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Edited Transcript of LSTR earnings conference call or presentation 24-Oct-19 12:00pm GMT

Q3 2019 Landstar System Inc Earnings Call

JACKSONVILLE Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Landstar System Inc earnings conference call or presentation Thursday, October 24, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James B. Gattoni

Landstar System, Inc. - President, CEO & Director

* Joseph J. Beacom

Landstar System, Inc. - VP and Chief Safety & Operations Officer

* L. Kevin Stout

Landstar System, Inc. - VP, CFO & Assistant Secretary

* Robert S. Brasher

Landstar System, Inc. - VP & Chief Commercial Officer

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Conference Call Participants

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* Amit Singh Mehrotra

Deutsche Bank AG, Research Division - Director and Senior Research Analyst

* Bascome Majors

Susquehanna Financial Group, LLLP, Research Division - Research Analyst

* Benjamin John Hartford

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Jack Lawrence Atkins

Stephens Inc., Research Division - MD & Analyst

* Jason H. Seidl

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Jizong Chan

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst

* Matthew Stevenson Brooklier

The Buckingham Research Group Incorporated - Analyst

* Ravi Shanker

Morgan Stanley, Research Division - Executive Director

* Scott Andrew Schneeberger

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Scott H. Group

Wolfe Research, LLC - MD & Senior Transportation Analyst

* Stephanie Benjamin

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Todd Clark Fowler

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to Landstar System Incorporation's Third Quarter 2019 Earnings Release Conference Call. (Operator Instructions) 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; Rob Brasher, Vice President and Chief Commercial Officer; Joe Beacom, Vice President and Chief Safety and Operations Officer.

Now I would like to turn the call over to Mr. Jim Gattoni. Sir, you may begin.

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [2]

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Thank you, Eunice. Good morning, and welcome to Landstar's 2019 Third Quarter Earnings Conference Call. 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-K for the 2018 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.

During the first 9 months of 2019, both truckload volume and revenue per load on loads hauled via truck were impacted by softening conditions in the spot market. As we discussed on our 2019 second quarter earnings conference call on July 25, year-over-year growth in both revenue per load and the number of loads hauled via truck began to decelerate during the 2018 fourth quarter.

These trends continued into 2019, with revenue per load beginning to decrease on a year-over-year basis in January, and a number of loads hauled via truck beginning to decrease on a year-over-year basis in April.

We believe this softening has been due to slowing U.S. manufacturing and increased available truck capacity. Also, as we anticipated in the beginning of the year, Landstar's exceptional financial results during 2018 have made for very difficult year-over-year comparisons.

During our 2019 second quarter earnings conference call, we provided revenue guidance of $1.01 billion to $1.06 billion or 12% to 16% below the 2018 third quarter. 2019 third quarter revenues $1.012 billion or 16% below the 2018 third quarter. We also provided diluted earnings per share guidance of $1.48 to $1.54 or 6% to 9% below the 2018 third quarter. 2019 third quarter diluted earnings per share was $1.35 or 17% below the 2018 third quarter.

On September 11, we announced in a Form 8-K filed to the SEC that we were more comfortable at the low end of our third quarter revenue guidance, and we expected to be below the low end of our earnings per share guidance provided on July 24.

Our update to revenue guidance in early September stated that truck revenue per load and number of loads hauled via truck through the first 2 fiscal months of the quarter were trending at the lower end of our revenue guidance. Our updated diluted earnings per share guidance reflected lower-than-anticipated truck volumes attributable to softer overall market conditions and the impact of a tragic highway accident that involved the Landstar BCO in early September.

Through the first half of 2019, I believe we're in a relatively healthy freight environment. The first half of 2019 was by far Landstar's second-best January through June performance in the company's history, second only to the first half of 2018.

More recently though, weaker economic conditions, especially in the U.S. manufacturing sector, appear to have led to seasonal softness in Landstar's truck volumes. We experienced the softness particularly in September and into the first several weeks of October.

On a comparative month over prior year month basis, truck volume was 4%, 3% and 6% below July, August and September of 2018. As it relates to the 2019 third quarter, the 5% decrease in load volume compared to prior year was mostly driven by decreased load volumes in the automotive, foodstuffs and metals sectors, partly offset by an increase in consumer durables loadings.

Automotive load count fell approximately 14% compared to the 2018 third quarter. We attribute this to a decision by the company to cease providing service on certain nonprofitable lanes and, more recently and to a lesser extent, the strike at General Motors and lower U.S. automotive production.

Foodstuff load count decreased approximately 29%, almost entirely due to 1 customer, who in prior year awarded Landstar significant volumes due to unique onetime issues that have not been resolved by that customer. The decrease in truck volumes in the metals sector was probably -- approximately 16% due mostly to overall softness in that sector.

On a more positive note, although revenue with the consumer durables sector was down approximately 11%, volume was above the prior year quarter by 3%. Although the current macro environment makes long-term trends somewhat unpredictable in the near term, we expect the more recent pricing trend to continue through the fourth quarter. Dispatch truckload volume in the first weeks of October compared to the same period of 2018 is trending somewhat below the volume variance we experienced in September. We expect the seasonal softness in truckload volumes to continue through the remainder of the year.

Overall, 2019 third quarter truck revenue per load was 13% lower than in the 2018 third quarter. On a monthly basis, revenue per load on loads hauled via truck was 14%, 14% and 11% lower in July, August and September of 2019 compared to each corresponding month of 2018. The decrease in shortfall of the prior year was due to less difficult year-over-year comparisons as we moved through the quarter, rather than an uptick in rates.

On a sequential month-to-month basis beginning in the middle of the second quarter and continuing through September, truck revenue per load fluctuated rate somewhat consistent with historical seasonal patterns. Based on recent October trends that continue to show seasonal softness, we expect truck loadings in 2019 fourth quarter to be lower than the 2018 fourth quarter in an upper single-digit percentage range.

We expect revenue per load in 2019 fourth quarter to be below the 2018 fourth quarter in a high single-digit percentage range. This would represent an improvement from the 13% decrease we experienced from 2018 third quarter to the 2019 third quarter, mostly due to easier year-over-year comparisons in the fourth quarter.

