Landstar System - Q2 2019
July 25, 2019
Transcript
Operator (participant)
Welcome to Landstar System's second quarter 2019 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; Rob Brasher, Vice President and Chief Commercial Officer; and 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, Missy. Good morning. Before we begin, let me read the following statement. The following is a safe harbor statement under the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts are forward-looking statements. During this conference call, we may make statements that contain forward-looking information that relates to Landstar's business objectives, plans, strategies, and expectations. Such information is, by nature, subject to uncertainties and risks, including, but not limited to, the operational, financial, and legal risks detailed in Landstar's Form 10-K for the 2018 fiscal year, described in the section Risk Factors and other SEC filings from time to time. These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated.
Investors should not place undue reliance on such forward-looking information, and Landstar undertakes no obligation to publicly update or revise any forward-looking information. Landstar opened the 2019 second quarter faced with a decelerating rate of growth in year-over-year truck volumes and increased pressure on spot market pricing. Both truckload volume and revenue per load on loads hauled via truck were impacted by the continued softening of the spot market, we believe has been due to slowing U.S. manufacturing production growth and increased available truck capacity. Also, the exceptional financial results of 2018 have made for very difficult year-over-year comparisons. During our 2019 first quarter earnings conference call on April 24th, we provided revenue guidance of $1.075 billion-$1.125 billion.
2019 second quarter revenue was $1.045 billion. We also provided earnings per share guidance of $1.56-$1.62 during our first quarter earnings conference call. 2019 second quarter diluted earnings per share was $1.53. On June 5, we announced in a Form 8-K filed with the SEC that there was risk to Landstar achieving the low end of our second quarter revenue and earnings guidance provided on April 24. Our update to guidance in early June was a result of May truck revenue per load that fell below our expectations. As our June update warned, revenue and diluted earnings per share, share fell short of the second quarter guidance we provided during our first quarter earnings conference call.
Nevertheless, by historical standards, we remain in a relatively solid freight environment, with Landstar continuing to perform at high levels. While 2019 second quarter gross profit was $13 million lower than the 2018 second quarter, 2019 second quarter gross profit exceeded the 2017 second quarter, previously second highest second quarter gross profit in the company's history, by $25 million or 19%. 2019 second quarter operating income was $80.9 million, also far exceeding any other second quarter in the company's history, other than the 2018 second quarter.
Diluted earnings per share in the 2019 second quarter of $1.53 was the highest diluted earnings per share of any second quarter in Landstar history, exceeding even that of the 2018 second quarter. Turning back to the top line, year-over-year growth in revenue, in both revenue per load and the number of loads hauled via truck, began to decelerate toward the end of 2018. This weakening environment continued into 2019, with revenue per load beginning to decrease on a year-over-year basis in January, and the number of loads hauled via truck beginning to decrease on a year-over-year basis in April. Overall, 2019 second quarter truck revenue per load was 11% lower than the 2018 second quarter.
During the first half of 2019, beginning with January, month-over-prior-year-month revenue per load on loads hauled via truck was 3%, 4%, 7%, 8%, 11%, and 13% lower than each corresponding month of 2018. The increase in shortfall the prior year was due to increasingly difficult year-over-year comps as we moved throughout the quarter, along with the effects of softer spot market demand and more readily available capacity during the 2019 second quarter. On a sequential basis, truck revenue per load increased from May to June at a rate somewhat consistent with historical seasonal patterns. Our shortfall to revenue guidance was also partially attributable to the actual truckload volume that was slightly below the volume anticipated in our April 24 guidance.
We also had a difficult year-over-year volume comparison, with truckload volume in the 2019 second quarter 1% below that of the 2018 second quarter. During the first half of 2019, beginning with January, month-over-prior year month truckload volume was 5%, 2%, and 1% above January, February, and March of 2018, but 1% below 2018 in April and May, and 2% below June 2018. From a historical standpoint, however, truck revenue per load and truckload volumes continue to be generally strong. Truck revenue per load in the 2019 second quarter was among the highest second quarter truck revenue per load in Landstar history.
