due to the effective increased revenue.
Interest and debt expense was $1.8 million in both the 2008 and 2007 third quarters. Effective income tax rate was 38% in the 2008 quarter compared to 38.7% in the 2007 quarter.
The effective income tax rate in the 2008 39 week period was 38.4% equal to the effective income tax rate for the full year 2007. Operating margin for the 2008 third quarter was 7.5% compared with 7.8% in the 2007 third quarter.
The operating margin in the 2008 third quarter reflects a provision for bonuses under the company's incentive compensation plan whereas no such provision was reported in the 2007 third quarter. Net income in the 2008 third quarter was $32.8 million, or $0.62 per diluted share compared to $29.3 million or $0.54 per diluted share in the 2007 quarter.
Included in net income is diluted earnings per share in the 2008 quarter was net income of $1.7 million worth $0.03 per diluted share from revenue derived from evacuation assistance from the storms that impacted the Gulf Coast. In addition, diluted earnings per share was impacted by $0.03 from the net income effect of the provision for bonuses reported in the 2008 third quarter compared to the 2007 quarter in which no provision for bonuses was reported.
Looking at our balance sheet, we ended the quarter with cash and short term investments of $103 million. Cash flow from operations was $50 million during the 2008 39 week period.
During the 2008 third quarter Landstar purchased approximately 580,000 shares of its common stock at a total cost of $28.5 million. As of September 27, 2008 there were approximately 2,155,000 of the company's common stock available for purchase under Landstar's authorized share purchase program.
At September 27, 2008 shareholders equity represented 62% of total capitalization. 2008 trailing 12 month return on average shareholders equity remains high at 53%.
Back to you.
Henry Gerkins
I anticipate a fourth quarter freight environment with weak demand, lower fuel prices and increased capacity. In this environment I would anticipate yields from a brokerage standpoint to expand for those brokerage arrangements on a margin split.
Should the weak environment continue, eventually I would anticipate additional capacity to exit the market place later in the fourth quarter and into 2009. Although the general economic outlook might be bleak, this is the time when Landstar's operating model should outperform its competitors.
I see opportunities from both an agent and BCO recruiting standpoint. Our agent pipeline remains full and I would anticipate more productive agent locations joining our system over the coming months.
I would anticipate a continued decline in our automotive business and certain other accounts. I also anticipate a decline in business with other transportation companies as their business declines.
However, I believe we will offset these declines with new business with increased account penetration, new productive agent locations and continued strength in the heavy haul business. Considering the economic uncertainty, I would anticipate a lower rate of revenue growth in the 2008 fourth quarter over the 2007 fourth quarter versus what we have experienced for the first nine months of 2008 over the first nine months of 2007.
I also would anticipate our 2008 fourth quarter diluted earnings per share to be similar to that of the 2007 fourth quarter. With that, I will open it up for questions.
Operator
(Operator Instructions) Your first question comes from Justin Yagerman – Wachovia Securities.
Justin Yagerman – Wachovia Securities
The first question is pertaining to the guidance. Henry didn't mention, is all the disaster relief work that you guys are doing over with and does that guidance include any revenue under those disaster relief contracts that you have?
Henry Gerkins
The only contracts we had was with one contract with the state for evacuation services which there is no more revenue to be had on that. There is some sporadic FEMA stuff but nothing material.
Justin Yagerman – Wachovia Securities
So that was just the bus and now that's over and you wouldn't expect much in Q4.
Henry Gerkins
That's correct.
Justin Yagerman – Wachovia Securities
When I think about what you said in the third quarter, you obviously put up some pretty impressive numbers in the machinery segment. A lot of that feels like it is attributable to exports, at least from our standpoint.
How is that fairing? And could you talk about what you're seeing in October in terms of the other verticals and maybe what those customers are saying or what you're hearing out there in terms of why the economy has taken this next leg down.
Henry Gerkins
First of all, as it relates to our business mix, as you well know it's very diversified and our revenue growth is all about product mix. When you look at our flatbed or heavy haul business it really is generated through customers that some of its export, but a lot of it's not.
