Jim Gattoni - President & CEO Kevin Stout - VP & CFO Pat O'Malley - VP & Chief Commercial & Marketing Officer Joe Beacom - VP & Chief Safety & Operations Officer.

Gason Seidl - Cowen & Company Jack Atkins - Stephens Danny Schuster - Credit Suisse Tom Kim - Goldman Sachs Scott Group - Wolfe Research Todd Fowler - KeyBanc Capital Markets Matt Brooklier - Longbow Research Daniel Hultberg - Oppenheimer Ben Hartford - Baird John Barnes - RBC Capital Markets Rob Salmon - Deutsche Bank Matt Young - Morningstar Kelly Dougherty - Macquarie.

Good afternoon, and welcome to Landstar System Inc.'s Second Quarter 2015 Earnings Release Conference Call. All lines will be in a listen-only mode until the formal and question-and-answer session. Today's call is being recorded. If you have any objections, you may disconnect at this time.

Joining us today from Landstar are Jim Gattoni, President and CEO; Kevin Stout, Vice President and CFO; Pat O'Malley, Vice President and Chief Commercial & Marketing Officer; and Joe Beacom, Vice President and Chief Safety & Operations Officer. Now I would like to turn the call over to Jim Gattoni. Sir, you may begin..

Thank you, Dory. Good afternoon, and welcome to Landstar's 2015 second quarter earnings conference call. This conference call will be limited to no more than one hour. Due to a high level of participation on these calls, I'm requesting that each participant have a two question limit. Time permitting we can circle back for additional questions.

But before we begin, let me read the following statement. The following is a Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts are forward-looking statements.

During this conference call, we may make statements that contain forward-looking information that relates to Landstar's business objectives, plans, strategies and expectations.

Such information is by nature, subject to uncertainties and risks, including, but not limited to, the operational, financial and legal risks detailed in Landstar's Form 10-Q for the 2014 fiscal year, described in the section Risk Factors and other SEC filings from time-to-time.

These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking information, and Landstar undertakes no obligation to publicly update or revise any forward-looking information.

2015 first quarter results included many second quarter records, revenue, gross profit, operating income and diluted earnings per share were all second quarter records. Additionally, the number of loads hauled via truck during the 2015 second quarter was at an all time high at 9% over the 2014 second quarter.

During our second quarter mid-quarter update conference call I stated that I anticipate revenue for the 2015 second quarter to be in within a range of $830 million to $880 million. I also stated that I anticipated diluted earnings per share would be in a range of $0.87 to $0.92.

Second quarter revenue was $868 million which was $54 million or 7% above 2014 second quarter revenue. Diluted earnings per share was $0.92 which was $0.12 or 15% above 2014 second quarter diluted earnings per share. Demand for Landstar's transportation services was strong throughout the 2015 second quarter.

Truck transportation revenue, which was 93% of revenue in the 2015 second quarter, grew 6% over the 2014 second quarter. The increase was driven by a 9% increase in the number of loads hauled via truck partly offset by 3% decrease in revenue per load.

2015 second quarter less than truckload revenue grew 4%, revenue hauled via railroads increased 28% and revenue hauled via air and ocean cargo carriers increased 12% over the 2014 second quarter. Revenue hauled via van equipment increased 8% over the 2014 second quarter entirely from an 8% increase in the number of loads hauled.

The 2015 second quarter was the six consecutive quarter where the number of loads hauled via van equivalent exceeded the prior year quarter by an upper single digit percentage. The increase in volume was broad-based across many customers and industries.

Revenue hauled via unsided/platform increased 2% over the 2014 second quarter on a 10% in the number of loads hauled offset by a decrease in revenue per load of 7%.

The number of loads hauled via unsided/platform equivalent experienced strong growth resulting from the large award from a single account during the quarter with underlying demand consistent with prior year's second quarter.

The company's heavy specialized service offering representing loadings requiring equipment escorts and permits and comprising approximately 30% of the company unsided/platform revenue continues to be soft.

In prior earnings conference calls we have commented that quarter-over-prior year quarter revenue per load comparisons were going to be difficult as we move through this 2015 second quarter and those difficult comparisons will continue throughout the remainder of the year.

Additionally, revenue per load on loads hauled via truck in the 2015 second quarter was impacted by both mix as demand for heavy specialized services, which has a high revenue per load, continued to be soft in comparison to 2014 and the impact of lower diesel fuel cost on loads hauled via truck brokerage carriers.

I estimate that lower diesel fuel costs reduce per load on loads hauled via truck brokerage carriers by approximately 6% in the 2015 second quarter compared to the 2014 second quarter.

