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Edited Transcript of LSTR earnings conference call or presentation 25-Apr-19 12:00pm GMT

Q1 2019 Landstar System Inc Earnings Call

JACKSONVILLE Apr 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Landstar System Inc earnings conference call or presentation Thursday, April 25, 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

* Patrick J. O'Malley

Landstar Transportation Logistics, Inc. - President-Landstar Carrier Group

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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

* Daniel Erik Hultberg

Oppenheimer & Co. Inc., Research Division - Associate

* Jack Lawrence Atkins

Stephens Inc., Research Division - MD and Airline, Airfreight & Logistics 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

* Scott H. Group

Wolfe Research, LLC - MD & Senior Transportation Analyst

* 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, Inc.'s First 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; Pat O'Malley, Vice President and Chief Commercial and Marketing 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, Prema. Good morning, and welcome to Landstar's 2019 First Quarter Earnings Conference Call.

Before we begin, let me read the following statement. 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.

Landstar had a successful 2019 first quarter as we set numerous first quarter financial records, including gross profit, operating income, net income and earnings per share. This performance was achieved even as the overall freight environment softened from the exceptional freight environment of 2018.

As it relates to revenue, we ended 2018 with decelerating growth rates in truck revenue per load and truck loadings. This deceleration in growth rates, along with a difficult year-over-year comparison attributable to 2018's very strong financial performance, resulted in 2019 first quarter revenue to be slightly below revenue in the 2018 first quarter. Nevertheless, the company's 2019 first quarter results were generally in line with the expectations that were communicated in our first quarter guidance as provided during our 2018 fourth quarter earnings conference call held on January 31.

Short capacity appeared to be more readily available in the 2018 fourth quarter than during the first 9 months of 2018. As anticipated, 2019 first quarter truck capacity continued to be more readily available as compared to the 2018 first quarter, putting downward pressure on spot rates.

During the 2019 first quarter, growth in the number of loads hauled via trucks slowed as compared to recent quarters. We experienced significant growth in truck loadings in the 2017 and 2018 first quarters, driven partly by the best operating environment in decades during 2018.

That volume growth made for challenging comparisons of the 2019 first quarter to the 2018 first quarter. To put our volume growth in perspective, Landstar truckload volumes increased 26% from the first quarter of 2016 to the 2019 first quarter, a cumulative average annual growth rate of 8%. I was pleased to see 2019 first quarter truck loadings increase over the 2018 first quarter considering the softening market and difficult year-over-year comparisons.

During the 2019 first quarter, downward pressure on truck rates reduced gross profit on the company's services that are contracted at a fixed gross margin, while the shift to more readily available capacity led to improved gross profit margins and increased gross profit on revenue under variable gross profit margin arrangements. During the 2019 first quarter, services provided under fixed and variable gross profit margin arrangements each contributed 50% to revenue.

Overall, 2019 first quarter gross profit margin increased to 15.1% compared to 14.8% the 2018 first quarter. The increase was mostly due to a 90 basis point increase in the gross profit margin on revenue under variable gross profit margin arrangements, mostly due to a lower rate of purchased transportation paid to truck brokerage carriers.

During our 2018 year-end earnings conference call, we provided first quarter 2019 revenue guidance to be in a range of $1.025 billion to $1.075 billion. 2019 first quarter revenue was $1.033 billion, within the range of prior guidance.

Revenue in the 2019 first quarter was 1% below the 2018 first quarter, while gross profit was slightly higher than the 2018 first quarter on an increased gross profit margin as explained previously. Our first quarter guidance also called for diluted earnings per share to be in the range of $1.51 to $1.57. Actual diluted earnings per share was $1.58. As expected, and included in our first quarter guidance, the effective income tax rate was below our annual effective rate, driving approximately $0.06 in earnings per share to the 2019 first quarter.

Additionally, insurance and claim costs in the quarter were 3.3% of BCO revenue, while guidance included insurance and claim costs at 3.6% of BCO revenue. The favorable variance added $0.02 in diluted earnings per share to the 2019 first quarter as compared to guidance.

The nature of the company's incentive and equity compensation programs are designed to vary with annual financial performance and coincide with the variable cost nature of the model.

As expected, 2019 first quarter equity and incentive compensation was far below the amount provided in the 2018 first quarter. Assuming current market conditions persist through the remainder of 2019, we expect that trend to continue. Kevin will speak more to this in a minute.

Overall, 2019 first quarter diluted earnings per share was a first quarter record, $1.58, 15% above the 2018 first quarter. We established -- we also established other records during the quarter. As mentioned above, gross profit, operating income and net income were also first quarter records and we ended the quarter with more BCO trucks than at any other quarter end in the history of the company.

