Landstar System - Q4 2017
February 1, 2018
Transcript
Operator (participant)
Good afternoon, and welcome to Landstar System Incorporated year-end 2017 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, 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, Jo. Good morning, and welcome to Landstar's 2017 fourth quarter earnings conference call. This conference call will be limited to 1 hour. When we open the line for questions, I ask that each participant have a 2-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 2016 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. 2017 was a great year for Landstar, highlighted by many new financial and operational records.
Revenue in fiscal 2017 was an annual record of $3.6 billion and exceeded 2016 by 15% on the strength of increased loadings hauled via truck of 9% and increased revenue per load of 6%. Demand for our services was strong throughout the year. We had record loadings hauled via truck in 2017. The number of loads hauled via truck in 2017 first quarter, second quarter, and third quarter exceeded the prior year quarters by 10%, 9%, and 13%, respectively. The number of loads hauled via truck in the 2017 fourth quarter exceeded prior year by 3% or 10% when excluding loads from the extra week and favorable timing of Christmas in 2016.
Revenue per load on loads hauled via truck in 2017 exceeded prior year by 1%, 3%, 6%, and 13% in the first, second, third, and fourth quarters of 2017, respectively. The strength in spot market pricing that began at the end of the third quarter continued for the remainder of 2017, resulting in revenue per load approaching the record level reached in the fourth, fourth quarter of 2014. During 2017, we had a record 542 agents generate revenue in excess of $1 million. Revenue from new agents, defined as an agent who contracted with Landstar subsequent to January 1st, 2016, was approximately $117 million in 2017.
Gross profit was a record $544 million, 11% over 2016. On the cost side, insurance and claim costs were 3.8% of BCO revenue, much higher than the 3.3% five-year historical average expected in 2017. Additionally, selling, general, and administrative costs were elevated, mostly on a higher provision for incentive compensation as a result of exceeding targets in 2017. Despite the increased costs, operating income was $244 million, also an annual record, and was 9% above prior year.
As it relates to net income, fiscal year 2017 was favorably impacted by $19.5 million from a one-time deferred tax liability revaluation resulting from the enactment of the Tax Cuts and Jobs Act, which increased 2017 fourth quarter diluted earnings per share by $0.46. Excluding the favorable impact of the Tax Act, 2017 net income would have been a record $158 million, and diluted earnings per share would have been a record $3.75. We expect the Tax Cuts and Jobs Act will lower the company's effective income tax rate in fiscal 2018 to approximately 24.5%, down from the prior rate of 38.2% prior to any discrete items.
Overall, the 2017 fourth quarter operating environment was outstanding for Landstar. We saw significant increases in both the number of loads being hauled by truck and revenue per load. Industry-wide truck capacity tightened as we moved through the quarter, while we continued to have a strong, broad-based demand for our services. Our 2017 fourth quarter results established numerous Landstar financial records as the company set all-time quarterly records for revenue, gross profit, operating income, net income, and diluted earnings per share. As to capacity, we ended the year with a record number of trucks provided by BCOs as we continued to work to attract high-quality BCO capacity to the network.
During our third quarter earnings conference call, we indicated we expected 2017 fourth quarter revenue to be in a range of $975 million-$1.025 billion. Revenue in the 2017 fourth quarter is $1.052 billion, leading to record quarterly gross profit of approximately $150 million in the 2017 fourth quarter. During our third quarter earnings conference call, we provided diluted earnings per share guidance of $0.98-$1.03. Actual diluted earnings per share was $1.54, or $1.08 when excluding the favorable impact of the Tax Cuts and Jobs Act on the fourth quarter net income. Our fourth quarter guidance called for loads to be above...
The 2016 fourth quarter on a high single- to low double-digit percentage range, when excluding the estimated 30,000 truckloads included in the 2016 fourth quarter, resulting from the extra week and favorable timing of Christmas. The number of loads hauled via truck in the 2017 fourth quarter was 10% over the 2016 fourth quarter, when excluding those 30,000 loads. The increase in revenue was broad-based among many customers and industries. Our expectation was that revenue per load on loads hauled via truck would be higher than the 2016 fourth quarter in a low double-digit percentage range. Revenue per load on loads hauled via truck exceeded the 2016 fourth quarter by 13% at the high end of our expectation.
Growth in revenue per load on loads hauled via truck on a month-over-month prior year month basis was 11%, 14%, and 14% in October, November, and December, respectively. These very strong revenue per load numbers represented an above-normal seasonal uptick in revenue per load on loads hauled via truck from the end of the third quarter through the end of the fourth quarter. The tightening of truck capacity that began at the end of the third quarter resulted in revenue per load on loads hauled via truck to increase $50 from August to September. During the fourth quarter, truck capacity continued to tighten, driving revenue per load on loads hauled via truck in December to $212 over September's revenue per load.
Both the September from August increase and December from September increase were significantly above historical trends. Revenue per load on loads hauled via van equipment was 13% above prior year's fourth quarter, while revenue per load on loads hauled via unsided platform equipment increased 14% compared to the 2016 fourth quarter. Length of haul in the 2017 fourth quarter was 1% lower in the 2017 fourth quarter compared to the 2016 fourth quarter for loads hauled via both van and unsided platform equipment. The number of loads hauled via Landstar-controlled trailer equipment, mostly van equipment hauled by BCOs and drop and hook operations, was 32% of truck loadings in the 2017 fourth quarter, and increased 3% over the 2017 third quarter.
