Landstar System - Q3 2016
October 20, 2016
Transcript
Operator (participant)
Good afternoon, and welcome to Landstar System Incorporated third quarter 2016 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'd like to turn the call over to Mr. Jim Gattoni. Sir, you may begin.
James Gattoni (President and CEO)
Thank you, Danica. Good morning, and welcome to Landstar's 2016 third quarter earnings conference call. This conference call will be limited to one hour. Due to a high level of participation on these calls, I'm requesting that each participant have a two-question limit. Time permitting, we can circle back for additional questions. Before we begin, let me read the following statement. The following is a safe harbor statement under the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts are forward-looking statements. During this conference call, we may make statements that contain forward-looking information that relates to Landstar's business objectives, plans, strategies, and expectations.
Such information is, by nature, subject to uncertainties and risks, including, but not limited to, the operational, financial, and legal risks detailed in Landstar's Form 10-K for the 2015 fiscal year, described in the section Risk Factors and other SEC filings from time to time. These risks and uncertainties could cause actual results 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 continued to execute well in the 2016 third quarter, considering the ongoing slow growth in the U.S. industrial sector.
Industry fundamentals during the 2016 third quarter remained similar to those experienced in the 2016 first half, with truck capacity continuing to be more readily available than experienced in either of the past two years. Keep in mind, however, that 2014 and 2015 were two of the best years of performance in Landstar's history. During 2014 and 2015, Landstar experienced significant growth on strong execution, along with very favorable spot market conditions, particularly in 2014. The softer freight conditions in 2016, along with diesel fuel prices that were on average 10% lower than last year's third quarter, have resulted in lower revenue per load on loads hauled via truck as compared to 2015. Let me point out a few highlights from the quarter.
Even in this comparatively soft spot market environment, Landstar increased the number of loads hauled via truck during the 2016 third quarter over the prior year quarter, when excluding loadings related to the now-completed special project for an automotive customer from the 2015 flatbed load count. We generated the second-highest third quarter gross profit in Landstar history. We ended the quarter with 9,510 trucks provided by BCOs, the highest quarter and truck count in Landstar history. We had a record number of truck brokerage carriers haul freight on Landstar's behalf during the 2016 third quarter, as the model continues to attract quality truck capacity to the system.
The 2016 third quarter had the second-highest number of loads hauled via truck in any third quarter in Landstar history, behind only the 2015 third quarter, which included 20,000 loads hauled via flatbed equipment related to the now-completed project I previously referenced. Landstar provided third quarter revenue and earnings guidance on July 20. That guidance implied revenue of approximately $775 million in the 2016 third quarter, and diluted earnings per share guidance of $0.79-$0.84. Third quarter revenue of $788 million was slightly above our revenue guidance. Diluted earnings per share of $0.86 was above the high end of our guidance. As it pertains to year-over-year revenue trends, revenue declined 6% during the 2016 third quarter compared to the 2015 third quarter.
This revenue decline was only 2% when excluding the $35 million in revenue from the automotive project from the 2015 third quarter. This decrease compares favorably with the 7% decrease in quarter over prior year quarter revenue we saw in the 2016 first quarter, and the 8% decrease in the quarter over prior year quarter revenue we saw in the 2016 second quarter, excluding the revenue from the automotive project from the 2015 second quarter. The revenue shortfalls in 2016 compared to the prior year were almost, were almost entirely due to the decreases in revenue per load across all modes.
As for year-over-year revenue per load comparisons, revenue per load on loads hauled via van equipment was 5% below prior year's third quarter, and revenue per load on loads hauled via unsided platform equipment was 1% below prior year's third quarter. Truck capacity continued to be more readily available than it was in the 2015 quarter, resulting in lower spot market pricing. Additionally, revenue per load was negatively impacted by a lower cost per gallon of diesel, which was almost 10% lower in the 2016 third quarter as compared to the 2015 third quarter. The number of loads hauled via van equipment during the 2016 third quarter was 6% above the 2015 third quarter, while unsided platform loadings decreased 14%.
