Landstar System - Q1 2016
April 21, 2016
Transcript
Operator (participant)
Good morning, and welcome to Landstar System Incorporated's First Quarter 2016 Earnings Release Conference Call. All lines will be in listen-only mode until the formal question-and-answer session. Today's call is being recorded. If you have any objections, you may disconnect at this time. Joining us today from Landstar are Mr. Jim Gattoni, President and CEO; Mr. Kevin Stout, Vice President and CFO; Mr. Pat O'Malley, Vice President and Chief Commercial and Marketing Officer; Mr. 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.
Jim Gattoni (President and CEO)
Thank you, Olive. Good morning, and welcome to Landstar's 2016 First Quarter Earnings Conference Call. This conference call will be limited to one hour. Due to a high level of participation on these calls, I'm requesting that each participant have a two-question limit. Time permitting, we can circle back for additional questions. 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 2015 fiscal year, described in the section Risk Factors and other SEC filings from time to time. These risks and uncertainties could cause actual results, 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. Late yesterday afternoon, we filed a traditional 8-K with the SEC that included our quarterly earnings release. We also included with that filing a slide presentation with some additional information regarding revenue, gross profit margin, operating margin, and a few other performance metrics.
This information has been provided to assist with the earnings conference call and to provide some additional information on the results of the quarter. I will not be talking to these slides during my prepared remarks, but feel free to ask questions on any of the information included in the slide presentation during the Q&A. I will now touch on a few first quarter highlights. For the second straight quarter, new agent revenue exceeded $25 million. This key metric reflects the continued strength of the Landstar model in attracting quality agents to the network. We ended the quarter with 9,497 trucks provided by BCOs, the highest number of trucks provided by BCOs at the end of any first quarter. We also had a first quarter record number of truck brokerage carriers haul freight on Landstar's behalf during the 2016 first quarter.
The number of loads hauled via truck in the 2016 first quarter was a first quarter record, and diluted earnings per share of $0.69 in the 2016 first quarter was another first quarter record. As you know, Landstar filed an 8-K with the SEC on March twenty-ninth, providing updated first quarter revenue and earnings guidance. First quarter revenue of $712 million was in line with our revenue guidance of $705 million-$725 million. Revenue in the 2016 first quarter was 7% lower than revenue in the 2015 first quarter. The decrease in revenue as compared to the 2015 quarter was due to decreases in revenue per load across all modes. In particular, Landstar experienced a 10% decrease in revenue per load on loads hauled via truck.
We also saw lower revenue per load on loads hauled via rail, air, and ocean cargo carriers. Revenue per load on loads hauled via van equipment was 8% below prior year's first quarter, and revenue per load on loads hauled via unsided platform equipment was 13% below prior year's first quarter. Overall, truck capacity was more readily available than it was in the 2015 first quarter, putting downward pressure on spot market pricing. During the first quarter and through the first few weeks of April, that availability is more pronounced in the unsided platform market as compared to the van market. Additionally, revenue per load has been negatively impacted by a lower cost per gallon of diesel, which was over 25% lower in the 2016 first quarter as compared to the 2015 first quarter. One final point on rates.
Landstar's truck revenue per load was at a record level in the fourth quarter of 2014. In 2014, higher fuel prices, truck productivity reductions due to the new hours of service regulations, rail congestion, and peak U.S. industrial production drove rates to their highest point in the company's history. During 2015, we experienced decreasing revenue per load as the new hours of service provisions were suspended, fuel prices began to contract, congestion was reduced at the rails, and the growth rate of U.S. industrial production slowed. Those industry dynamics continued into the 2016 first quarter, but with additional deceleration in the growth rate of U.S. industrial production, resulting in additional pressure on price. During the first few weeks of April, we have seen a normal seasonal uptick in rates on loads hauled via truck.
I believe we will continue to see the normal seasonal uptick in pricing as we move through the second quarter. Thus far, the price of fuel has been fairly stable, and truck capacity, although clearly more readily available than during 2015, seems to be holding at a consistent level. As it relates to volumes, the number of loads hauled via van equipment increased 4% compared to the 2015 first quarter. Unsided platform loadings increased 1%, and the number of LTL loadings increased 3% over the 2015 first quarter. We continue to experience increased demand for services provided via Landstar-provided trailing equipment. The number of loads hauled via Landstar-controlled trailing equipment, mostly van equipment hauled by BCOs in drop and hook operations, was 31% of truck loadings in the 2016 first quarter and increased 9% over the prior year.
Overall, we have maintained stable unsided platform volumes in a difficult flatbed environment. Heading into the second quarter, our quarter-over-quarter comparisons of volumes on unsided platform equipment gets more difficult as we hauled over 13,000 loads via flatbed equipment in the 2015 second quarter under a project for a specific account in the automotive industry. That project concluded at the end of 2015. As it relates to the company's customer account base, the company's top 100 customers, ranked by 2015 first quarter revenue, comprised approximately 41% of 2016 first quarter total revenue. 2016 first quarter revenue from those top 100 accounts decreased 10% from the 2015 first quarter, while the remaining accounts decreased 4%.
From an industry standpoint, revenue from the building product sector was one of few industry sectors that grew over the 2015 first quarter. As to revenue declines, freight relating to the energy sector, which was 3% of revenue in the 2016 first quarter, decreased almost 50% compared to the 2015 first quarter. Other sectors showing significant revenue declines over the 2015 first quarter were machinery, metals, foodstuffs, and automotive products. Gross profit decreased 3% compared to the 2015 first quarter, 4% better than the quarter-over-quarter decrease in revenue, as gross profit margin expanded 70 basis points in the 2016 first quarter compared to the 2015 first quarter.