Justin Yagerman – Wachovia Securities
Is the pricing still strong in that business?
Henry Gerkins
The pricing is strong because it has nothing to do, and I know there's been a lot of discussion on flatbed pricing and how it's going to go down. Again, our flatbed pricing is based on the particular type of move that we're doing.
The heavy haul move just commands a higher price and I don't anticipate the power generation business to slow down at all, so I would anticipate that pricing overall would maintain at a level. Now when you talk about steel which we don't do a lot of steel to begin with, I would think you've got some excess capacity.
But that's not our niche. We don't do a lot of that.
Justin Yagerman – Wachovia Securities
What percent of your revenue is that right now?
Henry Gerkins
Justin Yagerman – Wachovia Securities
Do you know where that stuff is going? Is it mostly export?
Henry Gerkins
I can tell you that about 12% to 17% of what we're hauling ends up going to a port destination in the United States. Whether it's leaving that port or rebuilding that port, I can't answer that question.
The rest of the stuff isn't heading to a port city. It's somewhere within the U.S.
Operator
Your next question comes from Jon Langenfeld – Robert W. Baird.
Jon Langenfeld – Robert W. Baird
As a guidance and kind of what you saw in September and October not a big surprise given everything we've seen out there, but can you just kind of explain how dramatic the drop off was for you as you saw it happen at the end of September. Did the deterioration continue and has it continued to date, and how does that play out in terms of the guidance?
Are you assuming that the deterioration continues or that it levels out more?
Henry Gerkins
We are anticipating that there will be no pick up at all in the fourth quarter. I am anticipating a continued decline in automotive business.
I am anticipating a decline in business we do with other third party companies, transportation companies because I believe that their business is going to be weak. But offsetting that, I think we've got other niche's that we operate in that I think are unique to Landstar that I believe will offset those.
Obviously one of the key factors is bringing in some agents and I think the heavy haul business continues which therefore, as I said before, the pricing from the flat bed side or the unsided side will remain fairly consistent. So we have seen that continuation through October, but that's what I would see into the month and as I said in my comments, we do believe that we will grow our revenue.
It's just that the environment is so unpredictable, we're being a little bit cautious.
Jon Langenfeld – Robert W. Baird
Talk to me a little bit about the bonus, how that would work. Let's assume that next year you have flat earnings.
Do bonuses get reset, or the expectation or target for bonuses get reset based on the environment or is it based on the goal of growing the business every year.
Henry Gerkins
The goal is always to grow the business every year, and when we put together our budget, obviously we have to take into consideration the current environment and that does factor into the budget. As you roll into that budget your bonus targets or bogies are set, so coming off a fourth quarter in a weakening economy, we're obviously going to take all of that into consideration.
But we would never put together a plan that we're not growing, number one. And therefore it would always be based on that.
And as I've said in other conference calls some of the senior executives do not get paid a penny unless you exceed those goals, not only meet those goals but exceed those goals.
Jon Langenfeld – Robert W. Baird
I didn't catch the cash flow from op number.
Jim Gattoni
$50 million. That's for the 39 weeks.
Operator
Your next question comes from Tom Wadewitz – J.P. Morgan.
Tom Wadewitz – J.P. Morgan
In terms of the breakdown of some of the weakness that you're seeing in the fall off in September, you commented on weakness in automotive and transport providers, but are there other areas where geographically your customer wise you've seen the fall off.
Henry Gerkins
There are certain other customers. Housing remains weak.
One of our accounts that happens to be a flat bed account was down. The substitute line haul was weak towards the end of the quarter don't anticipate any pick up in that in the fourth quarter.
Automotive continues to be down, and as I said it was less than 6% of the quarter. That one account that we always talk about, we still have about 2,000 loads in the fourth quarter versus about 8,000 in the third quarter so that headwind sort of starts to go away.