Excluding the loads hauled via flatbed equipment in 2015—in 2015 related to the automotive project, the number of loads hauled via flatbed increased 1% in the 2016 third quarter over the 2015 third quarter. Overall, we have maintained stable unsided platform volumes in a difficult flatbed environment. The number of loads hauled via Landstar-controlled trailing equipment, mostly van equipment hauled by BCOs and drop and hook operations, was 34% of truck loadings in the 2016 third quarter and increased 8% over the prior year quarter. As it pertains to sequential quarterly revenue trends, we are encouraged by improvement we saw in the quarterly revenue trends as the 2016 third quarter compared to the 2016 second quarter, was slightly better than the normal seasonal pattern.
In recent years, we have typically seen low single-digit decreases in loadings in the third quarter compared to the second quarter. This year, the number of loads hauled via truck in the 2016 third quarter was about equal to the 2016 second quarter, better than the recent historical trend. Similarly, revenue per load on loads hauled via truck increased 2% over the 2016 second quarter, slightly ahead of the typical recent years when moving from the second quarter to the third quarter. Landstar has a highly diversified customer base in a wide range of industries, primarily operating in the U.S. manufacturing sector. The company's top 100 customers accounted for 42% of revenue in the 2016 third quarter.
From an industry standpoint, revenue from the automotive sector was 33% below the 2015 third quarter, entirely due to $35 million in revenue in the 2015 third quarter, driven by the project I previously referred to. Also, freight relating to the energy sector, which was approximately 4% of revenue in the 2016 third quarter, decreased over 24% compared to the 2015 third quarter. Other sectors showing notable revenue declines during the 2016 third quarter were machinery and metals. The machinery and metals revenue decreases were mostly driven by overall market conditions and not related to any specific account, as the company's customer base in those sectors is highly diversified. Gross profit decreased 4% compared to the 2015 third quarter on a 6% quarter-over-quarter decrease in revenue.
Gross profit margin expanded 40 basis points in the 2016 third quarter compared to the 2015 third quarter. The rate of purchased transportation paid to truck brokerage carriers in the quarter was relatively equal to prior year's third quarter, yet at the lower end of the historical range. Here's Kevin with his review of other third quarter financial information.
Kevin Stout (VP and CFO)
Thanks, Jim. Jim has covered certain information on our 2016 third quarter, so I will cover various other financial information included in the press release. Gross profit, defined as revenue less the cost of purchased transportation and commissions to agents, decreased 4% to $121.8 million, and represented 15.5% of revenue in the 2016 third quarter, compared to $126.8 million, or 15.1% of revenue, in 2015. The cost of purchased transportation was 76.3% of revenue in the 2016 quarter versus 76.7% in 2015. The rate paid to truck brokerage carriers in the 2016 third quarter was 8 basis points lower than the rate paid in the 2015 third quarter.
The decrease in the cost of purchased transportation was mostly due to an increase in the percentage of revenue contributed by BCO independent contractors, which typically have a lower rate of purchased transportation than revenue on loads hauled by truck brokerage carriers. Commissions to agents as a percent of revenue were four basis points higher in the 2016 quarter as compared to 2015. Other operating costs were $7.5 million in the 2016 third quarter compared to $8.7 million in 2015. This decrease was primarily due to increased gains on the sale of used trailer equipment and decreased trailer rental costs.
The company has increased its company-controlled trailer fleet to 11,057 trailers, a 10% increase over prior year, as the number of BCOs hauling Landstar trailer equipment has increased with the increased demand for drop and hook services. Insurance and claims costs were $12.5 million in the 2016 third quarter, compared to $10.5 million in 2015. Total insurance and claims costs for the 2016 quarter were 3.3% of BCO revenue, compared to 2.7% in 2015. The increase in insurance and claims compared to the 2015 period was due to increased severity of commercial trucking accidents in the 2016 third quarter as compared to the 2015 third quarter, partially offset by increased net favorable development of prior year's claims in the 2016 period.
Selling, general, and administrative costs were $34.7 million in the 2016 third quarter, compared to $36.8 million in 2015. The decrease in SG&A costs was primarily attributable to reduced incentive compensation expense and a decrease in stock compensation expense, partially offset by costs associated with the company's multiyear project that we believe will increase efficiencies and improve the processing of transactions from order to delivery at both the agent's office and at Landstar. Included in SG&A expense in the 2016 and 2015 third quarters is $2 million and $0.5 million, respectively, related to the agent workflow project. SG&A expense as a percent of gross profit was 28.5% in the current year, compared to 29% in 2015.