Although revenue per load on loads hauled via truck broker carriers was 6% lower than the 2014 second quarter the cost of purchased transportation on those loads was 7% lower during the same period.

Revenue per load in the 2015 second quarter on loads hauled via BCO capacity which excluded fuel surcharges billed to customers and, therefore, represent a somewhat pure line haul rate remained the same as prior year's all time high second quarter BCO revenue per load.

During the 2015 second quarter, we added over 260 trucks provided by BCOs and ended the second quarter with over 9300 trucks provided by BCOs. The highest number of trucks provided by BCOs in Landstar history. Additionally, we had the highest number of truck broker carriers haul [indiscernible] per day any quarter in Landstar history.

Landstar ended the 2015 second quarter with a total [indiscernible] quarter and approximately 3500 over year end 2014. Both approved and active broker carrier account were at record levels at the end of the 2015 second quarter.

Although we ended the second quarter with over 700 more trucks provided by BCO or an 8% increase as compared to the end of the 2014 second quarter the number of loads hauled by BCOs was only 1% above the number of loads hauled than the 2014 second quarter as BCO utilization measured in loads hauled per BCO per week was 6% lower than the 2014 second quarter.

Regardless the company's ability to source capacity remained solid as the number of loads hauled via truck broker carriers increased 18% over the 2014 second quarter more than offsetting the effect of the lower BCO utilization.

New agent revenue representing revenue from agents who joined the company after April 1, 2014 contributed $22 million of revenue in the 2015 second quarter while revenue at existing agents increased 5% over the 2014 second quarter.

The 2015 second quarter freight transportation contributed to provide significant opportunities to increase the account base and strengthen our relationship with customers.

The company's top 100 customers ranked by 2014 second quarter revenue comprised approximately 40% of [indiscernible] was approximately the same in 2014 second quarter while revenue at customers beyond the top 100 increased $54 million. With over 25,000 billed customers the company's account base is highly diversified. I'll now pass over to Kevin..

Thanks, Jim. Jim has covered certain information regarding the 2015 second quarter. So I will cover various other financial information included in our press release.

Gross profit defined as revenue less the cost of purchased transportation and commissions to agents increased 8% to $130.8 million and represented 15.1% of revenue in the 2015 second quarter compared to $121.6 million or 14.9% of revenue in the 2014 second quarter.

Cost of purchased transported was 76.9% of revenue in the 2015 quarter versus 77.2% in the 2014 quarter. The rate of purchased transportation paid to truck brokerage carriers in the 2015 second quarter was 97 basis points lower than the rate paid in the 2014 second quarter and 45 basis points lower than the rate paid in the 2015 first quarter.

The decrease in the cost of purchased transportation was mostly due to the effect lower diesel fuel cost have on revenue and the cost of purchased transportation on freight hauled via truck brokerage carriers.

Both revenue per load and the cost of purchased transportation per load on loads hauled via brokerage carriers decreased from the 2014 second quarter by similar dollar amounts reflecting the decrease in year-over-year fuel cost.

As such, 2015 second quarter net revenue per load on loads hauled via truck brokerage carriers was similar to the 2014 second quarter.

The favorable impact of lower diesel fuel costs on the cost of purchased transportation as a percent of revenue was somewhat offset by an increase in the percentage of revenue contributed by truck brokerage carriers in the 2015 second quarter which has a higher cost of purchased transportation.

Commissions to agents as a percentage of revenue were 22 basis points higher in the 2015 quarter as compared to the 2014 quarter due to an increased net revenue margin revenue less the cost of purchased transportation on loads hauled by truck brokerage carriers.

Other operating costs were $8 million in the 2015 quarter compared to $6.2 million in the 2014 quarter. This increase was primarily attributable to increased trailing equipment rental and maintenance costs and decreased gains on the sale of used trailing equipment.

The company has increased its company controlled trailer fleet by 8% over prior year as demand for transportation services hauled via van equipment continues to be very strong. Insurance and claims cost were $12.3 million in the 2015 second quarter compared to $13.8 million in the 2014 second quarter.

Total insurance and claims for the 2015 quarter were 3.1% of the BCO revenue compared to 3.5% in the 2014 quarter. The 2015 quarter had unfavorable development of prior year claims of approximately $800,000 and the company experienced increased severity of accidents in the 2015 period as compared to 2014.

The 2014 quarter had unfavorable development of prior year claims of approximately $4.9 million. Selling, general and administrative costs were $37.7 million in the 2015 second quarter compared to $36.8 million in the 2014 second quarter.