As you turn into 2009, at some point in time that head wind becomes less for us also. It's really same type of accounts we've seen all year long.
I think the biggest change is the change in business that we're doing with other third party transportation companies and that is just a reflection of just how weak their business is.
Tom Wadewitz – J.P. Morgan
When you look out to 2009, what do you think is necessary to get back into a mode where you're growing earnings or is it a function of weak demand trends make it tough to see earnings up much similar to what you're looking at in fourth quarter.
Henry Gerkins
What I said in my comments, I'm not forecasting any pick up in demand in the fourth quarter and I actually see demand being weak going into 2009. Is there a pick up?
Historically every time we have this type of environment is says, well the back half of 2009 we pick up. It's kind of tough to make those forecasts considering where we are.
I think one of the advantages that we have is the variable cost operating model and some of the businesses that we are in and this is really Landstar specific, I just don't see some of those things going away. So I think Landstar is going to fare very well.
This is the first time we've seen in a long time, probably in the last nine months or so, you've seen a little pick up in the BCO count and that's important. I would have thought as things got weak, and I've always said this, we should increase that BCO count.
We didn't see that at the beginning of the year and I was a little bit surprised at that, but we're starting to see that in the back half of that year so I think that's also something that will help us next year. From a brokerage standpoint, I think right now we've got 50% of our business is BCO and 38% was brokerage.
We were getting a nice balance there. I think in a weak environment with fuel prices coming down, we should be able to expand margins on our business that is not that 88/12 deal that I always talk about, but purely on a margin split basis.
We should be able to gain some margin split there. So Landstar is pretty well positioned to face the economic crisis, and the key going forward is we've just got to continue to focus on bringing in new business, because new business will offset some of the declines we might see in other areas.
Tom Wadewitz – J.P. Morgan
You said through the quarter, you talked about revenue growth by month. I didn't catch the number in September.
Is it 13 in July, 9 in August. What was the September number ex the bus business?
Henry Gerkins
It was about 8% but we saw a fall off again towards the back half of that month.
Tom Wadewitz – J.P. Morgan
What does the trend look like in October so far?
Henry Gerkins
It's just a continuation of a trend that we've seen falling demand. We're forecasting additional fall off from third party providers which is really the biggest change.
Tom Wadewitz – J.P. Morgan
So you're up year over year a couple percent.
Henry Gerkins
My guidance, although not as specific as I usually would give, I am forecasting growth in the fourth quarter. I think it's hard to pinpoint what that would be because we are in uncharted waters here and we are entering a recessionary environment, so we're trying to be a little bit cautious.
But again, based on what we currently know, we should have revenue pick up in the quarter.
Tom Wadewitz – J.P. Morgan
You spent a little bit of time talking about revenue per load and why that was up in the boats in the BCO business and why it was up so significantly in the brokerage business. Can you run through that again?
I just didn't catch all the detail on those comments.
Henry Gerkins
The revenue per load from the BCO piece really has to do with revenue mix, not so much a pure price increase. There's no fuel component in the BCO piece.
And when I say revenue mix, it's really the heavy haul component which is a revenue per load number. When I switch to the brokerage piece, the brokerage per load increase, 30% of that was really due to fuel.
The balance is really due to a change in mix. You've got more of the heavy haul stuff being hauled by brokerage carriers than you had in the prior year, so therefore what you had was a little bit more of an increase in that particular arena.
But those are the two pieces.
Tom Wadewitz – J.P. Morgan
On the brokerage, if you parsed out the fuel and the mix component it didn't appear that the base rate that you were paying to the carrier was changing much year over year.
Jim Gattoni
I would expect that we're paying slightly more but it's mostly what Henry was talking about, the fuel.
Henry Gerkins
My guess is that we were paying more in the first part of the quarter. As flat bed capacity I think has been relatively stable.
I think from a van standpoint I think things might have changed a little bit where it was the back end of the quarter when capacity became a little bit looser. We probably paid a little bit less.
