Landstar System - Q2 2015
July 23, 2015
Transcript
Operator (participant)
Good afternoon, and welcome to Landstar System Inc's second quarter 2015 earnings release conference call. All lines will be in a listen-only mode until the formal question-and-answer session.
Today's call is being recorded. If you have any objections, you may disconnect at this time. Joining us today from Landstar are Jim Gattoni, President and CEO; Kevin Stout, Vice President and CFO; Pat O'Malley, Vice President and Chief Commercial and Marketing Officer; and 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, Dorothy. Good afternoon, and welcome to Landstar's 2015 second quarter earnings conference call. This conference call will be limited to no more than one hour. Due to a high level of participation on these calls, I am requesting that each participant have a two-question limit. Time permitting, we can circle back for additional questions.
But before we begin, let me read the following statement. The following is a safe harbor statement under the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts or forward-looking statements. During this conference call, we may make statements that contain forward-looking information that relates to Landstar's business objectives, plans, strategies, and expectations.
Such information is, by nature, subject to uncertainties and risks, including, but not limited to, the operational, financial, and legal risks detailed in Landstar's Form 10-Q for the 2014 fiscal year, described in the section Risk Factors and other SEC filings from time to time.
These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking information, and Landstar undertakes no obligation to publicly update or revise any forward-looking information. 2015 second quarter results included many second quarter records.
Revenue, gross profit, operating income, and diluted earnings per share were all second-quarter records. Additionally, the number of loads hauled via truck during the 2015 second quarter was at an all-time high and 9% over the 2014 second quarter.
During our second quarter mid-quarter update conference call, I stated that I anticipated revenue for the 2015 second quarter to be within a range of $830 million-$880 million. I also stated that I anticipated diluted earnings per share to be in a range of $0.87-$0.92. Second quarter revenue was $868 million, which was $54 million or 7% above 2014 second quarter revenue. Diluted earnings per share was $0.92, which was $0.12 or 15% above 2014 second quarter diluted earnings per share. Demand for Landstar's transportation services was strong throughout the 2015 second quarter.
Truck transportation revenue, which was 93% of revenue in the 2015 second quarter, grew 6% over the 2014 second quarter. The increase was driven by a 9% increase in the number of loads hauled via truck, partly offset by a 3% decrease in revenue per load. 2015 second quarter less-than-truckload revenue grew 4%, revenue hauled via railroads increased 28%, and revenue hauled via air and ocean cargo carriers increased 12% over the 2014 second quarter. Revenue hauled via van equipment increased 8% over the 2014 second quarter, entirely from an 8% increase in the number of loads hauled.
The 2015 second quarter was the sixth consecutive quarter, where the number of loads hauled via van equipment exceeded the prior year quarter by an upper single-digit %. The increase in volume was broad-based across many customers and industries. Revenue hauled via unsided platform equipment increased 2% over the 2014 second quarter on a 10% increase in the number of loads hauled, offset by a decrease in revenue per load of 7%.
The number of loads hauled via unsided platform equipment experienced strong growth, resulting from the addition of a large award from a single account during the quarter, with underlying demand consistent with prior year's second quarter. The company's heavy specialized service offering, representing loads requiring specialized equipment, escorts, and permits, and comprising approximately 30% of the company's unsided platform revenue, continues to be soft.
In prior earnings conference calls, we have commented that quarter over prior year quarter revenue per load comparisons were going to be difficult as we moved through this 2015 second quarter, and those difficult comparisons will continue throughout the remainder of the year. Additionally, revenue per load on loads hauled via truck in the 2015 second quarter was impacted by both mix, as demand for heavy specialized services, which has a high revenue per load, continued to be soft in comparison to 2014, and the impact of lower diesel fuel costs on loads hauled via truck brokerage carriers.
I estimate that lower diesel fuel costs reduced revenue per load on loads hauled via truck brokerage carriers by approximately 6% in the 2015 second quarter, compared to the 2014 second quarter.
Although revenue per load on loads hauled via truck broker carriers was 6% lower than the 2014 second quarter, the cost of purchased transportation on those loads was 7% lower during the same period. Revenue per load in the 2015 second quarter on loads hauled via BCO capacity, which excluded fuel surcharges billed to customers and therefore represents a somewhat pure line haul rate, remained the same as prior year's all-time high second quarter BCO revenue per load.
During the 2015 second quarter, we net added over 260 trucks provided by BCOs and ended the second quarter with over 9,300 trucks provided by BCOs, the highest number of trucks provided by BCOs in Landstar history. Additionally, we had the highest number of truck broker carriers haul Landstar loads compared to any quarter in Landstar history.
Landstar ended the 2015 second quarter with a total quarter, and approximately 3,500 over year-end 2014. Both approved and active truck broker carrier count were at record levels at the end of the 2015 second quarter. Although we ended the second quarter with over 700 more trucks provided by BCOs, or an 8% increase as compared to the end of the 2014 second quarter, the number of loads hauled by BCOs was only 1% above the number of loads hauled in the 2014 second quarter, as BCO utilization, measured in loads hauled per BCO per week, was 6% lower than the 2014 second quarter.
Regardless, the company's ability to source capacity remains solid, as the number of loads hauled via truck brokerage carriers increased 18% over the 2014 second quarter, more than offsetting the effect of the lower BCO utilization. New agent revenue, representing revenue from agents who joined the company after April 1, 2014, contributed $22 million of revenue in the 2015 second quarter, while revenue at existing agents increased 5% over the 2014 second quarter.
The 2015 second quarter freight transportation environment continued to provide significant opportunities to increase the account base and strengthen our relationship with customers.