During the 2019 first quarter, the rate of growth in both revenue per load and the number of loads hauled via truck slowed month over prior year month. Revenue per load on loads hauled via truck in January, February and March were 3%, 4% and 7% below each corresponding month of 2018.

During the 2019 first quarter, growth in the number of loads hauled via truck in January, February and March increased 5%, 2% and 1% as compared to each corresponding month of 2018. Year-over-year comparisons will remain difficult at least through the first 9 months of 2019, given the outstanding performance of 2018 and the softening freight environment that began in late 2018.

During the first few weeks of April, truck rates and volumes continued to follow the March trends. We expect the more recent trends experienced in March and early April to continue through the 2019 second quarter. As such, we expect truck revenue per load in the 2019 second quarter to be below the 2018 second quarter in an upper single-digit percentage range and the number of loads hauled via truck to be similar to the 2018 second quarter.

Based on those expectations, I anticipate revenue in 2019 second quarter to be in the range of $1.075 billion to $1.125 million. Assuming that estimated range of revenue, I anticipate diluted earnings per share to be in the range of $1.56 to $1.62.

We knew year-over-year financial comparisons were going to be difficult in 2019, especially during the first 9 months of the year. 2018 first quarter gross profit and operating income at that time was the highest ever achieved by Landstar in any quarter in the company's history. Add to that, the softening freight environment driven by what appears to be a looser truck capacity marketplace and less robust U.S. manufacturing.

As seen during the 2019 first quarter, the company's highly variable cost business model performs well in most freight environments. The model performed exceptionally well during the 2019 first quarter with record first quarter earnings per share and over $100 million -- $115 million in free cash flow.

We ended the quarter with cash and short-term investments of approximately $305 million. 2019 first quarter operating margin climbed to 52%, 370 basis points higher than the 2018 first quarter operating margin, the first time in history the first quarter margin was above 50%. We continue to focus on profitable load volume growth and increasing our available capacity to haul those loads. We also remain focused on our priority to provide enhanced technology and industry-leading sales and operations support to all of our independent business owners in the Landstar network. We look forward to 2019 being another successful year.

Here is Kevin to provide additional commentary on the 2019 first 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 first quarter. So I will cover various other first quarter financial information included in the press release.

Gross profit, defined as revenue less the cost of purchased transportation and commissions to agents, was $155.6 million and represented 15.1% of revenue in the 2019 first quarter compared to $155.5 million or 14.8% of revenue in 2018.

The cost of purchased transportation was 76.6% of revenue in the 2019 quarter versus 77.3% in 2018. The rate paid to truck brokerage carriers in the 2019 first quarter was 177 basis points lower than the rate paid in the 2018 first quarter.

Commissions to agents as a percentage of revenue were 45 basis points higher in the 2019 quarter as compared to 2018 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 $8.2 million in the 2019 first quarter compared to $7.6 million in 2018. This increase was primarily due to increased trailing equipment costs, partially offset by decreased contractor bad debt. Insurance and claims costs were $15 million in the 2019 first quarter compared to $17.4 million in 2018.

Total insurance and claims costs for the 2019 quarter were 3.3% of BCO revenue compared to 3.7% in 2018. The decrease in insurance and claims compared to 2018 was attributable to decreased net unfavorable development of prior year claims in the 2019 period and reduced severity.

Selling, general and administrative costs were $41.3 million in the 2019 first quarter compared to $45.3 million in 2018. The decrease in SG&A costs was mostly attributable to a decrease in the provision for bonuses under the company's incentive compensation plans and a decrease in stock compensation expense, partially offset by increased wages and customer bad debt. Stock compensation expense was $1.9 million and $3.7 million in the 2019 and 2018 first quarters, respectively. The provision for incentive compensation was $1 million in the 2019 first quarter compared to $4.1 million in the 2018 first quarter.

Quarterly SG&A expense as a percent of gross profit decreased from 29.1% in the prior year to 26.5% in 2019.

Depreciation and amortization was $11.3 million in the 2019 first quarter compared to $11 million in 2018. This increase was primarily due to the increase in the number of company-owned trailers.

Operating income was $80.9 million or 52% of gross profit in the 2019 quarter versus $75.2 million or 48.3% of gross profit in 2018. The increase in operating margin was driven by decreased SG&A expense and decreased insurance and claims costs. Operating income increased 8% year-over-year.

The effective income tax rate was 21% in the 2019 first quarter compared to 22.7% in 2018. The effective income tax rate was impacted in both periods by excess tax benefits related to vesting of equity awards to employees.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $305 million. Cash flow from operations for the 2019 first quarter was $121 million and cash capital expenditures were $5 million. There are currently 1,876,000 shares available for purchase under the company's stock purchase programs.

