Landstar System - Q4 2018
January 31, 2019
Transcript
Operator (participant)
Good morning, and welcome to Landstar System Incorporation's Year-End 2018 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, Prina. Good morning, and welcome to Landstar's 2018 fourth quarter earnings conference call. 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 2017 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's record financial performance during the first three quarters of 2018 continued through the 2018 fourth quarter. Fourth quarter revenue, gross profit, operating income, and diluted earnings per share each set fourth quarter records. During our third quarter earnings conference call, we provided 2018 fourth quarter guidance, fourth quarter revenue guidance to be in a range of $1.18 billion-$1.23 billion. Revenue in the 2018 fourth quarter was $1.182 billion, approximately 12% above our 2017 fourth quarter.
My prepared remarks during the 2018 third quarter earnings conference call included our anticipated gross profit margin for the 2018 fourth quarter to be in a range of 14%-14.3%. Actual gross profit margin in the 2018 fourth quarter was 14.3%. Our fourth quarter guidance called for diluted earnings per share to be in a range of $1.56-$1.62. Actual fourth quarter diluted earnings per share was $1.68. During the 2018 fourth quarter guidance... The 2018 fourth quarter guidance reflected income taxes, an effective tax rate of 24.5%. The 2018 fourth quarter included certain tax items not anticipated in our fourth quarter guidance, which favorably impacted diluted earnings per share by $0.09.
Our 2018 fourth quarter revenue guidance anticipated the number of loads hauled via truck to be 8%-10% above the prior year fourth quarter. 2018 fourth quarter truckload volume increased 4% over the 2017 fourth quarter. During the 2018 fourth quarter, truck loadings increased over the prior year month by 6%, 3%, and 4% in October, November, and December, respectively. Our fourth quarter guidance anticipated revenue per load on loads hauled via truck to exceed prior year in an upper single-digit range. Revenue per load on loads hauled via truck in the 2018 fourth quarter increased 7% over the 2017 fourth quarter. As mentioned in our 2018 third quarter earnings release, truck revenue per load in the first few weeks of October was trending slightly below normal seasonal patterns.
Nevertheless, truck revenue per load was 10%, 8%, and 4% above October, November, and December 2017, respectively. The slowing rate of growth as we moved through the quarter was attributable to more difficult year-over-year comparisons and continued seasonal softness. The number of loads hauled via rail, air, and ocean carriers was 1% above the 2017 fourth quarter. The slight increase in rail, air, and ocean loads was driven by a 6% increase in air and ocean loads, almost entirely offset by a 1% decrease in rail loads. Revenue per load on loads hauled via air and ocean carriers increased 22% over the 2017 fourth quarter. Revenue from new agents, defined as agents who joined Landstar within the past two years, was $149 million in fiscal year 2018, the highest annual revenue from new agents since 2011.
New agents added $22.1 million of revenue to the 2018 fourth quarter. We continue to attract qualified agent candidates to the model, and the agent pipeline remains full. In fact, during 2018, we had a record 608 agents generate $1 million or more of Landstar revenue. We ended the quarter with a record 10,599 trucks provided by business capacity owners, 903 trucks above our year-end 2017 count. That the net increase in the number of BCO trucks in fiscal 2018 was our highest-ever annual net increase. We had a record number of third-party carriers haul freight on our behalf during the 2018 fiscal year. Our network is strong and continues to attract qualified owner-operators and other third-party truck capacity.
Gross profit increased $19 million, or 13%, compared to 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, excuse me. Jim has covered certain information on our 2018 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 of purchased transportation and commissions to agents, increased 13% to $168.9 million, and represented 14.3% of revenue in the 2018 fourth quarter, compared to $149.7 million, or 14.2% of revenue, in 2017. The cost of purchased transportation was 77.1% of revenue in the 2018 quarter, versus 77.5% in 2017. The decrease in purchased transportation as a percent of revenue was primarily due to decreased rates paid to truck brokerage carriers.
The rate paid to truck brokerage carriers in the 2018 fourth quarter was 137 basis points lower than the rate paid in the 2017 fourth quarter. Commissions to agents was 8.6% of revenue in the 2018 fourth quarter, versus 8.2% in 2017. The increase in commissions to agents as a percentage of revenue as compared to 2017, was due to an increased net revenue margin, revenue less the cost of purchased transportation divided by revenue on loads hauled by truck brokerage carriers. Other operating costs were $7.6 million in the 2018 fourth quarter, compared to $6.2 million in 2017. This increase was primarily due to increased trailing equipment costs and increased contractor bad debt.
Insurance and claims costs were $18 million in the 2018 fourth quarter, compared to $16.2 million in 2017. Total insurance and claims costs was 3.7% of BCO revenue in both periods. The increase in insurance and claims as compared to 2017, was primarily due to increased severity of claims in the 2018 period. Selling, general, and administrative costs were $47.3 million in the 2018 fourth quarter, compared to $47.4 million in 2017. The slight decrease in SG&A costs was mostly attributable to a decrease in the provision for bonuses under the company's incentive compensation plans, partially offset by an increase in stock compensation expense and increased wages.
Stock compensation expense was $5.3 million and $4.1 million in the 2018 and 2017 fourth quarters, respectively, with the increase mostly due to the impact of increased earnings on our performance-based equity compensation arrangements. The provision for incentive compensation was $4.6 million in the 2018 fourth quarter, compared to $6.9 million in the 2017 fourth quarter. Quarterly SG&A expense as a percent of gross profit, decreased from 31.7% in the prior year to 28% in 2018. Depreciation and amortization was $11.1 million in the 2018 fourth quarter, compared to $10.6 million in 2017. This increase was primarily due to the increase in the number of company-owned trailers.