With respect to volumes, over the past three years, the number of loads hauled via truck has increased over 20% when compared to the 2016 second quarter, a cumulative annual growth rate of next to 6%. During the 2019 second quarter, services provided under fixed and variable gross profit margin arrangements contributed 51% and 49% of revenue, respectively. During the 2019 second quarter, lower truck rates as compared to the 2018 second quarter reduced gross profit on the company services that are contracted at a fixed gross margin, while the shift to more readily available capacity led to improved gross profit margins on services provided under variable gross profit margin arrangements.
Overall, 2019 second quarter gross profit margin increased to 15.1%, compared to 14.5% in the 2018 second quarter. The increase was mostly due to a 90 basis point increase in the gross profit margin on revenue under variable gross profit margin arrangements, mostly due to lower rate of purchased transportation paid to truck brokerage carriers. The nature of the company's incentive and equity compensation programs are designed to vary with annual financial performance and coincide with the variable cost nature of our model. As expected, 2019 second quarter equity and incentive compensation was far below the amounts provided in the 2018 second quarter. Assuming current market conditions persist the remainder of 2019, we expect that trend to continue.
As we continue to demonstrate, Landstar's variable cost business model generally performs well with changes in business cycles, and I would say the results of the 2019 second quarter are no exception. Operating margin increased to 51.2%, compared to 48.7% in the 2018 second quarter. Year-over-year comparisons will remain very difficult through the third quarter of 2019, given the outstanding performance of 2018 and the softening freight environment that began in late 2018. Although it's difficult to forecast long-term pricing conditions in the spot market, our recent trends indicate that pricing has returned to more normal seasonal patterns with May to June and June to July pricing trends generally in line with normal patterns.
However, reduced demand or additional truck capacity entering the market could result in unfavorable fluctuations in normal seasonal patterns. In the near term, we expect the more recent trends experienced in June and early July to continue through the 2019 third quarter. As such, we expect truck revenue per load in the 2019 third quarter to be below the 2018 third quarter in a low double-digit percentage range, and the number of loads hauled via truck to be below the 2018 third quarter in a low single-digit percentage range. Based on those expectations, I anticipate revenue to 2019 third quarter to be in a range of $1.01 billion-$1.06 billion.
Assuming that estimated range of revenue, I anticipate diluted earnings per share to be in a range of $1.48-$1.54. We knew we'd be facing difficult year-over-year comparisons in 2019 due to the exceptional freight environment and extraordinary financial results of the company in 2018. Although demand for freight services has slowed and capacity has become more readily available as compared to 2018, I believe we continue to be in a relatively healthy freight environment. If we again look at our 2019 second quarter results compared to those of 2017 second quarter, it is impressive to note just how much the company's performance exceeded the results of two years ago.
In addition to the growth in gross profit and operating income I previously mentioned, revenue in the 2019 second quarter exceeded the 2017 second quarter by $175 million, or 20%. Landstar truck volumes in the 2019 second quarter exceeded truck volumes in the 2017 second quarter by 9%, or almost 45,000 loads. We continue to focus on profitable load volume growth and increasing our available capacity to haul those loads. We also remain focused on our priority to provide enhanced technology and industry-leading sales and operation support to all the independent business owners in the Landstar network. We look forward to 2019 being another successful year at Landstar. Here's Kevin to provide additional commentary on the 2019 second quarter.
Kevin Stout (VP and CFO)
Thanks, Jim. Jim has covered certain information on our 2019 second quarter, so I will cover various other second quarter financial information included in the press release. Gross profit, defined as revenue less the cost of purchased transportation and commissions to agents, decreased 8% to $158 million, and represented 15.1% of revenue in the 2019 second quarter, compared to $171.4 million, or 14.5% of revenue, in 2018. The cost of purchased transportation was 76.5% of revenue in the 2019 quarter versus 77.5% in 2018. The decrease in purchased transportation as a percent of revenue was primarily due to a decrease in the rate paid to truck brokerage carriers and an increase in the percentage of revenue contributed by BCO independent contractors.
The rate paid to truck brokerage carriers in the 2019 second quarter was 168 basis points lower than the rate paid in the 2018 second quarter. Commissions to agents was 8.4% of revenue in the 2019 second quarter versus 8% in 2018 due to an increased net revenue margin, revenue less the cost of purchased transportation divided by revenue on loads hauled by truck brokerage carriers. Other operating costs were $9.9 million in the 2019 second quarter, compared to $7.6 million in 2018. This increase was primarily due to increased trailing equipment costs and increased contractor bad debt. Insurance and claims costs were $16.3 million in the 2019 second quarter, compared to $21.5 million in 2018.