The number of loads hauled via rail carriers was 2% higher than the 2016 fourth quarter, the first quarter-over-prior-year-quarter increase in 2017. The intermodal market was more competitive throughout 2017, and we continued to experience softness in rail intermodal loadings at several customers. The number of loads hauled via air and ocean carriers increased 26% over the 2016 fourth quarter. Gross profit increased approximately 13% compared to the 2016 fourth quarter. Gross profit margin decreased from 14.9% in the 2016 fourth quarter to 14.2% in the 2017 fourth quarter. Here's Kevin with his review of other fourth quarter financial information.
Kevin Stout (VP and CFO)
Thanks, Jim. Jim has covered certain information on our 2017 fourth quarter, so I will cover various other fourth quarter financial information included in the press release. Gross profit, defined as revenue less the cost to purchase transportation and commissions to agents, increased 13% to $150 million and represented 14.2% of revenue in the 2017 fourth quarter, compared to $132.8 million, or 14.9% of revenue in 2016. The cost of purchased transportation was 77.5% of revenue in the 2017 quarter versus 76.7% in 2016. The rate paid to truck brokerage carriers in the 2017 fourth quarter was 88 basis points higher than the rate paid in the 2016 fourth quarter.
Commissions to agents as a percentage of revenue were 16 basis points lower in the 2017 quarter as compared to 2016, due to a decreased net revenue margin, revenue less the cost of purchased transportation on loads hauled by truck brokerage carriers. Other operating costs were $6.2 million in the 2017 fourth quarter, compared to $8.2 million in 2016. This decrease was primarily due to decreased trailing equipment costs and decreased contractor bad debt. Insurance and claims costs were $16.2 million in the 2017 fourth quarter, compared to $14.5 million in 2016. Total insurance and claims costs for the 2017 quarter were 3.7% of BCO revenue, compared to 3.66% in 2016.
The increase in insurance and claims compared to 2016 was entirely attributable to increased net unfavorable development of prior year claims in the 2017 period. We believe that insurance and claims costs will approximate 3.5% of BCO revenue, representing the historical annual average over the previous five years, over the long term. However, accidents in the trucking industry can be severe and occurrences are unpredictable. Selling, general, and administrative costs were $47.4 million in the 2017 fourth quarter, compared to $37 million in 2016. The increase in SG&A costs was mostly attributable to an increase in the provision for bonuses under the company's incentive compensation plan and an increase in stock compensation expense due to increased assumed vesting of shares awards related to the enactment of the Tax Cuts and Jobs Act in December 2017.
The provision for incentive compensation was $6.9 million in the 2017 fourth quarter, compared to $559,000 in the 2016 fourth quarter. As a result, quarterly SG&A expense as a percent of gross profit increased from 27.9% in the prior year to 31.7% in 2017. Depreciation and amortization was $10.6 million in the 2017 fourth quarter, compared to $9.7 million in 2016. This increase was due to the increase in the number of company-owned trailers during 2017. The company currently has 11,882 trailers in its company-controlled fleet, a 4% increase over prior year. As the number of BCOs hauling Landstar trailer equipment continues to increase with the increased demand for drop-and-hook services.
Operating income was $70 million, or 46.8% of gross profit in the 2017 quarter, versus $63.8 million, or 48% of gross profit in 2016. The decline in operating margin was driven by the increase in the provision for incentive compensation and increased insurance and claims costs, offset by increased gross profit and decreased other operating costs. Operating income increased 10% year-over-year. The effective income tax rate was 6.9% in the 2017 fourth quarter, compared to 36.9% in 2016. The 2017 quarterly effective income tax rate was significantly affected by the revaluation of deferred tax liabilities as a result of the enactment of the Tax Cuts and Jobs Act in December 2017.
Excluding the impact of this revaluation, the effective income tax rate would have been 35% for the 2017 fourth quarter. The effective income tax rate, which has historically approximated 38.2%, was also impacted in both periods by tax benefits resulting from disqualifying dispositions of the company's common stock, and in 2017 by implementation of Accounting Standards Update 2016-09. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $291 million. The board declared a quarterly dividend of $0.15 per share, payable on March 16th, to stockholders of record on February 19th. This represents a 50% increase to the company's previous quarterly dividend. Cash flow from operations for 2017 was $139 million, and cash capital expenditures were $15.6 million.
There are currently $3 million, excuse me, 3 million shares available for purchase under the company's stock purchase program. Back to you, Jim.
Jim Gattoni (President and CEO)
Thanks, Kevin. We continue to attract qualified agent candidates to the model. Revenue from new agents was $27 million in the 2017 fourth quarter. As expected, we lost a minimal number of BCO trucks due to the ELD mandate. In fact, during the 2017 fourth quarter, we experienced the lowest truck turnover in 10 quarters and had the highest net BCO truck additions since the 2015 second quarter. And all of our active BCOs had installed ELDs by the December deadline. We ended the quarter with a record 9,696 trucks provided by business capacity owners, 257 trucks more than at year-end 2016, and 148 over the end of the 2017 third quarter.