Lower diesel fuel prices and the favorable impact of more readily available capacity drove down the cost of purchased transportation paid to truck brokerage carriers in the quarter, helping to increase the gross profit margin. Notably, the gross profit margin on loads hauled via truck brokerage carriers under variable cost arrangements expanded 80 basis points over the 2015 first quarter. I expect softer capacity conditions to persist through the 2016 second quarter, and therefore, expect gross profit margin to exceed the 2015 second quarter at a level somewhat similar to the margin expansion experienced in the 2016 first quarter over the 2015 first quarter. Here's Kevin with his review of other first quarter financial information. Kevin?
Kevin Stout (VP and CFO)
Thanks, Jim. Jim has covered certain information on our 2016 first quarter, so I will cover various other financial information included in the press release. Gross profit, defined as revenue less the cost of purchased transportation and commissions to agents, decreased 3% to $112.2 million and represented 15.8% of revenue in the 2016 first quarter, compared to $115.4 million, or 15.1% of revenue, in 2015. The cost of purchased transportation was 75.9% of revenue in the 2016 quarter versus 77% in 2015. The rate paid to truck brokerage carriers in the 2016 first quarter was 163 basis points lower than the rate paid in the 2015 first quarter.
The decrease in the cost of purchased transportation was mostly due to the effects lower diesel fuel costs have on revenue and the cost of purchased transportation on freight hauled via truck brokerage carriers. Commissions to agents as a percentage of revenue were 46 basis points higher in the 2016 quarter as compared to 2015 due to an increased net revenue margin, revenue less the cost of purchased transportation, on loads hauled via truck brokerage carriers. Other operating costs were $7.4 million in the 2016 first quarter, compared to $7.7 million in 2015. This decrease was primarily due to increased gains on the sale of used trailing equipment and decreased trailer rental costs, partially offset by increased trailing equipment maintenance costs.
The company has increased its company-controlled trailer fleet to 10,700 trailers, a 10% increase over prior year, as the number of BCOs hauling Landstar trailer equipment has increased with the increased demand for drop and hook services. Insurance and claims costs were $14.2 million in the 2016 first quarter, compared to $14.8 million in 2015. Total insurance and claims costs for the 2016 quarter were 4.3% of BCO revenue, compared to 4.2% in 2015. The decrease in insurance and claims compared to the 2015 period was due to decreased unfavorable development of prior year claims in the 2016 period, as the 2015 period included a $4.5 million charge related to a single accident that occurred in 2011.
The decrease was partially offset by increased severity of commercial trucking accidents in the 2016 first quarter as compared to 2015. Selling, general, and administrative costs were $34.6 million in the 2016 first quarter, compared to $37.2 million in 2015. The decrease in SG&A costs was primarily due to the timing of the company's annual agent convention, decreased employee health benefits costs, and decreased stock-based compensation, partially offset by increased professional fees. SG&A expense as a percent of gross profit decreased from 32.3% in the prior year to 30.8% in 2016....
Included in SG&A costs are costs of $1.5 million in the 2016 first quarter, and $250,000 in the 2015 first quarter, related to the company's multi-year project that we believe will increase efficiency, primarily through technology, and improve the processing of transactions from order to delivery at both the agent's office and at Landstar. Depreciation and amortization was $8.4 million in the 2016 first quarter, compared to $7 million in 2015. This increase was entirely due to the increase in the number of company-owned trailers. As it relates to operating leverage, operating income was $47.9 million, or 42.7% of gross profit in the 2016 quarter, versus $49 million or 42.5% of gross profit in 2015. Operating income decreased 2% year-over-year.
The effective income tax rate was 38% in the 2016 first quarter, compared to 37.8% in 2015. The effective income tax rate, which has historically approximated 38.2%, was impacted in both periods by tax benefits resulting from disqualifying dispositions of the company's common stock. Turning to our balance sheet, we entered the quarter with cash and short-term investments of $217 million. Cash flow from operations for the 2016 period was $72 million. Cash capital expenditures were $1 million, and the company acquired $12 million in trailing equipment financed under capital leases.
During the 2016 period, we purchased 175,000 shares of Landstar common stock at a total cost of $10 million, and there are currently 1.6 million shares available for purchase under the company's stock purchase program. Back to you, Jim.
Jim Gattoni (President and CEO)
Thanks, Kevin. Overall, considering recent industry fundamentals of low demand and looser truck capacity, Landstar had a good first quarter. I expect the current freight environment to continue throughout the second quarter. Although we have experienced a normal seasonal uptick in pricing into the first few weeks of April, I expect revenue per load on loads hauled via truck in the 2016 second quarter to be lower than the 2015 second quarter in a high single- to low double-digit % range. Excluding the 13,000 loads related to the automotive project from the 2015 second quarter, I expect their number of loads hauled via truck to increase over the prior year's second quarter in a low single-digit % range.
Based on the continuation of recent revenue trends, I currently anticipate 2016 second quarter revenue to be in a range of $770 million-$820 million. In comparing the 2016 second quarter diluted earnings per share guidance with the second quarter of 2015, the 2016 second quarter will be negatively impacted by approximately $0.03 per diluted share related to the company's annual agent convention, which was recently held in the 2016 second quarter, compared to 2015, when it was held in the first quarter. Additionally, the 2015 second quarter included approximately $0.05 in diluted earnings per share, attributable to the project for the automotive customer.
Based on the range of revenue estimate and considering the timing of Landstar's annual agent convention, we anticipate 2016 second quarter diluted earnings per share to be in a range of $0.80-$0.85. 2016 has started off with a soft operating environment. With that said, however, the model performed well in the current low growth environment. We continue to add agents and capacity to the network and are well positioned for when the market improves. With that, Olive, we will open to questions.