The increase in SG&A cost primarily attributable to increased employee wages and benefit and an increased provision for customer bad debt partially offset by a decreased provision for bonuses under the company's incentive compensation program. The increase in customer bad debt was primarily related to one specific customer.

Although SG&A dollars increased year-over-year, SG&A expense as a percent of gross profit decreased from 30.2% in the prior year to 28.9% in the current year. Depreciation and amortization was $7 million in the 2015 second quarter compared to $6.6 million in the 2014 second quarter.

This increase was due to increased depreciation related to the replacement of older fully depreciated trailing equipment. As it relates to operating leverage, operating income was $66 million or 50.5% of gross profit in the 2015 quarter versus $58.6 million or 48.1% of gross profit in the 2014 quarter.

Operating income increased 13% year-over-year and was the highest second quarter operating income in Landstar history. During the 2015 second quarter, 82% of incremental gross profit was passed to operating income. We continue to expect to pass 70% of incremental gross profit through to operating income on an annual basis.

The effective income tax rate was 38% in the 2015 second quarter compared to 37.9% in the 2014 second quarter. The effective income tax rate which historically is 38.2% was impacted in both periods by tax benefits resulting from disqualifying disposition of the company stock. Over to our balance sheet.

We ended the quarter with cash and short term investments of $131 million. Cash flow from operations for the 2015 year-to-date was $82 million and cash capital expenditures were $3 million.

During the 2015 year-to-date period, we purchased 1.3 million shares of Landstar common stock at a total cost of $85 million and there are currently 3 million shares available for purchased under the company's stock purchase program. At the end of June, shareholders equity represented 83% of total capitalization. Back to you, Jim..

Overall, Landstar has a very good second quarter. Currently industry remain similar to those experienced in the 2015 second quarter. We continue to have very strong demand for our services. I expect that strength to continue throughout the third quarter.

I expect the pricing environment experienced in the 2015 second quarter to continue through the third quarter which includes the impact of lower diesel fuel costs, a lower contribution of revenue attributed to heavy specialized services and a stable supply and demand environment with somewhat tight truck capacity and strong and steady demand for our services.

Assuming recent trends continue revenue per load on loads hauled via truck in the 2015 third quarter should be similar to the revenue per load experienced in the 2015 second quarter, which would represent a decrease in the low to mid single digit percentage as compared to the 2014 third quarter.

Historically, the number of load hauled via truck in the third quarter has been slightly less than a number of loads hauled in the second quarter. I expect that historical sequential trend to continue in the 2015 third quarter.

Given that trend I expect the number of loads hauled via truck in the 2015 third quarter to increase in the mid to upper single digit range compared to the 2014 third quarter.

based on continue of recent trends I currently anticipate 2015 third quarter revenue to be in the range of $830 million to $880 million and based on that range of revenue diluted earnings per share to be in the range of $0.87 to $0.92. And with that, Dory, we will open to questions..

Thank you very much, sir. [Operator Instructions]. Our first question comes from Gason Seidl with Cowen and Company..

Couple of quick questions for me. Number one, in your conversations with your customers who is the shaping up of PTs looking because we're getting some different responses from the companies that we follow..

Jason, this is Pat. The fuel customers that we run peak business for on a routine basis, we've talked to them and they anticipate similar if not slightly up from last year..

Okay, that’s good. You also, Jim, I think you talked a little bit about describing the overall market as fairly or slightly tight.

Do you think that that’s going to change later this year after the announcement of any potential government regulations or do you think that that sort of moves on only implementation phase, not just the announcement?.

Jason, this is Joe. I don’t think that the announcement of ELDs, if that’s what you're referring to, is going to have a big impact on capacity in the short term. I don’t think it's really much of a surprise.

I think over time it could, and it kind of remains to be seen on the implementation side of that, but in the short term I wouldn’t that in and of itself would be a big deal..

Jason, I would anticipate that we're going to look at the stable environment for next six months, through the end of the year is our expectation. We think -- we just don’t think it's somewhat tight.

When you look at our revenue per load, the BCO revenue per load is still sitting at an all time high, right, so that implies there's some level of tightness in the industry, more so on the van side than the flat bed side..

Okay. And just a quick follow-up.

That one customer that seems to giving you some issues in the quarter what area was that in? What's the end market?.

Automotive..

The next question comes from Jack Atkins with Stephens..

Just to start off, this is really the third or fourth quarter where we've seen very strong volume growth from you guys, even if comps get much more difficult.