Operating income was $86.1 million, or 51% of gross profit in the 2018 quarter, versus $70 million or 46.8% of gross profit in 2017. The increase in operating margin was driven by increased gross profit. Operating income increased 23% year-over-year. The effective income tax rate was 19.8% in the 2018 fourth quarter, compared to 6.9% in 2017. The effective income tax rate was favorably impacted in both periods by resolution of certain tax items, tax benefits resulting from equity compensation arrangements, and the Tax Cuts and Jobs Act enacted in December 2017. The act reduced the federal income tax rate from 35% to 21%, as effective for 2018, favorably impacting the 2018 fourth quarter as compared to 2017.
Additionally, the 2017 quarterly provision for income taxes was significantly favorably affected by the revaluation of the deferred tax liabilities as a result of the enactment of the Tax Act. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $240 million. Cash flow from operations for 2018 was $298 million, and capital expenditures were $10 million. There are currently 2 million shares available for purchase under the company's stock purchase program. Back to you, Jim.
Jim Gattoni (President and CEO)
Thanks, Kevin. Seasonally, we generally experience a sequential decrease in truck revenue per load from the fourth quarter to the first quarter. In the 2015, 2016, and 2017 first quarters, truck revenue per load decreased in a range of 4%-9% from the immediately preceding fourth quarter. The 2018 first quarter was an anomaly from the seasonal trend, with truck revenue per load growing almost 3% from the 2017 fourth quarter. During the first two weeks of the 2019 first quarter, revenue per load on loads hauled via truck show signs of the normal seasonal pattern, consistent with the trends experienced in the first quarters of 2015, 2016, and 2017.
Assuming current trends continue through the 2019 first quarter, I expect truck revenue per load to be below the 2018 first quarter in a low single-digit % range. With respect to truck volume, Landstar achieved significant year-over-year truckload volume growth in both the 2017 and 2018 first quarters. In fact, 2018 first quarter truckload volume was 23% greater than the 2016 first quarter volume. I expect a lower rate of volume growth in the 2019 first quarter, as demand is not as strong as compared to the 2017 and 2018 first quarters, and year-over-year comparisons have become more difficult. During the first two weeks of January, year-over-year truckload volume growth was slightly higher than the load volume growth experienced in the comparable period of 2018.
Assuming there are no significant flat freight flow disruptions from severe weather during the remainder of the 2019 first quarter, I anticipate the number of loads hauled via truck in the 2019 first quarter to exceed the 2018 first quarter in a low single-digit % range. Based on the continuation of recent revenue trends, I currently anticipate 2019 first quarter revenue will be in a range of $1.025 billion-$1.075 billion. I expect a more normalized provision for incentive comp in the 2019 first quarter, which would be lower than the 2018 first quarter by approximately $2 million.
Our guidance assumes insurance and claims will be 3.6% of BCO revenue, and I expect our first quarter effective tax rate to be 21.1%, which is lower than our estimated annual effective tax rate due to the anticipated excess tax benefits on stock-based compensation arrangements specific to the 2019 first quarter. Based on those revenue and cost assumptions, I anticipate 2019 first quarter diluted earnings per share to be in a range of $1.51-$1.57. 2018 was another historic year for Landstar, highlighted by many financial and operational records.
Revenue, gross profit, operating income, net income, and diluted earnings per share were all annual financial records, while a number of loads hauled via truck, truck revenue per load, and the number of trucks provided by BCOs were all annual operational records. Revenue grew $969 million over 2017, while gross profit grew $123 million. During 2018, 71% of incremental gross profit was passed through to operating income, resulting in an operating margin of over 50% when excluding approximately $8 million of incremental costs related to our technology initiatives. Once again, 2018 demonstrated that Landstar's light asset-based business model generates significant cash flow and outstanding returns in most economic environments.
At December 29th, the company had a strong balance sheet with cash and short-term investments of $240 million, and borrowings available under a revolving credit facility totaling $216 million. During 2018, we purchased 2 million shares of common stock at a total cost of $208 million. 2019 follows the back-to-back record financial performances of 2017 and 2018. It would be difficult to expect the overall environment in 2019 to be as robust as we experienced during 2018 at its exceptional highs. We believe truck capacity has been more readily available in the marketplace, and spot market pricing once again appears to be moving in line with historical seasonal trends.
With that said, the overall environment for Landstar continues to be strong by historical standards. We expect 2019 to be another successful year at Landstar, as we remain focused on profitable load volume growth, increasing our available capacity to haul those loads, investing in technology, and delivering value to our stockholders via share buybacks and dividends. And with that, we will take questions.
Operator (participant)
Thank you very much, sir. At this time, we will begin the question-and-answer session. If you would like to ask a question, please press star and then the number one on your touchtone phone. Once again, that is star one to ask a question. To cancel your request, please press star and then the number two. Our first question comes from Jason Seidl of Cowen and Company. Your line is now open.
Speaker 14
Hi, this is Adam on for Jason. Thank you for taking our question.
Jim Gattoni (President and CEO)
Yeah, sure.
Speaker 14
First question is, I guess, just kind of simply as spot, you know, spot rate has been falling, you know, kind of now for the last four or so months, has it been harder for you guys to recruit BCOs, just given this environment that we're in?
Joe Beacom (VP and Chief Safety and Operations Officer)
Adam, this is Joe. No, not really. I think both our recruiting initiatives, as well as our retention initiatives have really been impacted by, in 2018, the market, and early in 2019, we've not seen any impact due to what's happening in the way of rates in the last few weeks. But, clearly, the rate environment's a big win for BCOs as they're paid on a percentage, and it's been a large part of the attraction to the model, in 2017 and 2018, each on their own.