Operator (participant)
Thank you very much, sir. At this time, we will begin the question-and-answer session. If you would like to ask a question, please press star and number one on your touchtone phone. Once again, that is star and number one to ask a question. To cancel your request, you may press star and number two. Our first question comes from Alex Vecchio of Morgan Stanley. Your line is open.
Alex Vecchio (Analyst)
Good morning. Thanks for taking the questions. Hey, Jim, can you walk us through how total truckload volumes trended on a year-over-year basis through the quarter, on a monthly basis?
Jim Gattoni (President and CEO)
Yeah, sure. On a month-over-month prior year month?
Kevin Stout (VP and CFO)
Give me a second there, Alex.
Alex Vecchio (Analyst)
Sure.
Kevin Stout (VP and CFO)
It was 342.
Alex Vecchio (Analyst)
3, 4, 2.
Kevin Stout (VP and CFO)
January, February, March.
Jim Gattoni (President and CEO)
Yeah, 3%, 4%, 2%.
Alex Vecchio (Analyst)
Okay, got it. Thanks. All right, and then just higher level, you know, you, you had some good commentary on, on, capacity overall. You, I think Jimmy noted that it's still relatively elevated, but seems to be holding, at a consistent level. It, it looks like your, your, broker carrier count actually continued to tick up, sequentially. Is, is that more of a function of kind of Landstar, specific, initiatives? And then also, what, what do you think we need to, what, what needs to happen, in order for capacity to start coming out at a quicker pace and, and maybe start supporting the pricing environment? What, what do you need to see there for that to kind of change on the margin materially?
Joe Beacom (VP and Chief Safety and Operations Officer)
Alex, this is Joe. The broker carrier count, you did see an increase, and I think that's a function of, you know, carriers seeking out quality loads and looking perhaps at places that they hadn't looked before, right? So they're out there becoming approved, perhaps with people that they hadn't been approved with before. We do have a pretty strong outreach effort, and I think we have a good reputation, and I think, you know, you've seen that grow significantly over the last few years. I think it's just a continued-
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
... and carriers wanting to do business with Landstar. That's what I would attribute that to.
Jim Gattoni (President and CEO)
Well, I, I would say, Alex, that you did see the normal, there was a little bit of a downtick in the active count from the fourth quarter to the first quarter. So I mean, you did see the normal drop off and a little bit less participation. There's only 200 out of 29,000 that dropped off. But, you know, as to what has to happen, clearly, we can have industrial production that's, you know, ticking almost flat to slightly down the prior year. So, I mean, that puts a little pressure on rates, clearly. And, you're going to have to have some trucks come out of the market if we don't see a turn in manufacturing in the U.S.
Alex Vecchio (Analyst)
Yeah. No, that makes sense. Okay, I appreciate the color, gentlemen.
Operator (participant)
Thank you. Our next question comes from Jack Atkins of Stephens. Your line is open.
Jack Atkins (Analyst)
Good morning, guys. Thanks for the time.
Jim Gattoni (President and CEO)
Morning.
Jack Atkins (Analyst)
You know, I guess, Jim, when you think about, you know, the intermodal and air and ocean volume, both were up materially in 2015, and then both are off to a good start in 2016. You know, sort of could you maybe talk about what's driving that, and would you expect, you know, these type of growth rates to continue for the next several quarters?
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
Jack, this is Pat O'Malley. If you look at the intermodal sector, that's really driven by a couple of customers that we've done a nice job in converting business over to Landstar. So we've taken market share in that segment. On the air and ocean, it's a couple of customers combined with new agents that are offering that service. So, clearly, we continue to call on our customers and position ourselves well with them. We think we've got a pretty good intermodal solution. It's certainly proven itself with a number of customers, and obviously, our initiatives are always to bring on quality agents.
Jack Atkins (Analyst)
Okay. Okay, Pat, thanks for that. And then, Kevin or Jim, when you think about, the guidance for the second quarter, what, what does that assume in terms of insurance and claims expense as a percentage of BCO revenue? I think historically, we've been sort of cautious to think about it as 3.3%. Is that still the right number to use?
Jim Gattoni (President and CEO)
Well, it slipped a little bit. The average has dropped to 3.2, but yeah, so we're using 3.2 currently.
Jack Atkins (Analyst)
Okay, thanks again for the time.
Jim Gattoni (President and CEO)
Yep.
Operator (participant)
Thank you. Our next question comes from Jason Seidel of Cowen and Company. Your line is open.
Jim Gattoni (President and CEO)
Hey, Jason.
Jason Seidl (Analyst)
Hey, good morning, guys. You made a comment that flatbed was a little bit more under pressure. Can you elaborate on that? What's putting on that pressure on flatbed, and where are you seeing the weakness, what areas?
Jim Gattoni (President and CEO)
Well, I think it continues to show what happened in our business, even though that oil and energy is only 3% of our business, you can see what's going on there. And, you know, it just seems a little bit more focused this year than it was last year, and I think it's still coming from that energy sector. I think there's flatbeds coming into our market and driving rates down. I think that's the primary driver, you know, and that's been a kind of a consistent story. It just seems a little more intense than it was.
Jason Seidl (Analyst)
Okay. No, that makes sense. You know, also, you said that unless things pick up, more trucks are going to need to come out of the market. You know, what, what's the magnitude that we need? Do you think if we had, you know, a 2% reduction in, in, fleet sizes, whether they're bankruptcies or just reductions, is that going to get us more towards, equilibrium, or do you think we need more than that?