And I' m curious if you can maybe just talk about what you guys are doing internally and what the agents within your network are doing really to drive this? It's quite impressive the type of volume growth that you guys have been able to see even in the face of relatively soft spot market..

I think it's just execution by the agent family. It's true that -- as you know that we added about $22 million of new agent revenue during the quarter and that’s pretty consistent with history patterns of what we see. We're getting some good penetration in some existing accounts.

There's a significant amount of demand for drop and hook operations where we drop trailers at a facility and then our BCOs go, they load them up and then our guys come in haul them away, that adds significant value to our relationship with customers but it's just an overall deeper penetration into the existing customer base with our agent family.

And it's been consistent like you said for about 18 months and which historically is probably beyond anything we've done on that kind of a trend/.

And then from a bigger picture perspective you referenced to ELDs in response to the last question but thinking out over the course of the next couple of years if we do see the ELD implementation how do you think that impacts the brokerage market and your business specifically if you were to kind of look at the crystal ball over the next couple of years?.

Jack, this is Joe.

I think the ELD market, if that comes to pass, I think it will have some impact on the small guys and I think it's not just ELDs but it’s a lot of these other things that are coming down the pipe whether it's the driver physicals or whether its speed limiters or some of the things they're do around drug and alcohol, I think if you could see and you could see that impact in some of the small guys who don’t know how to manage for that and it could affect them from a capacity standpoint to where they might want to come find a home we think Landstar is a decent place for them if they want to go that route.

I think it will definitely tighten the capacity market if it goes that way.

I think if you're a company driver and you're getting paid by the mile I think it may impact you more because there's a lot of things that will limit your productivity whereas if you're an owner-operator and you own your own truck and you're getting paid on a percentage you're seeing the benefits for that inconvenience so it may not impact you as much but that’s kind of how I'd see that play out from a capacity standpoint..

Yes. I don’t think any of these regulations improve productivity or the number of well capacity, I'm sure you're all aware of that. So, it's hard getting your hands around two to three years down is what it does to capacity. And does that drive a reduction of productivity of 3% to 5%, I mean just right now it's hard to predict..

Our next question comes from Allison Landry with Credit Suisse..

Hi. Good afternoon, this is Danny Schuster on for Allison. Thanks for taking my question..

Okay..

So I saw that the pace of your share buyback accelerated quite a bit this quarter. You bought back almost 2% of the stock on a net basis. So we're just wondering would you expect that kind of same pace to continue throughout the rest of the year if shares remain at this similar level..

We're always opportunistic in the market. And speaking to the history of what we bought, we bought more into our first half of the year and we bought less during the first half of the year. We will still be opportunistic in the market. And to put a specific target on what we think we're going to do, we don’t have one set.

So we don’t really discuss a specific target..

Okay, great. Thank you. I know that you mentioned SG&A saw a bit of a tailwind from lower incentive comp this year.

Would you be comfortable providing us with what the either sequential or year-over-year tailwind was from that line?.

Yes, Danny, this is Kevin. The second quarter of 2014 had about $4.5 million of incentive comp, and second quarter of 2015 had about $1.1 million..

Great, thank you..

To put in perspective a normal annual year is probably $7 million, $8 million of that $2 million a quarter. We're slightly running behind that a little bit. And last year I think we had $17 million in total because we had an excellent year..

Understood..

To put it in perspective..

Our next question comes from Tom Kim with Goldman Sachs..

Hi good afternoon guys. Congratulations on the quarter. I mean it's obviously turning out to be a pretty challenging one for transport so it's great to see the tremendous volume growth.

And with regard to that, I'm curious with the one relatively large customer that you had won in the flatbed side, should we expect that volume growth to sustain in the third and fourth quarter?.

We anticipate that that account will be with us in the third and fourth quarter, yes..

Okay, great. Would you be able to provide any color in terms of what the organic growth would have looked like? You said it was soft.

Is that sort of up or down and can you sort of give us a little bit of a sense of what that would look like?.

I think what I've -- I think one of the things I said in my prepared remarks that the underlying demand was consistent with last year which means that without that volumes are relatively flat on the flatbed side consistent with where we were prior year..

Okay. That's really helpful, thanks.

And then just with regard to the BCO side of the business, can you give us a sense of your outlook for the second half, do you anticipate this maybe sort of picking up?.

You know it's hard to say I mean BCO utilization as I think what you're referring to their Tom, they had a terrific earnings year last year and I think there is just a little less motivation by some to get out there and operate. I also think we're adding so many new guys which is great for the long-term prospects of the BCO fleet.