Based on those expectations, I anticipate revenue in the 2019 fourth quarter to be in a range of $970 million to $1.020 billion. Assuming that estimate range of revenue, I anticipate diluted earnings per share for the 2019 fourth quarter to be in a range of $1.40 to $1.46. We knew we'd be facing difficult year-over-year comparisons 2019 due to the exceptional freight environment and extraordinary financial results of the company in 2018.

Although recent truck volume trends have shown seasonal softness, 2019 continues to deliver the second-best financial performance in the company's history behind only 2018. To put our 2019 third quarter results in historical perspective, gross profit in 2019 third quarter was $19 million lower than during the 2018 third quarter, yet 2019 third quarter gross profit exceeded the 2017 third quarter, previously second highest third quarter gross profit in the company's history by $13 million or 9%.

2019 third quarter operating was $70.6 million, also far exceeding any other third quarter in the company's history other than the 2018 third quarter. And diluted earnings per share in the 2019 third quarter of $1.35 was the highest diluted earnings per share of any third quarter in Landstar history other than the 2018 third quarter.

Similarly, revenue gross profit, operating income, net income and diluted earnings per share for the 9 months ended 2019, each significantly exceeded the amounts last achieved during the first 9 months of 2017, previously second-best year in Landstar's history.

In particular, operating income in the first 9 months of 2019 exceeded that of 2017 by 34%. In the context of this longer-term perspective, I believe the company's light asset variable cost business model is performing relatively well in the current environment. We're also well known for returning capital to our stockholders through a combination of stock buybacks and dividends. It is our intent to continue with our historical approach to buy back stock on the open market on an opportunistic basis.

Landstar remains focused on profitable load volume growth and increasing capacity to haul those loads. With our ongoing efforts to invest in and empower our network of small business owners, along with our healthy balance sheet, Landstar continues to be confident in our positioning within the transportation logistics marketplace.

Here's Kevin to provide additional commentary on the third quarter financials.

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L. Kevin Stout, Landstar System, Inc. - VP, CFO & Assistant Secretary [3]

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Thanks, Jim. Jim has covered certain information on our 2019 third quarter, so I will cover various other third quarter financial information included in the press release.

Gross profit, defined as revenue less the cost of purchased transportation and commissions to agents, decreased 11% to $153 million and represented 15.1% of revenue in the 2019 third quarter compared to $171.3 million or 14.3% of revenue in 2018.

The cost of purchased transportation was 76.6% of revenue in the 2019 quarter versus 77.5% in 2018. The decrease in purchased transportation as a percent of revenue was primarily due to a decrease in the rate paid to truck brokerage carriers and an increase in the percentage of revenue contributed by BCO independent contractors. The rate paid to truck brokerage carriers in the 2019 third quarter was 116 basis points lower than the rate paid in the 2018 third quarter.

Commissions to agents was 8.4% of revenue in the 2019 third quarter versus 8.3% in 2018 due to an increased net revenue margin, revenue less the cost of purchased transportation divided by revenue on loads hauled by truck brokerage carriers.

Other operating costs were $10.4 million in the 2019 third quarter compared to $9 million in 2018. This increase was primarily due to increased trailing equipment costs and increased contractor bad debt.

Insurance and claims costs were $24 million in the 2019 third quarter compared to $18.8 million in 2018. Total insurance and claims costs for the 2019 quarter were 5.1% of BCO revenue compared to 3.6% in 2018. The increase in insurance and claims as compared to 2018 was due to the adverse impact of a tragic accident involving Landstar that occurred during the 2019 third quarter and unfavorable development of prior year claims in 2019.

Unfavorable development of prior year claims was $3.4 million and $6.6 million in the 2018 and 2019 third quarters, respectively.

Selling, general and administrative costs were $38.2 million in the 2019 third quarter compared to $46.7 million in 2018. The decrease in SG&A cost was attributable to a decrease in the provision for bonuses under the company's incentive compensation plans and decreased stock compensation expense, partially offset by increased provision for customer bad debt.

Stock compensation expense was $1.1 million and $4.9 million in the 2019 and 2018 third quarters, respectively, mostly due to the impact of decreased earnings on our variable cost equity compensation arrangements.

The company's accrual for incentive compensation was reduced by $300,000 in the 2019 third quarter compared to an expense of $5.2 million in the 2018 third quarter. Quarterly SG&A expense as a percent of gross profit decreased from 27.3% in the prior year to 25% in 2019.

Depreciation and amortization was $10.7 million in the 2019 third quarter compared to $10.8 million in 2018.

Operating income was $70.6 million or 46.3% of gross profit in the 2019 quarter versus $87.1 million or 50.8% of gross profit in 2018. Operating income decreased 19% year-over-year.

The effective income tax rate was 23.8% in the 2019 third quarter compared to 22.4% in 2018. The effective income tax rate was favorably impacted in both periods by excess tax benefits recognized on stock compensation arrangements.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $316 million. Year-to-date cash flow from operations for 2019 was $261 million and cash capital expenditures were $15 million.

During the 2019 third quarter, the company purchased approximately 175,000 shares of its common stock at an aggregate cost of approximately $19 million. There are currently 1,151,000 shares available for purchase under the company's stock purchase program. Back to you, Jim.

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [4]

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All right, Kevin. With that, Eunice, we will open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question came from the line of Jack Atkins of Stephens.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [2]

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I guess to start, Jim, with load count deteriorating in October versus what you saw in the third quarter, what do you make of that? I mean is that a function of PMI deteriorating when we think about -- what we saw in September with that reading? Or are you seeing a step down in the broader economy, I'd just be curious to get your feel for that? And then I have a follow-up question around the impact of those customer losses and how that's impacting load count, I guess, as we look into October?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [3]

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Yes. Look -- we -- you know how diversified our customer base is. And typically, we don't even talk about sectors. But this time, I think, clearly, there were some sectors that we saw some load volume decreases through the quarter, that otherwise we might not have spoken, so that's why we spoke specific to some other sectors. But like I said, we're highly diversified, so when manufacturing turned negative in -- you saw negative growth in July, August and then followed into September, we attribute most of our load volume to that and then some of the specific [stuffs] as it relate to the sectors that we mentioned. But you know where our volumes come from, and it's really the manufacturing sector in the U.S. driving the general drop-off in our volumes. And the increase in the trend into October is just a continuation of the softness I think we saw from August into September because that was sequentially a little softer and just carried into October to drive that into more of a higher single-digit drop-off than -- where we were running at a 6% in September, we're looking at 7% to 8% now as we rolled into October. And that small percentage increase is hard to really put our hands around it. But it's just continuation of seasonal softness.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [4]