Jim Gattoni (President and CEO)
But, and to put it in perspective, there was a record revenue per BCO in 2018 of $197,000, and that's a record. I think a little pullback is not going to deter the BCOs from coming on board or staying with us.
Speaker 14
Got it. Thank you guys for that. And then I guess maybe just a quick follow-up here as well. I guess just broadly, what do you guys see in terms of expectations for pricing in 2019, how bid season is looking from your guys' vantage point? Just maybe a little bit on a higher level on pricing that you guys see.
Jim Gattoni (President and CEO)
Well, our assumption, and you know the volatility in spot pricing, but our assumption now is that we would be in a low single digit throughout the remainder of the year based on what we were looking at coming into January. As we said, we had seen some seasonal softness going into October, November, December, where you know, historically, you'd see an uptick in the rates, and it wasn't ticking up as high as it was. But as we pull into January, it looks like it's more consistent on a month-to-month for the January rate. And if we hold that consistency, we still think we're, you know, we'll be, we're going to be below the 2018 rates, but somewhere maybe low, mid-single digits, what the expectation would be.
Speaker 14
Got it. Thank you guys so much for the time.
Operator (participant)
Thank you. Our next question comes from Jack. Jack Atkins of Stephens, your line is now open.
Jack Atkins (Research Analyst)
Jim, Kevin, Pat, Joe, good morning, guys. Thanks for the time.
Joe Beacom (VP and Chief Safety and Operations Officer)
Sure, Jack.
Jim Gattoni (President and CEO)
Good morning, Jack.
Joe Beacom (VP and Chief Safety and Operations Officer)
Hi, Jack.
Jack Atkins (Research Analyst)
So let me just kind of start with a macro question, if I could, Jim and Pat, I'd love for to get you to weigh in on it as well, just in terms of what you're seeing on the customer side. But, you know, Jim, what are you feeling out there from a freight perspective? Obviously, you know, things are moderating versus the strong levels we saw in 2019. But, you know, there was a lot of concern, I think, going into the end of the year about our freight pull forward. You know, have you seen any indications of that? And then I would just be curious to get a feel for, you know, specific customer verticals where you're seeing particular strength and perhaps maybe some weakness.
Jim Gattoni (President and CEO)
... Clearly, demand is softer than it was, right? It and, you know, we think it's more of a demand than a supply side. We do expect that there's probably more capacity in the system today, moving freight. But the, you know, we're very diverse, so it's hard to point to a specific industry or a specific customer that drives our, decelerating growth rate, I would say. So I don't really have anything real specific on what's driving the slowdown other than overall, economic trends. But we still feel that we could- we can put some volume through, and we're coming off of tough comps.
So from an industry standpoint or geographic standpoint, Pat may have maybe more, you know, a deeper dive, but typically, we're more of a, you know, we're so diverse based on the way the agents are geographically dispersed around the country and then all the different industries, it's kind of an overall economic and industrial production effect.
Jack Atkins (Research Analyst)
Got you.
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
Jack, I would agree with, Jim, that this is more of a demand-driven than a supply-driven, case here. I would also say that, again, to echo what Jim said, if you think about the diverse nature of our agent base, it's kind of, difficult to say what particular industry. Again, if you look at what the comps are, and if you look at, In his opening remarks, I think, said it very well about this quarter versus 2017, excuse me, 2018 versus 2016 quarter, we're up 23% in that two-year period. So if you think about it, if it's a little softer, it's still a pretty robust market.
Jack Atkins (Research Analyst)
Yeah, and you're still driving volume growth, even-
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
Correct
Jack Atkins (Research Analyst)
... even if things aren't as robust, just from a backdrop perspective.
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
Correct.
Jack Atkins (Research Analyst)
Okay. All right, that's, that's great. Second question, gentlemen, you mentioned technology in your prepared comments, but could you just give us an update on your technology initiatives, sort of, you know, where we are in terms of the rollout of the new operating system for your agents? And, you know, what's the initial feedback been on that thus far?
Jim Gattoni (President and CEO)
It's all positive. I mean, it's taking longer than we anticipated. I would break down our technology into about four or five separate categories, and the operating system or the TMS, that we call it, is one specific area that we're investing in. And that project was one of the first things we jumped on about three or four years ago to convert our, you know, 1980s legacy systems into a more robust order entry to delivery system. That is going well. I mean, the agents, we have about 100 agents using it today, and, you know, it's mostly positive feedback. Clearly, you know, you get some negative feedback, but it's really mostly positive because it has some capabilities in our current order entry system and delivery system doesn't have. And we anticipate it's probably going to take...
You know, we originally launched this as a three to five-year project. Year five is over in 2019, but it's looking like probably going to take another two to three years to get all the agents on the system. Just, it's just the complexity of putting an agent on and putting a customer on it was probably a little more complex than we thought it would be. But there's all the other things, the outward-looking tools we're working on and the tools that we've delivered over the past year and a half is load boards and pricing tools and agent analytics for, so agents can better manage their business. It's the whole suite of tools we're rolling out that where we say we're spending $8 million-$10 million on.
Some of those tools are, to us, more important than the TMS. It's... You know, we've got a lot of balls in the air right now and getting very positive feedback. To tell you the truth, for the first time ever, I have heard one of our capacity guys say that maybe the reason that the BCOs are staying longer and we're recruiting more is because we rolled out better available load tools and our last, our Maximizer.