Operator
Your next call comes from Edward Wolfe – Wolfe Research
Edward Wolfe – Wolfe Research
The 7.6% yield improvement for the BCO's, you said that's mostly mix and there's no fuel in there? How did the mix change so much from second quarter when it was up half of that?
What was the big change there and do you think that 7.6% continues or even gets bigger in the fourth quarter if the mix changes, less auto and more something.
Henry Gerkins
It's 3.9 year over year in the second.
Edward Wolfe – Wolfe Research
And that was the revenue per load increase?
Henry Gerkins
When you look at what was hauled, the BCO's in the third quarter, my assumption, would be that they hauled more of the heavy haul stuff because the fuel surcharges as you well know from the BCO stuff is passed dollar for dollar back to the BCO. So my assumption is that they hauled more of the heavy haul stuff.
Edward Wolfe – Wolfe Research
So you think that assumption would continue? It sounds like you think that 7.6% will be even higher in the fourth quarter because the heavy haul holds up and LCL stuff doesn't.
Henry Gerkins
I would hope that the 7.6% holds. It should hold assuming there's no change in mix and I don't expect that volume to go down.
So that would be correct. As those volumes go up you might even see that go even higher.
Edward Wolfe – Wolfe Research
Of that stuff that's moving with the BCO's on the 7.6%, you got the heavy haul which is about a third of it? It's a third of the flat bed right?
Henry Gerkins
Of our overall business, flat bed is about a third.
Edward Wolfe – Wolfe Research
And of that third, about a third of that is heavy haul, right?
Henry Gerkins
That's correct.
Edward Wolfe – Wolfe Research
So the rest of that business that's not heavy haul, the other two-thirds of flat bed is steel and other things.
Henry Gerkins
It could be other things. We don't do a lot of steel.
Edward Wolfe – Wolfe Research
Those other things directionally, are they becoming a smaller part of the mix, and they have a lower yield?
Henry Gerkins
That's not necessarily true because you've got other accounts that are flat bed related that's new revenue for us when I look at some of the accounts that we've brought on. And that's the key to everything, is new accounts that you bring on.
That has grown. The flat bed business was up about 23%.
Jim Gattoni
You've got to look at the diversity of what we're doing. The problem is to us remember, it's a flat bed load.
We don't actually look to see, just because it's machinery and equipment it doesn't mean it's a BCO. That's also hauled by brokerage carriers, and if I were to run you a list of my customers that are my flat bed customers, for everybody who's had a change in excess of $250,000 third quarter 2008 to third quarter 2007, you're looking at 250 customers.
It's very diversified. And it's mixed between whether BCO hauls it or a broker hauls it, but the pricing is relatively similar within those.
The only difference is, if it's on a BCO the fuel is not in there.
Edward Wolfe – Wolfe Research
You said a couple of times that third party providers, the transport providers business feels pretty dead right now. Is that LTL or is that other things also?
Henry Gerkins
It's other things. I didn't say it was dead.
I said it was declining and that's the feeling we get.
Edward Wolfe – Wolfe Research
Give us a sense of what makes up when you talked about third party transport providers.
Henry Gerkins
It could be LTL carriers. It could be truck load carriers.
It could be 3 PL's.
Edward Wolfe – Wolfe Research
You gave revenue guidance of something better than zero and less than where it's been the three quarters to date which is 10%. Is the body language right?
It's closer to zero than 10% at this point?
Henry Gerkins
What I was saying was that I think we're trying to be a little bit cautious because of the uncertainty as we move into this what I'm seeing as a recessionary environment. On the other hand, I do think because of what we've got going there will be a revenue increase.
Edward Wolfe – Wolfe Research
On the hurricane side of things besides the $0.03 for the buses, another carrier reported recently and said they saw a lot of business to help bring stuff there whether it's for the Red Cross or Home Depot or for FEMA but not on a contract? Is there a business that would somehow help you in the brokerage business related to hurricanes but not specifically government kind of stuff?
Henry Gerkins
Less than 1%.
