Landstar System Inc (LSTR) 2015 Q4 法說會逐字稿

Good afternoon and welcome to Landstar System Incorporated's year-end 2015 earnings release conference call.

(Operator Instructions)

Today's call is being recorded. If you have any objections, you may disconnect at this time.

Joining us today from Landstar are Mr. Jim Gattoni, President and CEO; Mr. Kevin Stout, Vice President and CFO; Mr. Pat O'Malley, Vice President and Chief Commercial and Marketing Officer; Mr. Joe Beacom, Vice President and Chief Safety and Operations Officer. Now, I would like to turn the call over to Mr. Jim Gattoni. Sir, you may begin.

Thank you, Olive. Good afternoon, and welcome to Landstar's 2015 fourth quarter earnings conference call. This conference call will be limited to one hour. Due to a high level of participation on these calls, I am requesting that each participant have a two question limit. Time permitting, we can circle back for additional questions.

But before we begin, let me read the following statement. The following is a Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts 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 2014 fiscal year, described in the section Risk Factors and other SEC filings from time to time. These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking information and Landstar undertakes no obligation to publicly update or revise any forward-looking information.

Before I go into my more detailed prepared remarks, let me touch on a few fourth quarter highlights. New agent revenue exceeded $25 million in the 2015 fourth quarter, the highest quarterly new agent revenue in the past 16 quarters. During 2015, we had 512 agents generate $1 million or more of Landstar revenue.

We ended the year with 9,500 trucks provided by BCOs, the highest number of trucks provided by BCOs in Landstar history. BCO turnover was a low 25% in FY15. The number of loads hauled via truck increased 7% over the 2014 fourth quarter and the number of loads hauled via rail, air, ocean cargo carriers exceeded prior year fourth quarter by 35%.

During the 2015 fourth quarter, we've purchase 779,000 shares of Landstar common stock and ended the year with over $160 million in cash and short-term investments. Overall, the model performed well in the current environment of low growth and truck capacity that is more readily available as compared to 2014.

Now, for my more detailed comments. Revenue for the 2015 fourth quarter, was $849 million, slightly above the midpoint of the range of previously issued guidance of $815 million to $865 million. Diluted earnings per share was $0.88 in the 2015 fourth quarter on previously issued guidance of $0.85 to $0.90.

Revenue in the 2015 fourth quarter, was 2% less than the 2014 fourth quarter. The decrease was a result of lower truck revenue of 3%, partially offset by a 23% increase in rail, air and ocean revenue. The decrease in truck revenue was driven by a 7% increase in the number of loads hauled via truck over the 2014 fourth quarter, offset by a 9% decrease in revenue reported load on loads hauled via truck.

Excluding the 2014 fourth quarter, revenue for load on loads hauled via truck in the fourth quarter typically has been about the same as the third quarter. This held true in the 2015 fourth quarter. However, revenue for load on loads hauled via truck in the 2015 fourth quarter was 9% less than the 2014 fourth quarter, due to a difficult year-over-year comparison as we experienced unusual pricing growth from the third quarter to fourth quarter of 2014.

Revenue per load on loads hauled via BCO capacity, which excludes the effect of fuel surcharges billed to customers, was 5% below prior year's fourth quarter. That decrease was partly due to a slightly shorter length of haul in the 2015 period along with the effect of the increase in available truck capacity.

Revenue per load on loads hauled via broker capacity, which includes the effect of fuel surcharges billed to customers, was 13% below prior year's fourth quarter. I estimate that the effect of lower diesel fuel prices decreased revenue per load in the 2015 quarter by 7% on loads hauled via broker carriers.

Revenue per load was also impacted by the low growth environment and related increase in truck availability compared to 2014. The number of loads hauled via van equipment increased 4% over the 2014 fourth quarter. There continues to be elevated demand for transportation services requiring Landstar provided van equipment. Approximately one-third of Landstar's truck revenue in the 2015 fourth quarter was hauled on Landstar trailing equipment, mostly drop and hook van services.