Back to you, Jim.

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

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Thanks, Kevin. With that, Prema, we'll open to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jack Atkins of Stephens.

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

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Congratulations on a good quarter in a tough operating environment. Jim, let me start with you and I guess, ask a bigger picture question, but I guess when people think about Landstar, they tend to think about you guys as a spot market player and that's correct to a certain degree, but you guys are certainly outperforming the spot market both from a rate and a volume perspective. And I guess when I look at your volumes, truck volumes were up 2.5% year-over-year in the first quarter when spot market loads generally were down for the rest of the market. So can you kind of help us think through what's allowing Landstar to really drive these market share gains because we saw it in the 2016/'17 down cycle and we're seeing it again? Just I think it would be helpful to kind of walk through sort of what's driving this outperformance?

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

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I think it has to do with the mix of business that we offer and some of the specialized things that we do. Jack, if you remember back 15 years ago, people referred to us as an overflow business, where things started slowing down and everybody would be -- all the traffic would be going through routing guys, there'd be no fallout freight. So there was none of that overflow stuff. But that's not necessarily how the model works today, right. We have 30% of our businesses flatbed of which 30% of that is heavy haul. So the special handling there doesn't really fall under that spot rate dynamic. When we drop and hook trailers, van trailers is about 30% of our businesses, we have equipment sitting out there that needs to be loaded and moved. So that is a little more sticky there.

So there's other dynamics within our business. So it relates to the mix within our business -- of spot business. Now yes, are we attracting and do we pay all the capacity in the spot market? Are they paid on spot? Yes. We negotiate rates daily. But on the shipper side, we do have some agreements that aren't necessarily locked up, but kind of tend to hold in an environment like this because we have committed trailing equipment into a location or we provide specialized services flatbed or it's an expedite move. There is so many different variations to what our spot business is. I think that's what makes us a little different than the true spot market world.

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

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Okay. That's great. And then, I guess, just kind of following up on that for a moment, can you kind of walk through some of your different end market verticals and maybe talk about what you're seeing, particular areas of strength and weakness?

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

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Well, I think if you -- we put out a chart that shows our sectors that comes with the release. And the one that really jumps out is the foodstuff sector. But when you look at the foodstuff sector, the top 25 customers makes up about 90% of that. So we don't do a lot of that, but we do have some agents that specialize in it. And when you look at that, when I believe it was off 34%, and that one where there's weakness it was primarily 1 customer as they -- as I talked about routing guys, they seem to be -- their core carriers tend to hauling more of that freight where we were a little bit overflow there, where that's one of the softnesses in that area. On the other strength and weaknesses, our heavy haul did well during the quarter, which is a bit hard to identify exactly what the specific customer or specific area where that was. Automotive, probably a little bit soft as you see the production lines coming down and stuff like that where the counts are coming down. Other than that there's been softness across the board in certain areas, but a little bit of strength coming out of maybe geographic regions where we see like maybe Texas and that area down there is doing relatively well.

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

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Okay. That's great. One last question and I'll turn it over. But we now have had 2 quarters in a row where you guys have been above your 50% net operating margin goal and the second quarter guide would point to a third quarter in a row. How are you guys thinking about the margin goals internally? And where do you want to see that line as you look out over the next, call it, 2 to 3 years?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [7]

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You know it's the -- we're coming out of -- we never hit our goal of an annual 50%. We are 49.7% at the end of 2018, I believe, was the number. So as we hit that goal this year, we will establish a new goal. But as you know, Jack, it gets more and more difficult to expand that margin. I think 50% was a good target and we'll work through that as the year progresses. And to hit the first quarter, which hasn't -- I don't think we've been above 45% in any first quarter, maybe last year, it was 48% or something, but it's been -- I think everything is going in the right direction to get there, and we'll put a new target out probably somewhere towards the end of the year as we progress through this year.

One thing, Jack, too is you don't want to focus so much on the target and limit our ability to invest in the technology we're working on. So that's one of the things that was pulling it down a little bit during the '17, '18 years.

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Operator [8]

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Our next question comes from Bascome Majors of Susquehanna.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [9]

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Based on the projections you shared for the second quarter today, can you share how the business is tracking versus the annual planning you set for yourselves in 4Q?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [10]

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I would say it's tracking relatively close. I don't think we anticipated the March drop-off the way it did. As I said, we projected -- I think we projected rates in the first quarter to be down 0 to 3% or in the low single digits, I would say. Compared to prior year, March was down 7%. That was not anticipated. So I'd say based on our annual, the rates were a little bit lower than we anticipated, where volumes are probably coming out above where we thought they would, and that continued into April. So from an annual projection, I'd say, it's probably a little softer. In our heads, what we were thinking about our annual number was, I'd say, we're a little bit softer where we thought we're coming out annually.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [11]

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I appreciate that. And translating that, I mean clearly, the incentive comp is a pretty big tailwind. Are you still accruing on an annual basis? It sounds like you are. I just wanted to get a sense for kind of where the lever is to that on the margin line.