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Okay. Got you. And then when you think about those specific customer losses, whether it was the automotive customers that it sounds likes you guys walked away from or the foodstuff customer that sort of changed their supply chain. Is there any way to think about how that's impacting load count on a year-over-year basis?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [5]

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Yes. On the foodstuff side, we give the revenue percentages in that presentation. But the 29%, that was one -- that was just that one customer. I think that rolls off fourth quarter or maybe first quarter next year. So that comp is better. Let's just say first quarter 2020. You've got the automotive strike, which I really can't put -- we can't quantify how much volume that really is because it's -- we're doing parts and stuff like that, so it doesn't necessarily have the GM name on it, but we're going in and out of plants. So I can't run my bill to against GM. We got to try to identify all that. So that's part of the GM strike, which, I'm not sure how material it was, but if I were to guess, you're talking maybe 50 loads or something on a per day basis. And then the other stuff is just automotive production, which we felt a little softness in. Metals was -- our metals commodities, when you look at the top 25 customers, only makes about 25%. So there's nothing specific to that one other than softness there.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [6]

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Okay. Got you. Got you. One quick follow-up then I'll hand it over. But when I look at your active broker carrier account, it decreased sequentially as you move through this year. And so, Joe, I guess, as you're sort of talking to drivers and thinking about sort of what's happening on the capacity side of the market, are you starting to see some capacity leave the market on the fringes? I mean should we sort of read that and interpret that as a sign of capacity attrition in the market? Just sort of curious what you're seeing on that front?

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Joseph J. Beacom, Landstar System, Inc. - VP and Chief Safety & Operations Officer [7]

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Sure. Yes, Jack, I tend to not think of it like that. I tend to think that with our load demand a little bit different than it was a year ago, a little bit lower, we're putting fewer loads out publicly to the public load boards and that -- and when you put fewer loads out, then you've got fewer carriers who maybe haven't hauled the load before that looked to come and get qualified and haul that load. I just think that the need to reach out further and find the capacity that's there is less because demand is down. So I would attribute that both to our total count and our active count as well. It just -- we just haven't needed to reach into the marketplace as far. I don't necessarily attribute that to an exodus, especially when you hear some of the conflicting information about the truck sales and that kind of thing. So we don't see that there's really a lot of capacity that's exited the marketplace. I just think that our need to -- and the way the model works to grow that count to satisfy our needs hasn't been there.

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [8]

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Yes. Jack, if you look at the quarter, we were -- volume growth was -- we were down 5% volume. It was 9% on truck brokerage, but BCO was up 1%. So just the need to put the brokers on the loads is kind of softer now than it was a year ago.

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Joseph J. Beacom, Landstar System, Inc. - VP and Chief Safety & Operations Officer [9]

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Yes. Our active count I think, Jack, went down like a maybe not even a 1/3 of 1%, I think a 134 carriers. So it's pretty -- our active count is staying pretty healthy, it's just, again, we're not needing to expand it. And as Jim pointed out, BCO load count growth is positive.

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Operator [10]

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The next question is from the line of Amit Mehrotra of Deutsche Bank.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [11]

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Maybe the first question, I just wanted to talk about -- if you could talk about the volumes related to your trailer drop and hook business. I would imagine you'd start getting some orders or requests for volumes ahead of kind of the busier season, maybe we can read something from what you say on what the peak season is going to look like on that particular piece of the business.

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Joseph J. Beacom, Landstar System, Inc. - VP and Chief Safety & Operations Officer [12]

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Amit, this is Joe. I mean, business on our trailer still runs in that low 30% of our overall truck loadings. We have seen a little bit of a softer request for trailers going into the peak season than we did a year ago. Not exactly a surprise. And what was the rest of your question?

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [13]

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I'm just trying to understand if you just isolate that 30%, I mean, is that 30% piece of the business, is it up year-over-year? Is it -- are you getting more requests on that particular side of the business?

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Joseph J. Beacom, Landstar System, Inc. - VP and Chief Safety & Operations Officer [14]

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I would not say we're getting more requests on the, like the drop and hook spotted trailer business in the quarter. We have -- no, I would say that's actually a little bit softer. Some of that could be a function of the automotive that Jim spoke of as well. I would say that it's not what it was last year, but still formidable. And I think you see that in the BCO load count on the van side, which is flat year-over-year and a lot of those BCOs on the van side are participating in the drop and hook business.

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [15]

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And actually, the drop and hook was up slightly on the number of loads hauled in the '19 quarter over the '18 quarter. Because like the BCO business and the drop and hook holds a little more firm than your general ad hoc type business. So that's still doing relatively well.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [16]

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Okay. And then just one talking about I think you guys have talked about kind of dropping 70% of the incremental gross profit to the EBIT line. I'm just trying to understand maybe Kevin can talk about this, but thinking about it the other way. How should we think about like the decremental margins on the gross profit? Because you obviously show some really impressive declines in SG&A expenses in the quarter. I don't know if there's kind of a way to think about your ability to minimize the decremental margins?

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L. Kevin Stout, Landstar System, Inc. - VP, CFO & Assistant Secretary [17]

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Yes, Amit. It's -- you can't do the comparison when we talk about the 70% flow-through just because it's negative. We don't have a lot of levers underneath gross profit that we can pull. Obviously, when you have -- if you look at it over a long time period, the 70% is not a stretch goal. We should be able to do that. This environment though, it's impossible to make that comparison.

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Operator [18]

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The next question is from the line of Scott Group of Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [19]

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So Jim, I wanted to get your perspective here. I guess there's this growing view or hope that the cycle is bottoming and optimism about maybe second half recovery next year from an earnings standpoint. You've been a pretty straight shooter it seems. Just curious what you think?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [20]

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Well, if you look at historical cycles, that statement is probably rather accurate. You'll see the downturn start probably 12 to 18 months prior, and I'd say our downturn or softness, I would say, started somewhere in the maybe not necessarily at the end of '18 because it was still relatively strong. And then really, our softness on the volume side started about April. So if you go -- if you roll that out 12 to 18 months, yes, we should see some turn next summer, but I think there's a lot of things going on.

When you look at what's going on politically, just and how that affects economic conditions in the U.S., I think part of that's what's going on in manufacturing sector today. And where do we get the relief on that? Where do the business owners start to get some confidence back and investing into their businesses?