Jim Gattoni (President and CEO)
I tend to be a little more optimistic. You know, I look at what I look at is our revenue per mile on BCO. That's kind of a pure play without much fuel in it. And those rates right now, when you're looking at van or flatbed, they're on a revenue per mile basis, it's tracking to about where 2013 was, which wasn't a great year, but it wasn't really a bad year. So, you know, how much capacity has to get back to be a little bit better than 2013? You know, 2%-3%. I don't think it's as significant as what I'm reading, but I think I've got guys in this that say my maybe it is a little bit more than I think.
But I'm being a little more optimistic than what I'm reading about and all these reports come about how soft things are, because, again, our revenue per mile on BCO rate, on BCO equipment, whether it's van or flat, it's grown 20% in the last five years, which is pretty historic high, right?
Jason Seidl (Analyst)
Mm-hmm.
Jim Gattoni (President and CEO)
It's pulled back to about 2013 levels. You know, we need to get some of the trucks out that came in in, you know, 2013, 2014, 2015. From a significance, I can't tell you how many, you know, whether it's 2% or 3%, I don't want to put a number on that.
Jason Seidl (Analyst)
What's your read on ELDs and when we're going to start to see the impacts in the marketplace?
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
Jason, this is Joe. I think most larger carriers are addressing that now, and I don't think you'll see a major impact. I think, you know, those smaller carriers, the 10-truck guys or less, that are the preponderance of carriers out there, I think they'll—they won't address that until probably the middle of next year, you know, maybe a little bit before that. I don't think we'll see any anybody leaving the market, if that's the question, because of ELDs, if you're smaller, until sometime in 2017, probably the middle of the year.
Jason Seidl (Analyst)
Okay. Gentlemen, I appreciate the time and the color, as always.
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
Sure.
Operator (participant)
Thank you. Our next question comes from Rob Salmon of Deutsche Bank. Your line is open.
Jim Gattoni (President and CEO)
Hey, Rob.
Seldon Clarke (Analyst)
Hey, guys, it's Seldon Clarke on for Rob.
Jim Gattoni (President and CEO)
Okay.
Seldon Clarke (Analyst)
So I know you're talking about capacity just staying at a consistent level. Are you referring to just overall truck, or is that, more so in van and less so in flatbed?
Jim Gattoni (President and CEO)
It as it pertains to each, I think we've seen a consistent level in both flat. Flats are a little softer than where the van is, but I think we're seeing consistency just based on the pricing we're seeing recently on the A, you know, coming into April. If we're seeing normal seasonal upticks like we do, to me, that kind of indicates that it's kind of we've stabilized on where the capacity is. And again, I'm not saying that we're tightening. I'm saying we're kind of still in that readily available capacity as compared to last year, on both van and flat. And remember, the flat to me is clearly softer than where the van is.
Seldon Clarke (Analyst)
Okay, and then did flat really like... It's just tough to tell, like, comp-wise, because of the auto contract. Did flat, like, did that start to accelerate into Q1, or, or I guess, towards the end of the year, or how did that really trend?
Jim Gattoni (President and CEO)
... on the flat side?
Seldon Clarke (Analyst)
Yeah, like, I mean, I just feel like it was a little. There's a little delay with the energy CapEx coming down.
Jim Gattoni (President and CEO)
Yeah, it felt like there was a delay. I think we would have anticipated that would have felt more pressure in 2Q, early 2015 or halfway through 2015 from the energy side.
Seldon Clarke (Analyst)
Right.
Jim Gattoni (President and CEO)
It just feels, like I said, it feels a little more intense right now than it felt throughout last year. And it actually, to tell you the truth, from January, February, March, the flat softened on a year-over-year slightly. So yeah, we felt a little more pressure as we moved through the quarter on the flatbed side.
Seldon Clarke (Analyst)
Okay, thanks. And then, just a little bit more of a minor question. I think there was a decent sequential drop-off in ocean and air cargo revenue per load. Is there anything to read into there, or, is this just typical seasonality, or is there gonna be a lower base moving forward, or?
Jim Gattoni (President and CEO)
Yeah, it's such a small component of our business. I wouldn't read that into any industry trends.
Seldon Clarke (Analyst)
Okay.
Jim Gattoni (President and CEO)
It's really basically the you know handful of agents we have moving ocean freight and the accounts that they're in, and the lanes they're moving freight. And I, that's not a... That, I wouldn't use that as a read into the ocean dynamics.
Seldon Clarke (Analyst)
Okay, all right. Thank you very much.
Operator (participant)
Thank you. Our next question comes from Todd Fowler of KeyBanc Capital Markets. Your line is open.
Jim Gattoni (President and CEO)
Morning, Todd.
Todd Fowler (Analyst)
Hey, good morning, Jim. Great. Hey, just on the 2Q guidance and the sequential ramp from 1Q, and I know that there's some moving parts with the timing of the agent convention this year. But can you help us think about, you know, kind of the seasonality that you have baked in? And I think when you build your guidance, you normally think about the normal seasonal trends and kind of where you ended 1Q. Are you just, you know, kind of thinking about a normal sequential progression into 2Q? Or are you factoring in maybe some potential softness, you know, on the flatbed side into the second quarter? How are you thinking about the ramp 2Q over 1Q?
Jim Gattoni (President and CEO)
I'm expecting the normal seasonal uptick based on what we've seen over the last, you know, 3-4 weeks, because we've seen it. And generally, what happens, we see the revenue per load tick up about 1%-2%, and that's kind of what we built into the, you know, sequentially, first quarter to second quarter. You know, it's just, it, like I said, it's soft, but I'm not sure it's soft ended. It's not, it's kind of consistent with where we were through the first quarter. So I, I-
Todd Fowler (Analyst)
Okay, so-
Jim Gattoni (President and CEO)
We're seeing the normal seasonal uptick in the last four weeks.