Jack Atkins (Research Analyst)
Okay, that makes sense. That definitely is good to hear. One last, if I could squeeze one last quick one in for Kevin. Kevin, could you give us a sense for, you know, where free cash flow ended for 2018, and any preliminary thoughts on free cash flow for 2019?
Kevin Stout (VP and CFO)
Yeah, the free cash flow for 2018 was about $244 million if you take out the capital lease payments that we made in 2018. So, $250 million is probably the low end for 2019. I'd say $250 million-$275 million, as, you know, sitting here in January as a guess for 2019.
Jack Atkins (Research Analyst)
Okay. That's, that's great to hear. Thanks again for the time.
Jim Gattoni (President and CEO)
Sure, Jack.
Operator (participant)
Thank you. Our next question comes from Ravi Shanker of Morgan Stanley. Your line is now open.
Shaked Atia (Equity Research Associate)
Hi, this is actually Shaked here for Ravi. I wanted to ask a quick question about loads per BCO. What exactly drove the deceleration in loads per BCO? Is it just seasonality or something else?
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
I don't think it's necessarily seasonality. I think it's a function of the very strong year. I think you heard Jim mention $197,000 per BCO truck in the year. I think it was a function of the fact that they had a very good year, and things just slowed down towards the back half of the year.
Shaked Atia (Equity Research Associate)
Got it. Another question about the rev per load. It was very strong, as you noted, even though spot rates, for both dry van and flatbed decelerated this quarter. Considering that you're entirely spot, can you explain why there is a lag in your pricing versus market rates? Can we expect that into 1Q?
Jim Gattoni (President and CEO)
Yeah, we tend to not be as volatile. Although we're spot, we're spot market, we access our capacity in the spot market. We do have contracts with customers that have contract rates, and they, some of them tend to hold longer into a cycle, even if there's a downturn in price. Because, you know, we have about 30% of our business is drop and hook, so we have a trailer at, we have trailers and locations at shippers, and they tend to not just kick us out of there because they want to get the next, you know, drop their price by a nickel or $.10. We're a little more sticky when it comes to the pricing than true spot market.
Heavy haul, too, some of that special stuff, the rates stay a little more firm into a cycle that we're in right now. So that's why it's not-... We're, yes, we're spot business, but we're also a little bit of a mix of, we have contracts with a lot of our customers that stick a little bit longer into a downturn cycle.
Shaked Atia (Equity Research Associate)
Sorry, did you say how much of your business is contract? Or-
Jim Gattoni (President and CEO)
We, I would guess 60%-70% of our customer contracts have some pricing mechanism, but it, but in our world, we don't guarantee a truck, right? So that's why we, that's why people refer to us being 100% spot. We don't dedicate capacity at a price, where that, you know, regardless of what happens in the environment, $2 a mile will do it for 12 months. We'll give you a price, but if the truck's not going to haul it, you know, the, the shipper generally goes and gets a, a different carrier in there.
Shaked Atia (Equity Research Associate)
I see. Makes sense. Thank you for your time.
Jim Gattoni (President and CEO)
Sure.
Operator (participant)
Thank you. Our next question comes from Todd Fowler of KeyBanc Capital Markets. Your line is now open.
Todd Fowler (Managing Director in Transportation and Logistics Equity Research)
Great. Hey, good morning, everyone.
Jim Gattoni (President and CEO)
Morning.
Todd Fowler (Managing Director in Transportation and Logistics Equity Research)
Hey, Jim, I was just hoping you could talk a little bit about, you know, the volume growth that you've been experiencing, and you made some comments at the end of your prepared remarks about being focused on profitable load growth in 2019. I guess a couple of things. First, I mean, do you think that you're taking share in the market? And then, you know, secondly, do you, as you think about, you know, focusing on volume growth into 2019, how do you incentivize the agents, or what's the mechanism that you know, you're able to, you know, kind of enforce to put that into place?
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
Todd, this is Pat. A couple of things.
Todd Fowler (Managing Director in Transportation and Logistics Equity Research)
Hey, Pat.
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
If you think about the volume growth and the obligation that we have and the mechanisms that we have, there are certain things that we can do from a field management and a sales management perspective to make sure that we are maximizing the opportunity in each one of these accounts. Jim talked about the agent analytics tools that we now have, that agents are able to look inside their business better to identify where the opportunities are to grow their business. And I would say to you that I think in certain markets, we are taking market share, whether that's on the platform side, whether that's on some dedicated van business.
If you think about those accounts where there's our expertise and execution is valued, we do very well with those accounts. And if you look at the commodity list in the exhibits in the release, you'll note that, you know, for example, in the automotive world, we're taking market share there because of the requirements that are inside that industry that we're able to do very well.
Jim Gattoni (President and CEO)
There's another thing, too, you know, one thing that we get concerned about when pricing starts turning down is that the agents don't act fast enough. They don't realize what's going on, and shippers are looking for better deals. We're doing a much better job. We rolled out a pricing tool 12 months ago to give them information more readily available. Okay, here are the trends we're seeing, so they can react in this environment. They're not holding their $2 a load, and they're, you know, they're more, they're seeing what's going on in the industry, and they can react. So instead of losing the load, you renegotiate the price, and you haul for less. So there's, we got a little bit of confidence there, too, based on the information we've been sharing.
And so that pricing tool we rolled out to get them better data, so they can react to changing market conditions.
Todd Fowler (Managing Director in Transportation and Logistics Equity Research)
Got it. Okay, so you're not, you know, saying, "Hey, you've got to go after volume." It's giving them the tools in place to manage the business better, and one of the byproducts of that becomes the volume growth that you've been experiencing.
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
Correct. Better knowledge about the marketplace allows them to go and capture market share.