So I think the -- if you look at a true cycle and how things usually work, you've seen some bankruptcies on the trucking side. Sales are continuously relatively high, but orders are way down on the -- for trucks. So you should see the trucking -- the supply side maybe balance out, maybe balance now and start to maybe shrink a little bit over the next 8 to 12 months. So that all points to that, but what's really going to go on in manufacturing side and how we're going to resolve some of these international issues we're having, that one I can't speak to. But from a true cycle standpoint, I would say, you would anticipate that start in -- an uptick starting in this summer.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [21]

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Okay. That makes sense. And then I want to ask about your -- so your model -- so incentive comp has been a nice sort of buffer this year. If we're contemplating, let's say, operating results down again next year, at least, beginning in next year, does the model work where incentive comp would go lower again next year? And then separately, I mean, we're seeing some other guys in the space with some just big, big increases in their SG&A cost, do we need to contemplate that at all for you guys going forward?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [22]

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Well, the way -- we'll speak to the bonus program first is, we've set -- it wouldn't necessarily be another drop-off in the bonus because the bonuses will be relatively small this year, especially with the drop-off in earnings into the third quarter we saw here. We actually ended up taking a little bit of the bonuses down that we had put up in the third quarter. But we will set a target for 2020. That target will be based on what we think it takes to beat what a market condition looks like. So it doesn't mean that our target would be higher or lower than the 2019 number. So you could actually have a bonus in a year or consecutive years. Our earnings might be a little lower than the prior year based -- because if the market is still not doing well, but we're beating market, I think there should be some type of bonus program.

It wouldn't be excessive, but there would be something. So that -- there may be headwind going into next year on the bonus side.

From the SG&A side, yes, we are seeing a little bit of creep, but it's all the investments that everybody else is doing, right? There's some investments in the -- into the tech and into the tech world where you'll spend a little bit more money today than you were in prior years, but incrementally, I don't think you're going to see that creep up or be that noticeable into the SG&A in 2020.

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Operator [23]

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The next question is from the line of Jason Seidl of Cowen and Company.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [24]

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I want to talk a little about BCOs as we look out to 2020, there's been a lot of talk about huge increases in insurance cost for some of the smaller carriers. Do you think that's going to push people to look at the Landstar model to drive for U.S.?

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Joseph J. Beacom, Landstar System, Inc. - VP and Chief Safety & Operations Officer [25]

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Yes. Jason, this is Joe. I think there probably is some of that. I think it's hard for us to readthrough to know how much of that's driving people's decisions. I think it's one factor probably among many, if somebody is out on their own authority. If they're looking at a big cost increase, whether it's insurance premiums or something else or business that they had that goes away and they want to come in and into the safety net that we think Landstar provides to owner-operators. It's a multitude of things, but I think clearly insurance is one of those factors that guys that are out there on their own look at. It's that, it's receivables, it's a host of other things. But clearly, as you've noted and read some of the things about insurance driving some of these guys out, I think it does impact the small truck owner going forward.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [26]

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Okay. And so if we do see those increases move throughout 2020, should we look at your BCO line as potentially growing because of this? Or it's too early to tell?

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Joseph J. Beacom, Landstar System, Inc. - VP and Chief Safety & Operations Officer [27]

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I think it's too early to tell. I think on the other side of that equation is kind of the market that we're in, right? And we've seen -- we saw some decline in our truck count in the third quarter, and I think that's a just a function of the demand environment that's out there now and the pricing environment that's out there now. So I think, you've got a little bit of that to factor in, too, and where are these guys going in and what are they doing?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [28]

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And the other thing too is, we really focus on bringing the higher-quality owner-operator in the network, which kind of every 3 to 4 applications we bring in, maybe one guy qualifies to come on. So that always is -- its self-limiting, but it's on purpose and we think it protects the model and keeps us safe.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [29]

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That makes sense. A follow up on some of your end markets. Just so I understand it. When you look at your foodstuffs, excluding that customer, where would the revenues have been in the quarter?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [30]

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That's a tricky question. Let's say, the top 25, which that -- the top 25 customers and that were down 36%. And overall, it was down 36% mostly because of that customer.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [31]

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So roughly flat then?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [32]

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Yes.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [33]

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Okay. And on the energy side that was the one lone bright spot. I know it's not a large percentage of your business, but just curious what's going on there since it was the one positive?

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Robert S. Brasher, Landstar System, Inc. - VP & Chief Commercial Officer [34]

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This is Rob. We continue to see very positive market there. We continue -- we're trending that at least through the first half of next year. So we see that as a positive moving forward.

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [35]

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I want to go back on that foodstuff. The foodstuffs would have been down if you -- even if you take that customer out.

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Operator [36]

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The next question is from the line of Todd Fowler of KeyBanc Capital Markets.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [37]

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So Jim, you fielded a lot of questions so far on the volume performance here in the quarter. But it sounds like that pricing is pretty much consistent on a month-over-month basis with normal seasonal expectations. Does it feel like at this point that the spot market is kind of found a floor? And then do you have any thoughts kind of on pricing as you move into 2020? I know that you're definitely more of a function of the spot market, but what would your expectations be for pricing trends moving forward from these levels?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [38]

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Well, I'll tell you that, yes, I get very comfortable when we see our pricing stabilize since May to June. The seasonal trend is holding, but you would expect it over the last 5 years or 5 or 7 years. The one concern I would have is the volume side. Over time, if the volumes stay where they are, does that cause a double dip where we're going to see pricing drop-off again sometime early into next year? So that's where my concern would be that since we've held it for 4 or 5 months and we've seen the volumes drop-off, I think we're okay, and we're going to be stable throughout the rest of the year and into the first quarter. Speaking beyond that, it's really hard to predict based on where the demand is going to come from. Can we get the automotive sector to pick back up? And can we get the manufacturing sector to pick back up? And then I do think we're back into the normal cycle where we'll see the increases in spot pricing mid half -- halfway through the year.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [39]

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Okay. Good. Yes. No, that's helpful. I mean just it feels like that relative to your guidance, the shortfall has been more on the volume side this quarter, in particular, versus the...

