Landstar System Inc (LSTR) 2016 Q1 法說會逐字稿

Good morning and welcome to Landstar System Incorporated's first-quarter 2016 earnings release conference call.

(Operator Instructions)

Today's conference 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 Beacon, 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 all. Good morning and welcome to Landstar's 2016 first-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 FY15 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.

Late yesterday afternoon we filed our traditional 8K with the SEC that included our quarterly earnings release. We also included with that filing a slide presentation with some additional information regarding revenue, gross profit margin, operating margin, and a few other performance metrics.

This information has been provided to assist with the earnings conference call and to provide some additional information on the results of the quarter. I will not be talking to these slides during my prepared remarks, but feel free to ask questions on any of the information included in the slide presentation during the Q&A.

I will now touch on a few first quarter highlights. For the second straight quarter new agent revenue exceeded $25 million. This key metric reflects the continued strength of the Landstar model in attracting quality agents to the network.

We ended the quarter with 9497 trucks provided by BCOs, the highest number of trucks provided by BCOs at the end of any first quarter. We also had a first-quarter record number of truck brokerage carriers small freight on Landstar's behalf during the 2016 first quarter. The number of load hauled via truck in the 2016 first quarter was a first quarter record, and diluted earnings per share of $0.69 in the 2016 first quarter was another first-quarter record.

As you know, Landstar filed an 8K with the SEC on March 29 providing updated first quarter revenue and earnings guidance. First quarter revenue of $712 million was in line with our revenue guidance of $705 million to $725 million. Revenue to 2016 first quarter was 7% lower than revenue in the 2015 first quarter.

The decrease in revenue as compared to the 2015 quarter was due to decreases in revenue per load across all modes. In particular, Landstar experience a 10% decrease in revenue per load on loads hauled via truck. We also saw lower revenue per load on loads hauled via rail, air, and ocean cargo carriers.

Revenue per load on loads hauled via van equipment was 8% below prior year's first-quarter, and revenue per load on loads hauled via unsided/platform equipment was 13% below prior year's first quarter. Overall, truck capacity was more readily available than it was in the 2015 first quarter putting downward pressure on spot market pricing.

During the first quarter and through the first few weeks of April, that availability is more pronounced than the unsided/platform market as compared to the van market. Additionally, revenue per load has been negatively impacted by a lower cost per gallon of diesel which was over 25% lower in the 2016 first quarter as compared to the 2015 first quarter. One final point on rates, Landstar's truck revenue per load was at a record level in the fourth quarter of 2014.

In 2014 higher fuel prices, truck productivity reductions due to the new hours of service regulations, rail congestion, and peak US industrial production drove rates to their highest point in the Company's history. During 2015, we experienced decreasing revenue per load as the new hours of service provisions were suspended, fuel prices began to contract, congestion was reduced at the rails, and the growth rate of US industrial production slowed.

Those industry dynamics continued into the 2016 first quarter but with additional deceleration in the growth rate of US industrial production resulting in additional pressure on price. During the first few weeks of April we have seen a normal seasonal uptick in rates on loads hauled via truck. I believe we will continue to see the normal seasonal uptick in pricing as we move through the second quarter.

Thus far, the price of fuel has been fairly stable, and truck capacity, although clearly more readily available than during 2015, seems to be holding at a consistent level. As it relates to volumes, the number of loads hauled via van equipment increased 4% compared to the 2015 first quarter, unsided/platform loadings increased 1%, and the number of LTL loadings increased 3% over the 2015 first quarter. We continue to experience increased demand for services provided via Landstar provided trailing equipment.

The number of loads hauled via Landstar controlled trailing equipment, mostly van equipment hauled by BCOs and drop and hook operations was 31% of truck loadings in the 2016 first quarter and increased 9% over the prior year. Overall, we have maintained stable unsided/platform volumes in a difficult flatbed environment.

Heading into the second quarter, our quarter-over-quarter comparisons of volumes on unsided/platform equipment gets more difficult as we hauled over 13,000 loads via flatbed equipment in the 2015 second-quarter under a project for a specific account in the automotive industry. That project concluded at the end of 2015.