Depreciation and amortization was $9 million in the 2016 third quarter, compared to $7.2 million in 2015. This increase was due to the increase in the number of company-owned trailers. As it relates to operating leverage, operating income was $58.5 million, or 48% of gross profit in the 2016 quarter, versus $64 million, or 50.4% of gross profit in 2015. Operating income decreased 9% year-over-year. The effective income tax rate was 36.9% in the 2016 third quarter, compared to 37.8% in 2015. The effective income tax rate includes federal tax credits realized in the 2016 period and includes tax benefits resulting from the disqualifying disposition of the company's common stock in both periods.
Assuming an effective income tax rate of 38.2%, the tax credit favorably, favorably impacted 2016 third quarter diluted earnings per share by $0.02. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $227 million. Cash flow from operations for the 2016 year-to-date period was $171 million. Cash capital expenditures were $18 million, and the company acquired $46 million in trailing equipment financed under capital leases. Included in the $18 million of cash CapEx is $14 million related to the ongoing project to build a new freight staging and transload facility in Laredo, Texas.
During the 2016 period, we purchased 773,000 shares of Landstar common stock at a total cost of $51 million, and there are currently 1 million shares available for purchase under the company's stock purchase program. Back to you, Jim.
James Gattoni (President and CEO)
Thanks, Kevin. I expect capacity conditions experienced in the 2016 third quarter to continue to persist throughout the 2016 fourth quarter, with the rate of purchased transportation paid to truck brokerage carriers to be similar to the 2016 third quarter. However, I expect gross profit margin to be lower than the 2016 third quarter gross profit margin, as I expect a higher percentage of revenue contribution in the fourth quarter from truck broker carriers, which has a higher cost of purchased transportation. Seasonally, revenue per load on loads hauled via truck in October is typically slightly higher than September. During the first few weeks of October, revenue per load on loads hauled via truck has increased slightly from September, indicating the spot market continues to hold to more seasonal patterns.
I believe we will maintain this normal seasonal pattern as we move through the remainder of the year. Thus far, the price of fuel has been fairly stable, and truck capacity, although clearly more readily available in 2016 than during 2015, seems to be holding at a consistent level. Therefore, I expect revenue per load on loads hauled via truck in the 2016 fourth quarter to be slightly lower than the 2015 fourth quarter in a mid-single-digit percentage range. The company's 2016 fourth quarter includes one extra week of operation. Including the impact of the extra week, I expect the number of loads hauled via truck in the 2016 fourth quarter to increase over the prior year fourth quarter in a low single-digit percentage range.
Based on the continuation of recent revenue trends plus the extra week, I currently anticipate 2016 fourth quarter revenue to be in a range of $800 million-$850 million. Note that the 2015 fourth quarter included approximately $0.09 in diluted earnings per share attributable to the project for the automotive customer. Based on the range of revenue estimate and assuming insurance and claims costs are approximately 3.2% of BCO revenue, we anticipate 2016 fourth quarter diluted earnings per share to be in a range of $0.85-$0.90. So far, our results have reflected a softening operating environment and low economic growth in the U.S. economy. With that said, however, the model performed well, and we are encouraged by the improving sequential trends.
We continue to add agents' capacity to the network and are well positioned for when the market improves. With that, Danica, we can 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, star two. One moment, please. Our first question is from Jack Atkins of Stephens. Your line is open.
James Gattoni (President and CEO)
Hey, Jack.
Jack Atkins (Research Analyst)
Hey, guys, good morning, and congrats on a great quarter.
James Gattoni (President and CEO)
Thanks.
Jack Atkins (Research Analyst)
So, I guess, Jim, just first off here on the extra week, could you walk us through the mechanics of that in the fourth quarter? Is that pulling from 1Q17? And then, you know, obviously, that week is in a seasonally soft period of the calendar. But how should we think about what's assumed in the revenue guidance from that extra week, you guys?
James Gattoni (President and CEO)
It has no impact on 2017. It's really just the extension of 2016. But you know, we see it, it's a slow week, right? It's Christmas week. It's comparable, you know, we're saying it's $25 million ±
Jack Atkins (Research Analyst)
Okay. Okay, that's helpful. Thank you for that, that clarification.
James Gattoni (President and CEO)
Sure.