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L. Kevin Stout, Landstar System, Inc. - VP, CFO & Assistant Secretary [12]

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Yes, Bascome. We put up $1 million in Q1. If we really thought we were going to hit right exactly on target, we would be at $2 million in the quarter. So we'll see how the rest of the year progresses. If we make up that difference, obviously we'll have another $100 million we put into either Q2, 3 or 4. So...

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [13]

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Is there any flex lower if things deteriorate below the plan? I'm just trying to think if that is pretty clear at this point.

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L. Kevin Stout, Landstar System, Inc. - VP, CFO & Assistant Secretary [14]

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Well. It can flex down to 0. We could take that. We're going to have a little bit of incentive comp that's not tied directly to the company earning. It's more of a sales type incentive. So by region, we'll have a small amount in there regardless, but the overall comp could go to 0, yes.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [15]

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And lastly, you bought back a lot fewer shares in 1Q versus 4Q. Can you just share, I mean, the thoughts around that? Is it price-driven, anything else going on there and do you think it will be in the market as we get deeper into the year?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [16]

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Yes. In the first quarter generally we have most -- the first quarter has more closed shut opportunity than most other quarters. So the number of days and there was a little volatility in the stock during the quarter. So we jumped in to be opportunistic and then we got locked out. But our philosophy is unchanged on providing back to shareholders through share buybacks. That hasn't changed. And if they -- if we see the price hovering in this range, it stays here for a while, yes, we'd be in.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [17]

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Congrats on the results.

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Operator [18]

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Our next question comes Jason Seidl from Cowen and Company.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [19]

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Couple of quick things. I wanted to touch on some of your commentary on the flatbed side of things. Could you talk a little bit about your outlook? You mentioned sort of overall truckloads to be flat. Do you expect a little more strength in the flatbed division?

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Patrick J. O'Malley, Landstar Transportation Logistics, Inc. - President-Landstar Carrier Group [20]

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Jason, this is Pat. Yes. I think if you think about the capacity market writ large, the barriers to entry in that side are significantly greater than they are on the van side. So I think you see the capacity is coming into the market, not a lot of it's going on the platform side. So I think that's one thing. Secondly, from an execution standpoint, I don't think that there is -- we have few peers as it relates to our ability to execute in that platform business. So we remain very optimistic as it relates to that segment of business at Landstar.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [21]

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So as we think about the overall load growth that you added to, it would be a little bit weaker in the van division and stronger in the platform side?

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Patrick J. O'Malley, Landstar Transportation Logistics, Inc. - President-Landstar Carrier Group [22]

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I think the challenges on the van side relative to capacity coming in the marketplace are significantly different than on the platform side.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [23]

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Should we assume the same for revenue per load?

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Patrick J. O'Malley, Landstar Transportation Logistics, Inc. - President-Landstar Carrier Group [24]

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If you look historically, revenue per load has been, on the flatbed side, platform side higher than on the van side. I think the pressures, again, just thinking about the marketplace, thinking about the number of competitors, I think that the impact will be different on the platform side than the van side. I think the van side is subject to greater volatility on the pricing side than the flatbed side, but I do think some of the cost factors that have come into play for everybody in the industry are going to raise the floor on what the bottom price is going to be from a van or a platform side.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [25]

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Okay. That's fair enough. And a follow-up question, the BCOs, you guys are doing a pretty good job at a [track end fee]. Can you talk about this current environment and what you expect going forward?

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Joseph J. Beacom, Landstar System, Inc. - VP and Chief Safety & Operations Officer [26]

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Yes. Jason, this is Joe. It's -- we, as you know, grew 38 BCO trucks in the quarter and we're looking to do something similar in the second quarter, the way it is looking here at the end of April. There is a strong pipeline of candidates that we're looking at continuously, but there's a little bit of churn going on and you kind of get that anytime there's this demand/supply dynamic change, pricing change, so that tends to occur. So our growth will be a little bit slower than it was in the last couple of years, but nonetheless, growth probably in that 25 to 50 range in Q2.