Edward Wolfe – Wolfe Research
Does that continue on?
Henry Gerkins
We don't see that continuing on.
Edward Wolfe – Wolfe Research
Any bonus accruals in the fourth quarter? What should we expect?
Henry Gerkins
That depends on where we come out.
Edward Wolfe – Wolfe Research
So in your guidance of flat year over year, was there accrual?
Henry Gerkins
That's going to depend on where the overall year comes out and how that plays out.
Edward Wolfe – Wolfe Research
But assuming it comes out at $0.54, would there be accruals in it?
Henry Gerkins
Potentially.
Operator
Your next question comes from David Campbell – Thompson, David & Co.
David Campbell – Thompson, David & Co.
I wondered if you could give me the truck brokerage surcharge revenues year to year in the third quarter.
Henry Gerkins
I can give you a percentage. As far as the revenue per load number 30% of the increase was the fuel surcharge.
David Campbell – Thompson, David & Co.
The company seems to have had a decrease in intermodal revenues sequentially from the second quarter. I wondered if that's fuel surcharge revenues going down or what is that?
Henry Gerkins
The actual volumes were down. Pricing was up.
Volumes were down related to some customer take backs of certain lanes that we were doing, again dealing with some of the substitute line haul stuff, the substitute rail that we do, and one other customer as far as declining volumes. The actual revenue per load was up.
David Campbell – Thompson, David & Co.
On a seasonal basis, is that intermodal business usually go up from the third to the fourth or does it usually go down?
Jim Gattoni
It actually usually goes up. And that's again what Henry was saying, there's really two main factors.
One, we usually see some sort of peak season even though last year it actually flattened out a bit. This year we're not seeing one at all as most of the market indicators show.
So traditionally right now, we'd be scurrying looking for equipment coming off the west coast. But instead, equipment is very plentiful.
Traditionally we would have started to see most of our shippers showing strong growth in the third quarter and the other factor is in our substitute line haul. Some of that moves intermodally and when their business starts to soften up they take away schedules that they don't have to run and the first place they're taken away is on the intermodal side.
Operator
Your next question comes from John Barnes – BB&T Capital Markets.
John Barnes – BB&T Capital Markets
On your guidance, I've heard you say a couple of times that you're expecting some revenue growth, but in the press release you said you expect fourth quarter earnings to mirror that of fourth quarter a year ago. Is there some cost element that I'm missing there that you're not going to get the flow through from the revenue down to the bottom line?
I also heard you comment about capacity loosening up a little bit. Is there something there I'm missing.
Henry Gerkins
As we have gone through the first three quarters we have had a change in mix. I would anticipate that some of that mix change to continue, so therefore I think from the margin standpoint you'll probably come about the same type of margin differential as from the prior year.
And again, I think my whole guidance for the fourth quarter, because of the uncertainty of the environment in the economy, I think we're better off being cautious than anything else.
John Barnes – BB&T Capital Markets
Your comments about being a very attractive recruitment environment on agents and operators, can you give us an idea as you go through '09, do you have a targeted number of agent recruitment that you are shooting for?
Henry Gerkins
It's not so much the number. We have a list, but it's really the productivity of a given agent.
For example, I looked at all my ads in the carrier group this year versus the ads we had last year. Although the number of additions are down, the productivity of an agent ad in the carrier group for example on revenue per week has doubled.
So that's the type of thing we're trying to put a concentrated effort on, is to bring in agents that have an existing book of business that have an immediate impact.
John Barnes – BB&T Capital Markets
As you've gone through that list, your focus has been that million dollar plus agent. Have you culled it down to that point?
Are there enough of those out there to continue to recruit or are your having to reach a little deeper?
Henry Gerkins
I think there are a lot of agents that we can recruit. I think as you go into an environment that things are weak, people are looking to try to strengthen their business, grow their business and looking for better alternatives, and I think Landstar offers a home to that.