Todd Fowler (Analyst)
Okay. And maybe where you're not seeing it, or maybe where it's a little bit softer, so one of the earlier questions is just on the flatbed side?
Jim Gattoni (President and CEO)
Yeah, you know, it is an overall... We, I don't have flatbed information for April yet, so I, you know, the mix side, but I would, I would expect it might be a little softer on that side. But right now, combined, van and flat is showing the normal uptick.
Todd Fowler (Analyst)
Okay. And then just for my second question, you know, with all of the rate pressure on the spot side, is there a point where you see, you know, loads not moving that are posted on your load board? I mean, is there, is there a rate level where the BCOs just, just won't, won't accept the freight at that certain price? And, and if there is, I mean, have you started to see that? I mean, really what I'm trying to get a sense is, I mean, can you still see more downward pressure in spot rates, or is it just a point where, you know, people just won't accept loads at a certain price point?
Jim Gattoni (President and CEO)
I don't think we're seeing that. The other way we could actually measure it is if our BCOs, right? But their utilization is consistent where it was a year ago. So they're hauling as many loads now than they were a year ago. So we're not seeing that.
Todd Fowler (Analyst)
Okay. So you still could see... You're not seeing loads not being cleared, basically, where the spot rates are right now?
Jim Gattoni (President and CEO)
No.
Todd Fowler (Analyst)
Okay, good. Okay, thanks a lot for the time this morning, guys.
Jim Gattoni (President and CEO)
Yep.
Operator (participant)
Thank you. Our next question comes from Matt Brooklier of Longbow Research. Your line is open.
Matt Brooklier (Analyst)
Hey, thanks. Good morning. I think you talked about your truckload volume growth in April, but you didn't put a number to it. Do you have the number in terms of truckload volume growth thus far in April?
Jim Gattoni (President and CEO)
Yeah, we're at the low. We're running that low single-digit rate over the prior year, same four weeks. Three weeks?
Matt Brooklier (Analyst)
Okay. I mean, I guess, is it, is it more similar to March, or is it more similar to, to Jan, Feb, when you were at, I think, three, four?
Jim Gattoni (President and CEO)
More similar to March.
Matt Brooklier (Analyst)
Okay. And then, my second question, it's pretty clear there's, you know, incremental capacity availability within the truck market. The thought process is that, you know, current pricing doesn't really support incremental trucks being added, and we're going to go through this, you know, a process of supply rationalization. I think that's the message is heard loud and clear amongst, you know, the publicly traded trucking names. I guess my question is, is the other portion of the market, the private carriers, do you think that kind of the rationale there is that they're at a point, where they understand that, you know, adding trucks at this point in time is probably not the right move?
I guess my question being, are you still seeing, you know, a portion of the market adding trucks at this point in time? Or do you think in general, most carriers at this point are kind of paring back their fleet growth initiatives for 2016?
Jim Gattoni (President and CEO)
Well, I think if you just look at the orders on Class 8s, where they went and the direction that's going, I wouldn't even think private fleets are adding. And the one indicator we can look at is those companies that we haul freight that have private fleets. I don't think we've seen or heard where they're going to add trucks in the system. I think our volumes there are consistent with where they were. So I wouldn't anticipate that even the private fleets would be adding any kind of equipment into the system based on what's going on. But I know that's... That's a good question, but hard to answer.
Matt Brooklier (Analyst)
Yeah, okay. Appreciate the time.
Operator (participant)
Thank you. Our next question comes from Scott Schneeberger of Oppenheimer. Your line is open.
Daniel Imbro (Analyst)
Good morning, this is Daniel in for Scott. Jim, could you provide how flatbed volumes trended month by month in the first quarter 2016? And if you can, discuss your expectations for the next couple of quarters.
Jim Gattoni (President and CEO)
Yes, I can. If you just give me one second, I flipped that page for some reason. Flatbeds were relatively stable. I think I got, Kevin will confirm it, 2% in January, ±1% in February, and then +1% in March. I would say we're gonna stay in this relatively flat territory right now. I mean, if you look at March and what was going on in U.S. manufacturing, I mean, it wasn't a strong environment. It was relatively flat. If it holds where it is today on U.S. industrial production, I'd say we'd hold this flat volumes now, excluding this automotive project, right?
Without the automotive in there, we think we can hold flat based on just looking at where March was on demand. I think we'd hold that flat. We're doing a good job of maintaining a flat, you know, volumes on these unsided platform equipment environment that's pretty soft.
Daniel Imbro (Analyst)
Okay, got it. And a follow-up on that, I mean, historically, you had, like, large projects such as the auto contract last year, and I think some alternative energy a few years ago. Do you anticipate any significant project work in 2016? And how strong is your visibility into such project work?
Joe Beacom (VP and Chief Safety and Operations Officer)
This is Pat. You know, obviously, we're in front of our customers frequently, and I think our reputation and our ability to gin up capacity in a critical situation is well documented. So when those customers have the needs for that type of service, we're certainly, I think, one of the first people they think of. We don't plan for any projects. We don't currently anticipate that any projects will come our way. But in, you know, a manufacturing environment that's very dynamic, when those opportunities present themselves, we're able to capitalize on them.
Daniel Imbro (Analyst)
Okay, thank you very much.
Operator (participant)
Thank you. Our next question comes from Ben Hartford of Baird. Your line is open.