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [40]

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Yes. Absolutely, absolutely. The pricing came in pretty much where we thought it was going to come in and then the drop-off in September in the volumes was where we saw that -- where we didn't anticipate it to drop off 6%, and that's what we're seeing into October.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [41]

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Yes. Okay. And then just for my follow-up, there's been a lot of commentary here in the early part of the third quarter earnings season about competition within the brokerage space. And I know that your niche is a little bit different where you may not be going up against some of the more purely transactional dry van brokers, but I'm curious from your seat, if you could talk a little bit about what you've been seeing from the competitive landscape? If your view would be that this is more competitive than what you typically see at a point in the cycle? If any of the new entrants in the marketplace are really having a big impact? Or just kind of what your view on the competitive landscape right now is on the market?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [42]

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Yes. I would say, I think there is a little bit of impact on the overall brokerage market by those new entrants. I don't think there's any question that they're getting some kind of traction there. They're doing their marketing campaigns. They are fantastic as it relates to marketing to the investment community. But as it relates to directly hitting our business, I think over the last 12 months, we're probably seeing more of them coming in and trying to sell into our -- some of the stuff we do. I don't know of a significant amount of customers anything we've lost to those -- I'd refer to the digital guys who are coming into the marketplace. But yes, I think, everybody is focused on it, and they want to see what they can do, and they're getting traction. I think they -- one of them has come across to say that they're not making great margins now, but over time, they're going to get to 15% to 20%. And in my personal opinion, I think those 15% to 20% margins are realistic in the future that these digital guys compete against each other for pricing.

So I think in the long-term, I'll be watching our margins and that's kind of where the whole industry is going to be on the brokerage side. Is that 15% that people talk about margin is that going to continue into the future? It's possible. And for us, we believe it is probable, especially in some of the niche markets we're in because there's a value-added on top of flatbed and heavy haul and drop and hook and all that stuff that we do, that isn't necessarily -- that's just ad hoc business on a dry van.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [43]

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Yes. No, I certainly understand your niche and the comments just about the general market are definitely helpful and I think something that everybody has kind of dialed into at this point, especially given some of the recent commentary. So -- hey, that's what I had this morning.

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Operator [44]

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The next question is from the line of Scott Schneeberger of Oppenheimer.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [45]

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Just curious as we head into the holiday season, your thoughts on e-commerce and the consumer this time of year, how it compares to previous years? And then how that -- I assume that mostly ties into consumer durables, I don't know how you measure it, but any commentary on that as well?

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Robert S. Brasher, Landstar System, Inc. - VP & Chief Commercial Officer [46]

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Yes, Scott. This is Rob. As we enter into the peak season, e-commerce we're kind of seeing it flat year-over-year to what we're seeing. And we're still waiting for orders to come in for some of our big customers and kind of tell us what their expectations are for the season. But based on kind of what Joe said earlier about trailer requests and things like that, we're kind of flat as we were to last year.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [47]

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And then just kind of to clarify the question on consumer durables. How are you feeling about that into the fourth quarter trends you're seeing being your largest end market? And it sounds overall in the economy that consumer is still strong. Do you feel solid there? And how much visibility do you have maybe fourth quarter or beyond?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [48]

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We -- as you know, we don't have much visibility into the -- that sector is highly diversified from a customer standpoint. So the visibility is more general economic. So I -- based on the consumer confidence and all things are going on, you'd expect us to be a little confident on the durable side going to the end of the quarter -- fourth quarter. Coming into the next year, I think it gets a little more unpredictable. But if there's one area that we do have that little bright spot, you'd say that the consumer durables is where it is, and I think we have a little bit of confidence that will kind of hang through the quarter until we get that year-end.

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Operator [49]

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The next question is from the line of Matt Brooklier of Buckingham Research.

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Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [50]

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I apologize I missed it, but could you give us the truck volume declines by month, again?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [51]

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It was 4%, 3% and 6%, July through September.

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Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [52]

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And then you said October is running at 8%?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [53]

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Yes, higher single digits.

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Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [54]

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Do you have those numbers for van? And also what you do on the unsided/platform business? If not...

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [55]

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Yes. If you can give us a minute, I think, Kevin can get that for you, he's just got to grab it.

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Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [56]

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Okay. And then just taking a look at your gross yields or your net revenue margin that came in kind of at the higher end of your expectations, is that just a function of the model and where we're at in the cycle? Was there anything, I guess, unique about that number? And then, I guess, what are your expectations for your gross yields in fourth quarter?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [57]

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Yes. I think what you'll see is, I think, as we're into that cycle a little bit where the capacity really loosened up during the year, I think I don't want to call it tight, but we saw the rates go up a little bit into the third quarter, but they're still very good. So I think it's more cyclical. I don't think there's anything unique about what happened in the quarter. Generally, we see a little bit more squeeze on margins coming into the fourth quarter as the trucks get more busy during the peak time. I think we anticipated a slight uptick, but nothing much moving from the PT rate we saw coming in through the third quarter.

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L. Kevin Stout, Landstar System, Inc. - VP, CFO & Assistant Secretary [58]

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Yes, Matt. We should probably put in 14.7% to 15.1% on the gross profit margin for Q4. And here are the volumes van versus flatbed in Q3: 6%, 6% and 9% down on van and platform was negative 5 flat and negative 2.

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Operator [59]

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The next question is from Stephanie Benjamin of SunTrust.

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Stephanie Benjamin, SunTrust Robinson Humphrey, Inc., Research Division - Associate [60]

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Just most of my questions have been answered, but I do want to take a step back to talk a little bit about some of the technology initiatives that have been rolled out over the past couple of years. Maybe you can provide an update on -- I know there are a lot done from a pricing standpoint and any anecdotes, some of the benefits that you're seeing? Or how we should think about just given the timeline of those investments when we should start to see some returns or even stepped up investments going forward. That would be helpful?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [61]

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Yes. I think there'll continue to be investments into the technologies that we use today. As you mentioned, we'll walk through as a pricing tool, which we didn't really have, which Landstar didn't really have. We had a -- it was kind a very manual process to do pricing in about -- I'd say, about 18 months ago, we rolled out a pricing tool where you get prices within seconds when you put in lane information. The usage there is, we're looking at about 5,000 users a week on that. So what's really going on is these tools we put out, they're just being absorbed by the agent family and making their jobs more efficient, more effective. We also rolled out -- what we did is we -- our mobile app was significantly enhanced for available loads, so where the trucks can see our loadings. Significant enhancements, that also was rolled out, I'd say, 12 to 18 months ago. 64,000 downloads, 12,000 users per day. So high volume of activity on that. We -- and internally, we managed a trailer fleet of 14,000 trailers. We're given better visibility into those trailers. We're also doing electronic requests, so we can manage our trailer fleet better. So there's efficiencies on that side of it.