Todd Fowler (Managing Director in Transportation and Logistics Equity Research)
Okay, got it. Then just for my follow-up, you know, Jim, I think you usually give some comments on your expectations for gross profit margins on a quarterly basis. You know, it feels like in the fourth quarter, there was a little bit of a mix shift, or there was probably a higher net revenue margin on some of the brokered freight, and so that pushed up agent commissions. What would your thought be for first quarter gross profit margins, and then, you know, maybe some expectations, if you wanted to share them, for how that should trend throughout 2019?
Jim Gattoni (President and CEO)
Yeah. The first quarter, we're probably sitting about $14.9-$15.2.
Todd Fowler (Managing Director in Transportation and Logistics Equity Research)
Okay.
Jim Gattoni (President and CEO)
All right? Generally, that's driven because I think there's a little more BCO business. The cycle is a little bit softer in the first quarter, and the broker carriers are charged a little bit less. So from that point on, it generally tends to cycle a little bit down after the first quarter. I don't have... but I would guess that, you know, with... If you follow the history, I wouldn't... If you're going from $14.9-$15.2 in the first quarter, follow the historical trends from that point for the rest of the years, I don't expect anything that would change. Unless the capacity loosens up even more, you know, you might see that rate, that gross margin holding for a little while through maybe even to the second quarter.
Todd Fowler (Managing Director in Transportation and Logistics Equity Research)
Okay. Yeah, that makes sense. I was just looking for something a little bit more directional for the rest of the year, so that helps. So stay warm, guys.
Jim Gattoni (President and CEO)
It was 37 here this morning. We're freezing.
Todd Fowler (Managing Director in Transportation and Logistics Equity Research)
Yeah, right. Right, right. See you. Thanks a lot.
Jim Gattoni (President and CEO)
Yeah, sure, Todd.
Operator (participant)
Thank you. Our next question comes from Stephanie Benjamin of SunTrust. Your line is now open.
Stephanie Benjamin (VP in Equity Research)
Hi, good morning. Thank you for the question.
Jim Gattoni (President and CEO)
Sure.
Stephanie Benjamin (VP in Equity Research)
I was really just hoping if you could provide an update just on your e-commerce-related loads during 4Q and really how that performance compared to the 2017 fourth quarter, or just kind of your expectations. Any color there would be great. Thanks.
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
Stephanie, this is Pat. Our fourth quarter peak business was not as robust as it was in 2017.
Stephanie Benjamin (VP in Equity Research)
Got it. And do you think that's just the nature of tougher comps, or did you see any kind of shift or any change, for that?
Pat O'Malley (VP and Chief Commercial and Marketing Officer)
It was more of a shift in one account.
Stephanie Benjamin (VP in Equity Research)
All right, great. Well, thanks so much for your question, for my, the question.
Operator (participant)
Thank you. Our next question comes from Matt Brooklier of Buckingham, your line is now open.
Matt Brooklier (Senior Equity Research Analyst in Industrial Transportation and Manufacturing)
Hey, thanks. Good morning. So your revenue per load guidance for, you know, for first quarter expected to be, I think, down low single digits. I'm assuming there's some impact from fuel surcharge also being down. Do you have that number when you, you know, when you x out fuel surcharge?
Kevin Stout (VP and CFO)
No, Matt, we don't have that. We, we wouldn't have assumed very much of a change with respect to fuel. I think, barrel is, what? $54-$60, somewhere in that range. Yeah, we wouldn't have assumed any, any delta from Q4 to Q1 on that.
Jim Gattoni (President and CEO)
If you remember, fuel is excluded from the BCO freight, so half of the freight doesn't even have fuel in it.
Matt Brooklier (Senior Equity Research Analyst in Industrial Transportation and Manufacturing)
Right. But included on the brokerage side.
Jim Gattoni (President and CEO)
Yeah, we didn't anticipate a big change from the fourth quarter to the first quarter.
Matt Brooklier (Senior Equity Research Analyst in Industrial Transportation and Manufacturing)
Okay. It just looks like fuel, you know, per some projections, the price year over year is expected to be down. So I was just trying to get a sense for maybe how much that's, you know, potentially weighing on your yield guidance, if it's maybe taking a little bit away. Because it just seems like a pretty drastic shift, right? In terms of what you put up in the fourth quarter and then going to negative in the first quarter if fuel's contributing to that. And then second question, Jim, you mentioned that, you know, we're still in the midst of this IT rollout. Did you talk to the expected expenses around that program in 2019? I think in 2018, it was like something like $8 million.
Kevin Stout (VP and CFO)
$8 million to $10 million.
Jim Gattoni (President and CEO)
Yeah, we're looking at about $8 million-$10 million again this year.
Matt Brooklier (Senior Equity Research Analyst in Industrial Transportation and Manufacturing)
Okay.
Jim Gattoni (President and CEO)
But it's probably gonna go on for a little while. We have a lot of good things going on here, that we just want to keep advancing our technology and the tools for the agents and the BCO. So $8 million-$10 million is what we plan for 2018, 2019, I'm sorry.
Matt Brooklier (Senior Equity Research Analyst in Industrial Transportation and Manufacturing)
Okay, great. Appreciate the time.
Operator (participant)
Thank you. Our next question comes from Scott Group of Wolfe Research. Your line is now open.
Scott Group (Managing Director and Senior Analyst)
Hey, thanks. Morning, guys.
Kevin Stout (VP and CFO)
Hi.
Scott Group (Managing Director and Senior Analyst)
So big picture, if this quarter, flattish revenue, mid-single-digit profit, double-digit earnings growth, if that sort of revenue environment continues all year of flat revenue, maybe even slightly negative revenue, do you think you can maintain sort of that sort of profit growth the rest of the year?