The company's top 100 customers, ranked by 2014 second quarter revenue, comprised approximately 40% of 2014, was approximately the same as the 2014 second quarter, while revenue at customers beyond the top 100 increased $54 million. With over 25,000 bill-to customers, the company's account base is highly diversified. Now I'll pass it to Kevin.
Kevin Stout (VP and CFO)
Thanks, Jim. Jim has covered certain information regarding the 2015 second quarter, so I will cover various other financial information included in our press release. Gross profit, defined as revenue less the cost of purchased transportation and commissions to agents, increased 8% to $130.8 million, and represented 15.1% of revenue in the 2015 second quarter, compared to $121.6 million, or 14.9% of revenue, in the 2014 second quarter. The cost of purchased transportation was 76.9% of revenue in the 2015 quarter versus 77.2% in the 2014 quarter.
The rate of purchased transportation paid to truck brokerage carriers in the 2015 second quarter was 97 basis points lower than the rate paid in the 2014 second quarter, and 45 basis points lower than the rate paid in the 2015 first quarter. The decrease in the cost of purchased transportation was mostly due to the effect lower diesel fuel costs have on revenue and the cost of purchased transportation on freight hauled via truck brokerage carriers.
Both revenue per load and the cost of purchased transportation per load on loads hauled via brokerage carriers decreased from the 2014 second quarter by similar dollar amounts, reflecting the decrease in year-over-year fuel costs. As such, 2015 second quarter net revenue per load on loads hauled via truck brokerage carriers was similar to the 2014 second quarter.
The favorable impact of lower diesel fuel costs on the cost of purchased transportation as a percent of revenue was somewhat offset by an increase in the percentage of revenue contributed by truck brokerage carriers in the 2015 second quarter, which has a higher cost of purchased transportation. Commissions to agents as a percentage of revenue were 22 basis points higher in the 2015 quarter as compared to the 2014 quarter, due to an increased net revenue margin, revenue less the cost of purchased transportation on loads hauled by truck brokerage carriers.
Other operating costs were $8 million in the 2015 quarter, compared to $6.2 million in the 2014 quarter. This increase was primarily attributable to increased trailer equipment rental and maintenance costs and decreased gains on the sale of used trailer equipment.
The company has increased its company-controlled trailer free fleet by 8% over prior year, as demand for transportation services hauled via van equipment continues to be very strong. Insurance and claims costs were $12.3 million in the 2015 second quarter, compared to $13.8 million in the 2014 second quarter. Total insurance and claims for the 2015 quarter were 3.1% of BCO revenue, compared to 3.5% in the 2014 quarter.
The 2015 quarter had unfavorable development of prior year claims of approximately $800,000, and the company experienced increased severity of accidents in the 2015 period as compared to 2014. The 2014 quarter had unfavorable development of prior year claims of approximately $4.9 million.
Selling, general, and administrative costs were $37.7 million in the 2015 second quarter, compared to $36.8 million in the 2014 second quarter. The increase in SG&A costs was primarily attributable to increased employee wages and benefits and an increased provision for customer bad debt, partially offset by decreased provision for bonuses under the company's incentive compensation program.
The increase in customer bad debt was primarily related to one specific customer. Although SG&A dollars increased year-over-year, SG&A expense as a percent of gross profit decreased from 30.2% in the prior year to 28.9% in the current year. Depreciation and amortization was $7 million in the 2015 second quarter, compared to $6.6 million in the 2014 second quarter.
This increase was due to increased depreciation related to the replacement of older, fully depreciated, fully depreciated trailer equipment. As it relates to operating leverage, operating income was $66 million, or 50.5% of gross profit in the 2015 quarter, versus $58.6 million, or 48.1% of gross profit in the 2014 quarter. Operating income increased 13% year-over-year and was the highest second quarter operating income in Landstar history.
During the 2015 second quarter, 82% of incremental gross profit was passed to operating income. We continue to expect to pass 70% of incremental gross profit through to operating income on an annual basis. The effective income tax rate was 38% in the 2015 second quarter, compared to 37.9% in the 2014 second quarter.
The effective income tax rate, which historically is 38.2%, was impacted in both periods by tax benefits resulting from disqualifying dispositions of the company's stock. Over to our balance sheet. We ended the quarter with cash and short-term investments of $131 million. Cash flow from operations for the 2015 year-to-date period was $82 million, and cash capital expenditures were $3 million.
During the 2015 year-to-date period, we purchased 1.3 million shares of Landstar common stock at a total cost of $85 million, and there are currently 3 million shares available for purchase under the company's stock purchase program. At the end of June, shareholders' equity represented 83% of total capitalization. Back to you, Jim.
Jim Gattoni (President and CEO)
Thanks, Kevin. Overall, Landstar had a very good second quarter. Currently, industry fundamentals remain similar to those experienced in the 2015 second quarter. We continue to have very strong demand for our services. I expect that strength to continue throughout the third quarter.
I expect the pricing environment experienced in the 2015 second quarter to continue through the third quarter, which includes the impact of lower diesel fuel costs, a lower contribution of revenue attributed to heavy specialized services, and a stable supply and demand environment with somewhat tight truck capacity and strong, yet steady demand for our services.
Assuming recent trends continue, revenue per load on loads hauled via truck in the 2015 third quarter should be similar to the revenue per load experienced in the 2015 second quarter, which would represent a decrease in a low- to mid-single-digit % as compared to the 2014 third quarter. Historically, the number of loads hauled via truck in the third quarter has been slightly less than the number of loads hauled in the second quarter.
I expect that historical sequential trend to continue in the 2015 third quarter. Given that trend, I expect the number of loads hauled via truck in the 2015 third quarter to increase in a mid- to upper-single-digit range compared to the 2014 third quarter.