Inquiries as far as coming into the Landstar system have increased. It's a lot to get used to at Landstar, but I think we're close to making some moves as I said, in the next several months to bring on some agents that I think have some meaningful impact.
John Barnes – BB&T Capital Markets
On the brokerage side, I think you said earlier capacity had gotten, you felt like it had gotten a little more plentiful. Can you talk a little bit about magnitude?
I would imagine it had some positive impact on revenue margin within the brokerage side. Can you elaborate on that a little bit, what kind of benefits you saw there?
Henry Gerkins
I think one think you need to take away from Landstar business, when you talk about brokerage, let's talk about the carrier group side. 50% of our brokerage business in on this 88/12 split and therefore whatever I pay that carrier, you really don't get the margin benefit.
It's on the other 50% that you would get that benefit. When you factor that into the whole scheme of Landstar, we pick up some margin points but not to the degree if you were 100% brokerage.
But what we've seen from the van side especially is it just appears from what we have seen from the brokerage standpoint that there is more capacity out there. I think you're going to see eventually more carriers exit the market place.
O'Malley dropped me off something from Transport topics that Gainey Corporation filed for bankruptcy, a carrier that does about $400 million and was ranked about a 64. I think you're going to start to see more of that happen as the environment weakens.
And again, Landstar has a very strong financial base. I think when carriers and individuals get weaker, I think they're going to look for a home, and they want a home where you've got a strong financial backing.
And I think that's where Landstar tends to grow our business from both agent additions, BCO additions, capacity additions from brokerage side. In addition to that, as bigger carriers potentially have financial difficulties, I think you just pick up more customers also.
Operator
Your next question comes form Chris Ceraso – Credit Suisse.
Chris Ceraso – Credit Suisse
Do you have a measure on an industry level of how much capacity you saw come back into the market? Was it up 1%, 2%, 3%?
How would you measure that?
Henry Gerkins
It's just a matter of the trucks that we saw in our own systems that were available. We also look at the number of hits to our web site that are searching for available loads and that's gone up, so I think that speaks to the market and demand for capacity.
I don't know if it's so much capacity coming back onto the market place as it is a decrease in demand and therefore we had quite a bit of capacity exit the market place in 2007 and early 2008, and then capacity got tight because demand was sort of balanced and things were working very well. But I think we had a fall off of demand and now I think you've got a situation where you potentially have some excess capacity that is eventually going to force some more carriers out.
Chris Ceraso – Credit Suisse
Have you seen any issues with any of your independent contractors with them having difficulty getting credit to buy trucks?
Henry Gerkins
I'm not aware of any.
Operator
Your next question comes from John Larkin – Stifel Nicolaus.
John Larkin – Stifel Nicolaus
When I attended the agent convention down in South Beach it seemed like your big strategic priority was to try and convince the agents that are in the system currently who seemed comfortable selling conventional truck load flat beds to sell the broader product line. I was wondering if you've made any progress in that regard.
Can you talk about some of the initiatives that you have in place to get these folks to be a little more aggressive.
Henry Gerkins
What we've created internally in August of this year, something that we call business unit specialists, which are groups of individuals within logistics in the carrier group that specialize in a given mode, rail, international, warehousing, expedited and heavy haul. And we've actually had heavy haul for awhile.
What we've done is to start to roll that out to first our field sales force, our employee sales force where we had meetings in house here where presentations were given and now the next phase of this whole thing is to roll it out on a more robust basis to individual regional meetings with agents. We've created a three tiered pricing structure where for example, if it's an international sell, and if we do the operational component in house, the agent would get one split.
If he uses one of our agents that has that capability already, he will split a higher commission rate with that agent who does that operational piece, and if he does the operational piece on his own, and eventually that's what we want to push, he gets the full commission because we're going to try to push this out to everybody. It's really getting the agent comfortable and asking for all the different pieces of business.
So those are the more recent actions that we have taken on. We have gotten a number of inquiries for our carrier group agents from the intermodal bus as we call it.
So we'll see that develop over the next year.