Jim Gattoni (President and CEO)
Yes, and the reason why is I think there's a whole bunch of tailwinds we have in 2019, whether it be incentive comp or equity comp. And I don't, we don't count on insurance, but in 2018, we had $14 million of unfavorable development in 2014 in 2018, that you hope you don't have pushed through into 2019 again. But it's unpredictable, but so I see where our share count is down about 3%, so you got some of that. So when you drive all those things through, and you think you're going to be flat on the gross profit line, yeah, we can still drive operating income and EPS growth through the model. Just because, you know, when you...
If, for people who understand our model, we're a variable cost business model, and if the, you know, if the agents aren't making a lot of money, neither do we, and the bonuses kind of fade away. So the variability of the model goes right through the comp line, too. So in a good year like 2018, we have a lot of equity comp and incentive comp, and if 2019 slows down, that number comes down. So it's, that's where you get the benefit, and that's how the model works. But just to know, you know, First Call has a consensus out, and we're comfortable with the consensus of the First Call, of the analyst estimates for the year.
Scott Group (Managing Director and Senior Analyst)
Okay, that's helpful. Then I know it's very early, but maybe can you talk what sort of impact you're seeing from the, from the weather out there? Do you think this is the sort of event that can have a more prolonged impact on the market?
Jim Gattoni (President and CEO)
I, we're believers, unless the plants shut down, that the freight comes back, that the freight is going to be sitting. But in this environment, I think plants might be shut down, so there might be some freight opportunities being lost and pushed maybe later into the quarter. But since it's happening right now, it's actually this week, we get daily load reports, and it is impacting our load volumes. Clearly, we're, you know, in this week right now, which wasn't included in our opening comments, was that, you know, we're a couple thousand loads short in the first couple of days this week because of the weather. And if it eliminated some plant production, it could affect the quarter.
We always anticipate those plants get back up and running, and by the end of the... You know, we still have a month and a half to make up on volume, so I don't think we're thinking that the 2,000 loads we lost in the last couple of days isn't going to come back.
Scott Group (Managing Director and Senior Analyst)
I was thinking maybe from the other way, do you think it's, this is enough to, like, really retighten the market and have a prolonged impact in terms of higher rates?
Jim Gattoni (President and CEO)
I don't know if it's prolonged, but I do think there's probably a short-term impact because some of that freight probably turns in the spot market, and you got to go get trucks in when they, you know, the guys who are on scheduled routes now are hauling their scheduled routes, but there's more freight sitting on the sidelines because it didn't get moved for a couple of days. I don't believe it's long term, but short term effect the quarter possibly on spot rates, maybe.
Scott Group (Managing Director and Senior Analyst)
Okay. Thank you for the time, guys.
Operator (participant)
Thank you. Next is from Amit Mehrotra of Deutsche Bank. Your line is now open.
Amit Mehrotra (Managing Director)
Thanks. Good morning, guys. How are you?
Jim Gattoni (President and CEO)
Good, good.
Kevin Stout (VP and CFO)
Good.
Amit Mehrotra (Managing Director)
It's 5 degrees in New York today, so we'll take 38 any day.
Jim Gattoni (President and CEO)
Yeah, you'd be down here in a bathing suit. You'd be, you'd be fabulous.
Amit Mehrotra (Managing Director)
I wanted to go back to the gross profit question, and maybe come at it more conceptually. You know, obviously, the beauty of the Landstar model is really the variability of the cost structure, as you said. But wondering how should we think about it as how that you know maybe evolves as volume growth slows. You know, how the mix in that environment, whether it's your broker carriers or you know the rate you pay to the brokerage carriers may be a little bit less, that allows you to take that gross profit towards that mid-15% level where it was you know back in 2016 in a weaker volume environment. So maybe that could have offset some of the possible gross revenue headwinds.
Any thoughts or just conceptually how we can think about that?
Jim Gattoni (President and CEO)
Would actually prefer to have a 14% gross margin, because that means we're driving more, more brokerage revenue through the system, and the brokerage and the BCOs are still hauling. We don't really focus so much on that margin, to tell you the truth. If you look at 2009, our margin was 16.7%. Our gross profit margin, and that's because, you know, the BCOs hauled more of our freight.
Amit Mehrotra (Managing Director)
Mm-hmm.
Jim Gattoni (President and CEO)
When in an environment that we're dealing with now, the way the gross margin work, if we can put more brokerage business over the model, we'll see the 15% go to 14.5% or 14%. But that's okay because there's not a lot of infrastructure costs for the brokerage freight, you know? So when we're doing third-party truck freight, you basically pay the truck, you pay the agent, and then we've got some receivables flow. But there's not a lot of infrastructure here to excess cost below that gross profit line. So that's kind of how we look at it. And depending on the... Most of the time, when you see the margin move, it's because of mix. How much was BCO and how much was brokerage?
The extent we can push more brokerage and maintain our BCO fleet or grow our BCO fleet, you'll continue to see that margin drop, but in a good way, because that means gross profit's climbing from a dollar standpoint.
Amit Mehrotra (Managing Director)
Okay, right. Does the volume environment of the mix in that at all change the way you guys think about, you know, incremental EBIT margins? I think you've talked about 70% of-
Jim Gattoni (President and CEO)
Yeah
Amit Mehrotra (Managing Director)
of net revenue. Does that change at all in terms of our expectations of that? It seems the lower it goes, the higher that could go, just based on what you, what you just said.