Based on the continuation of recent trends, I currently anticipate 2015 third quarter revenue to be in a range of $830 million-$880 million, and based on that range of revenue, diluted earnings per share to be in a range of $0.87-$0.92. And with that, Dory, 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 one on your touchtone phone. Once again, that is star one to ask a question. To cancel your request, press star two. Our first question comes from Jason Seidl with Cowen and Company.
Jim Gattoni (President and CEO)
Hey, Jason, how are you?
James Seidl (Managing Director and Senior Analyst)
Hey, guys. Pretty good. You know, it's earnings, so trying to keep our head down and keep working here. A couple quick questions from me. Number one, in your conversations with your customers, how is the shaping up of peak season looking? Because, you know, we're getting some different responses from the companies that we follow.
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
Jason, this is Pat. The few customers that we run peak business for, on a routine basis, we've talked to them, and they anticipate similar, if not slightly up from last year.
James Seidl (Managing Director and Senior Analyst)
Okay. Well, that's good. You also, Jim, I think you talked a little bit about describing the overall market as fairly or slightly tight. Do you think that that's gonna change later this year after the announcement of any potential government regulations, or do you think that sort of moves on only implementation phase, not just the announcing?
Joe Beacom (VP and Chief Safety and Operations Officer)
Jason, this is Joe. I don't think that the announcement of ELDs, if that's what you're referring to, is gonna have a big impact on capacity in the short term. I don't think it's really much of a surprise. I think over time, I think it could, and it kind of remains to be seen on the implementation side of that, but in the short term, I wouldn't think that in and of itself would be a big deal.
Jim Gattoni (President and CEO)
Yeah, Jason, I would anticipate that we're gonna look at the stable environment for the next six to six months, you know, through the end of the year as our expectation. You know, we think it's-- we think, you know, we, we do still think it's somewhat tight. When you look at our revenue per load, you know, the BCO revenue per load is still sitting at an all-time high, right? So that, that implies there's some level of tightness in the industry, more so on the, on, on a van side than the flatbed side.
James Seidl (Managing Director and Senior Analyst)
Okay, and, and just a quick follow-up. That, that one customer, that seems to have given you some issues in the quarter, what area was that in? What's the end market?
Jim Gattoni (President and CEO)
Um, automotive.
James Seidl (Managing Director and Senior Analyst)
Automotive. Okay. Thanks for the time as always, guys.
Operator (participant)
Our next question comes from Jack Atkins with Stephens.
Jim Gattoni (President and CEO)
Hey, Jack.
Jack Atkins (Research Analyst)
Good afternoon, guys. Thanks for the time. So I guess, Jim, just to kind of start off, you know, this is really the third or fourth quarter in a row where we've seen, you know, very strong volume growth from you guys, even as comps get much more difficult. You know, I'm curious if you could maybe just talk about what you guys are doing internally and what the agents within your network are doing to really drive this, because it's quite impressive the type of volume growth that you guys have been able to see, even in the face of a relatively soft spot market.
Jim Gattoni (President and CEO)
Yeah, I, you know, I think it's just execution by the agent family, to tell you the truth. As you saw, you know, we, we added about $22 million in new agent revenue during the quarter, and that's pretty consistent with historical patterns of what we see. You know, we're getting some good penetration in, in some, some existing accounts.
There's, there's a significant amount of demand, demand for drop-and-hook operations, where we load, we drop trailers at a facility, and then our BCOs go, they load them up, and then our, our guys come in and haul them away. You know, that, that adds significant value to our relationship with customers.
But it's just an overall, a deeper penetration into the existing customer base with our agent family, and it's been consistent, like you said, for about 18 months now, and which historically is probably beyond anything we've done on that kind of a trend.
Jack Atkins (Research Analyst)
Makes sense. And then from a bigger picture perspective, you know, you referenced ELDs in response to the last question. But, you know, thinking out over the course of the next couple of years, if we do see this ELD implementation, how do you think that impacts the brokerage market and your business specifically, you know, if you were to kind of look into the crystal ball over the next couple of years?
Joe Beacom (VP and Chief Safety and Operations Officer)
Yeah, Jack, this is Joe. I think the ELD market, you know, if that comes to pass, I think you'll I think it will have some impact on the small guys, and I think it's not just ELDs, but it's a lot of these other things that are coming down the pipe, whether it's the driver physicals or whether it's speed limiters or some of the things they're trying to do around drug and alcohol. I think it, you could see it, and you could see that impacting some of the small guys, who don't know how to manage that, and it could affect it from a capacity standpoint to where they might want to come find a home.
And we think Landstar is a decent place for them if they want to go that route. I think it will definitely tighten the capacity market if it goes that way. I think if you're a company driver and you're getting paid by the mile, I think it may impact you more because there's a lot of things that are going to limit your productivity. Whereas if you're an owner-operator and you own your own truck and you're getting paid on a percentage, you know, you're seeing the benefits for that inconvenience, so it may not impact you as much, but that's kind of how I'd see that play out from a capacity standpoint.
Jim Gattoni (President and CEO)
Yeah, I don't think any of these regulations improve productivity or the number of available capacity. I'm sure you're all aware of that. So, it's hard getting your hands around in 2-3 years down the road is what it does to capacity. And, you know, does that drive a, you know, a reduction of productivity of 3%-5%? I mean, it's just right now, I think it's hard to predict.
Jack Atkins (Research Analyst)
Okay. Guys, thanks again for the time.
Operator (participant)
Our next question comes from Allison Landry with Credit Suisse.
Danny Schuster (Analyst)
Hi, good afternoon. This is Danny Schuster on for Allison. Thanks for taking my question.
Jim Gattoni (President and CEO)
Okay.