The number of loads hauled via unsided platform equipment in the 2015 fourth quarter was 12% above the 2014 fourth quarter, entirely due to a large award that began in April 2015, from one account in the automotive sector. Excluding the loads from the large automotive sector award, the number of loads hauled via unsided platform equipment in the 2015 fourth quarter was 4% lower than the 2014 fourth quarter.

On a final note, as it relates to revenue per load on loads hauled via truck, we came into 2015 expecting slightly higher revenue per load as compared to 2014. Those expectations did not consider the significant drop in diesel fuel prices which have decreased over 30% from the 2014 fourth quarter to the 2015 fourth quarter.

We also were well aware that the record revenue per load on loads hauled via truck in 2014, was going to make for tough comparison. However, we executed on driving increase in gross profit in the 2015 fourth quarter over the prior year, despite the 9% decrease in revenue per load on loads hauled via truck.

The increased revenue in rail, air and ocean services compared to the 2014 fourth quarter was driven by strong execution by our existing agent base, increasing volumes hauled by those modes by 35% over the prior year quarter. Gross profit representing revenue less the cost of purchased transportation and agent commissions, increased 1% over the 2014 fourth quarter.

The 2015 fourth quarter gross profit margin increased to 14.9% compared to 14.4% in the 2014 fourth quarter. The increase in the gross profit margin resulted mostly from 110 basis point decrease in the rate of purchase transportation paid to truck broker carriers.

During the 2015 fourth quarter, revenue per load on loads hauled via truck broker carriers decreased 13%, while the cost of purchased transportation on those loads decreased 14%. The decrease in the cost of purchased transportation per load paid to truck brokerage carriers was due to an increase on the available truck capacity as compared to 2014 and the result of lower diesel fuel prices in the 2015 fourth quarter.

During the 2015 fourth quarter, we net added 59 trucks provided by BCOs and ended the fourth quarter with 9,500 trucks provided by BCOs, the highest number of trucks provided by BCOs in Landstar history. Additionally, we had the highest number of truck broker carriers haul Landstar loads compared to any quarter in Landstar history.

Landstar ended the 2015 fourth quarter with a total truck capacity network of over 53,000 providers, more than 6,600 over the 2014 fourth quarter. Both approved and active truck broker carrier accounts were at record levels at the end of 2015.

As it relates to the Company's customer account base, the Company's top-100 customers ranked by 2014 fourth quarter revenue, comprised approximately 44% of 2015's fourth quarter total revenue. 2015 fourth quarter revenue from these top customers decreased 2% from the 2014 fourth quarter.

From an industry standpoint, revenue growth from automotive sector was very strong in the quarter, although this was primarily due to a specific award from one customer. Volumes related to this award are expected to be insignificant in the 2016 first quarter.

As expected, freight relating to the energy sector decreased as a double-digit percentage. Energy-related freight was 4% of total revenue in the quarter. I will pass it over to Kevin for some more comments.

Thanks, Jim. Jim has covered certain information on our 2015 fourth quarter, so I will cover various other financial information included in the press release. Gross profit, defined as revenue less the cost of purchased transportation and commissions to agents, increased 1% to $126.4 million and represented 14.9% of revenue in the 2015 fourth quarter, compared to $124.7 million or 14.4% of revenue in 2014.

The cost of purchased transportation was 76.7% of revenue in the 2015 quarter, versus 77.5% in 2014. The rate paid to truck brokerage carriers in the 2015 fourth quarter was 110 basis points lower than the rate paid in the 2014 fourth quarter. The decrease in the cost of purchased transportation was mostly due to the effect lower diesel fuel costs have on revenue and the cost of purchased transportation on freight hauled via truck brokerage carriers.

Commissions to agents as a percentage of revenue were 32 basis points higher than in the 2015 quarter as compared to 2014, due to an increased net revenue margin, revenue less the cost of purchased transportation, on loads hauled via truck brokerage carriers. Other operating costs were $7.2 million in the 2015 fourth quarter, compared to $6.4 million in 2014. This increase was primarily due to increased trailing equipment maintenance costs.