Jack Atkins (Research Analyst)
And then, but for my follow-up on the, you know, the operating expense side, I thought you guys did a really fantastic job managing G&A expenses in the quarter. I think you're able to actually see G&A as a percentage of net revenue decline year-over-year, despite lower net revenue in the quarter. Could you maybe talk to the actions that you guys were able to take to sort of effect that?
James Gattoni (President and CEO)
... Well, as you know, Jack, our one is our bonus program is variable, right? If we're not hitting our targets, there's no bonus. So if you look to prior year, it's basically mostly the incentive comp coming out because we're not hitting our targets this year. If you go sequentially, if you look at second quarter to third quarter, that piece is the agent convention was held in the second quarter, and there's no agent convention in the third quarter. So that's really the majority of what you're seeing on the SG&A line.
Jack Atkins (Research Analyst)
Okay. Okay, great. Thanks, Jim.
James Gattoni (President and CEO)
Yeah.
Operator (participant)
Thank you. Our next question is from Scott Group of Wolfe Research. Your line is open.
James Gattoni (President and CEO)
Morning, Scott.
Scott Group (Managing Director and Senior Analyst)
Hey, thanks. Morning, guys. So just quickly on the extra week in the fourth quarter, on that $25 million or so in revenue, should we just assume a kind of an average margin on that? Is that the best way to think about the EPS impact?
James Gattoni (President and CEO)
Yes, absolutely.
Scott Group (Managing Director and Senior Analyst)
Okay. So, wanted to ask you about the sequential pricing trends. So it looks like we saw a much kind of bigger sequential uptick in flatbed than dry van, which is surprising, kind of given the spot data out there. So kind of, can you help us understand why the bigger uptick in flatbed this quarter?
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
Hi, Scott, this is Pat. It's really a mix in the type of freight that we're transporting. As you know, high, wide, heavy, dimensional freight carries a higher revenue per load, so it's kind of a mix of the business that we're transporting.
Scott Group (Managing Director and Senior Analyst)
So is that kind of somewhat... Is, like, the wind energy stuff picking back up or, or something like that, or, or do you think this mix benefit in the third quarter is sustainable?
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
It's -- we don't have a line of sight into that. It, some of that was wind, but it was just... I think Jim's opening remarks are worth repeating here. It was broad-based across a number of industries, and so we don't see any resurrection in oil and gas. We don't see any resurrection in energy, but we, I think, continue to execute, and I think our expertise around that platform business is what puts us in a pretty good position when it does recover.
Scott Group (Managing Director and Senior Analyst)
Okay, and then just lastly, Jim, kind of the comments in the release said kind of, I think, volumes in October, better than normal. I think your comments today on the call were more kind of normal seasonality, just, unless I missed that. Can you just follow up on that and, to the extent that it's better than normal, kind of where you're seeing that?
James Gattoni (President and CEO)
Yeah, I think, you know, what we're talking about is slight improvements to growth rates, right? So we are, you know, we generally see the September to October, say, peak, maybe 1% volume growth, and we're, you know, we're slightly above that. It's not, you know, it's, we're not, by any means, blown out of the water. It's just, it's good to see that trend. It's a trend we hadn't seen. Yeah, we started seeing the third quarter when the sequential trends were getting better, and the point is, those sequential trends keep on going, and it, we're seeing a little bit better than sequential in October.
Scott Group (Managing Director and Senior Analyst)
Okay. Thank you, guys.
Operator (participant)
Thank you. Our next question is from Todd Fowler of KeyBanc Capital Markets. Your line is open.
Todd Fowler (Managing Director)
Great, thanks. Good morning, and nice quarter. Jim, I guess I just want to make sure I understand where you, you know, back to the questions about what you're seeing on the volume side. You know, the third quarter volumes were stronger than what we were looking for, and I think some of your initial commentary. So, you know, is that mostly the growth in the trailers and the drop-and-hook operations, or is there something else that you're seeing specific to drive the share here this quarter?
James Gattoni (President and CEO)
It's really just very broad-based, Todd. It's hard to put your hands on specifically what it is. You could see clearly our freight on our trailers has grown. We continue to see that as being favorable to us, and we keep putting more trailers in the system. And clearly, if we had more BCOs, we'd put more trailers in the system because demand there is probably more than we can handle. At this point, we keep working on putting more trailers in the system, keeping up with that pace. And plus, I think even on our side, I got to tell you that the flatbed turned out a little bit better than we thought it was going to be.