The number of loads hauled by BCO truck capacity in the 2017 fourth quarter was 2% below the 2016 fourth quarter. BCO productivity was 4% lower in the 2017 fourth quarter, compared to the 2016 fourth quarter, mostly from the extra week in 2016. The 4% decrease in productivity was partly offset by the 2% increase in BCO trucks. We had a record number of third-party broker carriers haul freight on our behalf during the 2017 fourth quarter. Our network is strong and continues to attract third-party truck capacity. Our 2017 financial performance was outstanding. I am extremely pleased with the way we closed out the year. 2017 fourth quarter revenue increased approximately 8%-18% compared to the 2016 fourth quarter.
This result reflected strong volume gains and elevated pricing throughout the quarter. During the first several weeks of 2018, strong volume and elevated pricing continues on our truckload services. Strong demand from the industrial sector, the ELD mandate, and extreme winter weather across the country disrupting freight flow, have all contributed to a strong start to 2018. The number of loads hauled via truck is currently running in a high single-digit percentage growth range over the same period of 2017. Revenue per load on loads hauled via truck also continues to be strong in the mid-teens percentage range over the same period of 2017.
I expect gross profit margin to be in a range of 14.7%-14.9% in the 2018 first quarter, compared to 15.6% in the 2017 first quarter. Although I expect that truck capacity will remain tight as we move through the first quarter, the expected decrease in gross profit margin as compared to the 2017 first quarter, is mostly due to a greater percentage of revenue hauled via truck broker carriers. Seasonally, revenue per load on loads hauled via truck in the first quarter is typically lower than the fourth quarter. Over the past 5 years, revenue per load on loads hauled via truck has decreased an average of 5% from the fourth quarter to the first quarter.
Considering the current freight environment, we're expecting a smaller decrease in revenue per load in the 2018 first quarter, and expect the fourth quarter to first quarter decrease to be in a range of a decrease in a range of 1%-4%. The lesser decrease is somewhat due to the disruption of freight transportation due to the recent extreme weather, and also due to strong demand and the ELD mandate. I expect revenue per load to remain elevated through the remainder of the first quarter at a mid-teen digit percentage above prior year first quarter. Recent trends through the first few weeks of January show a continuation of strong volumes experienced throughout 2017.
Assuming the current trends continue, I expect 2018 first quarter loads hauled via truck to be above the 2017 first quarter in a high single-digit percentage range.
... I currently anticipate 2018 first quarter revenue to be $925 million-$975 million. And based on that revenue expectation, based on that revenue expectation, and assuming insurance and claim costs are approximately 3.5% of BCO revenue, I anticipate 2018 first quarter diluted earnings per share to be in a range of $1.22-$1.27. The operating environment experienced in the 2017 fourth quarter exceeded our expectations. The momentum and demand for our service that began in the fourth quarter of 2016 continued and strengthened through 2017. The increased demand, combined with a significant increase in rates that started late in the third quarter, contributed to the very strong fourth quarter revenue and gross profit.
We reported record fourth quarter gross profit and the highest fourth quarter diluted earnings per share in the company's history. We continued to focus on profitable load volume growth, increasing the number of agents and capacity providers in our network, and enhancing the tools available to our network of agents and capacity providers to enable them to effectively dispatch and haul more loads. With that, Jo, we will open to questions.
Operator (participant)
Thank you very much. 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. That is star one to ask a question, and to cancel your request, press star two. Our first question comes from Amit Mehrotra of Deutsche Bank. Please proceed with your question.
Amit Mehrotra (Director and Lead Analyst)
Great. Thank you, Alberta. Good morning, everybody. Thanks for taking my questions. I wanted to ask about the demand environment. I mean, you clearly touched on it a little bit, but clearly, the strength seems to be the driver of the strong performance. I mean, correct me if I'm wrong, I don't think the company has ever achieved a revenue per load growth in the mid-teens percentage range, so that's obviously very impressive. Clearly a perfect storm of good stuff in the truckload wood market. But in that context, could you just break down the demand environment for us, where there's some specific pockets of strength, particularly maybe in the unsided business with the energy prices up?
I know also visibility is somewhat limited, but your thoughts on maybe how much of the strength, the current strength, do you think is sustainable based on just your experience in looking at past cycles and what's going on now? Thank you.
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
Amit, this is Pat. I'll answer the question. In Jim's remarks, he talked about the broad-based nature of the opportunities and the broad-based nature of the revenue growth. And I think you see the kind of the power of Landstar on display there. So because of our diversified network of agents, we're able to penetrate a lot of these different industries and accounts, and when those accounts and industries are up, again, it's just been a broad-based across many industries and customers at Landstar that we've seen the growth.
Amit Mehrotra (Director and Lead Analyst)
Okay.
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
If we could think of one industry that's maybe not growing, and that would be automotive alone. But, again, it's not growing, but it's not declining either.
Amit Mehrotra (Director and Lead Analyst)
Got it. Yep, okay, that makes sense. And then just one follow-up from me. Just if you could talk about, you know, the company's ability to, I guess, increase the BCO count in the current environment. That's number one. And then, two, kind of, you know, given this gap between when the ELD mandate went into effect and the full enforcement, there is a percentage of capacity that maybe is waiting for the last minute. Have you seen, you know, customers, shippers, you know, want to only do business with companies, with carriers that are now fully ELD compliant, or is there some flux there?