The Company has increased its Company controlled trailer fleet to 10,723 trailers, a 9% increase over prior year, as the number of BCOs hauling Landstar trailing equipment has increased with the increased demand for drop and hook services. Insurance and claims costs were $11.1 million in the 2015 fourth quarter, compared to $8.5 million in 2014.

Total insurance and claims for the 2015 quarter were 2.9% of BCO revenue compared to 2.2% in 2014. The increase in insurance and claims in the 2015 period, was mostly due to a difficult comparison as the 2014 fourth quarter had an unusually low claims expense.

Selling, general and administrative costs were $38.3 million in the 2015 fourth quarter compared to $41.7 million in 2014. The decrease in SG&A costs was primarily attributable to a decreased provision for bonuses under the Company's incentive compensation program partially offset by increased employee wages and benefits. SG&A expense as a percent of gross profit, decreased from 33.4% in the prior year to 30.3% in 2015.

Depreciation and amortization was $7.8 million in the 2015 fourth quarter, compared to $7.2 million in 2014. This increase was due to the increase in the number of Company owned trailers.

As it relates to operating leverage, operating income was $62.6 million or 49.6% of gross profit in the 2015 quarter versus $61.2 million or 49.1% of gross profit in 2014. Operating income increased 2% year-over-year.

During the 2015 fourth quarter, 82% of incremental gross profit was passed through to operating income. For the full-year 2015, 65% of incremental gross profit was passed through.

The effective income tax rate was 38.9% in the 2015 fourth quarter compared to 36.2% in 2014. The effective income tax rate which historically is 38.2%, was impacted in the 2015 fourth quarter by an unfavorable state tax true-up. The difference between the 2015 tax rate and our historical rate of 38.2% resulted in a reduction of diluted earnings per share of $0.01.

The difference in the 2015 fourth quarter effective tax rate versus the 2014 fourth quarter rate of 36.2% resulted in a reduction of diluted earnings per share of $0.04. The 2014 fourth quarter tax rate was impacted by favorable outcomes of various tax matters.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $163 million, cash flow from operations for the 2015 year-to-date period was $216 million, cash capital expenditures were $5 million and the Company acquired $49 million in trailing equipment financed under capital leases. During the 2015 year-to-date period, we purchased approximately 2.5 million shares of Landstar common stock at a total cost of $161 million and there are currently 1.8 million shares available for purchase under the Company's stock purchase program. At the end of December, shareholder's equity represented 79% of total capitalization. Back to you, Jim.

Thanks, Kevin. Overall, considering recent industry fundamentals of low demand and looser truck capacity, Landstar had a very good fourth quarter. I expect the current freight environment to continue throughout the first quarter. I expect the 2016 first quarter pricing environment to be somewhat challenging as compared to the 2015 first quarter, which includes the impact of slightly lower diesel fuel costs and a looser capacity environment.

Based on the continuation of recent revenue trends, I currently anticipate 2016 first quarter revenue to be in the range of $720 million to $770 million. In comparing the 2016 first quarter diluted earnings per share guidance with the first quarter of 2015, the 2016 first quarter will be favorably impacted by approximately $0.03 per diluted share related to the Company's annual agent convention scheduled to be held in the 2016 second quarter, compared to 2015, when it was held in the first quarter.

However, we expect incentive compensation in the 2016 first quarter to mostly offset the variance caused by the timing of the agent convention as we had a minimal provision for incentive compensation in the 2015 first quarter. Based on the range of revenue estimates and considering the timing of Landstar's annual agent convention and impact of incentive compensation, we anticipate 2016 first quarter diluted earnings per share to be in a range of $0.70 to $0.75.

As we move forward in 2016, I believe there's opportunity for Landstar to continue to see profitable volume gains even given the low growth environment we are now experiencing. We continue to invest capital into our trailer fleet and anticipating approximately $55 million in 2016 in new trailing equipment representing some growth to the existing fleet plus to replace older equipment.