I wouldn't have expected it to be positive, slightly positive, you know, assuming we take out the automotive project. So I think some of that heavy haul, well, you know, looking at the heavy haul stuff, I think we ratcheted back to being flat the prior year. That's been dropping every quarter for the last probably eight to 12 quarters, and we saw the flatbed come back a little bit this quarter, which was a nice surprise. I think you got a little bit of... You know, it's not like we're growing at 10% or 15% load volumes, but it's nice to see these upticks where we hadn't seen them before, especially on the heavy haul side, like Pat had mentioned.
Todd Fowler (Managing Director)
Yeah, no, I definitely agree with that. And again, I'm just trying to get a sense of kind of where you're seeing it. I know you've said it a couple of times, but it definitely seems like it's, it's across the board and kind of maybe no one specific area that we can point to. I guess, just for my follow-up, at the end of your prepared remarks, you made some comments on the gross profit trends, your expectations into the fourth quarter, and it sounds like you're expecting gross profit to come down, at the margin, to come down a little bit sequentially. But it sounds like most of that is mix related to more brokerage revenue in the fourth quarter. Is that -- do I understand those comments right? And maybe if you could just clarify that.
James Gattoni (President and CEO)
Yes. Absolutely. It's typically what you see is brokerage as a percent of our revenue picks up into the fourth quarter as compared to the third quarter, and brokerage has a higher PT rate, and therefore, or, I mean, a lower gross margin, I'm sorry, and therefore it'll just have an impact. It's not a – we're not seeing any trends that, you know, that brokerage structure costing more or anything like that. That's really just a mix.
Todd Fowler (Managing Director)
Got it. Okay. And, and that's also because the BCOs kind of dial it back a little bit towards the end of the year, and, and that's why the brokerage piece steps up?
James Gattoni (President and CEO)
Slightly, but I'm not sure that's as big an impact. Yes. I mean, we do run a lot of business from about mid-November to the end of December, and a lot of that's BCO business.
Todd Fowler (Managing Director)
Okay, got it. Thanks for the time this morning.
Operator (participant)
Thank you. Our next question is from Matt Brooklier of Longbow Research. Your line is open.
Matt Brooklier (Senior Equity Research Analyst)
Thanks, good morning. So, just an additional question on the volume side, and specifically with your BCO segment. And you talked to kind of a broader base, I guess, sequential pickup. Were there any big customer wins in 3Q that maybe potentially moved the needle a little bit?
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
Matt, this is Pat. No, there were not any major customer wins in the quarter that moved the needle. Certainly, we're out calling on customers, and we're winning business, but I think it bears repeating from Jim's opening remarks. I mean, it's the model, and it's the model executing. If you think about the market penetration that we have with our million-dollar agents, that's 500+ salespeople out in market that are calling on customers face-to-face, fundamentally different than a call center environment. And I think what you're seeing is customers are more welcoming to sales calls. I think there's some concerns about where does capacity line up in 2017, and so I think we've been in the right place at the right time and executing around the diversification of the model.
Matt Brooklier (Senior Equity Research Analyst)
Okay. And then, I think the IT spend this quarter was $2 million, if I heard that correctly. I guess, what are your expectations for IT spend around the initiative for 4Q? And then maybe if you could talk to your expectations for next year, if you continue to spend on the project, what roughly are you assuming in terms of the expense?
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
I was looking for our, my notes there. We, yes, Q2, Q2, the spend was $2 million, and that compares to about $500,000 last year in Q3. So, from a comparative stance, about $500,000 last year, almost $2 million this year. We're going to kind of continue on this pace and maybe increase this pace through 2017. I think what we said for this year, we were, you know, for 2016, we expect it to be within a range of $0.05-$0.10 impact on EPS. Year to date, I think we're at $0.07, and I expect we'll probably be at that higher end, $0.10, when we get through the year.
Next year, you know, I—we haven't finalized next year yet, but some of the preliminary numbers I'm looking at, as, you know, hopefully, we're at launch, and we're doing a lot of training and stuff like that, and there's some cost in there. So we're looking, we probably will be higher than that $0.10, but I don't want to commit to a number right now until we finalize what we're looking at for next year's plan.