As it relates to the Company's customer account base, the Company's top 100 customers ranked by 2015 first quarter revenue comprised approximately 41% of 2016 first quarter total revenue. 2016 first quarter revenue from those top 100 accounts decreased 10% from the 2015 first quarter, while the remaining accounts decreased 4%.

From an industry standpoint, revenue from the building product sector was one of few industry sectors that grew over the 2015 first quarter. After revenue declines, freight relating to the energy sector which was 3% of revenue in the 2016 first quarter decreased almost 50% compared to the 2015 first quarter. Other sectors showing significant revenue declines over the 2015 first quarter were machinery, metals, foodstuffs, and automotive products.

Gross profit decreased 3% compared to the 2015 first quarter, 4% better than the quarter-over-quarter decrease in revenue as gross profit margin expanded 70 basis points in the 2016 first quarter compared to the 2015 first quarter. Lower diesel fuel prices and the favorable impact of more readily available capacity drove down the cost of purchased transportation paid to truck brokerage carriers in the quarter helping to increase the gross profit margin.

Notably, the gross profit margin on loads hauled via truck brokerage carriers under variable cost arrangements expanded 80 basis points over the 2015 first quarter. I expect softer capacity conditions to persist through the 2016 second quarter and therefore expect gross profit margin to exceed the 2015 second-quarter at a level somewhat similar to the margin expansion experienced in the 2016 first quarter over the 2015 first quarter.

Here's Kevin with his review of other first-quarter financial information. Kevin?

Thanks, Jim. Jim has covered certain information on our 2016 first quarter, so I will cover various other financial information included in the press release. Gross profit defined as revenue less the cost of purchased transportation and commissions to agents decreased 3% to $112.2 million and represented 15.8% of revenue in the 2016 first quarter compared to $115.4 million or 15.1% revenue in 2015.

The cost of purchased transportation was 75.9% of revenue in the 2016 quarter versus 77% in 2015. The rate paid to truck brokerage carriers in the 2016 first quarter was 163 basis points lower than the rate paid in the 2015 first 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 truck brokerage carriers.

Commissions to agents as a percentage of revenue were 46 basis points higher in the 2016 quarter as compared to the -- as compared to 2015 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 $7.4 million in the 2016 first quarter compared to $7.7 million in 2015.

This decrease was primarily due to increased gains on the sale of used trailing equipment and decreased trailer rental costs partially offset by increased trailing equipment maintenance costs. The Company has increased its company controlled trailer fleet to 10,700 trailers, a 10% 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 $14.2 million in the 2016 first quarter compared to $14.8 million in 2015. Total insurance and claims costs for the 2016 quarter were 4.3% of BCO revenue compared to 4.2% in 2015.

The decrease in insurance and claims compared to the 2015 period was due to decreased unfavorable development of prior year claims in the 2016 period as the 2015 period included a $4.5 million charge related to a single accident that occurred in 2011. The decrease was partially offset by increased severity of commercial trucking accidents in the 2016 first quarter as compared to 2015.

Selling, general and administrative costs were $34.6 million in the 2016 first quarter compared to $37.2 million in 2015. The decrease in SG&A costs was primarily due to the timing of the Company's annual agent convention, decreased employee health benefit costs, and decreased stock-based compensation partially offset by increased professional fees. SG&A expense as a percent of gross profit decreased from 32.3% in the prior-year to 30.8% in 2016.

Included in SG&A costs are costs of $1.5 million in the 2016 first quarter and $250,000 in the 2015 first quarter related to the company's multi-year project that we believe will increase efficiency primarily through technology and improve the processing of transactions order to delivery at both the agent's office and at Landstar.

Depreciation and amortization was $8.4 million in the 2016 first quarter compared to $7 million in 2015. This increase was entirely due to the increase in the number of company owned trailers.

As it relates to operating leverage, operating income was $47.9 million, or 42.7% of gross profit in the 2016 quarter versus $49 million or 42.5% of gross profit in 2015. Operating income decreased 2% year-over-year.