Today, we execute more drop and hook business than at any other time in our history and we intend to continue to pursue opportunities to grow that business. As also discussed in today's press release, we continue to invest in the resources that support our agent network and are currently underway in a multi-year project that we believe will increase efficiencies, primarily through technology to improve the processing of transactions from order delivery at both the agent's office and at Landstar.

Perhaps even more important, we are investing in providing our agents with advanced tools to assist them with satisfying changes in customer demands. We expect costs associated with this multi-year initiative to impact diluted earnings per share by approximately $0.05 to $0.10 in FY16.

Excluding the cost of the multi-year project and assuming this low growth environment isn't prolonged, we believe we can achieve our financial goals of passing 70% of incremental gross profit to operating income, achieve an operating margin of 50% and over the next five years, achieve an average annual growth rate in diluted earnings per share of 10% to 15%. 2016 has started off with a challenging operating environment given recent turmoil in world markets, a slow growth in a messy economy and the uncertainties relating to a very unpredictable Presidential election later this year.

As such, we will not be providing annual guidance. With that said, however, I'm confident that the strength of our model and our network's ability to execute along with our long-term investment in our future will position Landstar for many years of industry outperformance.

With that, Olive, we will open to questions.

(Operator Instructions)

Alex Vecchio, Morgan Stanley.

Good evening, thanks for taking the questions. Jim, I just wanted to clarify on the auto contract. Can we assume that most of the volume from that customer have now gone back to the rail, and as such, the volumes are going forward from that customer will be insignificant for the remainder of the year?

Yes, that is our expectation.

Okay, that's helpful. Then on the guidance, I realize there's a few puts and takes here, but I do believe that in the first quarter of 2015, you had about $0.06 of a headwind from an unusual legal settlement, which would suggest maybe on an apples-to-apples basis, EPS flat on organically.

And given that the headwinds you might face in the back half, given the lack of the auto customer, as well as the IT investments, I know you are not giving full-year guidance, but at this point, do you feel comfortable that earnings can actually increase on a year-over-year basis in 2Q, 3Q and 4Q given those dynamics there?

I will say that I anticipate the revenue per load to be better -- to be an easier comparison in the back half, but I don't want to comment on a full-year at this point.

Okay.

From a rate standpoint, we do expect -- from a comparison quarter over quarter, for that to improve. But the automotive business was pretty significant starting in September, so I don't want to comment on the full year.

Okay. Just to clarify, did you start the auto business in September? I thought it was April or the May time frame?

Yes, April 15, that's what I mean. And it's second, third and fourth quarter, there was what I consider a pretty significant amount of volumes coming across from that project.

Okay. Got it. All right, thanks for the time.

Jack Atkins, Stephens.

Great. Thanks, guys, and thanks for taking the questions. So Jim, I guess to start off, if we can go back to the investments that you guys have been making in your trailing equipment, is clearly paying off for you in terms of incremental van demand.

You talked about investing again in 2015 in your trailing equipment. Could you maybe comment on the impact this is having on your customers' preference for your services, and would you expect a similar type of volume tailwind in your van business this year from your investments in the trailing equipment?

Jack, this is Joe Beacom. What we do is as we've grown BCO count, those BCOs that look to haul van for us, we buy essentially provide a trailer for them to haul and a trailer to put at a customer. And then, as we've seen that demand come, we've had the capacity behind it to support that.

So as additional demand comes from the customer base, we think we're pretty well-positioned from a capacity standpoint to satisfy that. So as that demand exists, we think we're pretty well-positioned to satisfy it.

Okay. That's helpful. Then when we think about the month-to-month volume progression that you guys saw in the fourth quarter, I'm curious what you're seeing into January. Could you comment on what you are seeing there from a van perspective and on your unsided business?