Matt Brooklier (Senior Equity Research Analyst)
Okay, fair enough. Thank you for the time.
Operator (participant)
Thank you. Our next question is from Ben Hartford of Baird. Your line is open.
Ben Hartford (Senior Equity Research Analyst)
Hey, good morning, guys. Jim, could you provide a little context to, you know, the above seasonal volumes that you're seeing here in October? You'd mentioned, you know, sounded like you were positively surprised about the heavy haul business stabilizing here in the third quarter. But as we look in October, how much of that is hurricane relief activity, kind of just a normal sequential seasonal improvement, or maybe some of the stability that we're seeing in commodity and industrial end markets having a continuation of that heavy haul effect here in the fourth?
James Gattoni (President and CEO)
Yeah, I don't, I don't believe any of it's hurricane related. The most I heard is we hauled 25,000, 25 loads or something. So I, you know, I don't think that is going to be anything significant in the quarter, and I, I don't think that's the sequential volume trend, because I, I think we saw those trend even before the hurricane hit. We were looking at trends that looked better than the seasonal pattern, from September to October. Again, when I touch on the better seasonal pattern, it's hard to put your hands around because it's slightly better. It's not, we're not talking about a huge breakout, where things are getting better. It's just a nice sign to see because we hadn't had that for a while. And again, it's broad-based.
It's hard to say where it's coming from. Again, it's good. We saw the flatbed volumes increase over the prior year, based on, you know, taking out those automotive loads from last year, and the 6% growth in van volumes that we got through the third quarter, and that just continued through October or at least for the first three weeks of October. It's hard to put our hands on what's driving it. You know, I think we have a lot of demand on our drop and hook operations and our trailers. You can see that, I think that grew 8% in the third quarter, and I think we agreed it was 6, 6% in the second quarter, so we're seeing acceleration of growth on our van equipment. You know, so it's a combination of everything.
I think there's good execution. Pat's done a good job of bringing new agents in. I mean, I think we're over $110 million in new agent revenue for the first nine months of the year. So, you know, and our target's usually $100 million, and so we're beating that. So I think it's a combination of everything that's going on, whether it's, you know, our drop and hook operations, a little bit better flatbed environment. For us, it feels a little better. Now, it's still flat to last year, but that's good. And then the execution on the, some of the new agents coming on board.
Ben Hartford (Senior Equity Research Analyst)
Okay, that's great. As a follow-up, Kevin, tax rate in the fourth quarter in 2017, what are you looking at in it as well on the, on the share repurchase side? What, what type of run rate are -- should we expect in the fourth quarter and 2017?
Kevin Stout (VP and CFO)
The tax rate we're modeling the 38.2%. That's our effective rate we've had over the years. As far as the share repurchases, you know, we're going to do what we normally do. We're going to watch the share price and let history be your guide there. We modeled about 1 million shares. Year to date, we're at 773, I do believe, or $50 million. So, I would expect something similar to that run rate. 2017, probably the same same number of shares.
Ben Hartford (Senior Equity Research Analyst)
Okay, that's great. Thank you.
Kevin Stout (VP and CFO)
... We're probably going to budget for 1 million shares.
Ben Hartford (Senior Equity Research Analyst)
Okay, perfect. Thanks, Kevin.
Operator (participant)
Thank you. Our next question is from Scott Schneeberger of Oppenheimer. Your line is open.
Greg Bjork (Equity Research Associate)
Hey, good morning. This is Greg on for Scott.
James Gattoni (President and CEO)
Hey.
Greg Bjork (Equity Research Associate)
How would you characterize visibility in your industrial end markets, and has there been any change in optimism from your industrial customers in recent months?
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
... Greg, this is Pat. No, there's not a lot of optimism in that segment of the business.
Greg Bjork (Equity Research Associate)
Great. Thank you, guys.
Operator (participant)
Thank you. Our next question is from Ryan Mueller of Buckingham Research. Your line is open.
Ryan Mueller (VP of Equity Research)
Hey, guys. Thanks for the time.
James Gattoni (President and CEO)
Yeah, morning.
Ryan Mueller (VP of Equity Research)
Morning. Can you talk about what the impact of ELDs will be on your BCOs, and how many of your BCOs currently have ELDs?