Total insurance and claims costs for the 2019 quarter were 3.4% of BCO revenue, compared to 4.1% in 2018. The decrease in insurance and claims as compared to 2018 was due to reduced net unfavorable development of prior year claims in 2019. Unfavorable development of prior year claims was $5.7 million and $1.5 million in the 2018 and 2019 second quarters, respectively. Selling general and administrative costs were $41.3 million in the 2019 second quarter, compared to $49 million in 2018. The decrease in SG&A costs was attributable to a decrease in the provision for bonuses under the company's incentive compensation plans and decreased stock compensation expense.
Stock compensation expense was $1.4 million and $4.4 million in the 2019 and 2018 second quarters, respectively, mostly due to the impact of decreased earnings on our variable cost equity compensation arrangements. The provision for incentive compensation was $900,000 in the 2019 second quarter, compared to $5.4 million in the 2018 second quarter. Quarterly SG&A expense as a percent of gross profit decreased from 28.6% in the prior year to 26.1% in 2019. Depreciation and amortization was $11 million in the 2019 second quarter, compared to $10.8 million in 2018. This increase was primarily due to increased depreciation on information technology, hardware and software, and the increase in the number of company-owned trailers.
Operating income was $80.9 million, or 51.2% of gross profit in the 2019 quarter, versus $83.4 million, or 48.7% of gross profit in 2018. Operating income decreased 3% year-over-year. The effective income tax rate was 23.8% in the 2019 second quarter, compared to 24.3% in 2018. The effective income tax rate was favorably impacted in both periods by tax benefits resulting from employee equity compensation programs. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $285 million. Year-to-date cash flow from operations for 2019 was $184 million, and cash capital expenditures were $9 million.
During the 2019 second quarter, the company purchased approximately 550,000 shares of its common stock at an aggregate cost of approximately $57 million. There are currently 1,326,000 shares available for purchase under the company's stock purchase programs. Back to you, Jim.
Jim Gattoni (President and CEO)
All right, Kevin. Missy, we will now open up to questions.
Operator (participant)
Thank you very much, sir. At this time, we will now begin the question-and-answer session. If you would like to ask a question, please press star, followed by the number one on your touchtone phone. Once again, that is star one to ask a question. Please record your name and company name once prompted. To cancel your request, please press star followed by the number two. Our first question is from the line of Jason Seidl of Cowen & Co. Your line is now open.
Jason Seidl (Managing Director)
Thank you, operator. Hey, good morning, gentlemen. I just want to talk a little bit about the pricing side. You mentioned it returned to more seasonal patterns, but you gave it a caveat, obviously, looking for reduced demand or an increase in capacity. What have you seen in terms of capacity in the marketplace, out there? You know, are you, are you looking for increased capacity coming to the marketplace in this market?
Joe Beacom (VP and Chief Safety and Operations Officer)
Yeah, Jason, this is Joe. I don't think we're going to see a lot of increase, but I don't... At this point, it doesn't look like we've seen much in the way of decrease either. So from a capacity standpoint, I'd say it would be kind of consistent with where it's been in Q2.
Jason Seidl (Managing Director)
Okay. Well, that, that's good color. The other thing, wanted to see if you can talk a little bit more about the unsided platform business. Obviously, that looked like it had more strength in the quarter. Where you think that demand is coming from and sort of the outlook for that particular portion of your business?
Rob Brasher (VP and Chief Commercial Officer)
Hey, Jason, this is Rob.
Jason Seidl (Managing Director)
Hey, Rob.
Rob Brasher (VP and Chief Commercial Officer)
Yeah, the platform side does look strong at this point. If you pull heavy haul out, the platform actually is performing about the same level as the van. So, so more on the heavy haul project side, where we participate, that's kind of where you're seeing that influx in that number.
Jason Seidl (Managing Director)
And how is the outlook for heavy haul right now in the back half of the year, since it's more big project type stuff? Do you have any sort of a view into that?
Rob Brasher (VP and Chief Commercial Officer)
We feel it's kind of stabilized to where it's at. We don't see any highs, any lows right now. Most of that is project driven. But we've got a... We feel pretty good going into the back half of the year on the heavy haul side.