On the van side, the progression in the gross -- relatively, it was -- if you go through October, November, December, over prior year, van was 4%, 3%, 6% over prior year on the load count basis from a volume. So, pretty consistent.

Okay. Then the January, Jim?

We are looking at low to mid single-digit really is what we are looking.

Okay. Thanks very much for the time, guys.

Rob Salmon, Deutsche Bank.

Good afternoon, and thanks for taking the question. Following up with regard to the trailing equipment investments that you've been making, can you give us a sense if the Q4 run rate in both the other operating expenses as well as D&A is the right starting point? Or to what magnitude should we be thinking about growing those operating expenses given plans to increase your trailing equipment?

My guess is you are probably looking at an $8 million to $9 million number in depreciation in a quarter -- quarterly. I would go for maybe a $6.5 million to $7.5 million on the other operating costs.

Then what assumption are you guys using in the insurance and claims? You guys are doing, have done a little bit better on that line item in the past couple quarters. Should we still be thinking your historical average there?

Yes, because we don't use the current run rate. We use last five years. So we're still a 3.3%. 3.3% of BCL is what we use in this projection that we are putting out in the guidance.

Appreciate the clarifications. I will hop back in.

Okay.

Scott Schneeberger, Oppenheimer.

I'm curious, if we went back in fourth quarter and looked at the trend, excluding the auto customer on flatbed, how was that looking just taking that out and how that's trending into the current quarter, if you could please?

I think we have that.

This is just for the flatbed. This is Kevin, Scott. The flatbed, I can tell you for the whole quarter, it was down 4%, and it's going to be consistent for each of the months there without the auto (multiple speakers).

Month to month, it's probably pretty consistent, but for the quarter, it was down 4%. We don't have the information yet for January. So overall, we can say that where we think January's load volumes coming out is about, like I said, low to mid single-digit growth rate. But we don't have the splits yet between van and flats.

Okay, but the trend was steady through the quarter is the bottom line?

Yes.

All right. Thanks, guys. Appreciate it.

Matt Brooklier, Longbow Research.

Good afternoon. I wanted to circle back to this technology initiative that you guys talked to. Get a little bit more color in terms of what are the benefits? What's potentially the volume growth benefits? If you could talk to if you are expecting margin benefit? I'm trying to get a better feel for how this project could have positive impact?

And then, if you could also talk to the initial cost of the project in 2016, but it sounds like it is a multi-year project. So I'm just trying to get a feel for what the total investment could look like over the life of the project?

This is -- this project actually started two years ago. When I started the project, it was really just -- what we did is we pulled together about 50 agents and started asking them questions, how is the technology used in your office today? What would you need better than what you have?

We spent the first year just dealing with what we call the focus group agents. We showed them some tools, we showed them some additional stuff that we might be able to provide, and then we went out to the market and started to look at third-party packages that we could give them to use from what we're referring to as auto delivery. Internally here, we are talking about the agent workflow product.

So it's strictly to make them more efficient within their office. And it should also, at the same time, it is a tool that will give them the ability to provide better information to their customers. When you talk about revenue metrics and adding volume and stuff like that, it is really right now, we are just trying to upgrade the technology they have in their office.

We believe that it will help us recruit more agents into the system. We believe when the agents get more efficient, they will have more time to do sales, but I'm not going to put a number on what that is.

Okay.

About going forward, too, I would expect -- this isn't an SAP implementation. We are not spending $100 million. And the reason we put this out there is to indicate $0.05 to $0.10. That's about $3.5 million to $7 million we're going to spend this year. Hopefully, part of that cost is for launch costs. If you think about -- we have 1,200 independent agents all around the country and we have to launch them individually one at a time. So it is a little bit of training and working with the agents to launch it.

The launch is probably going to take -- once we get it up and running, there's an agent on it today, loves it, but it is going to take -- launch is going to take a very long time, probably two years. So that's why we spent two years developing and designing and coming up with a prototype. We are in beta with one agent now, and hopefully, by the end of the year, we are in launch mode.