Just trying to understand if there's this temporary dislocation that's being created in the truckload market because of this gap between the mandate, you know, the enforcement and when the mandate went into effect.
Joe Beacom (VP and Chief Safety and Operations Officer)
Sure. Amit, this is Joe. I'll take that question on the BCO count. Yeah, we, you know, interest remains strong. And if you think about the environment we're in, where pricing goes up, is on the rise, BCOs, our BCOs are paid on a percentage of revenue. So, when rates are going up, they're getting a pay increase every time the rate goes up, so it's a very attractive feature to the model. Fuel is moving higher. We passed through 100% of fuel surcharge to our BCOs. So I think, from a recruiting environment and a retention environment, both of those bode well, for growth as we move through 2018.
Typically, in the first quarter, we're flat to down, through the January, we're actually flat, so far, but typically that's not uncommon. We usually see a flatness or a slight decline in January. But I think the prospects for 2018 are actually pretty good. On the ELD front, as Jim stated, we had just a handful of BCOs that we lost over the ELD mandate, and another very small handful who have yet to install that are currently inactive. I think our customers do expect that ELD-equipped trucks service them, right? To what, and to that extent, we honor that with our BCO fleet.
And I think that, you know, there is some delay in enforcement that, where you might have some operators in brokerage equipment that may or may not have put ELDs in or in the process of doing that, but certainly, I do think that expectation is there. But I also think that there's plenty of opportunity and a mechanism for that to happen as we move through the first quarter.
Amit Mehrotra (Director and Lead Analyst)
Got it. Okay, that's all from me. Thanks. Congrats on the, on the really strong results, guys.
Jim Gattoni (President and CEO)
Yeah, thanks.
Operator (participant)
Thank you. Our next question comes from the line of Jason Seidl of Cowen. Please proceed with your question.
Jason Seidl (Managing Director)
Hey, thank you, operator, and good morning, guys. I also want some of your your end markets and sort of the flatbed side of things. Looks like you had a lot of strength in building products and metals. Where do you think that was coming from? Was it sort of broad-based? Was it anything in particular? And what are your thoughts on an infrastructure bill, if that gets passed, and how that might affect Landstar's business going forward? Thank you.
Jim Gattoni (President and CEO)
Well, on the infrastructure bill, we generally, you know, it just tends to tighten up flatbed capacity and maybe not directly for us. So it would tighten up a market that already feels a little tight, and it's been over the last two or three years. So no direct impact that we would think from an infrastructure bill, but clearly an indirect impact as more flatbed gets sucked into any new project that they're working on.
Jason Seidl (Managing Director)
In terms of breaking out the end demands for some of your flatbed business and what you're seeing there?
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
Jason, this is Pat. Again, very broad-based. You mentioned metals, building products, machinery. Those, again, we've. I, I really want to emphasize the diverse nature of the model, and then all the different end markets that we're penetrating, and then the customers within that. So, if you look at those three segments, those three segments were up in the quarter, and we anticipate a similar strength as we go through the first quarter here in those segments as well. I think it's worth repeating that, you know, in January, what we've seen is a high watermark for the number of requests from customers for information related to Landstar. An RFI comes in, and typically following that RFI is a request for quoting on business.
And so I think, again, it gives you an idea of just how diverse and broad-based the opportunities are and how our model is set up to take advantage of that.
Jason Seidl (Managing Director)
All right. Well, gentlemen, thank you for the time and impressive quarter.
Jim Gattoni (President and CEO)
Thank you.
Operator (participant)
Our next question comes from the line of Matt Brooklier of Buckingham Research. Please proceed with your question.
Matt Brooklier (Senior Equity Research Analyst)
Yeah, thanks, and good morning. So I wanted to get back to the BCO growth in the quarter. You saw nice growth, even despite loads being down, and obviously, there was a difficult comp in the quarter. And not sure if you have this information, but can you talk to the pace of additions through fourth quarter, if potentially you saw more BCO additions toward the end of the year? What I'm getting at is, do you see any change in terms of your ability to add BCOs post the ELD mandate?
Joe Beacom (VP and Chief Safety and Operations Officer)
Yeah, Matt, this is Joe. No, really, the ELD mandate, you know, I'll take you back. We've been requiring ELDs for all new BCOs since the end of 2012. So that adding BCOs into the network as a result of having to get an ELD really hasn't been anything new for us. So the pace of additions continued pretty steady. Our retention, as Jim mentioned, improved in the quarter, and again, I think that's a function of the system that we provide, but also just the general environment for freight and some of the, again, rising prices that were in the quarter. It just makes Landstar a great place to be for owner-operators.
Matt Brooklier (Senior Equity Research Analyst)
Okay. So I guess your sense is it's the model and, you know, an increase in pricing and freight opportunities, which was probably the main contributor to this nice growth that we're seeing in-
Joe Beacom (VP and Chief Safety and Operations Officer)
Yeah, I think, you know, overall, we believe we're the best place for an owner-operator. I mean, we provide the level of freedom, the access to growth, the access to being a part of a system that provides freight that they can't get on their own, or they can't get in many other systems that are out there. And I think that advantage that we see just heightens in an environment like we're seeing today.