Danny Schuster (Analyst)
So, I saw that the pace of your share buyback accelerated quite a bit this quarter. You know, you bought back almost 2% of the stock on a net basis. So we're just wondering, you know, would you expect that kind of same pace to continue throughout the rest of the year with, if shares remain at a similar level?
Jim Gattoni (President and CEO)
You know, we're always opportunistic in the market. And, speaking to the, you know, the history of what we bought, we, you know, we bought more during the first half of the year, and we bought less during the first half of the year. We will, we will still be opportunistic in the market. And, and to put a specific target on what we think we're going to do, we don't have one set, so we don't really discuss a specific target.
Danny Schuster (Analyst)
Okay, great. Thank you. And then I know you well, I know that you mentioned SG&A saw a bit of a tailwind from lower incentive comp this year. Would you be comfortable providing us with what the, you know, either sequential or year-over-year tailwind was from, from that line?
Kevin Stout (VP and CFO)
Yeah, Danny, this is Kevin. The second quarter of 2014 had about $4.5 million of incentive comp, and second quarter of 2015 had about $1.1 million.
Danny Schuster (Analyst)
Great. Thank you.
Jim Gattoni (President and CEO)
To put it in perspective, a normal annual year is probably $7-$8 million, so it's about $2 million a quarter. We're slightly running behind that a little bit. And last year, I think we had $17 million in total because we had an excellent year.
Danny Schuster (Analyst)
Understood.
Jim Gattoni (President and CEO)
To put it in perspective.
Danny Schuster (Analyst)
Great. Thank you. That's very helpful.
Operator (participant)
Our next question comes from Tom Kim with Goldman Sachs.
Tom Kim (Senior Industrials Equity Research Analyst)
Hi, good afternoon, guys. Congrats on a strong quarter. I mean, it's obviously turning out to be a pretty challenging one for transport, so it's great to see the tremendous volume growth. And, you know, with regard to that, I'm curious, you know, with the one relatively large customer that you'd want in the flatbed side, should we expect that volume growth to sustain into the third and fourth quarter?
Jim Gattoni (President and CEO)
We anticipate that that account will be with us in the third and fourth quarter, yes.
Tom Kim (Senior Industrials Equity Research Analyst)
Okay, great. Would you be able to provide any color in terms of what your organic growth would have looked like? You said it was soft. Is that sort of up or down, or and can you sort of give us a little bit of sense of what that would look like?
Jim Gattoni (President and CEO)
Yeah, I think one of the things I said in my prepared remarks is that the underlying demand was consistent with last year, which means that if, you know, without that, volumes are relatively flat on the flatbed side. You know, consistent with where we were prior year.
Tom Kim (Senior Industrials Equity Research Analyst)
Okay, that's really helpful. Thanks. And then just with regard to the BCO side of the business, can you give us a sense of your outlook for the second half? Do you anticipate this may be sort of picking up?
Joe Beacom (VP and Chief Safety and Operations Officer)
You know, it's hard to say. I mean, BCO utilization is, I think, what you're referring to there, Tom. You know, they had a terrific earnings year last year, and I think there's just a little less motivation by some to get out there and haul freight. I also think we're adding so many new guys, which is great for the long-term prospects of the BCO fleet. But as a new BCO here, you tend to be a little less productive. It just takes you a little bit to get assimilated into the network and make your agent relationships and those kind of things. So, I wouldn't expect a huge increase in utilization as we go forward.
I just think, we're kind of where we are, and until something changes, it's hard to forecast any huge improvement in utilization.
Tom Kim (Senior Industrials Equity Research Analyst)
That's great. Thanks a lot, guys.
Operator (participant)
Our next question comes from Scott Group with Wolfe Research.
Scott Group (Managing Director and Senior Analyst)
Hey, Scott.
Hey, thanks. Afternoon, guys. Just to follow up on that one question on the large customer, do you think you'll have that in 2016?
Jim Gattoni (President and CEO)
I think that's too far off to project at this point. We're pretty confident we'll have it for the next six months, but I don't want to speculate on what happens next year.
Scott Group (Managing Director and Senior Analyst)
Okay. How do you explain the just the huge growth in, in the BCO count that you're seeing right now? And what does that tell you about what you're doing? What does it tell you about just the overall market and capacity?
Joe Beacom (VP and Chief Safety and Operations Officer)
This is Joe. I think, you know, as I look out, you know, the BCO growth, to your point, has been pretty significant. I think some of the things that could be driving it, I don't think there's any one thing, I think it's a multitude of things. There are a large number of carriers who have company iron, who've also gotten into the owner-operator business. And I think when things get a little bit, the demand gets a little bit softer, they tend to not treat those owner-operators like they did in 2014, so they look for a new home, and I think we're a pretty good home because that's a pretty level playing field at Landstar.
I think given the year that we had in 2014, many of our existing BCOs were very quick and very active in recruiting for us and recommending Landstar as an option for other owner-operators in the business that they knew. I think the van drop-and-hook piece being as strong as it was, and the way to participate in that at Landstar is to lease on.
You can't really do that as well as a broker carrier. And then a big story, a big part of the story for BCO fleet growth in 2014 and thus far in 2015, has been turnover in the low 20 percent. I mean, we're like 21%-22%, which is if you're doing that and you're doing a decent job on the recruiting side, you.
Scott Group (Managing Director and Senior Analyst)
Okay, that's helpful. And just last question for you, Jim. When I look at typically second quarter to third quarter, we often see some earnings growth sequentially, and the guidance implies that it's just at the midpoint that you'll see kind of earnings go the other direction. What's different in your mind this quarter with the guidance?