And then, for about a year or two, it is going to take -- some of our agents might take a month or two just to launch an individual agent. But I would expect when you look at the $0.05 to $0.10 this year, I don't think you are not looking at the similar number next year. Until we are fully launched -- hope to be fully launched sometime mid-2018.

Okay. That's helpful. Then of -- and I know I'm getting a little granular here, of the $0.05 to $0.10 of cost expected in 2016, what's the cadence? How much should we assume in the first quarter?

I think more of the cost is in the back half but it is more -- I don't know if I've got -- so, it's $3.5 million to $7 million. All I can really tell you is it's really the launch -- once we are ready to launch, is when it really creeps up, which is more in the back half. But we will have some in the front in the first half of the year. I don't have those numbers.

Okay. Once you worked through the project, you garner the anticipated benefits from the project, what are your thoughts on the 50% net operating margin target that you've had previously? I think you talked to it a little bit in your prepared remarks.

Should we would assume that 50% -- we can do better than 50% moving forward? And it is probably hard to quantify what that number could look like, but if you could just talk to the potential benefits from the program? And if we should be thinking about a higher net operating margin moving forward once the project's complete?

Yes. Once the project is complete, I think we should clearly have a higher one. But I think -- we set that 50% margin by the end of 2017. With some of these costs we are spending, we still have a chance to hit that 50% operating margin. It makes it a little tougher with some of those costs we have in there.

So we may when we're done with the project, I clearly believe we're going to be at 50%, and then from there, we will just ramp up. I don't want to give a number where we will end up until we are done.

Got you. Okay. Appreciate the time.

John Lawrence, RBC Capital Markets.

Thank you, guys, for taking the questions. A couple of things, one on the technology implementation. Can you talk a little bit about -- what do you derive out of that, that helps you get to that margin target? Or am I thinking -- seems like there's something there with the technology implementation that helps you achieve that 50% other than just recruiting more agents into the system. Is there something else there?

Once we're done spending the implementation and getting it launched, then we think we save in efficiencies in the up. We actually we cut expenses going forward. I haven't quantified it yet, but I think there's a lot of efficiencies we can gain inside this building, and I also think that the product we are putting in place is probably a little bit cheaper than what we are paying today to run our systems.

Because right now, we are running five disconnected systems and we're supporting five disconnected systems that the agents are using. They are not all using every one of them, but we do have agents using five different systems, whether it is LTL, whether it's Truckload, whether it is air, ocean or forwarding. So we are trying to consolidate it to one, to simplify the process for not only the agents in the field, but here internally.

So I think we'll build efficiencies once we're done implementation and launch, I think we can -- we should see -- I'm not saying we're going to cut a lot of costs, but we should maintain the cost levels we have but grow the business but get new agents in the system. I think that's how you get there. Like I said, the only piece that could impact us not reaching the 50% is the implementation stage. Once we are launched, we're back into the cost structure we have today.

Okay, all right. But how much is dependent -- what percentage is dependent on the -- to achieve the 50%? Is it 20% is dependent on the efficiencies derived out of this technology spend?

No, no. I think once we -- when we launch and get through the process, I don't think there's anything relying on those efficiencies. The efficiencies just get us over and above the 50%.

All right. I just wanted to clarify that. One was not dependent on the other.

No.

My other question is, you talked about the $0.03 benefit in the first quarter from the timing of your agent conference, but I'm assuming then that, that means that's a $0.03 overhang on 2Q. Am I correct?

That's the main reason why I said it. Between the incentive comp is a wash to the convention in the first quarter, so it is a plus and minus in the first. Doesn't really affect the first quarter. Really, it was a delivered comment just to let everybody know that in the second quarter, we are going to have that's when the convention is going to hit.

All right, I appreciate it.

Scott Group, Wolfe Research.

Thanks, good afternoon. Can you just remind us the quarterly revenue from the auto contract in each quarter last year? I'm not sure if it was BCO or brokerage business. I guess I'm not sure if it is better or worse than average margin business. If you have any color there?