Matt Brooklier (Senior Equity Research Analyst)
Okay. And then, Jim, I think you touched on your gross margin expectations for first quarter. We're seeing kind of continued compression. You talked about mix, you talked about rising purchase transportation costs. Any thoughts as to when we may see some, I guess, alleviation in terms of the headwinds from a gross margin perspective? Should we just be looking at, you know, spot pricing and getting through, you know, the bid season in terms of contract rate increases? Or is it like, is there any other dynamic that's, you know, outside of those factors, which is maybe providing a little bit more pressure on your gross profit margin? Thank you.
Jim Gattoni (President and CEO)
Yeah, most of the pressure is probably coming more from mix because we expect more brokerage revenue in the first quarter as compared to the prior year. I think when you look sequentially through maybe third quarter or fourth quarter, you know, the spread between the, you know, revenue per load and PT per load on a brokerage actually got, got better coming into the fourth quarter. So I think that we, we -- the revenue per load accelerated faster into the fourth quarter than the PT rate did because we, we closed that gap. So I, I think we're, we're there now on when you just speak to the brokerage piece of our business, you know, I, there's not a lot of compression left in there.
I think we're starting to that point where pricing is now offsetting the increased pressure on the trucks from the tightening. So, it's more of a mix for us from our first quarter projection.
Matt Brooklier (Senior Equity Research Analyst)
Okay, good to hear. Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Jack Atkins of Stephens. Please proceed with your question.
Jack Atkins (Research Analyst)
Hey, hey, guys. Good morning, and congratulations on a great quarter here.
Jim Gattoni (President and CEO)
Thank you.
Jack Atkins (Research Analyst)
So I guess, Jim, let me kind of go back to the macro questions for a moment, because I think, you know, when we look at sort of your guidance for the first quarter, obviously, it's very encouraging. And then when we think about just the signs that we're seeing from the economy, it seems like things are accelerating, and then you layer on the tax reform to that and ELDs, it just seems like we're potentially at a point where we could see an extended cycle... this time versus what we saw in 14 and 15. And I'm just curious from your perspective, you know, when you think about it, how are you thinking about this cycle playing out over the next 12-18 months?
Jim Gattoni (President and CEO)
I honestly don't see anything slowing this down. I mean, it's you got the ELD mandate, you got an industrial production in the U.S. increasing. You know, it's the demand, as Pat says, broad-based, and it slowly came on us, right? It wasn't like it popped, and we expect it to go away. You know, it started building in the end of this third quarter and flowed right through the fourth quarter. I think we're doing a great job on executing, putting more volumes. You know, Pat's focus over the years has been to just focus on volumes, price will come, and I think now we're seeing that, the results of the efforts Pat's putting in and his team. I expect, you know... Do I expect this?
Look, the one thing is we're coming into January, probably one of the hot... It was probably the lowest drop from December to January in price in the history of the company. And the only question I have is, will that price level elevate like it typically does throughout the year, or we see more balanced pricing 'cause we've already got the increase built in? That's the one question I have for the remainder of the year. But from a volume and demand standpoint, the environment feels great for us right now. I don't see any hiccups from the volume side, and price is strong. Will it climb into the back half of the year to the typical, or did we already get the price built in right now?
That's kind of the question I have.
Jack Atkins (Research Analyst)
Okay.
Jim Gattoni (President and CEO)
But we're—I feel, I mean, we're executing on all cylinders, and I haven't—I think we all feel pretty good about what the year is looking like.
Jack Atkins (Research Analyst)
Okay. That's helpful, Jim. Thank you. And then, you know, when I think about, you know, the impact from the tax reform bill, I mean, obviously, it's gonna have a positive impact to your cash flows. And so I'd be curious if you could comment on your thoughts on capital allocation, you know, the buyback. I don't... You guys have 3 million shares authorized, but I don't think you executed on any of the buyback in 2017. You know, do you anticipate that changing, you know, in 2018? And then how do you think about your capital distribution? But then secondly, on the tax reform bill, does it change the calculus for some of the owner-operators looking to affiliate with Landstar's BCOs?
Could you possibly see, you know, your BCOs perhaps adding trucks because of some benefits around immediate expensing and depreciation that will flow to them through the tax reform bill?
Jim Gattoni (President and CEO)
Well, yeah. Well, go with the last one first. I don't see that the impact on our BCO and agent network as much because 98% of our trucks is one guy.
Jack Atkins (Research Analyst)
Okay.
Jim Gattoni (President and CEO)
You know, I don't see that group jumping in and buying a second truck. But maybe, you know, from my perspective, yeah, I don't see that happening, especially when, like I said, of our 9,600 trucks, 9,200 of them are probably single owner-operators, 9,000.
Jack Atkins (Research Analyst)
Okay.
Jim Gattoni (President and CEO)
From the question on our... You know, the philosophy hasn't changed on our stock buybacks and our small dividend buybacks. We prefer the buyback program. And yes, we didn't buy any stock during 2017. You know, we look at market multiples, we look at our multiple. We also look at, you know, where the tax reform was speculation at the time, and, you know, and you had the sense it was driving some of the market multiples, and until reality set in with the tax reform being... So we were kind of on the sideline throughout 2017, but our philosophy hasn't changed. We still wanna, you know, focus on buybacks. And with it clearly we'll have in 2018, we'll have an increased cash flow based on the tax reform.