Jim Gattoni (President and CEO)
Well, if you, if you look at the range of revenue we've put out, the midpoint is $855 million, and we did approximately $868 million in the second quarter. So, you know, looking sequentially, typically what we see, and if you look back five years, revenue per load generally increases third quarter over second quarter by an average of about 3%. And the number of loads, third quarter over second quarter, usually drops off about 3%.
So when you do that math, right, the second quarter and third quarter revenue generally looks similar. And, you know, then, then there's some insurance and gives and takes and some MICP and stuff like that, but generally end up in a position where the quarters look the same.
What we're seeing this year, though, a little bit in the third quarter, what we're expecting is, we're not going to get the revenue per load growth coming into the third quarter. We're seeing a kind of a stable compared to the second quarter, so that 3% growth. So we're expecting 70% of our range. That, that kind of explains about $0.01 or $0.02 of what we're dealing with.
Scott Group (Managing Director and Senior Analyst)
That makes sense. Okay, thank you, guys.
Operator (participant)
Our next question comes from Todd Fowler with KeyBanc Capital Markets.
Jim Gattoni (President and CEO)
Hey, Todd.
Todd Fowler (Analyst)
Jim, how are you? Good afternoon. Hey, congratulations on the quarter. I guess maybe where I wanted to start was, you know, with the flatbed business being, you know, flat, if you strip out the share gains from the large customer, I mean, I still think that that's a good performance, given some of the data points that we're seeing in the industrial data or in the industrial end markets.
I don't know if this is for you or for Pat, but maybe I was hoping you could talk a little bit about where you're seeing some of the strength on the flatbed side, and also some of the areas where you're seeing some weakness, so we get a sense of some areas that we should be paying attention to, to either turning up or improving or maybe softening a little bit as we move forward.
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
Todd, this is Pat. So, we saw kind of, as Jim mentioned in his opening remarks, it was pretty broad-based. Now, coming into the year, we talked about some of the impacts in the energy market. We certainly saw that, to oil and gas. We certainly saw some negative impacts there and in the government sector. But if you think about the diversification of Landstar, it really kind of protects us in this down market, and I think it's been evidenced by the results here, this quarter. So, you take government, some energy stuff, those two were soft, but other than that, we kind of held our own in every one of those markets that we serve.
Todd Fowler (Analyst)
Just to be clear, Pat, the other markets would be, I mean, machinery's been okay, and then some of, like, maybe the construction markets, or what were some of the other markets that the-
Joe Beacom (VP and Chief Safety and Operations Officer)
Building's been okay, machinery's been okay, you know, up in the quarter. So, those end markets, I think, are performing well, and we're performing well within those end markets.
Todd Fowler (Analyst)
Any sense on the government and the oil field, does it feel like that that's bottoming at this point, and that should stabilize? Or do you have any indication on how those markets could trend into the second half?
Joe Beacom (VP and Chief Safety and Operations Officer)
I would think that what we've seen in the government is going to continue for the balance of the year. I think we use the term bottomed out. I think we've bottomed out on where the energy markets are, but it's a low bottom. So I would expect the kind of similar results here in the back half of the year. Certainly, in government, it's gonna be what we've seen in the first half, we're gonna see in the back half.
Todd Fowler (Analyst)
Okay. All of that's very helpful. Then just for my follow-up, Jim, I'm not trying to ask something I know the answer to, but, you know, the cash generation is very good. You're dropping a lot of the gross profit down to the bottom line. You know, do you consider anything else besides the share buybacks at this point, or is that still the predominant use of free cash?
Joe Beacom (VP and Chief Safety and Operations Officer)
Right now, that's the predominant use of free cash.
Todd Fowler (Analyst)
Okay, that's what I thought. Thanks again for the time, and congratulations.
Joe Beacom (VP and Chief Safety and Operations Officer)
Thanks.
Operator (participant)
Our next question comes from Matt Brooklier with Longbow Research.
Matt Brooklier (Senior Equity Research Analyst in Industrial and Manufacturing)
Hey, thanks. Good afternoon. I think I can back into it for your earlier comments, but I'm just gonna ask it. If you could quantify either how much revenue or volume, roughly, this customer win, the big customer that you added during 2Q, how much that added during the quarter?
Jim Gattoni (President and CEO)
Well, yeah, I'm not gonna give you the exact revenue number, but you can, If I say that the underlying demand on flatbed, that loads were almost similar to flatbed in the 2014 second quarter-
Matt Brooklier (Senior Equity Research Analyst in Industrial and Manufacturing)
Mm-hmm.
Jim Gattoni (President and CEO)
Just take this year's and take it down to what last year's was, and that should be the number of loads.
Matt Brooklier (Senior Equity Research Analyst in Industrial and Manufacturing)
It's the delta there. Okay.
Jim Gattoni (President and CEO)
Yeah, pretty much.
Matt Brooklier (Senior Equity Research Analyst in Industrial and Manufacturing)
Um.
Jim Gattoni (President and CEO)
That'll get you pretty close.
Matt Brooklier (Senior Equity Research Analyst in Industrial and Manufacturing)
Okay. And the volume, all of that volume is flatbed?
Jim Gattoni (President and CEO)
Yes.
Matt Brooklier (Senior Equity Research Analyst in Industrial and Manufacturing)
Okay. You're running it through your BCO or your brokerage ops, or, or are you running it through a little bit of both?
Jim Gattoni (President and CEO)
It's, it's about a 50/50. It's, it's about a little bit of both. 50/50 split, whether it's BCO or broker trucks.
Matt Brooklier (Senior Equity Research Analyst in Industrial and Manufacturing)
Okay. And can you talk to the, I guess, the end market that that customer's in?
Jim Gattoni (President and CEO)
That was automotive.
Matt Brooklier (Senior Equity Research Analyst in Industrial and Manufacturing)
Automotive, that's right. You mentioned that. Okay. That's all I got. Thank you.