Joe Beacom (VP and Chief Safety and Operations Officer)
Yeah, Ryan, this is Joe. About 67% of our BCO fleet is ELD compliant, as we speak. So we don't really anticipate much of any impact as we continue to roll out ELDs prior to the mandate with the BCO fleet next year.
Ryan Mueller (VP of Equity Research)
Okay. As a follow-up, what's the impact on gross margin if you know one were to think there's potential lower BCO count or BCO revenue generation?
Joe Beacom (VP and Chief Safety and Operations Officer)
Well, if the amount of revenue leans more towards brokerage because there's fewer BCOs, is that your question, Ryan?
Ryan Mueller (VP of Equity Research)
Yeah.
James Gattoni (President and CEO)
I think the best way, Ryan, for you to take a look at the last five years of the percentage of contribution from BCO and the percentage contribution brokerage, and you can see the trend of what happens to our gross margin there. And then you could probably model it to show, you know, bring BCO down, and you should be able to model what your gross profit is. We don't specifically get into the margins on BCO or brokerage. We kind of talk about it as a whole. We don't really discuss our margins on brokerage or BCO. But I think if you take a look at the historical trends, you can make some assumptions. You could probably get pretty close to what that margin is going to do if you reduce or increase BCO as a percent of the total.
Ryan Mueller (VP of Equity Research)
Okay, thanks.
Operator (participant)
Thank you. Our next question is from Jason Seidel of Cowen. Your line is open.
Matt Frankel (Equity Research Associate)
Hey, good morning, guys. It's Matt Frankel on for Jason.
James Gattoni (President and CEO)
Hey.
Matt Frankel (Equity Research Associate)
Hi. First thing on the agent workflow, I just want to confirm that you guys still planning on rolling this out early next year. Is that still on schedule?
James Gattoni (President and CEO)
Yeah, I'd like to say yes. At this point, I'm being told yes. But it's a slow rollout, so it's in our business model, where you're dealing with over 1,100 independent business owners being our agents, we can't just say, "Here it is, use it." So it's almost where you're rolling out, at the very beginning, we're rolling out very few agents, and then it, we accelerate the growth rates. It's going to be a rollout that takes more than a year. I mean, it, you know, we're thinking two years by the time, two to three years, we get every agent on as we slowly roll it out.
Matt Frankel (Equity Research Associate)
Sure. Understood. Do you have your hands around, I mean, do you have your hands around the productivity increase? I know you mentioned some things down in Jacksonville, or down in Florida, rather, a few months ago, when we met with you. But is there? Do you have your hands around, you know, what kind of benefits you could see, more so than you did a few months ago as you get closer to the-
James Gattoni (President and CEO)
Well, yeah, in March, at our agent convention, we had an agent stand up, and he described basically his business process. And it is the one agent that's utilizing the system today, but he's basically using it with one customer. And where he was doing a lot of manual type interactions between his carriers and the customer, the system we put in place now is a lot of automated, a lot of EDI, a lot of, you know, electronic communications. And, you know, our goal really is to provide, to make sure that the agents have tools that, you know, they can generate, say, $2 million of revenue. At that point, they have to add an employee, and we'd like to push that to $3 million.
So our goal is to build efficiencies out there. And his, one of his comments was that, you know, before we rolled out this tool, he was probably about $1 million. For every $1 million, he had to drop in an employee, and now he looks like it's more of a $5 million per employee. Now, there's, you got to consider, his business was very manual and went very automated. So I, we're not going to see that kind of outcome with every agent, but he's our only example. But we'd like to see an agent be able to do, you know, anywhere, maybe $3 million of freight with a single employee. That's kind of our goal and our target, and we'll see how that rolls out as we start rolling it out to the agent base.
There's more automation to it, a little bit more simplification to the process. That's what we're shooting for.
Matt Frankel (Equity Research Associate)
Understood. That's helpful. Thanks, Jim. And the second thing is on BCOs. We've heard a lot of asset-based providers talk about their desire to maintain or even shrink their fleets, their own assets. However, very happy to grow with independent contractors because of, obviously, the variable cost model. Does that put any more pressure on you guys? Does it make it more difficult to recruit BCOs? Has it changed at all for you guys as we've been in this soft freight market over the last year?