Jim Gattoni (President and CEO)
Yeah, our expectation on 70%, it kind of, it kind of moves off the year, right? Because it's a comparative to the prior year. In 2018, we had significant amount of incentive comp and equity comp.
Amit Mehrotra (Managing Director)
Mm-hmm.
Jim Gattoni (President and CEO)
It should, or 70% in 2019 should be significantly higher because you're taking some of those costs out, even if a flat gross profit, we should be able to push about 80%-90% of that growth in operating income, not growth in operating income, but it, our operating margin should climb.
Amit Mehrotra (Managing Director)
Got it. Okay. And then another question, maybe more conceptually, is one of the, one of the things that we're hearing from people that are maybe a little bit more bullish on the sustainability of, of the trucking market is the, the fact that, you know, ELDs have maybe structurally rerated the spot market a little bit higher because the thought being, you know, in prior cycles, independent owner-operators would maybe drive more miles to make up the lower rate per mile and, and, you know, go in excess of their hours of service rules. And, and now, obviously, they can't do that with the ELD. I mean, obviously, maybe we have to see it to believe it over a cycle, but does that thesis kind of make sense to you? And, and are you maybe seeing some of that in the marketplace?
Joe Beacom (VP and Chief Safety and Operations Officer)
Hey, Amit, this is Joe. I think the impact from ELDs and its impact on productivity, we probably saw that in 2018. I don't think you'd see any more exaggeration of the pricing impact of ELDs. The only thing that's forthcoming that could play any kind of role, and I think it would be very minimal, is the movement from AOBRDs to ELDs at the end of this year, which does change some of the personal conveyance rules. It does affect productivity just a little bit, but I wouldn't think that that would be a real material change in productivity or its impact on price.
Amit Mehrotra (Managing Director)
Well, I guess my point was not a change in the perspective, you know, tightness of the market. It's just that do ELDs now kind of raise the floor, but, you know, trough rates could be relative to what they were in past cycles? Maybe it's, that's too big of a statement, and we just haven't seen enough evidence yet, but that's really what the question was about.
Joe Beacom (VP and Chief Safety and Operations Officer)
Yeah. Conceptually, I see what you're saying. I guess we'll have to wait and see.
Amit Mehrotra (Managing Director)
Yeah.
Joe Beacom (VP and Chief Safety and Operations Officer)
I think it did raise some awareness as to the impact of declining productivity. And I think so to that extent, yeah, maybe it did raise the expectations of purchased transportation should be.
Amit Mehrotra (Managing Director)
Can I ask one last question before I hop off on the volume environment? And you might have addressed this before because I hopped on a little bit late, but you talked about volumes in the fourth quarter, they ended up where, you know, versus kind of the 8%-10% that you'd expected. I mean, the implication or where you talked about in October, I believe. So there seems like there was a big drop-off in November and December relative to maybe your expectations. Can you just give us the cadence of volume growth in the quarter, if you haven't already, and what drove that seemingly maybe large deceleration over the last couple of months of the year?
Jim Gattoni (President and CEO)
Yeah. In October, it was 6%, in November, it was 3%, in December was 4%.
Amit Mehrotra (Managing Director)
Mm-hmm.
Jim Gattoni (President and CEO)
I think our anticipation going into the quarter, that we would have a stronger e-commerce environment, and plus, there was one customer that cost about 30% of our miss. Like, if we hit 4%, our low end was 8%. 30% of that to the bottom range was one customer that dropped off.
Amit Mehrotra (Managing Director)
Right.
Jim Gattoni (President and CEO)
Not dropped off, just the lowest. So it's a combination of that demand on the e-commerce that we've had for the last three or four years was not near as strong as we anticipated, plus a single customer.
Amit Mehrotra (Managing Director)
Okay. That's very helpful. Thank you very much, guys. I appreciate it.
Operator (participant)
Thank you. Our next question comes from Bruce Chan of Stifel. Your line is now open.
Bruce Chan (Managing Director)
Yes, good morning, gentlemen.
Jim Gattoni (President and CEO)
Good morning.
Bruce Chan (Managing Director)
Just, you know, quick follow-up here on the drop and hook question from earlier. Jim, I think you said that percentage of truck business was floating around 31% right now, which I think is, you know, roughly sequentially flat over the third quarter. And I know, you know, the returns on that business generally seem to be pretty good. I'm wondering if you guys have a target mix of drop and hook in mind as you, you know, sort of plan the business, and whether, you know, as the capacity environment loosens, that affects your strategy as far as how you're deploying that trailing capacity?
Jim Gattoni (President and CEO)
... Well, our drop and hook business really ties to customer demand, and then how many BCOs we have that haul our trailers. Not all of our BCOs haul drop and hook, and Kevin, do you have the number? 7,000? 8,000?
Kevin Stout (VP and CFO)
About 6,000.
Jim Gattoni (President and CEO)
There's about 6,000 of our BCOs who don't haul the drop and hook freight. So you've got the customer demand on one side, but then you have the capacity, availability on the other side. So we have two trailers for every one of those BCOs hauling freight. We've got 12,000 trailers in the network. We'd love to have more of that if we can push more BCOs to the drop and hook business and get more shipments. So yeah, we don't have a planned mix, but it is a part of our business, and we try and get more BCOs to haul the drop and hook freight and get more drop and hook opportunities.
But there is no, you know, it is our best - it is our highest margin business because we're actually providing a, you know, you're, we're providing a little bit more value when you put a trailer in it and you coordinate trailers. But there is no targeted, you know, percent of revenue.