Jason Seidl (Managing Director)
Let me squeeze one more in on cost. Obviously, you talked a lot about insurance and claims. How should we view that line item going forward? I mean, it's been down a lot. And you have harder comps in the back half of the year in terms of, you know, it wasn't up as much as it was in the first half of the year in 2018.
Kevin Stout (VP and CFO)
Yeah, Jason, this is, this is Kevin. Last year, as everyone knows, we had a bad unfavorable development year last year. We continue to believe that the 3.6% of BCO revenue is your best number to put into your model for Q3 and Q4.
Jason Seidl (Managing Director)
Fantastic. Gentlemen, thank you for the time, as always. I'll turn it over to somebody else.
Operator (participant)
Thank you so much. Our next question is from the line of Scott Group of Wolfe Research. Your line is now open.
Scott Group (Managing Director)
Hey, thanks. Morning, guys.
Kevin Stout (VP and CFO)
Hey, morning.
Scott Group (Managing Director)
So, not a big change, but the BCO count just down slightly sequentially. What do you make of that? And maybe what trends do you expect for third quarter? I know you said you don't expect capacity to be exiting the market, but the TL carriers seem to think that it's starting to happen. Maybe the BCO count is, you know, an early sign that maybe it's starting to happen. Just curious on those questions.
Rob Brasher (VP and Chief Commercial Officer)
Sure. Yeah, Scott, this is Joe. So we've seen a great deal of interest in Landstar. The pipeline is very full, the ads are very strong, but the terminations are also strong, and there, you saw us lose 50 BCO trucks in the quarter. So I think the retention side of things is what we're focused on to try to, you know, maintain truck count. I would see, going forward, that we're kind of expecting flattish in the third quarter. We still think there's gonna be interest, but the environment, and the change in environment, the change in the price, I think there's an adjustment period going on. But I don't know that the capacity is necessarily leaving the market.
And on the carrier side, where we've seen a decline in total carriers, that is really a function of not necessarily, in our view, carriers leaving the market, but are posting fewer loads to third-party boards where we have unapproved carriers seeing our loads and then coming and being approved. So as that volume of load postings externally declines, you tend to see some level of decline in the approved carrier count. But our active count is off less than 1%, about 300 carriers from prior. That's where we come up with the comment that we're really not seeing evidence here that capacity is leaving the market. I understand and read what some of the other guys are saying.
I guess we'll, you know, whether bankruptcies take hold, or whether some of that stuff actually occurs, I guess we'll wait and see. But from where we're sitting today, capacity seems to be somewhat flattish overall.
Scott Group (Managing Director)
So, do you see risk of rates then taking another step down to get to the place where we will see capacity exit the market?
Joe Beacom (VP and Chief Safety and Operations Officer)
You know, I don't know. It's hard to... If it stays flat, maybe pricing stays kind of, you know, where it's at, right? I think there'd have to be some sort of a catalyst to change capacity in a little bit more meaningful way, to see much of a movement on price.
Jim Gattoni (President and CEO)
I think when I put a little bit of disclaimer in my opening remarks about the, you know, unpredictability of spot markets, you know, we are sitting at the end of April, pretty consistent with trends when we put out our guidance for the second quarter, and then May dropped off. You know, we had about a negative from April to May, I think rates dropped off about 2.6%, when generally they're slightly up, if you look at a five-year history. And that was unexpected. So, you know, it's hard to really predict what's gonna happen in a spot market. And like Joe said, it's you got a capacity side, but you also got the demand side. U.S. manufacturing is kind of key to some of the stuff we do.
We're not heavy into the consumer goods side. And you look at the U.S. manufacturing and what's going on there, I mean, it's growing at less than 1%, so there's a little unpredictable, you know, analysis there that we just don't know where it's gonna end up. So that's why the little disclaimer in the, you know, unpredictable spot market right now, because we didn't anticipate that May drop off, and we were almost through April.
Joe Beacom (VP and Chief Safety and Operations Officer)
Yeah. And you've also had one of the truck makers, I think, forecast the builds to be on the rise. And some of that maybe was market share moving around. But, so I think there's some mixed signals from what I see.