Jim Gattoni (President and CEO)
Okay.
Operator (participant)
Our next question comes from Scott Schneeberger with Oppenheimer.
Jim Gattoni (President and CEO)
Hey, Scott.
Daniel Berge (Senior Director of Investments and Portfolio Manager of OMEGA Portfolio Management)
Hi, guys. It's Daniel in for Scott. Most of the questions has been answered here, and congratulations on a great quarter. Can you give us some perspective on your expectations for carrier pricing and purchase transportation in the back half?
Jim Gattoni (President and CEO)
Well, like I think what we said is we expect kind of this somewhat tight, stable environment to stay where it is. And as you know, we've picked up a little bit of margin expansion in the second quarter. I anticipate that will continue through the next, at least through the third quarter. And if nothing changes, I'd expect that to continue into the fourth quarter.
Daniel Berge (Senior Director of Investments and Portfolio Manager of OMEGA Portfolio Management)
Okay, great. And then another question on, as far as the type of customers you're winning business here with, top tier, mid-tier, and small tier, and so forth, can you provide some color on that as far as the strong volume growth you are generating?
Joe Beacom (VP and Chief Safety and Operations Officer)
Well, I will tell you that the, it's, as we mentioned, before, and we'll repeat ourselves, it's broad-based. And it, and again, if you think about the model, the model is kind of naturally diversified because each of our agents comes in with a different level of expertise, account, contacts, and execution abilities. And so it's kind of across the board in many, many different markets. It'd be impossible for me to say we're winning business in large accounts, mid-size accounts, or small accounts because the fact of the matter is, it's true in each one of those segments.
Jim Gattoni (President and CEO)
Yeah, and to add on to what Pat said, and from in my prepared remarks, as we said, our top 100 customers, which makes up about 40% of our revenue, was relatively flat to prior year's second quarter. All the growth was coming from the guys 100 and lower, right? So that, to Pat's point, we're highly diversified. We have 25,000 customers, and it's just penetration into, you know, our entire account base. There's not a specific account or customer that we can speak to that really drives this growth, other than the one account we mentioned for just specific to the flatbed business.
Daniel Berge (Senior Director of Investments and Portfolio Manager of OMEGA Portfolio Management)
Okay. Great, guys. Thank you.
Operator (participant)
Our next question comes from Ben Hartford with Baird.
Jim Gattoni (President and CEO)
Hey, Ben.
Ben Hartford (Senior Equity Research Analyst)
Hey, guys. I guess, Pat, maybe we'll start with you real quick. Just, we were talking about the BCO count growth load. Loads per BCO have fallen. Is there a constraint? Can you continue to add BCOs at the pace that you are when, you know, the implied loads per BCO is falling? You know, do you run into your own utilization or satisfaction issues with regard to existing BCOs that provide a constraint if loads per BCO is running negative while you're growing that BCO count?
Joe Beacom (VP and Chief Safety and Operations Officer)
Ben, this is Joe. I'll take that. You know, the way that our agents operate is that they have available loads, and they'll give those available loads to whatever BCO wants them or whatever carrier is available to haul them. So if you look at our load volume growth, I mean, a lot of that growth is out there for whoever wants to take it. So clearly, if we had more BCOs who wanted to haul more loads, the opportunities are there for them. So I don't think adding more BCOs is necessarily, you know, needs to come to a slowdown just because their utilization is poor.
I think, I think it's really a mindset among the BCOs to adjust to the environment and decide on their own that they want to haul more freight, because clearly, the freight's there. And, and we've proven that just by our volume of growth in the quarter.
Ben Hartford (Senior Equity Research Analyst)
Okay, that's helpful. And then maybe, Jim, separately, when you think of the model, obviously, Henry had several initiatives under his belt that he had tried. Some were very successful, and some, I think, just given the nature of the agent network, there was a little bit more resistance. When you think about the opportunities, you know, in a market, a brokerage market that's likely to consolidate and the amount of cash flow that you guys generate, are there large agent networks that you think that you could pursue or potentially acquire and supplement Landstar?
Or do you think that, you know, the potential overlap with a large agent-type property with your existing agent base would make any sort of large acquisition of an existing agent network, would it preclude you from doing a deal from the get-go?
Jim Gattoni (President and CEO)
Yeah, looking at any potential acquisition of an agent-based entity, there's always gonna be certain conflicts at the customer level, you know, at the capacity level. So acquisition opportunities at Landstar is a little more limited than it would be at a true, you know, pure brokerage play. We, you know, when we get opportunities to look at acquisition opportunities, you know, we generally find too many conflicts where those agents are, and our customers' agents are the same as our agents, customers for our existing agents, and we don't necessarily play in that game.
So we like the organic growth. If we see acquisition opportunities, we take a look at them. But as you know, in this model, we don't want to compete against our agents, right? So we kind of do baby steps.
We do organic growth by recruiting agents into the system and supporting the agents that we have today through better tools and technologies.
Ben Hartford (Senior Equity Research Analyst)
Right. Okay, that's helpful. Thank you.
Operator (participant)
Our next question comes from John Barnes with RBC Capital Markets.
Jim Gattoni (President and CEO)
Hey, John.
John Barnes (Managing Director and Senior Research Analyst)
Hey, good afternoon, guys. Thanks for taking my question. Hey, so, you know, two questions on kind of the BCO growth. Number one, the recent success you've had on the BCO growth, you know, and maybe some of the regs that you've talked about, you know, maybe pressuring some of the smaller players. I mean, do you forecast a material shift in, in the mix of your business more, maybe back, you know, a little bit more in, in the BCO favor, on a go forward? You know, does more of the growth come from the BCO side, you know, going forward than it does maybe the, the broker side?