Other efficiencies is when we deal with the agents on getting credit approved for them. And we also automated that whole process over the last probably 6 months so that they can more rapidly get approval on new customers, so they can more rapidly move a load for those customers.

To measure the results of all that would be a little difficult in that environment. I'd like to say that -- well, I wouldn't say it, but would we be down -- would our volumes be down more with that? I can't answer those questions. But I think, it is building more efficiencies for the agents, so they can move more loads with the same number of staff.

And the continued down the road, as you know, we still have -- we rolled out the Max -- we call it the Landstar Maximizer, which is where the -- that was about 12 months ago, where the capacity can actually run routes. So they put in an origin. They say -- say you're in Jacksonville today and you want to be in Jacksonville in 7 days, you put that into your available loads request, and it'll give you a routing guide of what loads you can pick up to do that and what the revenue is for those loadings.

So there's a lot going on. We'll continue to push those out and continue to add functionality to those. But the good thing is we've got a baseline for all that, that's very effective now, and we'll just keep upgrading and tweaking them as we go forward. The biggest project we took out and the most complex one is just over our TMS. We're running off an IBM mainframe from the '80s, and we've been rolling out a TMS. And it's probably about 5% of our loadings today, truck loadings are on that TMS today, and we'll slowly continue to roll that out over 3 to 5 years. And there's a cost to that. It's probably $8 million to $10 million a year, maybe not that high, $5 million to $7 million a year to get that rolled out.

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Operator [62]

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Next question is from Bascome Majors of Susquehanna.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [63]

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I wanted to follow up a bit on Scott's question about incentive comp and how that flexes cyclically? It's clearly been -- really helped the decline in the net revenue this year. Can you give us a finer point on that, specifically where the 2019 full year accrual stands as of today for the annual incentive and the stock comp? What a return to target for both the annual incentive and stock comp might look like, the headwind as profits come back? And maybe to cap it off, what level of earnings growth will we need to see in 2020 to get you back to a target payout?

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L. Kevin Stout, Landstar System, Inc. - VP, CFO & Assistant Secretary [64]

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Bascome, this is Kevin. We've got $2.2 million accrued on the incentive comp year-to-date. So we're 3/4 of the way there. So annually, 2019 should be just south of $3 million at this rate. Stock comp is running in the $5 million to $6 million range. Obviously, with increased earnings soon for next year, that number is going to go up. I'd say, anywhere between $5 million and $10 million would be a good number there. But the incentive comp is all based on what the targets are for next year. Once they are reset at the end of the year, if we hit exactly on the target, it will be $8 million next year, and I guess, you could see that as a $5 million headwind. And that would assume that we're hitting exactly on the target and a onetime payout. So there'd be $2 million a quarter.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [65]

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Okay. And I know you're working on your targets now for the budgeting process, and you wouldn't share the internal target with us anyway, but I suspect that includes some level of earnings growth in line or approaching your historic kind of $10 million to $15 million target. Is that a fair assessment from the outside-looking in with limited information here?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [66]

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Well, I think what we do is -- the first approach we take is, what do we think revenue is going to do? And we look at what we think the market is going do. So by saying that it's not necessarily true that we would have a target that's higher than this year, especially if you believe you're heading into, and I'm not saying this is what's going on, but if you believe you're heading into a down market going into 2020, we may not have a target of revenue that's higher than the prior year, okay? So we look at market conditions. I think what the organization tries to do is, if we're performing at market or better, we should be rewarded even if the results are a little bit lower in the subsequent year on the top line.

And then there's other things we have to take into consideration. Did we have a good or bad insurance year in 2019? So you may have an earnings pickup or an earnings hit depending on, like, if our insurance came out and it did back in probably the early days. So it came out at $40 million. We're running at $70 million today. I don't think we'll budget $40 million because it's -- that's kind of an anomaly here. And then you take into consideration how much you got to put up for the incentive comp. If you have 0 in a year, and you're going to hit your targets, you're going to have $8 million. So those are kind of the factors you got to really look at. Typically, yes, I don't recall a year where we actually had a plan that was lower than the subsequent year, but it doesn't mean that, that can't happen, looking at market conditions or specific items within the prior year's P&L.

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L. Kevin Stout, Landstar System, Inc. - VP, CFO & Assistant Secretary [67]

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Bascome, I've got to correct something there. The annual number should -- this year's number should be $2.2 million. So we're 3/4 of the way to that annual number for 2019. I picked up the yearend number first.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [68]

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All right. All right. So $2.2 million for the full year.

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Operator [69]

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Next question is from Bruce Chan of Stifel.

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Jizong Chan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst [70]

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I'm in a pretty good shape here, but I did want to maybe get an update on how you're thinking about the regulatory framework? I know, Jim, you did mention the political situation. But first on California AB5 and the IC classification issue, do you have any updates there on how you're responding to that? And how you're thinking about the potential cost effects?

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Joseph J. Beacom, Landstar System, Inc. - VP and Chief Safety & Operations Officer [71]

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Bruce, this is Joe. We are, obviously, well aware of AB5, and we have roughly 400 BCO trucks that we're going to have a take a harder look at and start to talk to those individuals as to how they -- what their intentions are around the AB5. But we haven't had any of those conversations yet, so I think from an impact standpoint, we would -- we'll determine whether or not BCO trucks exit the system, either to get their own authority or to leave the business or what have you. Once we have a little bit of a chance to have those conversations, we'll have a better understanding as to how that might affect truck count for us.

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Jizong Chan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst [72]

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Okay. That's super helpful. And then, Joe, maybe this is a good one for you as well, but as we look at the final phase of ELDs or the AOBRD conversion and the drug and alcohol clearinghouse and maybe even IMO 2020, how are you benchmarking these issues in terms of capacity against, for example, the previous ELD phase?