Ben Hartford (Analyst)
Thanks. Kevin, real quick, on the net working capital side for 2016, what are you targeting for the year? I mean, I'm not asking for a specific number, but relative to perhaps 2015's contribution, the first quarter appears to be very healthy. For 2016, something above or below 2015's level, what is most reasonable?
Jim Gattoni (President and CEO)
On the CapEx?
Ben Hartford (Analyst)
On the net working capital contribution.
Jim Gattoni (President and CEO)
You know, we on net working capital, really, I mean, that's influenced on, you know, we will pile up assets, right, on the balance sheet with being cash in an environment where we're seeing where we recently saw you know our price, our stock price was probably in the mid-fifties during the first quarter. You know, we got up to 175,000 shares, and then it ran up to the mid-sixties. So we, you know, you kind of step back. Managing our working capital will be all based on, you know, what we're gonna do with our cash. And if we settle in this range, we'll be back into the market. You know, that's kind of the how we manage our working capital and our balance sheet.
Other than that, you know, we have no intentions on utilizing, you know, any kind of the assets or the cash. You know, right now, we have no acquisitions in the pipeline, and we're just gonna historically manage that working capital the way we have in the past.
Ben Hartford (Analyst)
Okay. And I guess what I'm getting at is it looks like it's gonna be a healthy year from a net working capital contribution perspective, overall, operating cash flow. And, you know, the leverage on the balance sheet is still fairly limited, particularly given, you know, where you've been in the past. So what's the appetite to use that cash more aggressively to be in the market and perhaps even use the balance sheet, add some leverage to support some share repurchases above and beyond what may have been previously thought?
Jim Gattoni (President and CEO)
We'll just, we're gonna do it the way we've done it historically and be opportunistic in the market. And what settles into a range, we'll get in. Again, we know we have significant cash on the balance sheet, and, you know, we'll be watching that, the opportunities as they come.
Ben Hartford (Analyst)
Okay, thank you.
Operator (participant)
Thank you. Our next question comes from Kelly Dougherty of Macquarie. Your line is open.
Kelly Dougherty (Analyst)
Hi. Thanks for taking the question. I just want to talk a little bit about the BCO side of things. You know, we saw a company like J.B. Hunt had a lot of owner-operator capacity in the fourth quarter and the first quarter. Your BCO growth continues, but seems to have tapered off a little bit. So can you maybe talk about the nuances there? Are there other companies that are being more aggressive in courting independent operators, or are the BCOs that you guys pull from just a different animal, so there's not as much competition with the traditional asset-based guys? And then, just any color how you can think about, how we should think about BCO growth in 2016, that would be helpful.
Joe Beacom (VP and Chief Safety and Operations Officer)
Okay, Kelly. Yeah, this is Joe Beacom. You know, I don't know exactly what Hunt did to add their own operators, but I would tell you that other companies oftentimes will take somebody from with a little less experience than we might have. Some other companies will have trucks that they'll lease purchase to company drivers to turn them into owner-operators. So I think there can clearly be a difference in the owner-operator. You know, we're taking people that own their own truck and have been out on their own for at least a year, so there can be a little bit of a difference there.
And they might be recruiting to a little different piece of business and a different dispatch system, where at Landstar, BCOs have complete independence and pick from whatever loads that we have in order to generate their income. So I think there's a pretty big difference, perhaps, in the lifestyle of a BCO or owner-operator at Landstar versus other companies. And I think that's pretty well known to the operator community and those that wanna have the freedom and the opportunity to run their own business, truly run their own business, I think tend to come to Landstar. But they have to start somewhere, right? So they start at other places where the opportunity presents itself.
Sometimes getting into a truck is easier if a company that you're with, driving as an employee driver, offers you a lease purchase option, and that's what some of the asset-based carriers have done historically.
Kelly Dougherty (Analyst)
... So that's helpful. You know, so, so maybe it is a bit of a different animal. Sorry. And, just wondering, you know, if these guys have to be able to run their own business, is there kind of a, a fixed pool of, of, you know, Landstar-appropriate BCOs, or how do you think about growth in that in this year?
Joe Beacom (VP and Chief Safety and Operations Officer)
Well, I think, yeah, we'll draw from individuals that are out there running their own authority, running their own business, and they want a place that's a little bit more stable or offers some benefits that Landstar offers, so we might draw from that pool. I think the growth in BCOs in 2016 just based on demand and where pricing is and so forth, it doesn't... You know, the first quarter we were pretty flat, which is pretty typical. There's only been once in the last six years that we've actually net grown BCOs in the first quarter.
So I guess it remains to be seen if the economy improves and the volume of freight in the system improves. I think we remain a very attractive option to owner-operators who wanna call the shots and run their own business. So we'll see where that goes. We're looking to grow. I don't think you'll see the growth this year that you saw last year.
Kelly Dougherty (Analyst)
Okay. Thanks, Joe.
Joe Beacom (VP and Chief Safety and Operations Officer)
Yep.
Operator (participant)
Thank you. Our next question comes from Scott Group of Wolfe Research. Your line is open.
Joe Beacom (VP and Chief Safety and Operations Officer)
Hey, Scott.
Scott H. Group (Analyst)
Hey, thanks. Morning, guys. So, couple quick things. First, on the tech rollout, is that still $0.05-$0.10 for the year? And can you just walk us through the cadence in terms of what's in second quarter and then what's in the back half?
Joe Beacom (VP and Chief Safety and Operations Officer)
I think you just said, it'll be consistent on a couple pennies a quarter, and yeah, we're still in that range of $0.05-$0.10.
Scott H. Group (Analyst)
Okay, perfect.