Jim Gattoni (President and CEO)
No, John, I just think we're in a very good market right now for recruiting BCOs into the system. You know, whether it be the quality of the freight or the price of the freight out there, I anticipate our majority of our growth going forward is still gonna come from a broker carrier. Look, if we could add 5,000 BCOs, we'd add them. It's again, it's still competitive market to add owner operators into the system. And if you... One of Joe's comments was, what we're really benefiting is that they're not leaving, right? Our turnover is really low. So I mean, that's really where we're getting the growth, you know, part of the growth from.
I would anticipate we're gonna continue to push through the, you know, freight onto the broker carriers to supplement that, you know, the BCO limitation. You know, even if we get to 10,000, I still think the majority of our growth is gonna come from the broker side.
John Barnes (Managing Director and Senior Research Analyst)
Okay, all right. And then just given your record on the safety side, and the focus there, you know, as some of these regs kind of come in, you know, will you dictate the implementation of this on top of, you know, maybe quicker than what the FMCSA is? You know, for example, if ELDs are announced and it's a two-year implementation, are you gonna force the BCO into using it quicker if they're operating under your authority? Or are you gonna start to look at the brokers maybe a little bit more aggressively on the use of this technology?
Jim Gattoni (President and CEO)
Well, well, yeah, we would, we would not force ELDs or any type of regulation on top of the BCOs prior to that regulation being enacted. So when it comes down to if, you know, in September, when they, if they, if they put the rule out, and two years from then, you know, two years from now, they have to get an ELD on their, on their truck, we will strongly encourage, but we will not enforce on the ELD side.
John Barnes (Managing Director and Senior Research Analyst)
Okay. All right. Very good. Thanks for your time, guys. Appreciate it.
Operator (participant)
Our next question comes from Rob Salmon with Deutsche Bank.
Rob Salmon (VP and Senior Analyst)
Hey, good afternoon, guys.
Jim Gattoni (President and CEO)
Hey, Rob.
Rob Salmon (VP and Senior Analyst)
You know, Jim, when I've traditionally thought about the Landstar model, it's been much more of a transactional-based business, and you've been highlighting kind of these new drop and hook relationships that you've been expanding. I'm curious, does this kind of change the overall context of the length and the volume visibility that Landstar has, and maybe any sort of color that you could provide around how big this represents of the business and where you see that going over time?
Jim Gattoni (President and CEO)
Well, we've always been in drop-and-hook, and it's always been a decent part of our business. You know, I would tell you that 60%-70% of our BCO van is on our trailer, all right? And I think it's something that's maybe just wasn't understood by, you know, the investment community or the analysts, is, you know, that freight's a little bit more, we're a little bit more ingrained in that customer when we stick a trailer on your lot, right? It doesn't necessarily mean we're tied up in long-term contracts, but it does give you a little more permanence with that customer.
And, you know, we have 9,000, approximately 9,800 trailers out there, you know, the majority of them working in drop-and-hook operations, and we continue to get more and more demand for that kind of service.
And there's somewhat of a thought process that, you know, as it relates to hours of service, that some of the shippers are starting to think, "Hey, instead of getting a truck in here and waiting for an hour to load them up, give us some of your trailers, we'll load them up, and then have the BCO come in and not waste some of his hours," right? So we think there's a little bit of that demand coming out of that, you know, that kind of hours of service ruling that, you know, not to limit the amount of hours that a driver can drive. But, you know, everybody historically has thought of us as the overflow carrier, right?
I think that, you know, most people think of us that way, but it's not necessarily true, especially when you say 70% of our van on BCO is on a, is one of our trailers. That's kind of, we're kind of a core carrier in that. We may not be the top one, but we're probably the top three in that scenario.
Rob Salmon (VP and Senior Analyst)
No, I think that's very fair. And certainly one of the things which really jumped out at me on the quarter was the growth that you're seeing in the truck broker carrier marketplace with the volumes up off of a very tough comp. And you would think with the transactional market softer year-on-year, that actually probably would have been down. So maybe you could talk to some of the business growth that you're seeing there and provide us a little bit more color in terms of what's driving, you know, and I think it's north of 30% on a two-year compounded basis, two-year stack basis with regard to load growth.
Jim Gattoni (President and CEO)
Yeah, well, you know what it is? It's, it's all the agent, right? As we were talking about that before, it's agent execution and penetrating deeper into their customer base and getting access to new customers. You know, over the last 18 months, we've probably engaged some smaller—a lot of small customers that wouldn't use, wouldn't necessarily come to us, but now that when the capacity market got tight over 2014, they kind of came to us, and we were hauling some freight for those guys.
And I think that continued through this year. They stayed with us because they can see the value in the service that the agents provide, 'cause the agent's kind of in the local market, and they, they build a relationship with those shippers. And I think that's what drives the capacity coming to us, right?
It's kind of a you know, you bring the freight, and they will come kind of concept. And I think it's just all about the execution by the agent family, putting more quality loads in the system. And that brings capacity in, and it not only brings capacity in, it allows that capacity to stay in our system and haul, you know, if they want to just land our freight. 'Cause if you think about it, we have about 50% of our loads are hauled by BCOs. That's 50% of our loads available to broker trucks.
A lot of the carriers out there that we deal with, some about half of our carriers, probably have 10 or fewer trucks. They're almost like BCOs, but they're outside of the, you know, but they're running freight for other people.
The more freight you provide to them, the more committed they are to your system, and they stick with you.
Rob Salmon (VP and Senior Analyst)
Makes sense. Well, it's definitely showing up. Congrats on a good quarter, guys.
Jim Gattoni (President and CEO)
Thanks.