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Joseph J. Beacom, Landstar System, Inc. - VP and Chief Safety & Operations Officer [73]

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I think that the -- this move from AOBRD to ELD, I think, is -- I think midyear there was a lot of concern over whether that transition would actually occur or would there be some severe disruption. I think, more recently I understand that most carriers are doing the right thing and moving forward on making that -- making themselves ready for that conversion. So I don't see quite the disruption moving from AOBRD to ELD. And then with the clearing house, I think the clearinghouse is really, again, I think people are just now getting their hands on that and how they're going do that. And if -- it's really more of a cost -- it's a potential cost impact. I mean for us, it's a fairly nominal cost, but for others, that are smaller, maybe that's more significant. It's really more about having the process and having the program in place to make sure that you adhere to the rule going forward. So again, not big cost, just more preparation and having your ducks in a row to make sure that you comply come 2020.

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Jizong Chan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst [74]

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Okay. That's great. Really helpful. And then just one final question here. If I'm not mistaken, we're lapping some of the lost Amazon business from their in-sourcing last year, and I know that you all mentioned that we'll flat on the e-com side, but how are you thinking about pricing as we replace some of that business?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [75]

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Actually, we -- the Amazon business kind of softened up on us last year. So from a comparison standpoint in this fourth quarter, there is no -- really no impact on there. And the pricing is overall for the e-commerce stuff, they're putting pressure on pricing just the way everybody else is in the marketplace. Although we've managed to keep our pricing stable for the last few months. We anticipate that will continue through the fourth quarter, and that we won't get a lot of -- much more pressure because regardless of how soft or how good the peak is, it's still a peak and there'll still be some demand for trucks.

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Operator [76]

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Next question is from the line of Ravi Shanker of Morgan Stanley.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [77]

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Jim, thanks for your comments earlier on the new competitors entering the space. I wanted to follow up specifically on flatbed. It sounds like the new guys have been primarily focused on dry van and refer so far. But I think if one of the new guys are entering the flatbed space right now, I think you pointed out that this is a more specialized operation. Can you elaborate a little bit more on that on kind of how specialized is it really? How easy is this business to "digitize" and kind of what kind of success or not do you think the new entrants will have in the space?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [78]

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Yes. Well, the -- our flatbed business, it's -- 30% of our flatbed business is the heavy specialized, which really requires some human intervention. You're putting big heavy equipment on specialized equipment. It's not just the regular flatbed. So 30% of our flatbed is that.

The other parts of the flatbed, there's probably some value-add on just a generic flatbed and then again there's probably some flatbed that isn't -- is very generic and probably can do ad hoc and go on to a digital freight platform. So it's really hard to tell the impact that they would have. Do we think we can just -- they can just jump in and take over all the flatbed market? Absolutely, not. I think there's a little bit of value-add there that not related to technology. I mean there's a lot of coordination on routing and guides and stuff like that. And Rob may actually have a little bit more to talk about on the flatbed side.

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Robert S. Brasher, Landstar System, Inc. - VP & Chief Commercial Officer [79]

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Yes, Ravi, on the flatbed side, again, as Jim said, the more specialized you get, the more touches there are. You've got permits. You've got routes. You've got -- the more touches, the more human interaction. And also as Jim said on the flatbed side, there are markets -- there are customers, I guess, you say that could be taken over by this space, but again, for the most part, it's an ad hoc type situation. It's going to job sites. It's a lot of human interaction and a lot of discussions that take place that can't be automated over -- we don't feel that can be automated over a website or an app.

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [80]

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Remember -- just -- you just got to remember, this whole thing is a pricing game. We have the tools that they have to do this. It's just -- will they come in and undercut pricing, and that's what we got our eyes on.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [81]

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Understood. And just a follow-up on that. Have you heard from any of your agents or partners that the new guys have been reaching out to them?

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Robert S. Brasher, Landstar System, Inc. - VP & Chief Commercial Officer [82]

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Again, we've heard of them in our space. We've heard of them possibly in some customers. We have not lost. We do not feel that we've lost any business to them at this point in time.

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Operator [83]

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Next question is from Scott Group of Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [84]

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So I just want to follow up with 2 things. One on rates. You're saying that they're sort of holding steady the last few months, you expect them to hold steady from here. I just want to understand, is that in line with normal seasonality or not? I would have thought that you'd see rates typically move higher in the fourth quarter. So I just want to understand what you're seeing?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [85]

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Yes. From a seasonal standpoint, yes, you're right, we expect it to continue seasonally the way it's been for the last -- since May. So seasonally -- and I'm looking at my notes here, typically, we see...

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L. Kevin Stout, Landstar System, Inc. - VP, CFO & Assistant Secretary [86]

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Pricing in the fourth quarter is typically 1% higher, and we were 1% better than the historical average in September. So that's where we landed on the pricing.

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [87]

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Yes. So we're basically coming out seasonal. We're expecting that seasonal trend.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [88]

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Okay. And you're saying that September actually was a point better than normal seasonality sequentially?

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L. Kevin Stout, Landstar System, Inc. - VP, CFO & Assistant Secretary [89]

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That's correct.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [90]

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Okay. Good. And then on this -- I mean, the idea of -- Jim, you mentioned earlier that maybe gross margins are going to head lower for the industry over time. How does this impact your model? You've got some parts of the business with more fixed margins. Do you need to rethink how the take rates work with your BCOs and agents? Do you need to rethink the agent model more broadly in this sort of world? I'm just curious how you think about that?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [91]

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No. No. When we speak to that it's mostly because the BCO has got a percent of revenue. So on that impact there as long as BCOs are willing to haul at the rates they're hauling at, then that spreads stays same. When we talk about the margins, it's mostly on the third-party truck side. When we're using third-party capacity, and also when I talk about, I'm talking about the ad hoc generic type freight more than I'm talking about drop and hook or flatbed or any of that type of stuff. I think in the long-term, I think it would be unrealistic to believe that if guys are trying to build scale using tools that to us don't add much value to the process that they are going to put pressure on pricing and margins into the future. They're going to try and buy trucks for higher than the normal brokers are going to buy for and they're going to try and bid the shipper a bit lower than the current incumbents are doing. And they're going to put a squeeze on margins.

Will that hold over the long term? Or will it happen in the long-term? I'm a believer that, yes, I think everybody is going to end up playing in that game. When more entrants come into a market, that's kind of what happens. It's unrealistic to believe it won't. Do I think it's significant from the -- just, say, the average markets today is 15%, do I think it's going to single digits? Absolutely not because there is value in what everybody provides. There's cost of funds, there's not necessarily direct cargo risk, but you get tangled up in it. There's other things that you have costs that you have to think about before you just give away a free service.