John Larkin – Stifel Nicolaus
Do you think that will have a positive impact on revenue growth rates in 2009 and beyond.
Henry Gerkins
Yes. That's one of our key revenue growth strategies.
John Larkin – Stifel Nicolaus
It seems that there could be some programs that perhaps come out of the election that could benefit you, one of which would be the winding down of operations in the Middle East, military operations. Can you talk a little bit about that?
Also maybe the infrastructure rebuilding program that has been discussed by the Obama campaign and then a real thrust into alternative energy. It seems like perhaps you are more well positioned than any other carrier to benefit from an Obama presidency.
Henry Gerkins
Everything that you touched upon is accurate and things that we have talked about. At one point in time we were not sure what was going to be left over in Iraq and at one point we were going to leave all the stuff there and the latest is we're going to bring it back.
So that would clearly bring some additional business Landstar's way. I've often talked about rebuilding the infrastructure in the United States.
If in fact that is going to take place, clearly Landstar would play a major part in that from a transportation aspect. I think the power generation alternative energy play, quite frankly whoever is President despite the decline in fuel, I just hope we don't lose sight of that.
That is an extremely important thing that we do. But yes, we would be playing in that too.
We should benefit from all of those things.
Operator
Your next question comes from Tom Albrecht – Stephens Inc..
Tom Albrecht – Stephens Inc.
I wanted to go back to the transport partners. I believe that the quarterly revenue growth was about 17% from beginning to end.
How much was the change from when it was red hot to the recent cooling?
Henry Gerkins
Yes, that was up 17% quarter over quarter.
Tom Albrecht – Stephens Inc.
You also indicated that's where you've seen some real slowing. 17% is a good number so I'm wondering what it was early in the quarter and where it's been more recently because that's still a healthy number.
Henry Gerkins
I don't have the breakdown on that particular number in front of me as far as what it was in July and August, but I will tell you, if you look at June and July that was a pretty healthy number, and we grew July 13%. We sort of tailed off a little bit in September on that number, and when I listen to and see what other people are saying, it's logic to me that their need to go to a third party provider, ie.
Landstar to provide capacity will diminish. Obviously if that doesn't happen, my assumption is wrong.
Tom Albrecht – Stephens Inc.
Do you have what the second quarter revenue growth was with your transportation partners? One of the great things that happened to you guys last down turn was how you unleashed the power of your brokerage business and it's sort of been this little side business that you really focused on and so you had tremendous revenue growth through the last downturn and continued for several years.
That doesn't seem to be the case anymore and I'm wondering if that is in your opinion because so many carriers and other companies have started brokerage operations, if your ability to really grow in downturn and the brokerage arena has been impacted by the population of the number of brokers.
Henry Gerkins
Clearly the fact that you've got more people in the brokerage arena is going to impact that. That's logical.
The second quarter revenue growth was 19%. I think it's logical that as more providers come in using brokerage, they're all competing for the same carrier.
One of the advantages that we've had is that because we also have BCO's and we also provide capacity to those people who are looking for carriers. So in essence that would be effectively increasing our business and that's what we've seen through the first couple of months this year.
As more of these companies get into brokerage, we're one of the providers that they utilize. And that's how we've been able to grow some of that stuff.
Tom Albrecht – Stephens Inc.
Normally you have a rate per mile that you give verbally, do you have that? And if so, do you have it broken out between dry and flat bed?
Henry Gerkins
The rate per mile on the flats is up 19%. The rate per mile on van is up 6%.
Tom Albrecht – Stephens Inc.
Do you have the actual number?
Henry Gerkins
$2.92 versus $2.42 for platform and van was $1.96 versus $1.83.
Tom Albrecht – Stephens Inc.
So that $2.93 is a huge increase. That's the base rate ex fuel?
Henry Gerkins
That's right.
Operator
Your next question comes from Todd Tyler – KeyBanc Capital Markets.