Joe Beacom (VP and Chief Safety and Operations Officer)
Matt, this is Joe. It really hasn't to date. I mean, the interest from owner-operators looking to come to Landstar is at a very high level. And we continue to, again, pretty flattish from a growth rate standpoint, but the interest is very high. We're not seeing any particular signs of increased competition that we can't meet. You know, we think we're really the home of owner-operators, and being a completely owner-operator non-asset-based fleet, I think has its advantages. And many of the programs and the way we distribute freight and all those kind of things, I think win out at the end of the day against most of the asset-based models. We're trying to be both.
Matt Frankel (Equity Research Associate)
Thanks, guys. Appreciate the time.
Operator (participant)
Thank you. Our next question is from Matt Young of Morningstar. Your line is open.
Matt Young (Senior Equity Analyst)
Good morning, guys.
James Gattoni (President and CEO)
Morning.
Matt Young (Senior Equity Analyst)
Quick question on the gross margin again. I think you said, the total gross margin percentage softened or is kind of pulling back a little bit, because of the mix of the broker carrier business. But are you not seeing hints of softening gross margin percentage on the brokerage business alone, when you consider the soft pricing in terms of the sell rate to customers?
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
Yeah, I think if you look quarter-over-quarter, we did have a slight increase in our PT rate.
Kevin Stout (VP and CFO)
Yeah, the brokerage brokerage buy rate was up about 48 basis points sequentially.
Matt Young (Senior Equity Analyst)
Okay, so there would be some softening on the brokerage front, like should be seeing throughout the market at this point? Okay, thanks.
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
Yes. Yes, yes.
Operator (participant)
Thank you once again. I'm sorry. Thank you once again. 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 is from Todd Fowler of KeyBanc Capital Markets. Your line is open.
Todd Fowler (Managing Director)
Thanks for taking the follow-up. Jim, just on the increase in the drop and hook, can you talk a little bit about the customer base that you're doing that with? And, you know, I think about your business as being a little bit more transactional versus contractual, but does drop and hook get you more into the contract market with certain customers, or how does that change the profile of the business, if it does at all?
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
Todd, this is Pat. Again, the customer base that we are attracting is broad-based, and if you just think about the business model and the natural diversification that the agent model kind of brings to the table, it's not surprising that it's very broad-based. As it relates to contractual versus spot pricing, clearly, in some of these accounts, there is contracted pricing. We feel very comfortable with the pricing that we have, in those situations, but in some of it, it's also spot business. So it's, it's, again, it's broad-based, it's multiple accounts, it's many industries, and it's just a reflection of the Landstar business model.
Todd Fowler (Managing Director)
Okay. So Pat, just because you're doing more drop and hook, doesn't necessarily mean that you're doing more with, like, large national shippers on a contract rate. It's just that you're providing a different service across, you know, a very broad customer base, and you have the trailer capacity to do different things at this point.
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
That is correct.
Todd Fowler (Managing Director)
Okay. And then just for my, my last follow-up, on the comments on the incentive compensation in the quarter or the impact, is, is that just that the comparison versus the third quarter of last year, you had incentive compensation or a higher amount of incentive compensation, and you don't have anything this quarter? Or was there some sort of adjustment to incentive compensation accruals as a result of where you were trending? Wasn't sure if I followed that completely.
Kevin Stout (VP and CFO)
Hey, Todd, this is Kevin.
Todd Fowler (Managing Director)
Hey, Kevin.
Kevin Stout (VP and CFO)
In the third quarter, the year-over-year decrease was about $2.5 million.
Todd Fowler (Managing Director)
Okay.
Kevin Stout (VP and CFO)
It should be about $1.5 million in the fourth quarter.
Todd Fowler (Managing Director)
Got it. Okay, guys. Thanks for the follow-up.
Kevin Stout (VP and CFO)
Mm-hmm.
Operator (participant)
Thank you. At this time, I show no further questions. I would like to turn the call back over to you, sir, for closing remarks.
James Gattoni (President and CEO)
Thank you, Danica. Thank you, and I look forward to speaking with you again on our 2016 year-end earnings conference call, currently scheduled for February second, 2017. Have a nice day.
Operator (participant)
Thank you for joining the conference call today. Have a good afternoon. Please disconnect your lines at this time.