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Operator [92]

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Next question is from Todd Fowler of KeyBanc Capital Markets.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [93]

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Great. Kevin, I just want to make sure I've got the incentive comp numbers correct. You said in the prepared remarks the third quarter incentive comp was $300,000. Was that what the amount was? Or was that what it was down year-over-year? I just -- I want to make sure I've got that number correct.

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L. Kevin Stout, Landstar System, Inc. - VP, CFO & Assistant Secretary [94]

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Yes. That's what we took the accrual down by was $300,000 in Q3.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [95]

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Okay. And so year-to-date right now you're expecting $2.2 million for the full year, but what is it through the third quarter?

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L. Kevin Stout, Landstar System, Inc. - VP, CFO & Assistant Secretary [96]

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Let's say, it's $1.7 million and $2.1 million, $2.2 million in total for the whole year. $1.7 million through 3 quarters and then about $2 million, $2.2 million somewhere in that range for the...

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [97]

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We basically have 3 quarters of the year covered.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [98]

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Yes. Okay. Got it. And then just my last one, Jim, as a follow-up. With the balance sheet, I think that you talked about share repurchases, I didn't hear you mention anything on the special dividend side. You guys continue to do a great job of generating free cash. What are your thoughts on the potential special dividend right now?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [99]

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Well, we always like to be opportunistic on the share buyback side, and that's been where our focus has been, but we've done special dividends in the past. Typically, it's related to something where we had -- we thought the capital -- we thought the gains tax -- the dividend taxes were going to go up back in 2012. We bought -- we sold companies in '13 and did a special on that.

We didn't buy stock in 2017 and ended up with cash at the end of the year. So it's a discussion that we have with the Board coming up. And that clearly will be considered. We're sitting on, as Kevin said, $320 million worth of cash right now. I don't think that's excessive. So I -- clearly as a management team, we like the buybacks. We've liked them since '97. We'd like to continue down that path. But it doesn't -- I wouldn't totally exclude a special, but I -- management leans on the opportunities of the buybacks.

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Operator [100]

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And our final question came from the line of Ben Hartford of Baird.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [101]

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Jim, I want to come back to your comment about the TMS that you're rolling out over the next 3 to 5 years. I imagine you'll talk more about it in April, but some perspective on that. Is that something that's internally developed versus off-the-shelf, one? Two, how flexible is that TMS is going to be in terms of being able to incorporate anything off-the-shelf that might come about in the market over the next few years? And then three, as you do think about the context of the changes in the competitive landscape, what is that TMS going to bring your agents in the field from a competitive point of view with regard to bids, et cetera, that you think is different than they might have today?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [102]

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Yes. The [definitive] of TMS, that's hard to get my hands around is, does TMS include pricing, truck visibility and everything like that? Is it all from soup to nuts? And internally, when I refer to TMS, it's more of our little operating system to place orders and attract freight just from a workflow standpoint, not necessarily from the visibility or the pricing or any of that type of stuff. So in our world and not to get too technical, but we are capable to plug and play many various third-party softwares. The TMS is a third-party that we are working on getting it to fit into our agency base. That's why it's taken us a little bit longer.

But in our world when we talk about the TMS, it's the center vehicle to process our freight transactions. Off of that, we can plug and play a visibility tool, a pricing tool and feed information back and forth through what we call the middleware. It's like the information highway, right?

So we can buy -- we can go out and buy third-party software today and connect it to our middleware to have it speak to the TMS or have it speak to our visibility tool or feedback into the pricing tools. And they all can interconnect. They don't have to be in the same software package. It doesn't have to be the same vendor. So I think, the fact that over the last 12 months, we've put in this middleware that helps all our systems talk to each other is very advantageous going forward and the ability for us to add any type of functionality or any type of system to the model today that we probably couldn't have done 2 year ago.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [103]

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And from an agent's perspective either collaboration with other agents or an individual agent, what does this tool bring them that they don't have today?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [104]

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Well, there's efficiencies. Clearly, I think when you -- when I -- I'd mentioned that we're working off of 1980s mainframe from IBM i that it's really -- they are doing a lot of manual things in their office. Just the fact that they were doing manual requests for trailers and manual requests for credit and the TMS will provide them. Our older system actually didn't store rates. They had to key the rate off a sheet every time they put in. So it's a little embarrassing to say, but yes, they didn't have the rates in there. The new system has rates in there, and it has everything that a newer TMS would have that's something you built in the '80s might not necessarily have.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [105]

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Okay. And then if I can get one more last one in? I know a lot of talk about bottoming potentially in industry fundamentals and an inflection mid next year, but given your perspective on the various cycles, what do you think the positioning is going to be in terms of the agents as they go into 2020s bid season? And just more broadly across the brokerage space, how competitive do you anticipate it to be, if we assume normal seasonality into next year, some softness in 1Q, still available supply. Is it something where competition for loads does continue to step up until we find that absolute bottom? Or do you expect this kind of relative discipline that we've seen over the past few months kind of hold over the next 6 months as we hold our breath to mid next year?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [106]

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Yes. I think as I said earlier, I think if you're -- if we're going through a true market cycle with no disruptions and no irregularities or abnormalities, you are looking at that -- the competition for trucks coming back, right? Where right now competition for trucks isn't difficult. I think if you look at us, 25% of our loads come in through EDI. It's automated. And we're accepting probably over 90-something percent of those loads, where a year ago, it was 80%. So from our standpoint, we look at what's the competition for trucks going to be? And then what's the competition for the shippers?

Today, we're getting similar amount of bids in from shippers and just probably not landing enough of them because of the pricing is lower in this market than it would be in a more balanced market. And next year, I think we do anticipate and hope to see where we'll hit more of those as people are having more difficulty finding trucks and the market tightens up a little bit. Can I swear that, that's going to happen today based on the economic environment and what's going on internationally? No. But if it's a normal cycle, I think we're back to normalcy come next summer. But it's just hard from an economic standpoint for me to just really say, yes, that's what's going to happen.

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Operator [107]

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

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [108]

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Well, thank you, Eunice. And I'd like to thank you, and I look forward to speaking with you, again, on our 2019 earnings conference call currently scheduled for January 30 and have a good day.

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Operator [109]

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Thank you for joining the conference call today. Have a good morning. Please, disconnect your lines at this time.