But as a new BCO here you tend to be a little less productive just takes you a little bit to get stimulated into the network and make your agent relationships and those kind of things. So I wouldn't expect a huge increase in utilization as we go forward.

I just think we're kind of where we are and until something changes it's hard to forecast any huge improvement in utilization..

Our next question comes from Scott Group with Wolfe Research..

Hey, Scott..

Hey thanks good afternoon guys.

Just a follow-up on that one question on the large customer, do you think you will have that in 2016?.

I think that's too far out to project at this point. We are pretty confident we will have it for the next six months but I don't want to speculate on what happens next year..

Okay.

How do you explain the huge growth in the BCO account that you're seeing right now and what does that tell you about what you're doing, what does that tell you about just the overall market in capacity?.

This is Joe. I think if I look out the BCO growth to your point has been pretty significant. I think some of the things that could be driving, I don't think there is any one thing, I think it's a multitude of things. There are large number of carriers who have company iron, who have also gotten into the owner operator business.

And I think when things get a little bit, demand gets a little bit softer they tend not to treat those owner operators like they did in 2014, so they look for new home and I think we are pretty good home, because that's a pretty leveled playing field at Landstar.

I think given the year that we had in 2014, many of our existing BCOs were very quick and very active in recruiting for us and recommending Landstar as an option for other owner operators in the business that they knew.

I think the van drop and hook piece be in as strong as it was and the way they participate in that at Landstar is to lease on, you can’t really do that as well as a broker carrier.

And then a big story, a big part of the story for BCO fleet growth in 2014 and thus far in 2015 has been turnover in the low 20 percentile, I mean we're like 21%, 22% which is if you're doing that and you're doing a decent job on the recruiting side you [indiscernible]..

Okay. That's helpful.

And just last question for you Jim, when I look at typically second quarter to third quarter, we often see some earnings growth sequentially and the guidance implies that just at the midpoint that you will see kind of earnings go the other direction? What's different in your mind this quarter with the guidance?.

Well if you look at the range of revenue, we put out the midpoint is $855 million, and we did approximately $868 million in the second quarter. So looking sequentially, typically what we see and if you look back five years revenue per load generally increases third quarter over second quarter but an average of about 3%.

And the number of loads third quarter over second quarter usually drops off about 3%. So when you do that math right the second quarter and third quarter revenue generally looks similar and then there is some insurance and gives and takes and some MICP and stuff like that but generally end up in a position whether the quarters look the same.

What we're seeing this year though a little bit in the third quarter what we're expecting is we're not going to get the revenue per load growth coming into the third quarter. We're seeing it kind of a stable compared to the second quarter so that 3% growth we're expecting [indiscernible] many of our range.

That kinds of explains about a penny or two of what we're dealing with..

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

Hey, Todd..

Jim how are you? Good afternoon. Hey congratulations on the quarter. I guess maybe where I wanted to started was with the flatbed business being flat if you strip out the share gains from the large customer. I mean, I still think that's a good performance given some of the data points that we're seeing in the industrial end markets.

And I don't know if this is for you or for Pat, but maybe I was hoping you could talk a little bit about where you are seeing some of the strength on the flatbed side and also some of the areas where you're seeing some weakness so we get a sense of some areas that we should be paying attention to, to either turning up or improving or may be softening a little bit as we move forward?.

Todd, this is Pat. So we saw, kind of as Jim mentioned in his opening remarks, it was pretty broad-based. And coming into the year we talked about some of the impacts in the energy market, we certainly saw that oil and gas, we certainly saw some negative impact there and in the government sector.

But if you think about the diversification of Landstar it really kind of protects us in this down-market. I think it's been evidenced by the results here this quarter. So you take government, some energy stuff those two are soft but other than that we kind of held our own in every one of those markets that we serve..

And just to be clear Pat the other markets would be I mean machineries has been okay and then some of things maybe the construction markets are what was some of the other markets that?.

Steel [ph] has been okay, machineries has been okay up in the quarter, so those end markets I think are performing well and we are performing well within those end markets..

And any sense on the government and the oilfields does that feel like that that's bottoming at this point and that should stabilize or do you have any indication on how those markets could trend into the second half?.

I would think that what we've seen in the government is going to continue for the balance of the year. I think we used the term bottomed out. I think we have bottomed out on where the energy markets are but it's a low bottom.

So I would expect kind of similar results here in the back half of the year, certainly in government it's going to be what we see in the first half, we're going to see in the back half..

Okay. All of that is very helpful.

And then just for my follow-up and Jim I'm trying to ask something or the answer to but the cash generation is very good, you're dropping a lot of the gross profit down to the bottom-line, do you consider anything else besides the share buybacks at this point or is that still the predominant use of free cash?.