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Operator [27]

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Our next question comes from Amit Mehrotra of Deutsche Bank.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [28]

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Jim, I guess in the past or more recently, you've been willing to comment on earnings expectations for the company in terms of your confidence in meeting those expectations. Obviously, the pricing environment you mentioned, March not being as strong as you would've thought and incrementally weaker pricing environment, I wonder if you could comment on expectations have come down a little bit, they are $6.40. How do you think about the company's setup in that pricing environment relative to those expectations?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [29]

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I think -- yes, the pricing is down, but I don't think it's down where we wouldn't be within -- I think, the Street estimate is $6.41. We're comfortable with that $6.41. Yes, we're comfortable.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [30]

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All right. And then with respect to, I guess, the Landstar model, one of the hallmarks is the variable cost structure. You might not capture all the upside and not as much operating leverage in the good times, but there is obviously not as many issues with the decremental margins on the weaker environment. There is some noise this year with respect to stock comp incentive-related expenses. But if you just kind of normalize for that, I guess this is going back to Jack's question, but how should we think about the EBIT margin? Should the rate of change in terms of decelerating revenue accelerate, maybe revenue down, can you just educate us on kind of how the model is positioned in that kind of environment from an EBIT margin perspective?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [31]

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So you're talking about on a downward trend and how it impacts us? I think we -- what we talk about is, if we hit our targets there's about an $8 million ICP payout. Our plan works it if we hit -- there is a lower level where we could actually pay half of that if we hit, which is slightly below target.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [32]

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I'm sorry. I'm not asking about that. I apologize. I'm really asking about just the overall consolidated profitability of the model in a down gross revenue environment, and that's really what I'm looking at here.

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L. Kevin Stout, Landstar System, Inc. - VP, CFO & Assistant Secretary [33]

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That's what I understood.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [34]

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I'm sorry. Maybe...

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

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We're not following your question.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [36]

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I apologize. If gross revenue, if volume and pricing are negative, how should gross margins and EBIT margins trend given the variability of the cost structure?

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L. Kevin Stout, Landstar System, Inc. - VP, CFO & Assistant Secretary [37]

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It depends on how far pricing goes down obviously, but we do have the cost tailwinds that will offset that to a degree and the share buybacks.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [38]

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Okay. I'll take it off-line. And then lastly from me, wondering if there were any headwinds on the quarter from lower business from customers that operate in the e-commerce arena. There's been some developments on resourcing or in-sourcing. Wondering if you felt any of that in the quarter that you want to call out or something like that?

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Patrick J. O'Malley, Landstar Transportation Logistics, Inc. - President-Landstar Carrier Group [39]

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Amit, this is Pat. I think -- I know what you're referring to and that is not an account that we did a lot of business with, and so the impact was not felt in the first quarter at all.

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

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And Amit, on to your question there, I mean this feels a little like 2016. You can see how that operated and what kind of margins we pushed through there. Clearly, the revenue number will be larger than 2016, but '15 to '16, it's kind of we're feeling that a little bit.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [41]

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I guess that's what I was talking about. Like one of the great things about your model is that you might not capture a lot of the upside from a margin perspective, your margins are pretty stable, but they're also quite stable on the downside and that's really what I was trying to get at.

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

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Yes. Like with the gross profit decline of $10 million, operating income can still go up because we have the variable cost compensation programs and we could have favorable insurance. So you could see operating income grow in a down gross profit environment, right. That's the reality of the model. And like I said, '16 was a good number to look back at to say because we saw a little shrink from '15 to '16 and how that held up.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [43]

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And you'll just buy more stock as well?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [44]

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Yes.

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Operator [45]

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Our next question comes 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 [46]

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Jim or Kevin, just within the second quarter guidance, maybe if you can help with some expectations for gross profit margin percentage. I think Kevin, just with the SG&A and with the incentive compensation, is it right to think about SG&A is around that 26.5% in the second quarter or for the rest of the year as it was in the first quarter?

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L. Kevin Stout, Landstar System, Inc. - VP, CFO & Assistant Secretary [47]

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Yes. This is Kevin. Yes, the gross profit margin range probably we're looking at 14.8%, 15.1% for Q2. We're going to have similar -- I've modeled similar decrease in brokerage buy rate, which was 177 bps lower in Q1. Yes, the SG&A, similar. If we got our numbers right in Q1 on the incentive comp, it will be another $1 million in Q2. That compares with $5.4 million that we booked in 2018. And then the only other cost item is our annual convention, which annually runs in the $2 million to $2.5 million range. That's in Q2, but that was also in Q2 of last year. So -- does that answer your question on the SG&A?