Todd Tyler – KeyBanc Capital Markets
Can you talk a little bit about share buy back program? It looks like you were a little bit more aggressive in buying back stock in September and I think I know how you feel about the balance sheet and leverage but it looks like you took on a little bit of leverage to do that.
So with the stock at these levels, and with the balance sheet capacity that you have, can you talk a little bit about what the Board's opinion and what the Board's thoughts are in executing the share buy backs with the stock where it is.
Henry Gerkins
I think we've been aggressive in the past and opportunistic in the past when the stock is at certain levels and I would see no reason why we wouldn't be the same. We obviously have the financial where with all to do all that.
Todd Tyler – KeyBanc Capital Markets
Is there any balance sheet point that you look at as far as how much leverage you'd be willing to take on or is that balance to the share price?
Henry Gerkins
I know it's a different environment. We would look at where we are from a financial condition standpoint, but I'm never worried about that.
We can clearly handle a lot more leverage, but we'll take a look at that.
Todd Tyler – KeyBanc Capital Markets
When you're looking at the load count in the carrier groups, looking at BCO"s versus broker loads, it looks like BCO loads were down about 2% and then carrier loads were down about 4% on a year over year basis in the third quarter. Is there anything to read into that?
Why the year over year change, the brokers would be down more than the BCO's are? Is it that the BCO freight is more stable and the carrier freight is more spot so when the environment is softer, those are the first loads that you don't see in the system?
Or is there anything to think about with those sorts of statistics or am I reading too much in the numbers that we have now?
Henry Gerkins
You're reading too much into it. You've got ups and downs in a lot of different things, but if I had to make a general comment, the reason both are down is the large decline in the number of loads from the automotive sector and the one other account, which the automotive sector load decline was 15,000 loads in the third quarter versus the third quarter of this year.
And then the one account that we talked about, that was another 8,500 loads. So you're talking 23,000 loads between just one sector as far as a decline.
And that was spread between both BCO and brokerage. And if it's 4% brokerage, it probably was more geared towards that.
Those were the big areas where we had declines.
Todd Tyler – KeyBanc Capital Markets
The one customer that you're no longer doing business with, you anniversary that in the fourth quarter so that head wind will subside. When do you really think you'll really start to see, if I remember at the beginning of the year automotive was 8% or 9%.
As we get into next year do the load count comparisons start to anniversary some of the softness in the automotive in the loss of this one customer?
Henry Gerkins
If you look at '07, we had 48,000 loads in the first quarter. You had about 52,000 in the second quarter, 45,000 in the third quarter of '07.
47,000 in '07 fourth quarter. In '08 it was 43,000, 40,000 and 30,000 and I would expect a similar decline in the fourth quarter.
At certain points in time I would think things get to level off. When you think about what I said before, automotive in the third quarter is less than 6% of our total revenue.
Again, people who are familiar with Landstar, going back in our history, as much as 15% at one time so again, not all bad as far as getting a little bit more diversified from that segment.
Todd Tyler – KeyBanc Capital Markets
How much was the percentage of revenue was other transportation companies in the quarter?
Henry Gerkins
Approximately 20%.
Todd Tyler – KeyBanc Capital Markets
What do you think it was in the year ago quarter and in the second quarter?
Henry Gerkins
It was about the same in all three.
Operator
Due to time restraints, I will turn it back over to you for closing comments.
Jim Gattoni
Obviously with the economy the way it is and the financial and the evaluated credit in the current environment is causing a lot of difficulties for a lot of companies out there, but with all that looking forward, I still think Landstar is well positioned and always has been in this kind of environment. The fundamentals hold together and the model protects itself in environments like this.
I'm always excited to move forward and I think we had a great quarter.
Henry Gerkins
I just want to thank everybody for dialing in. I'll leave you with the one thought.
As we move into the fourth quarter, albeit uncertain and being a little bit cautious we are pretty positive as far as how Landstar performs in any economic environment. And we'll have update for you on December 5 on our 2008 fourth quarter, mid quarter update call.
Thank you and have a good afternoon.