Right now that's a predominant use of free cash..

Okay. That's what I thought. Thanks again for the time and congratulations..

Our next question comes from Matt Brooklier with Longbow Research..

I think I can back into it per your earlier comments, but I'm just going to ask it.

If you could quantify either how much revenue or volume roughly this customer win, the big customer that you added during Q2, how much that added during the quarter?.

I'm not going to give you the exact revenue number but you can if I say the underlying demand on flat bed almost similar to flat bed in the 2014 second quarter just take this years and take it down to what last year was that should be the number..

It is the delta there. Okay..

That will get you pretty close..

Okay.

And the volume, if all of that volume is flat bed?.

Yes..

Okay.

And you are running into your BCO or your brokerage ops or you running into little bit of both?.

It is about a 50:50, it is about a little bit of a both, 50:50 split whether it is BCO or brokerage house..

Okay.

And can you talk to the I guess to the end markets does that customers in?.

Those automotive..

Automotive that is right, you mentioned it. Okay. That is all I got. Thank you..

Okay..

Our next question comes from Scott Schneeberger with Oppenheimer..

Hi Scott..

Hi guys, it is Daniel in for Scott.

Most of my questions has been answered there and congratulations on a great quarter, can you give us some perspective on your expectations for carrier pricing and purchase transportation in the back half?.

I think what we said as we expect kind of this somewhat type stable environment to stay where it is and as you know we have picked up a little bit of margin expansion in the second quarter. I anticipate that it will continue through the next at least through the third quarter and if nothing changes I expect that to continue into the fourth quarter..

Okay.

Great and then as far as the type of customers you are winning business here with Top tier, mid tier and small tier and so forth, can you provide some color on that as far as the strong volume growth you are always generating?.

Well I will tell you that the as we mentioned before we will repeat ourselves it is broad based and again if you think about the model the model is kind of naturally diversified because each of our agents comes in with a different level of expertise account, context and execution abilities and so it is kind of across the board in many, many different markets being possible for me to say we are winning business in large accounts, mid size accounts or small accounts because the fact the matter is it is true in each one of those segments..

And to add on to what Pat said and then from my prepared remarks as we said the our top 100 customers which makes up about 40% of our revenue was relatively flat to prior year second quarter all the growth was coming from the guys of 100 and lower, right to Pat point we are highly diversified, we have 25,000 customers and it is just penetration into our entire account base so it is not a specific account or customer that we can speak to that really drives this growth over than one account we mentioned for just specific to the flat bed business..

Okay. Great guys, thank you..

Our next question comes from Ben Hartford with Baird..

Hi Ben..

Hi guys, Pat we will start with you quick, just we are talking about the BCO account growth lowest for BCO - is there a constraint can you continue to add BCO as the phase that all win the implied loads per BCO is falling, do you run into your own utilization or satisfaction issues with regard to existing BCOs that provide a constraint if loads for BCO is running negative while you are growing that BCO account?.

Ben this is Joe. I will take that.

The way that there are agents operators they have available loads, they don’t give those available loads to whatever BCO wants them or whatever carrier is available to haul them, so if you look at our load value in growth, I mean the lot of that growth is out there for whoever wants to take it so clearly if we had more BCOs who wanted all more loads the opportunities are there for them.

So I don’t think adding more BCOs is necessarily needs to come to a slowdown just because the utilization is poor, I think it is really a mindset among the BCOs to adjust to the environment and decide on their own that they want home or because they clearly [indiscernible] there and we have proven that just by our volume growth in the quarter..

Okay, it is helpful and then maybe Jim separately when you think of the model obviously Henry had several initiatives under his belt that he had tried some were very successful and some I think just given the nature of the agent network there is a little bit more resistance when you think about the opportunities in a market, the brokerage market is likely to consolidate and the amount of cash flow that you guys generate, are there a large agent networks that you think that you could pursue potentially acquire and supplement Landstar or do you think that the potential overlap with a large agent type property with your existing agent base would make any sort of large acquisition of an existing agent network, what would preclude you from doing a deal of from that?.

Looking at any potential acquisition of an agent base entity, there is always going to be certain complex at the customer levels or at the capacity level so acquisition opportunities at Landstar is a little more limited than it would be at a true brokerage play.

When we got opportunities to look at acquisition opportunities we generally find too many complex where those agents are and our customers agents are the same as our agents, customers for our existing agents and we don’t necessarily play in that game.