Q1 2015, was $0. Q2 was $27 million. Q3 was $35 million. Q4 was $38 million. I would say in the second quarter -- Kevin, what was it? 60/40? 60% brokerage. 40% BCO?

Yes.

And then it flipped.

Yes, about 50/50.

It's about 50/50 BCO brokerage.

Thoughts on margin, if it is better or worse than normal or average?

It is about normal. So just 50/50, and our business is about 50/50. You get back to that normal margin.

Okay. Wanted to ask about the BCO. So we've seen all year, we saw a lot of growth in the BCO capacity. We saw that level out a little bit in the fourth quarter. What is your read on that? Is there less capacity that's starting to get added into the market by small guys? Is that a fair thought, or don't read much into one quarter if the BCO is not growing sequentially?

Scott, this is Joe. I don't know that I would read much into one quarter. I don't really have a great sense. I know that interest from prospective BCOs has remained pretty strong. I think the additions, as you pointed out, have tapered throughout the year.

The first quarter of any year, typically we are flat to down to a decline in net growth. So that's where we are seeing it. How things look from an individual owner operator getting his own authority into 2016? It is pretty fuzzy for me. I'm not exactly sure, if you look out at the environment, if it is all that attractive as it was back in 2014 and early 2015.

Maybe the same thing on the truck brokerage carriers? We're seeing good growth there. Are you seeing new trucking companies emerge or is that existing guys that you are finding?

I think it is some of both, Scott. We have clearly seen companies that formed in 2014 and 2015, both. Then there's others that are just out there and maybe have not done much with Landstar but signed up and became active and some business we had worked for them. And I think we are always out there mining that and do a pretty fair job of that, our agents do. So I think it's a little bit of both.

Okay. All right, thank you, guys.

Todd Fowler, KeyBanc Capital Markets.

Thank you. Good afternoon, everyone. At this point, is your expectation that incentive compensation will be higher year over year in 2016? So that $0.03 in the first quarter, is that something that we should assume for the balance of the year as well, or did the comparisons change throughout the year?

Todd, this is Kevin. When we build the models, we assume a one-time payout would be about $8 million for the year, which would be about $2 million for each quarter. So we assume the $2 million in the first quarter, and now in 2015, we did not have that. We did not hit our targets and we had a minimal accrual for incentive comp in 2015 first quarter. So that's the comparison year over year that's causing the problem.

Okay. Then for the balance of 2016? Assume that $2 million for now unless something changes?

Yes.

Okay. I wanted to ask a little bit about the gross profit margins and I know that they were up year over year. They were down just a little bit sequentially, and I know there's some moving parts through there, but it seems like the commissions to the agents were a little bit higher.

And it sounds like from the prepared remarks that some of that has to do with the brokerage gross margins. Can you just maybe help us think about the brokerage gross margin were favorable and the agents keep a little bit more of that on the commission side? Is that what happened here this quarter?

Yes. The brokerage PT rate was down 110 basis points. That's what drove the increase in the commission rate

Another thing that happens, Todd, if you're looking sequentially fourth quarter over third quarter -- the BCO program, when an agent moves a load on a BCO, they do get incentives as they grow. And they get more higher commission rates as they grow beyond a certain revenue amount.

So as they're hitting their targets going through the year and increasing their incentives -- their commissions, I'm sorry, you'd see a little big higher -- you'd typically see a little bit higher commission rate on the BCOs in the fourth quarter than the third quarter as they hit their targets and get the accelerated commission rates. So, there's a little bit of that too.

Got it, okay. But just as far as a thought about the environment, the gross margin compression sequentially or the gross profit margin compression sequentially, isn't indicative of the market getting really tighter, it's just the function of the splits with the agents. And then, Jim, to your point, the way that the commissions build over the year.

Yes.

Okay, that helps. Good. Thanks for the time tonight, guys.

Tyler Brown, Raymond James.