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [48]

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Yes, that's very helpful for both of those. And then just, I guess a couple of other questions. Jim, can you talk about where you're at with the technology, the IT rollout to the agents and if that's on track with kind of what your expectations were on kind of how many agents at this point have had the rollout and what the timing is or how long we're going to see that go into the next couple of years?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [49]

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Yes. There's a lot of things we're working on, whether it'd be the TMS, which is really the operating system to better build efficiencies within the agent offices and actually, within our office too. So there's efficiencies to be gained with a new TMS, which we have about 150 agencies using it today. Now we'll keep rolling out over the next 3 years is my estimation. But the other things we're rolling out -- within the last 12 to 18 months, we've rolled out brand-new pricing tools, new load boards, a new Landstar Maximizer, automating our credit process. So it's just not focused on the one thing. So we've already delivered on a significant number of the things we started talking about 2 years ago. So the spending there is -- now we're back more paying on license fees and stuff as opposed to build-outs. But we still have some things we're working on that should build -- make us a little more effective with both the agents and the capacity. But the TMS is the big one, that's the one where you have most of the costs rolling through the P&L. And like I said, we spent about $8 million to $10 million incrementally over what we would have spent without doing this, and that will continue.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [50]

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Got it. But it sounds like though, I mean, just from rolling it out from reception from the agents, I mean all of that is on track, and then the benefit is that the agents ultimately become more productive. The cost would roll off at some point, but then you've got more productive agents with better technology?

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

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Yes.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [52]

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Okay. And then just my last one and I know this is not something you'd go head-to-head with given kind of the nature of the freight that you're moving, but just with the fact that we've seen some of the financials from some of the technology startups, Uber Freight in particular, do you have any comments about the marketplace? Have you seen anything different from some of -- from let's say Uber Freight specifically, any impact with that or just kind of any thoughts on how that could impact the marketplace?

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

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Well, every -- we just came from our agent convention, it's probably 300-plus there. Very, very, very small number of our agents, very small number have seen any Ubers or Convoys or those guys in their accounts and there is not a lot of discussion from their accounts about those entities. And you know what I think. You can't let technology be the differentiator. And I don't know if that's really the differentiator, help move a shipper from us to a Convoy or -- because we already have all the stuff that they are pitching to the public, right.

So -- do we keep an eye on it? Yes. But it's -- and the technology can be built pretty rapidly. It's getting your business process built around it, getting the shippers to accept it and getting the carriers to accept it. Our carriers still want to call us. They still want to make the phone call to talk about the load. They've never been in that location before. We live in a spot world. They want a little more knowledge before they go pull into a location. So there's a lot that goes on hauling freight from point A to point B other than the tool. We have the tool, we can do it, but a lot of our stuff goes via phone call and communication between the driver and the shipper or the driver and the agent.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [54]

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Yes, no. Understood. I was just looking for some of the color and that was helpful from both the agents and then just also a perspective on the market. Good quarter, guys.

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Operator [55]

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Our next question comes from Scott Group of Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [56]

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So wanted to just get your perspective. Jim, as you think about your views on the market and just thinking about comps, do you think this high single-digit decline in rate, do you think that's about as bad as it's going to get?

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

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Yes. We've seen a -- we've actually seen a little bit, I would say slight, a slight uptick into April from March on the rates, which is a positive sign. As we saw March decrease from February, we're starting to see April be a little -- look, very slight better when it's not continuing to decline. So I would say, we might see this high single-digit through about August or September when rates actually start to slow down a little bit after that.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [58]

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Okay. That's helpful. And then you made the comparison to 2016. Now if I look at '16, revenue was down 5% and earnings were down 5%. So you're doing better than that now because revenues down 5% or 6% and earnings up 5% or 6%. So is the real difference just what you've talked about a bunch on the incentive comp or if there anything else that's different this time around relative to '16?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [59]

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Well, '16 was a very low -- it's just the way the model performed, right. But it wasn't necessarily the percentages. It's talking about year-over-year drops, right. And that was the year that we didn't hit our target. It's a very little -- very low incentive comp in '16. Insurance was, I think, I remember being about $57 million, which was kind of in a range and kind of how the model performed is how the operating margin would roll out in that environment, kind of from a margin-EBIT perspective.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [60]

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Okay. And then maybe just last question, I see the number of active broker carriers actually fell from the fourth quarter and to your point, like the BCO is not really growing much anymore. Like are -- is the environment bad enough where supply is really starting to leave the market? Do you think there is a case that we could start to see a lot of supply exit?

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Joseph J. Beacom, Landstar System, Inc. - VP and Chief Safety & Operations Officer [61]

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Scott, this is Joe. Our active carrier count did drop just a little bit. I attribute that just to being a function of the fact that there is a few less choices out there. The demand in the spot market is a little bit less than it used to be versus last year, which was obviously a record year. So it dropped slightly. I'm not sure that really means a big exodus. As much as it just means that we didn't require their services to the degree of growth that we did in the prior couple of years.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [62]

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I guess what I'm trying to ask is, do you think like that is enough to like help re-tighten the market?