The effective income tax rate was 38% in the 2016 first quarter compared to 37.8% in 2015. The effective income tax rate which has historically approximated 38.2%, was impacted in both periods by tax benefits resulting from disqualifying dispositions of the Company's common stock.

Turning to our balance sheet we ended the quarter with cash and short-term investments of $217 million. Cash flow from operations for the 2016 period was $72 million. Cash capital expenditures were $1 million, and the Company acquired $12 million in trailing equipment financed under capital leases. During the 2016 period, we purchased 175,000 shares of Landstar common stock at a total cost $10 million, and there are currently 1.6 million shares available for purchase under the Company's stock purchase program.

Back to you, Jim.

Thanks, Kevin. Overall, considering recent industry fundamentals of low demand and loser truck capacity, Landstar had a good first quarter. I expect the current freight environment to continue throughout the second quarter. Although we have experienced a normal seasonal uptick in pricing into the first few weeks of April, I expect revenue per load on loads hauled via truck into the 2016 second quarter to be lower than the 2015 second-quarter in the high single- to low double-digit percentage range.

Excluding the 13,000 loads related to the automotive project from the 2015 second-quarter, I expect our number of loads via truck to increase over the prior segment in the low single-digit percentage rate. Based on the continuation of recent revenue trends, I currently anticipate 2016 second quarter revenue to be in a range of $770 million to $820 million.

In comparing the 2016 second quarter diluted earnings per share guidance with the second quarter of 2015, the 2016 second quarter will be negatively impacted by approximate $0.03 per diluted share related to the Company's annual agent convention which was recently held in the 2016 second quarter compared to 2015 when it was held in the first quarter. Additionally, the 2015 second quarter included approximately $0.05 in diluted earnings per share attributable to the project for the automotive customer. Based on the range of revenue estimate and considering the timing of Landstar's annual agent convention, we anticipate 2016 second quarter diluted earnings per share to be in a range of $0.80 to $0.85.

2016 has started off with a soft operating environment. With that said; however, the model performed well in the current low growth environment. We continue to add agents and capacity within network and are well positioned for when the market improves.

And with that, I'll up -- we will open to questions.

(Operator Instructions)

Alex, Morgan Stanley.

Good morning. Thanks for taking the questions.

Jim, can you walk us through how total truck load volumes trended on a year-over-year basis through the quarter, on a monthly basis?

Yes. Sure. Month over prior year month.

Give me a second, Alex.

Sure.

It was three, four, two.

Three, four, two.

January, February, March.

3%, 4%, 2%.

Got it. Thanks.

And then just higher level, you had some good commentary on capacity overall. I think, Jim, you noted that it is still relatively elevated, but it seems to be holding at a consistent level.

It looks like your broker carrier count actually continued to tick up sequentially. Is that were of a function of Landstar specific initiatives and then also, what do you think we need to -- what needs to happen in order for capacity to start coming out at a quicker pace and start supporting the pricing environment? What do you need to see there for that to change on the margin materially?

Alex, this is Joe. The broker carrier account, you did see an increase. I think that is a function of carriers seeking out quality loads and looking perhaps at places that they hadn't looked before. They are out there becoming approved perhaps with people that they hadn't been approved with before.

We do have a pretty strong outreach effort, and I think we have good reputation. I think you've seen that grow significantly over the last few years. I think it's just a continued growth and carriers wanting to do business with Landstar. That's what I would attribute that to.

I would say, you did see the normal -- there was a little bit of down tick in the active count from the fourth quarter to the first quarter. So, you did see the normal drop off and a little bit less participation. There's only 200 out of 29,000 that dropped off. But, as to what has to happen, clearly we can't have industrial production that is ticking almost flat to slightly down the prior year. That puts a little pressure on rates clearly. You are going to have to have some trucks come out of the market if we don't see a turn in manufacturing in the US.

Yes, that makes sense. I appreciate the color gentlemen.

Thank you. Jack Atkins, Stephens.

Good morning, guys. Thanks for the time.