Bruce Chan (Managing Director)
Okay, great. I appreciate that. That's, that's helpful. And then, just back to the technology side. You know, you talked about the TMS and how the deployment is going there, but you also mentioned that you've got a few other buckets, and I'm wondering if you can remind us, you know, especially on the back office side, is there anything meaningful that you have coming up, you know, that we should be looking at, especially, you know, as it relates to corporate margins?
Jim Gattoni (President and CEO)
I wouldn't say it's related to corporate margins on the... Look, we only have 1,200 employees, so there's not a lot of flexibility in our... We can build efficiencies within the network, but as we grow, we probably still need the same number of people, right? So that's not where we're attacking. What we're really attacking is the front end, the customer experience, the agent experience, and the capacity experience, and the tools that they use to access our systems and the way we share information, is really what we're attacking.
Now, we've always had load boards, and we've always had that stuff, but we're putting out better tools and better products to make them more effective, you know, for the BCOs to better identify the loading opportunities they want, as opposed to seeing all loads, saying, "Hey, we see you like this." It's kind of like, we see you like this load, you might like this one, too. So we're building out... It's almost like that artificial intelligence stuff, that to push better data out to the, not just the BCOs, but even share information with the agents, too, and give the agents tools where they can watch their business, you know, simply see stats on their business on a day-to-day, and, you know, what capacity they're using, what customers they, you know, what happened with our customers yesterday?
Did 10 loads yesterday, how come none today? That kind of thing. That's what we're dealing with.
Bruce Chan (Managing Director)
Okay, great. And you did mention that pricing tool to agents. Is that, or has that been deployed network wide, or are there still, you know, some that still need to get it?
Jim Gattoni (President and CEO)
Yeah, it was fully deployed by the beginning of 2018. But, you know, it started off with just a basic, you know, sales side. Then there's, you know, then you build in a buy side, and then you build in a confidence level. So we're constantly working on all that stuff to get better and better tools.
Bruce Chan (Managing Director)
Perfect. Appreciate the time.
Jim Gattoni (President and CEO)
Yeah.
Operator (participant)
Thank you. Our next question comes from Bascome Majors of Susquehanna. Your line is now open.
Bascome Majors (Senior Equity Research Analyst in Industrials)
Yeah, thanks for taking my question here. Jim, you've talked over the years about targeting low to mid-teens EPS growth for the Landstar business over time. But, you know, as you acknowledged in some of the questions in your closing remarks, clearly 2018 was really exceptional for the business. As we look to 2019, are your annual incentive comp thresholds aligned with that longer term, kind of low double-digit growth expectation? Or would flattish earnings get you to a threshold payout, acknowledging how unique 2018 really was?
Jim Gattoni (President and CEO)
They're aligned with the longer-term goals.
Bascome Majors (Senior Equity Research Analyst in Industrials)
All right.
Jim Gattoni (President and CEO)
Yeah, it's not-
Bascome Majors (Senior Equity Research Analyst in Industrials)
Thank-
Jim Gattoni (President and CEO)
Yeah, we don't plan flat and then pay significant bonuses, so.
Bascome Majors (Senior Equity Research Analyst in Industrials)
That's great news, guys. Well, we hope you get there. Thank you.
Jim Gattoni (President and CEO)
Might be great for you.
Kevin Stout (VP and CFO)
For you.
Jim Gattoni (President and CEO)
Yeah, great for you.
Bascome Majors (Senior Equity Research Analyst in Industrials)
Yeah, we'll talk in 3Q, okay?
Operator (participant)
Thank you. 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 comes from Matt Brooklier of Buckingham. Your line is now open.
Matt Brooklier (Senior Equity Research Analyst in Industrial Transportation and Manufacturing)
Yeah. So just a follow-up question. The e-commerce customer, you indicated that customer, it sounded like they shifted some volume, you know, away from you. Just trying to get a sense for when that shift happened. I think I can make a guess, given, you know, per the monthly numbers that you gave us. And then, is there any way to just talk about how much the impact was for the entire quarter from a revenue perspective?
Jim Gattoni (President and CEO)
We can tell you that they insourced, so if that gives you an idea of who it is.
Matt Brooklier (Senior Equity Research Analyst in Industrial Transportation and Manufacturing)
Okay.
Jim Gattoni (President and CEO)
Just give me a sec. We generally don't share individual customer information.
Matt Brooklier (Senior Equity Research Analyst in Industrial Transportation and Manufacturing)
It just seems like it was more impactful as we're kind of going through the call and asking questions. I mean, you guys are talking about, you know, the overall environment moderating, yet-
Jim Gattoni (President and CEO)
Yep, yep, yes.
Matt Brooklier (Senior Equity Research Analyst in Industrial Transportation and Manufacturing)
It sounds like, you know, they were a pretty big contributor to that. I can get the number offline if that's easier.
Jim Gattoni (President and CEO)
No, no, no. It was why we don't talk about customers so much, 'cause it, you know, we're so diverse, but that one customer dropped $10 million year-over-year. So it would have impacted the quarter, and it generally happened in November, December, year-over-year.
Matt Brooklier (Senior Equity Research Analyst in Industrial Transportation and Manufacturing)
$10 million was the total-
Jim Gattoni (President and CEO)
The change. The reduction from the prior year.
Matt Brooklier (Senior Equity Research Analyst in Industrial Transportation and Manufacturing)
Okay. Got it. Thank you.
Operator (participant)
Thank you. At this time, I show no further questions. I would like to turn the call back over to you, sir, for closing remarks.
Jim Gattoni (President and CEO)
All right. Thank you, and I look forward to speaking with you again on our 2019 first quarter earnings conference call, currently scheduled for April 25th. Have a good day.
Operator (participant)
Thank you for joining the conference call today. Have a good morning. Please disconnect your lines at this time.