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Joseph J. Beacom, Landstar System, Inc. - VP and Chief Safety & Operations Officer [63]

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No. I don't think that's necessarily the case. I think the kind of a less tight, little more readily available capacity market is going to hang with us for at least the balance of this year.

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Operator [64]

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Our next question comes from Ben Hartford of Baird.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [65]

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Pat, I just wanted to come back to the comment you talked -- you made with regard to capacity on the dry van side. And just to clarify, I think a quarter ago you'd said that the softness in spot felt more like a demand than a supply issue. Just to be clear, have we seen incremental supply, particularly on the dry van side, enter the market over the course of the past 3 months?

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Patrick J. O'Malley, Landstar Transportation Logistics, Inc. - President-Landstar Carrier Group [66]

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I would say to you, Ben, that I believe that the demand -- the supply/demand mix was probably similar in the fourth quarter. I would say it was more of a 35% demand, 65% capacity. I would flip that here in the first quarter, and again, that's unscientific Pat O'Malley gut feeling report, Ben. So you can take that for what is worth, but it is -- but I do think the thesis that we rolled out earlier in the call concerning platform and the barriers to entry in van and the barriers to entry there, but I think there is more incremental capacity coming on the van side than on the platform side.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [67]

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That's helpful. I hope you publish that index going forward. That would be good.

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Patrick J. O'Malley, Landstar Transportation Logistics, Inc. - President-Landstar Carrier Group [68]

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I'll do the best I can, Ben.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [69]

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Jim, in the context of some of these technology tools and the discussion about 2016 versus today, obviously, net revenue growth is up meaningfully in that in the opening you talked about some of the changes in the business and it being a little less spot like. So could you talk about maybe the sources of share gains in the market over the past 3 years and then add onto that, as you look down the pipe the next 2 or 3 years as you develop these technology tools, can that be an accelerant to the share gains that your agents seemingly have realized over the course of the past 2 or 3 years?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [70]

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Well, one thing that's been over the last 3 years is just see where -- just speak to the drop and hook part of our business in the vans. We used to -- when we were recruiting BCOs into the market 3 or 4 -- into the company 3 or 4 or 5 years ago, 60% of the guys coming on needed one of our vans where 40% would come on with their own and now, it's about an 80-20, right. We have more and more guys looking to do that. That's clearly a market shift for us where we're picking up some gains there. In the flatbed side, we always tend to be one of the first guys in when there's a special project going on, on the flatbed special heavy stuff. And as it relates to the technology, look, we've been doing this for a very long time and we've had the technologies that these people are pitching. We're tweaking them and building them out. We did not use to have a pricing tool for the agents to use, so that was something that was new. We had a lot of manual processes around here that now have turned into -- we're doing it automated instead of -- we're doing digital and automated as opposed to manual. That's what we're doing.

But our business has always been the sharing of information in the best and fastest way you could do it. We went from pagers back in the early late 1990s, 2000s to now, you're on iPhones, laptops and tablets. So all our stuff has been converted into being able to -- we have the apps to access loads, we have the Maximizer to access multiple loads for 1 round trip and we have the pricing tool to pull it all together. The one thing that -- the one big thing everybody is talking about is tracking and visibility. Everybody all of a sudden wants to see where their freight is regardless whether you picked it up and delivered it for the last 20 years on time and safe. So that's another thing that we have rolling out. That should roll out sometime this summer where we have the operating agent who wants to see exactly where the freight is at any point in time. We're building that out. So those are the things we're working on to building the automation that we -- some of was used to be manual before, but we're just automating those -- the entire process, the way that it is getting pitched from these digital freight guys.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [71]

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So as you think about the model over the next few years, the bulk of the net revenue growth, do you think it will come from just making your existing agents bigger, more productive as you talked about and just growing loads on a per agent account basis? Or do you think you can attract and/or convert new agents onto the Landstar platform?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [72]

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It's both, but I'd like to -- look, we have 1,200 agents in the network. I'd like to grow each one of them 5% and you do that by giving them better tools and making them more efficient. And then we still have a big charge bringing new guys on. Our goal for the new guys coming on is $100 million a year. When you're a $4.6 billion company, that's good and that's good to say I do $100 million a year. We take those $100 million guys and turn them into $200 million guys, but take our existing guys and turn them into they're averaging $7 million a year in revenue per existing guy, turn them into a $10 million guy, so it's both. We're focused on both. But clearly, the spending on the technology should not only build efficiencies of the existing agents, it should help us draw additional agents into the business.

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Operator [73]

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Our next question comes from Scott Schneeberger of Oppenheimer.

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Daniel Erik Hultberg, Oppenheimer & Co. Inc., Research Division - Associate [74]

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This is Daniel on for Scott. Could you talk about free cash flow a little bit or cash flow in general, how you see CapEx and cash flow project this year?