Jim, when you think about the intermodal air and ocean volume, both were up materially in 2015, and both are off to good start in 2016. Could you maybe talk about what's driving that, and would what you expect these type of growth rates to continue for the next several quarters?

Jack, this is Pat O'Malley. If you look at the intermodal sector, that is really driven by a couple of customers that we've done a nice job in converting business over to Landstar. We've taken market share in that segment. On the air and ocean, it's a couple of customers combined with new agents that are offering that service.

Clearly, we continue to call on our customers and position ourselves well with them, but we think we've got a pretty good intermodal solution. It's certainly proven itself with the number of customers, and obviously our initiatives are always to bring on quality agents.

Okay, Pat. Thanks for that.

Kevin or Jim, when you think about the guidance for the second quarter, what does that assume in terms of insurance and claims expense as a percentage of BCO revenue? I think historically, we've been cautioned to think about it as 3.3%. Is that still the right number to use?

It's slipped a little bit. The average has dropped to 3.2%, but, yes, we are using 3.2% currently.

Thanks again for the time.

Thank you. Jason Seidl, Cowen and Company.

Hello, Jason.

Good morning guys. You made a comment that flatbed was a little bit more under pressure. Can you elaborate on that? What is putting on that pressure in flatbed and where are you seeing the weakness? What areas?

I think it continues to show what happened in our -- even though that oil -- energy is only 3% of our business, you can see what is going on there. It just seems to be a little bit more focused this year than it was last year, and I think it is still coming from that energy sector.

I think there's flatbeds coming into our market and driving rates down. That is the primary driver. That has been a consistent story. It seems a little more intense than it was.

Okay. That makes sense. Also, you said that unless things pick up more trucks are going to need to come out of the market. What is the magnitude that we need? Do you think if we had a 2% reduction in fleet sizes, whether they are bankruptcies or just reductions, is that going to get us more toward equilibrium, or do you think we need more than that?

I tend to be a little more optimistic. What I look at is our revenue per load -- our revenue per mile on BCO, that is a pure play without much fuel in it. And those rates right now, when you are looking at van or flatbed, they're -- on a revenue per mile basis it's tracking to about where 2013 was, which wasn't a great year, but it wasn't really a bad year.

So, how much capacity has to get back to be a little bit better than 2013? 2%, 3%? I don't think it is as significant as what I am reading, but I think I've got guys in this that say maybe it is a little bit more than I think. But I'm being a little more optimistic than what I'm reading about in all these reports about how soft things are. Because again, our revenue per mile on BCO rate -- on BCO equipment, whether it's van or flat, it's grown 20% in the last five years which is pretty -- a historic high.

And it's pulled back to about 2013 level. So we need to get some of the trucks that came in 2014, 2015. From a significance -- I can't tell you how many, whether it's 2% or 3%. I don't want to put a number on that.

What is your read on ELDs and when we're going to start to see the impacts in the marketplace?

Jason, this is Joe. I think most larger carriers are addressing that now. I don't think you'll see a major impact.

I think those smaller carriers, the ten truck guys or less that are the preponderance of carriers out there, they won't address that until probably the middle of next year. Maybe a little bit before that. I don't think we'll see anybody leaving the market if that is the question, because of ELDs if you're smaller until sometime in 2017, probably the middle of the year.

Gentlemen, I appreciate the time and the color as always.

Sure.

Rob Salmon, Deutsche Bank.

Hey, Rob.

Hey, guys. It's [Alvin Clark] on for Rob. I know you are talking about capacity staying at a consistent level. Are you referring to overall truck, or is that more so in van and less so in flatbed?

As it pertains to each, I think we've seen a consistent level in both flat -- I mean flats are a little softer than where the van is, but I think we're seeing consistency just based on the pricing we're seeing recently coming into April. If we're seeing normal seasonal upticks like we do, to me that indicates that it is kind of -- we've stabilized on where the capacity is.

Again, I'm not saying that we're tightening, I'm saying we're still in that readily available capacities is compared to last year on both van and flat. And remember flat to me is clearly softer than where the van is.