So we like the organic growth, if we see acquisition opportunities we take a look at them but if as you know when this model we don’t want to compete against our agents. Right so we kind of do baby steps, we do organic growth by recruiting agents into the system and supporting the agents that we have today with better tools and technologies..

Right okay. That is helpful. Thank you..

Our next question comes from John Barnes with RBC Capital Markets..

Hey good afternoon guys. Thanks for taking my question.

So two questions on kind of the BCO growth, number one the recent success you have had on the BCO growth and maybe some of the rates that you talked about maybe preferring some of the smaller players, do you forecast a material shift in the mix of your business more maybe back a little bit more in the BCO favor on a go forward, does more of the growth come from the BCO side going forward than it does maybe the broker side?.

No John I just think we’re in a very good market right now from recruiting BCOs into the system, whether it would be the quality of the freight or the price of the freight out there, I anticipate the majority of our growth going forward is still going to come from a broker carrier.

Look if we can add 5000 BCOs we would add them, it is again it is still competitive market to owner operators into the system and wanted those comments what we are really benefiting is that they are not leasing right our turnover is really low, so I mean that is really we are getting the growth or part of the growth from, I would anticipate we are going to continue to push through that freight onto the broker carriers to supplement that the BCO limitation even if we get the 10,000 I still think the majority of our growth is going to come from the broker side..

Okay.

All right and then just given your record on the safety side and the focus there as some of these - kind of come in will you dictate the implementation of this on top of maybe quicker than what the FMCSA is for example the BLD is announcing it is a two year implementation, are you going to force the BCO into using a quicker if they are operating under your authority of you are going to start to look at the brokers maybe a little bit more aggressively on the use of this technology?.

We would not force or any type of regulation on top of the BCOs prior to that regulation being enacted. So when it comes down to in September when they if they put the rule out and two years from then, two years from now they have to get and ELD on their truck, we will strongly encourage but we will not enforce on the ELD side..

Okay. All right, very good. Thanks you for your time guys. I appreciate it..

Our next question comes from Rob Salmon with Deutsche Bank..

Hey good afternoon guys.

Jim when I traditionally thought the Landstar model it has been much more of a transactional based business and you have been highlighting kind of these new drop and hook relationships that you have been expanding, I am curious if this kind of change the overall context of the length and the volume visibility that Landstar has and maybe any sort of color that you could provide around how big this represents of the business and where you see that going over time?.

Well we have always been a drop and hook and it has always been a decent part of our business, I would tell you that 60% to 70% of our BCO van is on our trailer and I think it is something that is maybe just wasn’t understood by the investment community or the analyst is that evaporates a little bit more earlier than [indiscernible] customer when we stick to trailer on the lot.

Right.

It doesn’t necessarily mean we are entitled to the long-term contracts but it does give you little more permanency to that customers and we have 9,000, 9800 trailers out there the majority of more in drop and hook operations and we continue to get more and more demand for that kind of service and they are somewhat of a thought process that as it relates to ours as a service that firming is starting to think hey instead of getting the truck in here and waiting for [indiscernible] them up given some of your trailers we will load them up and then have the BCO come in that way some of as ours right.

So we think there is a little bit of that demand coming out of that that kind of ours service ruling that no matter limit the amount of hours that a driver can drive but everybody historically has thought of us as the overflow carrier, I think most people think of us that way but it is not necessary true especially when you say 70% of our van on BCO is one of our trailers, that kind of - we are kind of a core carrier in that, we may not be the top one but we are probably the top three in that scenario..

I think that is very fair.

And certainly one of the things truly jumped out to me on the quarter was the growth that you are seeing in the truck broker carrier marketplace with the volumes up off of a very tough comp and you would think with the transactional market softer year-on-year that should climb up and down, so maybe you could talk to some of the growth that you are seeing there and provide us little bit more color in terms of what is driving, I think it is north of 30% on a two year compounded basis to your stack basis with regard to load growth?.

You know what it is, it is all the agent right, we are talking about that before agent execution and penetrating deeper into that customer base and getting access to new customer, over the last 18 months we probably engaged some smaller or lot of small customers that wouldn’t necessarily come to us but not that when the capacity market got tied over 2014 they kind of came to us and we are borrowing some freight for those guys and I think that continued through this year, they stayed with us, they can see the value in the service of the agents provide because the agents kind of in the local market they build a relationship with those shippers and I think that would drive the capacity coming to us, it is kind of a you are bringing the freight - compound the concept and I think again I think it is just all about the execution by the agent family to put more quality loads in the system and that brings capacity and it not only brings capacity and it allows our capacity to stay in our system and haul.