Scott Group (Managing Director)
Okay. Then just, we've seen the year-over-year decline in spot start to moderate just a little bit. Are you seeing that show up in your rev per load year-over-year at all?
Kevin Stout (VP and CFO)
Yes, Scott, we're, like Jim said, we're seeing a consistent sequential pattern going from June to July, which is up for pricing, up 1%-2%. So, you know, we've seen the other numbers out there, but we're not seeing the huge increases just yet.
Jim Gattoni (President and CEO)
Yeah, the June... Remember, June was off, I think I said 13%. July looks similar. You know, so I think we're seeing a stabilized spot pricing right now, based on the last two months. But two months doesn't really give me a lot of comfort, but at least it gives me some comfort.
Scott Group (Managing Director)
All right. Thanks for the time, guys. Appreciate it.
Operator (participant)
Thank you so much. Our next question is from the line of Amit Mehrotra of Deutsche Bank. Your line is now open.
Amit Mehrotra (Managing Director)
Thanks, operator. Hi, everybody, appreciate the question. I wanted to ask, I guess, first and foremost on the demand environment. I think, Jim, you've talked about in the past, kind of, you know, I know you guys operate in the spot market, but a lot of your loads and volume are kind of more relationship-based type business that's maybe a little bit stickier. So I guess in that context, you know, is there any reason for some optimism in some snapback in volumes in the back half of the year? Obviously, we've had lackluster volumes in the first half, but still pretty healthy in absolute terms. But any optimism around where inventory levels are on...
You know, what is the stickier aspects of your business kind of talking about with respect to back half volumes, and kind of the ahead of kind of the peak selling season? I think that would just be helpful given kind of the fast-moving data points that we're in today.
Jim Gattoni (President and CEO)
Yeah, one of the things we look at is, you know, that's important to us is, you know, 30% of our business is on our trailer, right? So we do that drop and hook business. Unfortunately, we- those, the requests for the volumes for there don't start coming in until the end of summer, so we're a little early on that. But we don't, we don't see any... We see probably a consistent, maybe a little bit softer request coming in for trailers this year, coming into the fourth quarter. The other stuff like heavy haul, automotive, government, expedite, cross-border, I just think it's gonna be sluggish through the rest of the year, the way it sits today.
You know, we don't see anything it's gonna drop off or grow, you know, unless we see a dynamic trend or some kind of strange move on the, you know, manufacturing in the U.S.
Amit Mehrotra (Managing Director)
Okay. Yeah, that makes sense. And then, you know, we've heard more and more about just digital brokers, and we're seeing, you know, some kind of asset-based carriers invest more and more in digital, you know, freight matching platforms. So one, does that at all kind of change your strategy and pressure maybe temporarily the drop-through to operating income? I know it's something you've been, whether it's with Connect or Maximizer, it's something you guys have been focused on for a while, but anything to call out from an investment standpoint as these digital platforms start to get more and more traction in the marketplace?
Jim Gattoni (President and CEO)
No, I would say that we have the capability that they have, right? And what they're doing, it's a pricing game, and we're well aware of the pricing game that they're playing. We make our agents well aware of it, and that's what we do, right? Just, you just got to stay price competitive. But, you know, our agents, you know, we're not hearing a lot from the agents that they're in there. We've heard a couple of scenarios where one of those digital freight guys have gotten into one of our customers. You know, but then you hear other scenarios where they come back to us because the trucks just don't show up. Because in our world, I mean, there's this belief out there that I think you put an app out and trucks just show up.
But, you know, in a lot of stuff we do, it's not the case, right? We're dealing with special handling and stuff like that, so it's a little bit different world. But we're... You know, do I anticipate that over the next few years, they're going to put pricing pressure on, they're trying to build scale? Absolutely. But, you know, we feel we're prepared for that, and we, you know, eventually, you might have to get into the pricing game. But today, we're not seeing that, and it's, you know, our the spreads on our brokerage freight are, you know, kind of trending the way they would in the environment we're in. There's nothing unusual there. So I think right now, we're ready from a technology standpoint.
We have all the tools they have, and we just got to make sure that when a shipper is deciding on whether they want to go digital freight matching and use Landstar, we can do both.