Joe Beacom (VP and Chief Safety and Operations Officer)
The $1.5 million, it's about $0.02 in the first quarter.
Scott H. Group (Analyst)
Okay. I think I heard you guys say that you expect the pure brokerage margins to be up a similar amount year-over-year in the second quarter as the first. I think it's a little bit more optimistic than we've heard from some other guys in terms of brokerage gross margins. What are you seeing that gives you confidence we'll still see gross margin expansion there?
Joe Beacom (VP and Chief Safety and Operations Officer)
Well, I think it's the just the market condition and where we were last year. I mean, when you look at last year, where we were and where we came out of the first quarter, you kind of look at sequential trends. It'll, it generally tightens up a little bit into the second quarter. But I, you know, and I, I think what I said is somewhat similar. I, I don't think we're gonna probably be at the level of the, was it 160 basis points, Kevin?
Scott H. Group (Analyst)
160.
Joe Beacom (VP and Chief Safety and Operations Officer)
I don't think we're gonna be at that 160 basis point level, but I do think we'll be up, you know, somewhere between that, you know, 120-150 range, so it's somewhat similar. We're still gonna get margin expansion off that, off the broker stuff. And fuel is still gonna be lower compared to the second quarter last year, which also drives a little bit of that pickup.
Scott H. Group (Analyst)
Okay, yeah, that's right. And then, I don't know if you just went through this with Kelly on just the last question, but, on the BCO count, should we make anything, read anything into the kind of that slight sequential drop from 4Q to 1Q? And is it getting any tougher to find BCOs? Or I guess I'm just wondering, like, if that's a sign to you that there's, the small truckers are starting to leave the market at all.
Joe Beacom (VP and Chief Safety and Operations Officer)
Scott, first, we, yeah, we were... I think we lost, we were down 3 trucks at the end of Q1 from the year-end. So pretty typical, first quarter. As I was saying to Kelly, there's only once in the last 6 years have we actually net grown BCOs in the first quarter, so that's not abnormal at all. The pipeline for BCOs coming into Landstar is very strong, along, and there's just a lot of guys out there interested. So ads are up considerably. Deletes are also up, right? So it's really a matter of managing the adds and the deletes, and that's where we're gonna spend our time to get the net growth as we move throughout the year.
Scott H. Group (Analyst)
Okay, that's helpful. And just lastly, can you just remind us what % of your BCOs have ELDs and what the timeframe is for you to roll that out to everybody?
Joe Beacom (VP and Chief Safety and Operations Officer)
We're sitting, Scott, around 65% of our BCOs have ELDs, and we are working now on a timeline to get them installed before the mandate in 2017. I don't think we'll have a huge issue there. I think it's we've kind of taken the approach we've taken, knowing we had the time, and we'll just kind of continue to progress and be where we need to be in plenty of time. No worries from our end at that, on that issue.
Scott H. Group (Analyst)
Do you see a difference in utilization or productivity from guys with ELDs versus guys without?
Joe Beacom (VP and Chief Safety and Operations Officer)
You know, we haven't done the side by side in a little while, but when we did do it last year, there was virtually no difference.
Scott H. Group (Analyst)
Okay. All right. Thank you, guys.
Operator (participant)
Thank you. Our next question comes from John Larkin of Stifel. Your line is open.
John Larkin (Analyst)
Hey, good morning, gentlemen. Thanks for taking the questions. On page 17, you have a pretty daunting set of charts there, which shows the revenue per load just really cratering, more so for flats than for vans. Could you ferret out how much of that was fuel and how much of that was rate? And then, maybe another way to differentiate would be how much of that was what you would consider to be contract business versus spot business?
Joe Beacom (VP and Chief Safety and Operations Officer)
Yeah, John, this is Jim. I would say that beginning of the early 2015, if you listen when we did our quarter calls, remember, the fuel only really affects the brokerage-
John Larkin (Analyst)
That's right.
Joe Beacom (VP and Chief Safety and Operations Officer)
Right?
John Larkin (Analyst)
Got it.
Joe Beacom (VP and Chief Safety and Operations Officer)
We're saying anywhere between, I would say, 5%-8% or in any given quarter was attributable to the fuel. A drop-off, the 5%-8% of the decrease in the revenue per load was due to fuel. And I'm sorry, the second part of the question was?
John Larkin (Analyst)
Second, second part of the question was related to how much of, of this was related to softness in the spot market versus softness in what you might call the contract market?
Jim Gattoni (President and CEO)
... Yeah, we, we are probably almost all of our freight, I'd say the, you know, probably 80%-90% of our freight is spot market, so it's, there's not a lot of contract rate in here. So the majority of our freight is just spot market driven. You know, we're, we're negotiating rates every day between our, you know, even in, even in our contracted, even in our contracts that have some rate information in it, when it gets soft like this, the shippers come back to you and say, "Hey," because we don't guarantee a truck, therefore, the shipper will come back and say, "Hey, you're going to have to take the rates down a nickel or a dime.
John Larkin (Analyst)
Right.
Jim Gattoni (President and CEO)
Otherwise, you know, I got the option to go someplace else." So that's even in our contractual relationships, some, it often happens that they drive the rates down. So I would just assume it's majority, mostly the spot market, is what we're showing.
John Larkin (Analyst)
As a second question, you had mentioned in your laundry list of sectors that were particularly soft in the quarter, the auto sector. I think the broader perception is that auto is, you know, one of the few stronger areas in the economy. Are you saying something different or is it particular to the plants you serve or the business that you have in particular?
Jim Gattoni (President and CEO)
Yeah, John, actually, I think a lot of that is just because the rates were down 10%. I don't think it's a volume thing, right? I think automotive was-
John Larkin (Analyst)
Okay.