Is flat really -- it is just tough to tell comp-wise because of the auto contract. Is flat -- does that start to accelerate into Q1 or, towards the end of the year? How did that really trend?

On the flat side?

Yes, I just feel like there's a little delay with the energy CapEx coming down.

Yes. It felt like there was a delay. I think we would've anticipated that we would felt more pressure in early 2015 or halfway through 2015 from the energy side. It just feels -- like I said, it feels a little more intense right now than it felt throughout last year.

And then actually, to tell you the truth, from January, February, March, the flat softened on a year-over-year slightly. So, yes, we felt a little more pressure as we moved through the quarter on the flatbed site.

Okay, thanks.

And then just a little bit more of a minor question. I think there was a decent sequential drop off in ocean and air cargo revenue per load. Is there anything to read into there, or is this just typical seasonality, or is there going to be a lower base moving forward?

Yes, it is such a small component of our business. I wouldn't read that into any industry trends. It's really, the basically -- the handful of agents we have moving ocean freight and the accounts that there are in and the lanes they're moving freight in. That's not a -- I wouldn't use that as a read into the ocean dynamics.

Okay. Great. Thank you very much.

Todd Fowler, KeyBanc Capital Markets.

Just on the Q2 guidance and the sequential ramp from Q1, andI know there's some moving parts with the timing of the agent convention this year. But can you help us think about the seasonality that you have baked in? I think when you build your guidance you normally think about the normal seasonal trends and where you ended Q1.

Are you just thinking about a normal sequential progression into Q2, or are you factoring in maybe some potential softness on the flatbed side into the second quarter? How are you thinking about the ramp Q2 over Q1?

I'm expecting the normal seasonal uptick based on what we've seen over the last three to four weeks, because we've seen it. Generally what happens, we see the revenue per load tick up about 1% to 2%. That is what we built into the sequentially first-quarter the second quarter. Like I said, it's soft, but I'm not sure it's softened. It is consistent with where we were through the first quarter. (multiple speakers)

Okay.

We are seeing the normal seasonal uptick in the last four weeks.

Maybe we're not seeing it, or it's a little bit softer and to one of the earlier questions it's just on the flatbed side.

Yes, it is an overall, I don't have flatbed information for April yet the mix side, but I would expect it might be a little softer on that side. But right now, combined, van and flat is showing the normal uptick.

For my second question, with all the rate pressure on the spot side, is there a point where you see loads not moving that are post cellular load board? Is there a rate level where the BCOs just won't accept the freight at that certain price, and if there is, have you started to see that? Really what I'm trying to get a sense is, can you still see more downward pressure in spot rates, or it is it just a point where people just won't accept loads at a certain price point?

I don't think we're seeing that. The other way we can actually measure it is ballpark BCOs, but their utilization is consistent where it was year ago. They are hauling as many loads than they were a year ago. We are not seeing that.

Okay. So you still could see -- you're not seeing loads not been cleared, basically, with the spot rates are right now?

No.

Okay. Good. Thanks a lot for the time.

Matt Brooklier, Longbow Research.

I think you talked about your truckload volume growth in April, but you didn't put a number to it. Do you have the number in terms of truckload volume growth thus far in April?

We're running that low single-digit rate over the prior year, same four weeks. Three weeks?

I guess, is it more similar to March or more similar to January, February when you were at I think 3%, 4%?

More similar to March.

Okay.

And then my second question, it's pretty clear, there's incremental capacity availability within the truck market, the thought process is that current pricing doesn't really support incremental trucks being added. And we're going to go through this process of supply rationalization. I think that's -- the message is heard loud and clear among the publicly traded trucking names.

My question is, the other portion of the market, the private carriers, do you think that, the rationale there is that they are at a point where they understand that, adding trucks at this point in time is probably not the right move. My question being, are you still seeing a portion of the market adding trucks at this point in time, or do you think, in general, most carriers at this point are paring back their fleet growth initiatives for 2016?

I think if we just look at the orders on class VIIIs, where they went and the direction that is going, I wouldn't even think private fleets are adding. And the one indicator we can look at is those companies that we haul freight that have private fleets, I don't think we've seen or heard where they are going to add 100 trucks in the system. I think our volumes there are consistent with where they where.