Amit Mehrotra (Managing Director)
I guess the uniqueness of the Landstar model is that kind of 50%± gross margin, and then the 70% incremental drop-through, that's still kind of well protected. Where you guys may be impacted by that trend would be, you know, the yield numbers, but the margin profile, the net revenue and the gross and operating margin kind of stays pretty consistent, I would imagine.
Jim Gattoni (President and CEO)
Yes, that's true. We just got to make sure. Look, if margins start to get squeezed, you got to push through more volume through the system, and I think our systems are capable of putting a lot more volume through our system without adding people. You know, we have automated systems, so it's just getting the volume pushed. As margins get squeezed, you just push more volume through, and that's kind of our you know our thought process going forward.
Amit Mehrotra (Managing Director)
Okay. All right. Thanks for taking my questions. Appreciate it, guys.
Operator (participant)
Thank you so much. Our next question is from the line of Jack Atkins of Stephens. Your line is now open.
Jack Atkins (Research Analyst)
Jim, Kevin, Joe, good morning.
Jim Gattoni (President and CEO)
Morning.
Jack Atkins (Research Analyst)
Rob, congratulations on the promotion.
Rob Brasher (VP and Chief Commercial Officer)
Good morning, and thank you.
Jack Atkins (Research Analyst)
So guys, just kind of following up on Amit's questions there for a moment, just in terms of, you know, how Landstar sort of manages through what could be a changing or more dynamic sort of brokerage market over the next couple of years. You know, can you help us think through, you know, different portions of your, of your business that would, you know, not be disrupted if we were to see some more, you know, competition from these digital brokers? I'm thinking your cross-border business, your drop and hook business. That makes up a pretty significant component of your overall revenue stream. Can you kind of remind us of sort of what that, what that looks like?
Jim Gattoni (President and CEO)
Well, platform, for example, is one which is 30% of our business. You got Automotive and government, you got time definite, right? Where you're probably not going to rely on an app, and you're going to want someone on the phone if something goes wrong. So you know, I would say between Automotive, government, drop and hook, cross-border Mexico, cross-border Canada, time definite, you're probably talking about 70% of our business that is some kind of sticky, where it wouldn't be conducive to an app.
Jack Atkins (Research Analyst)
Okay. Now, that's what I thought. I think it makes sense. I think it's worth kind of clarifying for folks. You know, Jim, or I guess, Rob, if you'd like to chime in, too, would love to get your take on it. I mean, you know, you talked about this a bit, but if you could expand on it, maybe if you could kind of go into some subsets of your business where, you know, maybe you're or maybe it's a mode, maybe it's a customer vertical, where you know have been surprised, you know, to the downside, you know, just in terms of demand, or conversely, if there's been an area of particular strength. Just curious what you're seeing out there as you sort of, you know, look across the business.
Rob Brasher (VP and Chief Commercial Officer)
Jack, this is Rob. On the Automotive side, in a lot of sectors, we made the decision not to do business that didn't benefit us as an agent base and us as a company. So we haven't really been surprised by the decrease in some of the volumes and some of the automotive in particular. We haven't been surprised by that. On the heavy haul side, you know, we're a project-driven company. We provide a service that very few people can. So that's one that we can capitalize on and that we continue to grow scale with.
So, as we look forward and some of the things that we touch, some of the things that we do, that I guess Jim refers to as sticky, that kind of protects us and our model across the board.
Jack Atkins (Research Analyst)
Okay, definitely. That makes sense. Last question, Kevin, for you. Can you give us an update on your free cash flow outlook for 2019? Just sort of how you're thinking about that for the year.
Kevin Stout (VP and CFO)
Yeah, we had $174 year-to-date free cash flow. The operating cash flow was $184, but it slowed into the second quarter. In round numbers, $120 million in Q1 and about $60 million in Q2. So I think the trend is going to continue to slow a bit. So my number is still $250, let's say $250-$275 on a year-to-date basis.
Jack Atkins (Research Analyst)
Okay, that's, that's really helpful. Thanks again for the time, guys.
Kevin Stout (VP and CFO)
Sure.
Operator (participant)
Thank you so much. Our next question is from the line of Todd Fowler of KeyBanc Capital Markets. Your line is now open.
Todd Fowler (Managing Director)
Great, thanks. Good morning.
Jim Gattoni (President and CEO)
Morning.