Jim Gattoni (President and CEO)
If I remember right, it was down 5%, but and pricing was down 10, down 10. So I think that was, those comments were based on revenue as opposed to volume. So I think it's mostly a volume game. And the other thing, too, is if automotive builds stay consistent, I don't see the growth in the automotive; you kind of flatten out.
John Larkin (Analyst)
Got it. Maybe one quick one on the ELD mandate, which, everyone, I guess, assumes will be fully implemented by the end of 2017. But this OOIDA lawsuit is out there right now, and historically, they have had some success in either delaying or getting the rule to be revised. Do you have any particular read on how that might play out? Are you hearing anything out there in the marketplace, or are your, lawyers advising you one way or the other?
Joe Beacom (VP and Chief Safety and Operations Officer)
John, this is Joe. I'm familiar with it to an extent, and I think it was somewhat predictable. I tend to think because the ELD discussion has been going on for so long, and I think it's been vetted, and I think FMCSA has handled it a little bit differently than some of the other stuff they've tried to throw out there. I'm not as optimistic that OOIDA will delay it, but who knows? I guess it just depends. It seems like there is more positive momentum from a lot of large carriers that this is good. So I think it becomes a little bit more of an uphill battle for OOIDA, but it's a wait and see. I really haven't heard one way or the other.
John Larkin (Analyst)
Thanks very much. I appreciate the time.
Operator (participant)
Thank you. Our next question comes from Matt Young of Morningstar. Your line is open.
Matt Young (Analyst)
Good morning, guys. Just wondering, with the overall demand relatively sluggish here, do you still expect growth in your drop and hook operations or the drop and hook, drop and hook opportunities in the quarters ahead? Along those lines, just which end markets are most likely to use that?
Joe Beacom (VP and Chief Safety and Operations Officer)
Matt, Pat and I are looking back and forth at each other. I'll start with the request for dropped equipment as continues to be pretty strong. It's diversification across a growing number of customers looking for dropped equipment. So, from that perspective, the demand appears to be pretty strong. Moving loads in and out of Mexico is obviously an attractive part of what we're doing, and that's trailer intensive as well. And a big part of doing business in Mexico is providing drop and hook equipment at the border and/or at, in the interior. So I think both of those things are driving some of our demand. And I'll let Pat try to tackle the end markets if he wants to-
Jim Gattoni (President and CEO)
Well, I mean, I think what Joe said is appropriate. Also, you know, the natural diversification that the Landstar model has because of the agent network, it's not concentrated in one specific industry, but across a multitude of industries. And so we see, again, to repeat what Joe said, we see an increase in requests for spotted equipment. Our spotted equipment continues to be utilized, and we anticipate that to continue through the balance of the year.
John Larkin (Analyst)
Yeah, and Matt, one thing to understand that, to, to make clear is, you know, the majority are... We, we generally only allow BCOs to haul our trailer equipment unless it's in, kind of a dedicated route on a broker carrier. So we're kind of reliant on the number of BCOs we have who want to haul our equipment, to grow that drop and hook. Now, we've done a great job of adding BCOs to, to haul the drop and hook. So it's the one spot where we have some capacity constraints, not that we're constrained significantly, but, you know, if we get more, drop and hook opportunity, we got to get the BCOs into the network to actually haul those drop and hook opportunities.
Matt Young (Analyst)
That makes sense. And what of the trailer business that uses your trailers, how much of that is the drop and hook, or is that most of it?
Jim Gattoni (President and CEO)
60% of what the BCOs hauls actually on our trailer, which a majority of that is drop and hook.
Joe Beacom (VP and Chief Safety and Operations Officer)
Yes. About 31% of the total is drop and hook.
Matt Young (Analyst)
Okay, thanks.
Operator (participant)
Thank you. Our next question comes from Alex Vecchio of Morgan Stanley. Your line is open.
Jim Gattoni (President and CEO)
Hey, Alex.
Alex Vecchio (Analyst)
Hey there. Hey, thanks for taking the follow-up. Can you remind us what the volume contribution from the auto contract was in 3Q and 4Q of 2015?
Jim Gattoni (President and CEO)
About 19,500 loads in Q3 and 18,700 loads in Q4.
Alex Vecchio (Analyst)
18.7 in Q4.
Jim Gattoni (President and CEO)
51,000 for the year. If that adds up, then I got it right.
Alex Vecchio (Analyst)
Great. Okay, thanks. That's all I had. Appreciate it.
Jim Gattoni (President and CEO)
Yep.
Operator (participant)
Thank you. Our next question comes from Barry Haimes of Sage Asset Management. Your line is open.
Barry Haimes (Analyst)
Thanks for taking my question. Just following up on the ELDs. Within your broker carriers, have you canvassed them to see what % are already on ELDs, what % plan to convert, and what %, if any, just plan to leave the business altogether? Thanks.
Joe Beacom (VP and Chief Safety and Operations Officer)
Barry, this is Joe. At this point, we have not canvassed our carriers. That is something that we're anticipating trying to do, but at this point, we have not started the process.
Barry Haimes (Analyst)
Okay, great. Appreciate it. Thanks.
Operator (participant)
Thank you. At this time, I show no further questions. I would like to turn the call back over to you, sir, for closing remarks.
Jim Gattoni (President and CEO)
All right. Thank you, Olive, and thank you, and I look forward to speaking with you again on our 2016 second quarter earnings conference call, currently scheduled for July twenty-first. Have a nice day.
Operator (participant)
Thank you for joining the conference call today. Have a good morning. Please disconnect your lines at this time.