What they want to just - freight because if you think about it, we have about 50% of our loads are hold by BCOs that is 50% of our loads are out with the broker trucks. A lot of the carriers out there that we deal with some of that half of our carriers might have [indiscernible] trucks.

They're almost like BCOs but they're outside of the -- but they're running freight for other people. And the more freight you provide to them the more committed they are to your system and they stick with you..

Our next question comes from Matt Young with Morningstar..

Just a follow-up on a previous question. It sounds like capacity is still tight but a bit more balanced.

When you listen to some of the other truckers out there we know that the spot market is not quite as strong as it was last year, but do you get the sense that shippers at this point are still concerned with capacity issues, and they still are willing to shift business to asset light providers with strong capacity networks like yourself in the interest of securing trucks down the road? Or is there some evidence at this point that maybe the impetus is subsiding even though you've seen that pretty strong in previous quarters?.

Matt, this is Pat. I think that the shipping community at large believes that the likelihood of capacity tightening in far greater than the likelihood of capacity getting looser. And that’s the thesis that I would endorse and it’s one that I believe you'll see play out over the next 12 to 18 months..

I read a lot of reports that get put up by you guys and some of the other asset based carriers and apparently the contract carriers are getting 4% to 6% rate increases. And to me, that would a shipper thinking let's lock it up now because 12 to 18 months down the road pricing is going to climb again; so I want to lock in those contracts.

So I think the shippers still a little about the future, maybe not the next six months, but I think there's got to be concern out there over 2016 2017 when more and more of these regulations get put in and productivity drop off..

That makes sense. And then one another quick one.

I think last quarter you mentioned that with lower BCO utilization or some cost headwinds on the trailer side, is that still the case in the quarter? Is it material?.

Well, it's not material but it does impact -- if you were to take our other operating cost as a percent of BCO revenues it probably climbed a little bit because of the, like I said, about 60% to 70% of the BCO van business is on our trailer and to the extent they're not hauling in as much there is a fixed cost component to that so, it's the only part of our business that there is a little bit of a utilization exposure.

It's not significant; it's not going to move a quarter..

[Operator Instructions]. Our next question comes Kelly Dougherty with Macquarie..

Just a quick housekeeping question and then a bigger picture one.

Just where is your assumption for fuel prices and the factor that your outlook for low to mid single digit revenue declines in or revenue per load declines in the back half?.

I just looked at the EIA information and it was going to be consistent for the rest of the back half and that’s really the only thing I can do is look at that. So, it's kind of flat. With diesel running at I think $2.80 to $2.90 and I think that’s where I saw it for the next six months. And that’s kind of our assumption..

And then can you give any color on like van versus unsided, how you're thinking about that from a revenue per load situation or kind of similar to what we saw in the second quarter as well?.

Yes. I think in the short term like we said in the next three months we're seeing a similar rollout of what's going to happen on van revenue per load and on flat bed revenue per load.

Beyond that into the fourth quarter we'll talk about that as we get to the mid-quarter call or further into -- if not even if probably in October when we get into the fourth quarter..

And then just a bigger picture question. We've seen durable goods industrial production maybe soft in the last three months but P&I has started to improve recently. So just wanted to get some of your thoughts on just the broader industrial economy right now.

It seems that you seem pretty confident about demand on your own so maybe what you're hearing from some of your customers about, maybe an industrial improvement in the back half..

Our volumes are kind of going against what they're saying industrial production, right. Industrial production is under 2%. Even on the flat bed side we're consistent with last year. Our customer demand is strong.

I mean, I think we still have all the flat bed customers, even though we're flat for last year there's still strong demand coming across there. The loads we did last year in flat beds were pretty high and they're still high this year, right, from a comp standpoint we're equal but it's still pretty strong.

And on the van side, clearly we continue to get -- I can tell you that personally that there is more and more demand for our trailers out there, demand that I hadn’t seen probably in the last 10 years. Strong demand from our standpoint, probably when you look at the stats out there on industrial production just its not tying that.

So again, we got to go back to the execution of the model..

So do you think that you are positioned well with the right customers or you're gaining market share?.

I think we're positioned well with the right customers to a certain degree and we're also penetrating some of those smaller customers like I said, our bottom 60% of our account, that’s where the growth came from in some of the smaller accounts..

At this time I show no further questions. I would like to turn the call back over to, sir, for closing remarks..

Thank you, Dory. That will wrap this second quarter call and I look forward to speaking with you again on our third quarter, mid-quarter update call currently scheduled for September 3. Have a nice evening..

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