Todd Fowler (Managing Director)
Hey, Jim. Can you guys maybe just provide a little bit more color on the van volumes here in the quarter? You know, obviously, I understand there's difficult comparisons in what's happening in the macro, but I mean thinking about your business and having more spot exposure, would think that there would be, you know, demand on the spot side, and so seeing the van volumes come in, is that just a reflection of the difficult comps, or is it something in the macro, or do you think there's some share that's going on on the van side?
Jim Gattoni (President and CEO)
Yeah, we can touch on a couple things there. One is that, you know, if you look at foodstuffs being off, that's pretty much one customer. That was all van volumes.
Todd Fowler (Managing Director)
Okay.
Jim Gattoni (President and CEO)
So that's one of it. That's one of the things. That was actually slow in the first quarter also. The other thing in our world is when, you know, when you're looking at 2018, and you have brokers and other carriers out there that just can't find trucks, you know, they kind of come to us, those third-party, you know, basically 3PLs. And now that trucks are a little more accessible, that business gets a little softer for us when we're, you know, working for other 3PLs to put stuff on vans. So I would say the two spots that we can actually point to, or actually, I'll add a third one, automotive, you saw that was down.
So if you take the foodstuffs, which is van, and the automotive, which is primarily van, and then the 3PLs who are finding it a little bit easier to find trucks and not having to come to us to find them, I think those are the three things that are probably driving the van volumes a little softer than they were compared to the prior year.
Todd Fowler (Managing Director)
Okay, good. That, that's really helpful. And then, you know, Jim, thinking about, you know, the second half of the year, I think in the last several years, you've, you know, had some ramp in the fourth quarters. You've done some more shipments or loads for some of the e-commerce, you know, type retailers. You know, based on where you sit today, would your expectation be that you see some of that lift as you move into the fourth quarter? Do you have any visibility onto that sort of demand in the second half of the year?
Jim Gattoni (President and CEO)
I just sense that we're going to stay... That Q3, Q4 are going to look similar. You know, we didn't necessarily feel that ramp up into 2018. Those e-commerce type companies were kind of softer. Now, I wouldn't say it's not soft, it's just on a comparative basis, right? So I would expect we're going to see a fourth quarter that's going to look similar to the third quarter as I sit here right now.
Todd Fowler (Managing Director)
Okay, good. That, that's helpful. And then just one last quick one, Kevin, on the other operating costs during the quarter, they were about $10 million, which was a step up. I think in the prepared remarks, you made some comments about trailing equipment and then some bad debt maybe that was through there. But can you go over, you know, kind of what was going through that line item again and what we should expect for that for the rest of the year?
Kevin Stout (VP and CFO)
Sure, Todd. Yeah, the contractor bad debt number was abnormally low in Q2 last year, and I'd say it's higher than average this year, so you got a delta there. And then the trailer costs were up about 930 trailers year-over-year, so you're going to have more maintenance and tires on those. So that's what's driving that. I'd split it probably evenly between contractor bad debt and maintenance on the trailers. As far as going the rest of the year we have an event, a BCO event, that hits in the third quarter. That's, let's say, in round numbers, $1 million. So let's assume normalized contractor bad debt. We're going to get a number pretty similar to Q2 and Q3, and probably, you know, $500,000-$1 million lighter in Q4.
Todd Fowler (Managing Director)
Okay, perfect. Thanks for the time. That was all helpful.
Operator (participant)
Thank you so much. Our next question is from the line of Scott Schneeberger of Oppenheimer. Your line is now open.
Scott Schneeberger (Managing Director and Senior Analyst)
Thanks very much. Good morning, everyone.
Jim Gattoni (President and CEO)
Good morning.
Scott Schneeberger (Managing Director and Senior Analyst)
Jim, or anyone, just looking back historically, could you give us a feel for what business conditions look like right now versus past cycles, perhaps the 2016 timeframe? It sounds like we're kind of at a crossroads where it's not clear what's going to come, but just anything historical to pull from?