Good afternoon, guys. Jim, you talked about new agent additions. I think adding around 3% organically to growth historically. And I think if you look at this year, it looks like you hit that number. But can you guys talk a little bit more about the agent pipeline and would you expect a similar contribution in 2016?

Tyler, this is Pat O'Malley. Yes, as we mentioned I think throughout the quarters last year, that the agent environment -- or the environment for recruiting new productive agents to Landstar, was a fairly fertile ground.

We don't anticipate any changes in that. The pipeline at this point in the year, is very robust and we expect the fundamentals that drove that, a challenging freight environment, a challenging capacity environment, will work in our favor as it relates to recruiting new agents to Landstar.

I think there's an indication of what you saw in the fourth quarter having the highest new agent revenue in the last 16 quarters hit the fourth quarter. As Pat said, I'm just going to confirm what he said, there's some nice agents in the pipeline right now.

Right. Okay, good. A quick housekeeping item, and Pat, maybe what percent of your revenues are arranged by your $1 million agents? And was your -- did your turnover step up in 2015? It looks like your $1 million agent count number was actually down in 2015.

It was. 91% of the revenue is produced by those $1 million agents.

Okay, did the turnover step up? Or why did the number drop down?

There's a lot of ins and outs going on there. I'll tell you, we lost -- so we went from 525 -- we had 525 $1 million agents during 2014. We have 512 during 2015. We lost 13 of the $1 million agents during 2015.

What else is going on there, we actually had 48 agents that moved up that were agents below $1 million, they moved up over $1 million. We also had 48 agents, coincidence they're the exact same number, that came down below the $1 million. Some of those guys who fell below the $1 million of the 48 guys is really because the pricing fell. So, if you were doing $1.2 million last year, and pricing falls 10%, now you're underneath. $1.1 million. So some of them fell out just because of pricing.

But it was really the focus is the 13 guys who left, and unfortunately, we had a couple people pass away and we had a couple people who got in trouble with the law and a couple left out to -- two of them left to go out and do business outside of transportation and three of them did go to other firms.

Okay, that's very helpful. Thanks, guys.

Matt Young, Morningstar.

Good afternoon. Thanks. Could you remind us where the mix of specialized heavy haul shakes out right now as a percentage of revenue? I guess naturally, soft demand will have an impact on the business mix, but is there any reason to think that changes in the market opportunities would materially change your mix of heavy haul or even overall flatbed in the years ahead, perhaps moving more to dry van?

Matt, this is Pat. I would expect the mix to remain about the same. As you heard earlier, we are adding a lot of van trailers. So that's naturally going to take the van percentage of freight up. The second part of your question again?

Just what the mix was at this point of heavy haul?

The heavy haul, Matt, is about 25% in 2015, and last year, it was about 28%.

Of flatbed.

Okay, that makes sense. The decline would be the markets in general. Just wondering what truck revenue per load looked like in the quarter if you exclude the lower fuel surcharges? Just to get a sense of core pricing?

Our estimate in the fourth quarter was that on the brokerage, it was 7%. The impact was 7%, which was about $27 million.

Okay. Appreciate it, thank you.

(Operator Instructions)

Jack Atkins, Stephens.

Great, guys. Thanks for taking my follow-up. Just to be clear, I hate to go back to that agent technology investment, but where exactly will those extra costs show up in the P&L just so we can model that correctly?

It is SG&A.

It'll show up just SG&A? Okay. Bigger-picture question, when you look at your various end markets, I know you said automotive was strong, energy was soft. Could you give us a little bit of additional color in terms of what you are seeing out there in terms of strength and weakness in your various end markets?

Jack, this is Pat. I would state that if you think about aerospace, building products, infrastructure, we are seeing some strength in those areas.

Okay, Pat. That's helpful.

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.

Thank you, Olive, and thank you all for your participation today. And I look forward to speaking with you again on our 2016 first-quarter earnings conference call, currently scheduled for April 21. Have a good day.

Thank you for joining the conference call today. Have a good afternoon. Please disconnect your lines at this time.