As part of that, we added a nickel to our quarterly dividend. Every year since 2004, you know, we've ever since we started doing dividends, we also look at during the second half of the year, we've increased the dividend. We left an opportunity to take a look, see how the year is going, and see if we want to increase that quarterly, but we still got the same philosophy.
Jack Atkins (Research Analyst)
Okay, that's great. Well, thanks again for the time.
Jim Gattoni (President and CEO)
All right. Thanks.
Operator (participant)
Thank you. Our next question comes from the line of Bascome Majors of Susquehanna. Please proceed with your question.
Bascome Majors (Senior Equity Research Analyst)
Yeah, good morning, and congratulations on the results. I wanted to talk a little bit on the SG&A side. You know, with the incentive comp around $7 million for the fourth quarter, looks like the full year probably came in around $20 million. Can you just confirm that number and, and walk us to what and sort of expected accrual would look like in 2018 if that came down to more target levels, and, and when within the year you'd expect to maybe revisit and want that accrual up if results were, coming in above plan like they did last year? Thanks.
Kevin Stout (VP and CFO)
Hey, Bascome, this is Kevin. I'll take that one. Yes, the number was $20 million for 2017. And, like, like we said in the past, it usually... If we're going to hit targets, our incentive comp number will be $2 million a quarter, so $8 million annual. So there's, I guess you could say, a $12 million tailwind there. We would revisit it at the end of each quarter and try to get our best estimate for the annual number and, you know, try to get whatever we think the annual number is gonna be into each quarter equally. So every quarter, we're gonna take a look at that.
Bascome Majors (Senior Equity Research Analyst)
Thanks for that.
Kevin Stout (VP and CFO)
But $2 million is probably the best number to put in for your model for the annual number for 2018.
Bascome Majors (Senior Equity Research Analyst)
Well, I appreciate that out. So, and, you know, could you just... Is there anything positive or negative on the SG&A side from your agent technology project this year versus last year? And, you know, could you kind of tell that all together? I mean, you've got these long-term margin targets out there for 70% plus incrementals on net revenue growth and reaching a 50% operating margin on net revenues. I mean, are those in your sights for 2018, given the results you expect?
Jim Gattoni (President and CEO)
... Yeah, clearly, I think the incremental margin, based on what Kevin just said in that, the tailwind of our bonuses should help us get to that 70%-80% incremental push-through of any incremental gross profit growth should push through 70% or more down to operating income. Also, you got to look at the fact that our 2017, not that this is the perfect for insurance, but we're at 3.8% of BCO revenue, and we're projecting 3.5%. So you got a little bit of hopeful tailwind there as long as we're safe, and that should help us get to that incremental margins. Our spending on tech continues at about an even rate between $8 million-$10 million a year, and that'll continue over the next couple of years.
That'll put a little pressure on that 50% margin. So we've pushed that 50% goal into 2020. To be 50% operating margin by 2020.
Bascome Majors (Senior Equity Research Analyst)
All right, well, I appreciate all the color there on the G&A side, guys. Thanks.
Operator (participant)
If you would like to ask a question, please press star one on your touchtone phone. Once again, that is star one to ask the question. Our next question comes from the line of Todd Fowler of KeyBanc Capital Markets. Please proceed with your question.
Todd Fowler (Director)
Great, thanks. Good morning. Jim, maybe just to follow up on your comments to Jack about expectations for the year. I mean, if I look at your first quarter guidance, and I adjust for the tax rate, I mean, it almost feels like that you're expecting first quarter to be comparable with fourth quarter, which is atypical from normal seasonal trends. I know that we're seeing, you know, strength here in January, but, you know, would your expectation at this point be that 2018 is going to be more linear from a quarterly standpoint?
I know there's a lot of variability with ELDs and what could happen, but from a starting standpoint, does it feel like we should, you know, think about things being more linear through 2018, or would you expect, you know, more of a ramp as we move through the second quarter and into the back half?
Jim Gattoni (President and CEO)
Yeah, my thoughts are a little bit more linear because, I think the, the first quarter anomaly is driven by a couple of specific things, right? It's everybody's new to it. Anybody who put on an ELD late in the year is new to it, right? And I think that probably affects productivity in the short term, or trucks sitting, getting the ELDs put in or down a couple of days, and then they got to learn how to use them. So that's kind of a phenomenon that's going on right now, and it could, could continue until April 1st. You know, the, the weather, even though it wasn't a lot for a couple of days, there was some, you know, which would keep spot market rates up. Any kind of disruption like that would keep the rates up in January, and the strength of IP. So I- it...
Sitting here today, coming out of a real strong first quarter, I would, you know, on a pricing side, do I expect it to elevate back into the back three quarters the way it has historically? To some degree, but not to the extent that it has in the past, because I think we started so strong. So from a comp basis, sequentially, I think, I don't know if it will elevate as we had before. But, you know, it, it's, it's early in the year. We're, we're dealing with only, only four weeks of results. So I think we are a little conservative on what I'm saying about the year.