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L. Kevin Stout, Landstar System, Inc. - VP, CFO & Assistant Secretary [75]

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Yes. This is Kevin. We did a free cash flow of $117 million, $116 million in Q1. Our model works. When revenue slows a bit, we generate a lot more cash. And I expect that same volume to be the rest of the year. So my guess at this point would be $200 million, $250 million. And what was your second question there?

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Daniel Erik Hultberg, Oppenheimer & Co. Inc., Research Division - Associate [76]

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On the CapEx.

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L. Kevin Stout, Landstar System, Inc. - VP, CFO & Assistant Secretary [77]

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Yes, CapEx. We probably do $10 million a year in cash CapEx. That would be the best number there.

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Daniel Erik Hultberg, Oppenheimer & Co. Inc., Research Division - Associate [78]

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Got it. On the flatbed side, are you showing any metrics on how the cadence, the monthly cadence on volume and revenue per load throughout the quarter and what you're seeing into April?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [79]

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We can. On the flatbed, if you look at the -- Kevin will confirm it as I read it. So if these are wrong, he'll come back and say that's not right. But on the load count on platform, growth over prior year was 13%, 1%, and 2%.

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L. Kevin Stout, Landstar System, Inc. - VP, CFO & Assistant Secretary [80]

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That's correct.

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [81]

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And on the rate was flat, up 2%, down 3%.

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Operator [82]

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(Operator Instructions) And our next question comes from Bruce Chan of Stifel.

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Jizong Chan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst [83]

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Just a quick question on the capacity side. You talked about some of the loosening that you've seen in the environment and that's certainly something that we've heard elsewhere. But when you look a little further out into the year, we've got a few things going on, on the regulatory front. Maybe a little bit less on the final round from the [ARB] to ELD conversion, but you've also got the drug and alcohol clearinghouse looming in the horizon and the hair follicle drug testing adoption. And I'm wondering if you anticipate any meaningful capacity tightening as a result of these issues and what your experience has been in terms of testing and experimenting with some of these measures yourself?

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Joseph J. Beacom, Landstar System, Inc. - VP and Chief Safety & Operations Officer [84]

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Yes. Bruce, this is Joe. I'll kind of hit those in the order that you mentioned them. The AOBRD to ELD conversion, internally we're well on our way to making that conversion and we anticipate no speed bumps in that regard. How the larger industry will perform? I would just say that it does require a software upgrade with most vendors and I'm not familiar with a lot of the vendors that are out there, but it does require an action on behalf of the small truck owner or the large truck owner for that matter in order to make that happen, which is why you're seeing the DOT strongly encourage people to get on that process because they are worried that the vendors won't be able to react in time, which could create a little bit of a speed bump as you get into the fourth quarter.

The drug and alcohol clearinghouse, that will be, I think, not a huge capacity tightener. I think it's going to be a process and an expense for the carriers that have to participate in that process as we go to a centralized clearinghouse and there'll be a little bit of a -- I think it's a little unclear as to the speed with which they'll be able to provide results, which may make the on-boarding process for carriers a little bit more difficult. And then the last is the hair follicle testing. We have not tested the hair follicle process. We're familiar with others who have. I do think that if that were to be implemented, you would see some fallout from capacity, hard to measure that, but I think there would be some impact from that, less so from the clearinghouse and not much, I don't think from AOB to ELD, from a fallout perspective. But from a conversion speed bump perspective, I think you might have a little bit, but not -- I don't think you're going to lose capacity over the AOBRD to ELD.

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Jizong Chan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst [85]

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Okay. Great, that's really helpful perspective. And just one final question. You had a nice insurance development or insurance result this quarter, but you also indicated that you're seeing a little bit more churn in terms of your capacity providers. And I'm wondering if there is any meaningful impact on accident rate or safety rate as you traditionally experience some of this churn?

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James B. Gattoni, Landstar System, Inc. - President, CEO & Director [86]

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No, not really. I mean I think we vet the guys coming in the door pretty thoroughly. So we don't -- we're not recruiting somebody in who is at a lesser safety performance than somebody who is already here. So it isn't like that's going to bring us down, so to speak. It's just I think a function of the environment and a lot of owner/operators seek Landstar in a protective way. They come here for kind of we're the safe bet. And on the other side, there are people that see the change, BCOs that see the change, think maybe the grass is greener somewhere else, so they want to get out of the industry or whatever. So that's kind of the churn that I was referring to.

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Operator [87]

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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 [88]

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Okay. Thank you, and we look forward to speaking with you again on our 2019 Second Quarter Earnings Conference Call currently scheduled for July 25. Have a good day.

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Operator [89]

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