Jim Gattoni (President and CEO)
Well, in my opening comments, I was talking about 2017, but because it, it felt similar to that up until probably the third quarter, but it's not going to feel similar to that, because if you recall, rates started climbing pretty rapidly at the end of the third quarter, 2017, when the storms hit Texas. So that comp really isn't there. I'm not sure we're at 2016. I think 2016 was a little bit softer than where we are now. You know, it's maybe 2014 was very strong. You know, I'd, I'd put it maybe 2014, 2015 kind of flow. 2015 was pretty soft, a little bit soft. We had some special freight in there, when we had that automotive contract. So it, it's kind of...
I tried to pin it back to what year it kind of looks like, and it's like, to tell you the truth, it was difficult, you know, so I would use 2017 for the first nine months, but now we're sitting; we're going to have a flat, what I expect, third quarter to fourth quarter, and I think that's probably what 2016 looked like.
Scott Schneeberger (Managing Director and Senior Analyst)
All right. Thanks, appreciate that perspective. Thoughts on gross margin going forward, about how purchase transportation looks like?
Jim Gattoni (President and CEO)
Say that again?
Scott Schneeberger (Managing Director and Senior Analyst)
Just thoughts on the gross margin expectations going forward on trends you've seen recently?
Kevin Stout (VP and CFO)
Yeah, like I said in my prepared remarks, the brokerage buy rate was down 168 bps in Q2. I'm modeling something similar to that in the third quarter. Obviously, pricing is going to impact that, but, I would expect, again, in the 14.9%-15.1% range in Q3 on the gross profit margin.
Scott Schneeberger (Managing Director and Senior Analyst)
All right, thanks. Appreciate it, guys. I'll turn it over.
Operator (participant)
Thank you so much. Once again, participants, 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. Our next question in queue is from the line of Bascome Majors Your line is now open.
Bascome Majors (Senior Equity Research Analyst)
Thanks. You guys were pretty clear that the shortfall in Q2 revenue was more rate-driven than volume-driven. And you talked about rates coming back to typical seasonality in the latter part of the quarter and into July. Can you dig into volumes a little bit? You know, how have those performed month-over-month versus what you typically expect for Landstar? And any sense of, you know, whether that's tracking normally or above or below, heading into the early parts of 3Q?
Jim Gattoni (President and CEO)
Yeah, it's actually tracking slightly slower than what the last five-year trends have seen. So when you go from April to May, May to June, you know, you typically see a and I don't have the specific numbers, but when I looked at it, we're about a half a basis point off of what the growth rate would have been in those months. You know, so it has, from a sequential basis, as you move month-to-month, it has slowed somewhat.
Bascome Majors (Senior Equity Research Analyst)
Okay. And Kevin, on incentive comp, with the shortfall in 2Q and the outlook for 3Q, can you let us know where you're accrued for the full year on a cash basis and maybe for stock comp as well? Thanks.
Kevin Stout (VP and CFO)
Yeah, Bascome, we booked $1 million on the incentive comp in Q1 and about $900,000 in Q2. I expect that number to be similar to the Q2 number the rest of the year. And the stock-based comp was $1.4 million in Q2. That, again, will continue into Q3 and Q4.
Bascome Majors (Senior Equity Research Analyst)
Okay. And lastly, you were fairly active on the buyback in the quarter, I think $57 million or so. Looks like the average price was closer to $100 million, $105 million than, than where you were trading yesterday. And do you still feel comfortable being active at the $110 million-$115 million range?
Kevin Stout (VP and CFO)
Yeah, the average price was $103 in Q2. I think it was $104 million in Q1, and we got 1 million shares at $105 in Q4. So, that should give you a pretty good indication of where our heads are on share buyback.
Jim Gattoni (President and CEO)
Yeah, but we, you know, there's a chance it'd be active at one time. We're not kind of counting that out. So it's, you know, we're kinda watch the volatility, look what's going on in the market, and, you know, wouldn't stop from getting at that rate, maybe just not at the volumes you saw.
Bascome Majors (Senior Equity Research Analyst)
Thank you very much, guys.
Operator (participant)
Thank you so much. At this time, I show no further questions. I would like to turn the call back over to you, Mr. Gattoni, for your closing remarks.
Jim Gattoni (President and CEO)
Well, thank you, Missy. And thank you, and I look forward to speaking with you again on our 2019 third quarter earnings conference call, currently scheduled for October 24th. Have a good day.
Operator (participant)
Thank you for joining the conference call today. Have a great morning. Please disconnect your lines at this time.