If it continues as is, you know, we could have a very strong year, but the strongest in the history, clearly, I mean, we'll see how it rolls out after the first quarter.
Todd Fowler (Director)
Yeah, no, I mean, that makes a lot of sense to me, I mean, and I think that that's probably the right framework to work from. And maybe one of the things just to help clarify, I mean, your model versus maybe some of the asset-based carriers, correct me if I'm wrong, but I think about you as having maybe less contract exposure. So some of the, you know, asset-based names that are talking about seeing rates improve as they sign the new contracts, that shouldn't... You maybe have less of a benefit from seeing contracts resetting in the second half of the year versus some of your asset-based truckload peers. Is that correct?
Jim Gattoni (President and CEO)
Oh, absolutely, yeah. We have contract rates in a lot of our with a lot of our customers, but when the market gets tight, the agent renegotiates the price. So our contract rates are a lot like spot market rates, and it happens the other way, too. If the shipper senses that there's rates going down, our agents react and bring the rates down. So we're a little bit more subject to changing coming off of contract rates than because it's a day-to-day, transaction by transaction kind of in our world, a lot of spot type business.
Todd Fowler (Director)
Okay, good. That's helpful. Just for my quick follow-up, do you have and maybe, give, these for the fourth quarter, the monthly volume comps for October, November, and December? And then do you also have the 2017 January, February, March comps, so we understand what you're comping against on a monthly basis for truck volumes?
Jim Gattoni (President and CEO)
We do, and Kevin, can you... But I'm going to disclaim on the December 2017.
Todd Fowler (Director)
Got the comps, yeah.
Jim Gattoni (President and CEO)
Just, yeah, just because October's clean, but this year, I believe November had Thanksgiving, but it was in December last year, and so there's a little confusion in the numbers. And then we had the extra week in 2016. But you didn't ask for 2016, did you?
Todd Fowler (Director)
No, I was hoping to get, I was hoping to get, what you saw in the fourth quarter of this year, and I understand if that makes sense about-
Jim Gattoni (President and CEO)
I got ahead of you. All right. Kevin, go ahead.
Kevin Stout (VP and CFO)
Yeah, volumes, October, November, and December, this is just for truck, year-over-year, 13, 5, and then -5.
Todd Fowler (Director)
Mm-hmm. And then what, what about January 17? So what are you comping against in January, February, and March this year?
Kevin Stout (VP and CFO)
The first quarter was 10%. Give me a second, I can find the other first quarter numbers.
Todd Fowler (Director)
Jim, maybe while Kevin looks at that, and if this isn't, can you have a CapEx number for 2018? I don't know if you had that in the release or not.
Jim Gattoni (President and CEO)
Yeah, about $40 million.
Todd Fowler (Director)
Okay. And that's mostly trailing equipment?
Kevin Stout (VP and CFO)
Yeah, about 30 of that is trailing equipment. So $8 million-$10 million on the, you know, the true cash CapEx.
Todd Fowler (Director)
Mm-hmm.
Jim Gattoni (President and CEO)
Load count? The load count for January.
Kevin Stout (VP and CFO)
By month in the quarter for last year.
Jim Gattoni (President and CEO)
Truckload count, January over January 2016. Todd?
Todd Fowler (Director)
Uh, 2017.
Kevin Stout (VP and CFO)
The 2017 for January, February, and March volume growth, 15%, 7%, and 9%.
Todd Fowler (Director)
Okay, good.
... Okay, great, guys. Thanks for-
Kevin Stout (VP and CFO)
January had the quirk in the calendar, so.
Todd Fowler (Director)
Okay, but the quirk was, there was what? From a holiday timing?
Kevin Stout (VP and CFO)
Christmas.
Jim Gattoni (President and CEO)
Yeah, January 1st was a Sunday, so we almost had a full week of productivity in the first week of January in 2017.
Todd Fowler (Director)
Okay.
Jim Gattoni (President and CEO)
So that's how we end up with a 15% load growth.
Todd Fowler (Director)
What you're seeing in January right now is up against actually a more difficult comp in January of 2017?
Jim Gattoni (President and CEO)
Absolutely.
Kevin Stout (VP and CFO)
Yes, yes.
Todd Fowler (Director)
Okay, very good. Very helpful. Nice quarter. Thanks for the time.
Jim Gattoni (President and CEO)
All right, thanks.
Operator (participant)
Now our last question comes from Scott Group of Wolfe Research. Please proceed with your question.
Scott Group (Managing Director and Senior Analyst)
Hey, thanks. Morning, guys.
Jim Gattoni (President and CEO)
Hey.
Scott Group (Managing Director and Senior Analyst)
So I think I heard BCO is flat so far in January. What about the number of approved and active broker carriers? And then do you have a view on, at this point, how many of your brokers or what percentage of your brokers have ELDs?
Jim Gattoni (President and CEO)
I'll take the last question first. We really don't have a way to have a true sense of all the carriers and whether or not they have ELDs. It's a, it's a... If you think about it, it's a very difficult thing to validate. You know, we rely on them following the rules around ELDs, just like they follow the rules around any other compliance-related item. And if there's a reason to believe that they don't have it, then we won't keep them as approved. But that's kind of how we think about that. And then, Scott, what was your first question? What was the other part of your question?