Operator (participant)
Our next question comes from Matt Young with Morningstar.
Matt Young (Senior Equity Analyst)
Good afternoon, guys. Just to follow up on that previous question, sounds like capacity is still tight, but a bit more balanced. When we listen to some of the other truckers out there, we know that the spot market's not quite as strong as it was last year.
But do you get the sense that shippers at this point are still concerned with capacity issues, and they still are willing to shift business to asset light providers with strong capacity networks like yourself in the interest of securing trucks down the road? Or is there some evidence at this point that maybe the impetus is subsiding, even though you've seen that pretty strong in previous quarters?
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
Matt, this is Pat. I think that the shipping community at large believes that the likelihood of capacity tightening is far greater than the likelihood of capacity getting looser. And that's a thesis that I would endorse, and it's one that I believe we'll see play out, you know, over the next 12-18 months.
Jim Gattoni (President and CEO)
Well, and you'd think, you know, I read a lot of the reports that get put out by you guys and some of the other, you know, the asset-based carriers, and apparently, you know, the contract carriers are getting 4%-6% rate increases. And to me, that would be, you know, a shipper thinking, "Let's lock it up now, because 12-18 months down the road, pricing is going to climb again, so I want to lock in those contracts." So, you know, I think the shipper is still a little concerned about the future.
Maybe not the next six months, but I think there's got to be concern out there over 2016, 2017, when more and more of these regulations get put in and productivity drops off.
Matt Young (Senior Equity Analyst)
Yeah, that makes sense. And then one other quick one. I think last quarter you mentioned that with lower BCO utilization, there's some cost headwinds on the trailer side. Is that still the case in the quarter? Is that, is that material?
Jim Gattoni (President and CEO)
Well, it's not material, but it does impact the... If you saw the, you know, if you were to take our other operating costs as a percent of BCO revenues, probably climbed a little bit because of the, you know, like I said, 70%, about 60%-70% of the BCO van business is on our trailer, and to the extent they're not hauling them as much, there is a fixed cost component to that. So it, it's the only part of our business that there's a little bit of a utilization exposure.
Matt Young (Senior Equity Analyst)
Okay, but it's not-
Jim Gattoni (President and CEO)
It's not significant. It's, you know, it's not going to move a quarter.
Matt Young (Senior Equity Analyst)
Got it. All right. Appreciate it. Thanks.
Operator (participant)
If you would like to ask a question, please press star then one on your touchtone phone. Once again, that is star one to ask a question. Our next question comes from Kelly Dougherty with Macquarie.
Kelly Dougherty (Senior Analyst)
Hey, guys. Thanks for the time. Just a quick housekeeping question and then a bigger picture one. Just what is your assumption for fuel prices as it factors into your outlook for, low to mid-single digit revenue declines in, revenue per load declines in the back half?
Jim Gattoni (President and CEO)
I just looked at the EIA information, and it was going to be consistent for the rest of the back half, and that's, that's really the only thing I can do is look at that. So it, it's kind of flat. I would, Diesel's running at $2.80, I think it's $2.80-$2.90, and I think that's where I saw it for the next six or eight months, six months. And, and that's kind of our assumption.
Kelly Dougherty (Senior Analyst)
Okay. Okay. And then can you give any color on, like, van versus unsided, how you're thinking about that from a revenue per load situation or kind of similar to what we saw in the second quarter as well?
Jim Gattoni (President and CEO)
Yeah, I think in the short term, like we said, in the next three months, we're seeing a similar rollout of what's going to happen on van revenue per load and on flatbed revenue per load. Beyond that, you know, into the fourth quarter, we'll talk about that as we get to the mid-quarter call or further into, not even in, probably in October, when we get into the fourth quarter.
Kelly Dougherty (Senior Analyst)
Okay, great. Fair enough. And then just a bigger picture question. You know, we've seen durable goods, industrial production maybe soften in the last three months, but the PMI manufacturing has started to improve recently. So just wanted to get some of your thoughts on just the broader industrial economy right now. You know, it seems that you seem pretty confident about demand on your end, so maybe what you're hearing from some of your customers about, you know, maybe an industrial improvement in the back half.
Jim Gattoni (President and CEO)
Well, you know, our business, our volumes are kind of going against what they're saying about industrial production, right? Industrial production is under 2%. You know, even on the flatbed side, we're consistent with last year. Our customer demand is strong. I mean, we still have all the flatbed customers, you know, even though we're flat to last year, there's still strong demand coming across there.
You know, the loads we did last year in flatbed were pretty high, and they're still high this year, right? From a comp standpoint, we're equal, but it's still pretty strong. On the van side, clearly, we continue to get, you know, I can tell you personally that there's more and more demand for our trailers out there, demand that I hadn't seen, you know, probably in the last 10 years.
So, you know, strong demand from our standpoint, but when you look at some of the stats out there on industrial production, it's just, it's not tying back. So again, we got to go back to the execution of the model.
Kelly Dougherty (Senior Analyst)
Do you think that you are positioned well with the right customers or you're gaining market share?
Jim Gattoni (President and CEO)
I think we're positioned well with the right customers to a certain degree, and we're also penetrating some of those smaller customers. Like I said, you know, our bottom 60% of our accounts, that's where the growth came from, in some of the smaller accounts.
Kelly Dougherty (Senior Analyst)
Great. Well, you know, keep up the good work, guys. Thanks very much.
Jim Gattoni (President and CEO)
All right, Kelly.
Operator (participant)
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, Dory. You know, that'll wrap up this second quarter call, and I look forward to speaking with you again on our third quarter mid-quarter update call, currently scheduled for September third. Have a nice evening.
Operator (participant)
Thank you for joining today's conference call. Have a good afternoon. Please disconnect your lines at this time.