Scott Group (Managing Director and Senior Analyst)
Just if you've seen any trend in the change of the number of approved broker carriers since the ELD mandate went into effect. I know you said BCO is flat. I'm wondering if broker carriers are flat or growing.
Jim Gattoni (President and CEO)
Carrier count continues to grow in the quarter.
Scott Group (Managing Director and Senior Analyst)
So far in post-ELD?
Jim Gattoni (President and CEO)
Yeah.
Scott Group (Managing Director and Senior Analyst)
Okay. Okay, thank you.
Jim Gattoni (President and CEO)
You're welcome.
Scott Group (Managing Director and Senior Analyst)
Was there any notable FEMA revenue in fourth quarter?
Kevin Stout (VP and CFO)
$17 million.
Disaster services.
Scott Group (Managing Director and Senior Analyst)
Okay. I know your, your incentive comp, there was a question earlier. I think it's tied to earnings per share. That target resets higher with the tax rate, correct?
Jim Gattoni (President and CEO)
Yes.
Scott Group (Managing Director and Senior Analyst)
Okay. And then-
Jim Gattoni (President and CEO)
We tried the other way, but we couldn't pull it off.
Scott Group (Managing Director and Senior Analyst)
Okay, and then just last thing, real quick, did you give a January volume number? I know you said full, full quarter up, high single, but what, what's January?
Jim Gattoni (President and CEO)
I think that's probably where it is, just based on that. I think it was high single. We're looking at high single digits for January.
Scott Group (Managing Director and Senior Analyst)
So, I mean, I guess my question is, and we've talked about the demand, but, like, if you think about some of the other transports so far, Robinson talked about slower volumes in January, Arkansas Best, rail volumes a little bit worse in January. Why do you think you're seeing just something different than what some other carriers have said? And they've been blaming weather, I think, but...
Jim Gattoni (President and CEO)
Yeah, well, it's superior management, clearly. Just kidding. That's a hard question for us to answer because we, you know, we're looking at daily load bombs coming through the system, and we don't break it down until the month is over and really pull it apart to see how we did and what, you know, what commodities, what customers, what agents are driving it. As you said, it's for us, it's kind of broad-based. But whenever there's weather disruption, we tend to get an elevation in and maybe the other guys don't see that because in our model, right, we got small business all around the country.
And if there's a disruption, right, and the shipper knows that Joe Agent's right next door, he can call him, we'll get him a truck, right? So it might just be a little different relationships that we have. Where Robinson is moving a lot of freight, and they get disrupted, we're the guys that's stepping in when things get disrupted. So that's why I'm saying weather might have had a little bit to do with that volume drive in January, and maybe that'll subside a little bit. We're not seeing it as of last week, and the weather's been over for three weeks. So, it's I think it just comes from the different business model and the fact that we have a local presence, and we can react quicker on a if there's a little bit of disruption in the freight patterns.
Scott Group (Managing Director and Senior Analyst)
Okay, thanks so much for the time, guys. Appreciate it.
Jim Gattoni (President and CEO)
Uh, sure.
Operator (participant)
Thank you. Our last question comes from Ben Hartford of Baird. Your line is now open.
Zach Rosenberg (Analyst)
Oops.
Hey, guys, this is actually Zach Rosenberg on for Ben.
Jim Gattoni (President and CEO)
Hey.
Zach Rosenberg (Analyst)
Thanks for taking the question. Just had a quick one. The other revenue line item had a decent spike this quarter, and just wondering, it doesn't seem like that was the insurance side. Just wondering what drove that and what we can expect for a run rate going forward?
Kevin Stout (VP and CFO)
This is Kevin. The only other thing in the other revenue are our premium revenues related to the insurance, and then we've got a very small amount, we're putting the Metro, the Mexico acquisition, that number in there, but that's, it's very small. The only other thing in there is premium.
Zach Rosenberg (Analyst)
Okay, so it is, it is all premium. And is that a good run rate going forward, that $16 million that we saw?
Jim Gattoni (President and CEO)
I think there's $2 million or $3 million of Mexico in there.
Zach Rosenberg (Analyst)
Two or three, okay.
Jim Gattoni (President and CEO)
Yeah, so you got to pull that out. So it's... I would go with about a $12 million run rate on that line.
Mexico's $1 million a month, $2 million a month, something like that?
Kevin Stout (VP and CFO)
Yeah.
Jim Gattoni (President and CEO)
Our new Metro entity is probably $1 million-$2 million a month.
Kevin Stout (VP and CFO)
$2 million-3 million, right.
Jim Gattoni (President and CEO)
$2 million-3 million a month.
Zach Rosenberg (Analyst)
Perfect. Thanks, guys.
Operator (participant)
Thank you. At this time, I show no further questions. I would like to turn the call back to you, sir, for closing remarks.
Jim Gattoni (President and CEO)
Thank you, Jo. And thank you, and I look forward to speaking with you again on our 2018 first quarter earnings conference call, currently scheduled for April 26th, 2018. Have a good day.
Operator (participant)
Thank you for joining the conference call today. Have a good afternoon. Please disconnect your lines at this time.