I wouldn't anticipate that even the private fleets would be adding any equipment in the system based on what's going on. But I know that's a good question, but hard to answer.

Okay. I appreciate the time.

[Kasheen Berger], Oppenheimer.

Good morning, this is Daniel in for Scott. Jim, could you provide how flatbed volumes trended month-by-month in the first quarter 2016, and if you can, discuss your expectations for the next couple of quarters?

Yes, I can if you just give me one second. Flatbeds were relatively stable. I think I got, Kevin will confirm it, 2% in January plus, minus 1% in February, and then plus 1% in March. And I would say we're going to stay in this relatively flat territory right now.

If you look at March and what was going on in US manufacturing, it wasn't a strong environment. It was relatively flat. If it holds where it is today on US industrial production I'd say we would hold this flat volumes-- now excluding this automotive project, right?

Without the automotive in there, we think we can hold flat, based on just looking where March was on demand. I think we'd hold that flat. Were doing a good job of maintaining a flat volumes on these unsided/platform equipment environment that is pretty soft.

Okay, got it. Historically you have large projects such as the auto contract last year and I think some alternative energy a few years ago. Do you anticipate any significant project work in 2016, and how strong is your visibility into such project work?

This is Pat.

Obviously we're in front of our customers frequently. And, I think our reputation and our ability to gin up capacity in a critical situation is well documented. So, when those customers have the needs for that type of service, we're certainly, I think, one of the first people they think of.

We don't plan for any projects, we don't currently anticipate that any projects will come our way, but in a manufacturing environment that is very dynamic when those opportunities to present themselves, we are able to capitalize on that.

Okay. Thank you very much.

Ben Hartford, Baird.

Kevin, real quick on the net working capital side for 2016, what are you targeting for the year? I mean I'm not asking for a specific number, but relative to perhaps 2015's contribution, the first quarter appears to be very healthy. For 2016, something above or below 2015's level, what is most reasonable?

On the CapEx?

On the net working capital contribution.

On net working capital, that's influenced on -- we will pile up assets on the balance sheet being cash in an environment where we are seeing -- where we originally saw our price, our stock price was probably in the mid-$50s during the first quarter. We got up to 175,000 shares, and then it ran up to the mid-$60s. So, you step back.

Managing our working capital, based on what we are going to do with our cash, and if we settle in this range, we will be back into the market. That's kind of how we manage our working capital and our balance sheet. Other than that, we have no intentions on utilizing any the assets or the cash.

Right now we have no acquisitions of the pipeline. We are just going to historically manage that working capital the way we have in the past.

Okay. What I'm getting at is it looks like it's going to be a health year from a net working capital contribution perspective, overall operating cash flow. The leverage on the balance sheet is still fairly limited, particularly given where you've been in the past. What's the appetite to use that cash more aggressively to be in the market and perhaps even use the balance sheet to add some leverage to support some share repurchases above and beyond what may have been previously thought?

We're going to do it the way we've done it historically and be opportunistic in the market which settles into a range we will get in. But again, we know we have significant cash on the balance sheet, and we will be watching that, the opportunities as they come.

Okay. Thank you.

Kelly Dougherty, Macquarie.

Thanks for taking the question.

I just want to talk a little bit about the BCO side of things. We saw a company like JB Hunt had a lot of owner operator capacity in the fourth quarter and the first quarter. Your BCO growth continues but seems to have tapered off a little bit.

So can you maybe talk about the nuances there? Are there other companies that are being more aggressive in courting independent operators, or are the BCOs that you pull from just a different animal so there's not as much competition with the traditional asset base guys? And then just any color how you can think about -- how we should think about BCO growth in 2016 that would be helpful.

Okay, Kelly, this is Joe Beacom. I don't know exactly what Hunt did to add their owner operators, but I would tell you that other companies often times will take somebody with a little less experience than we might have.

Some other companies will have trucks that they will lease purchased to company drivers to turn them into owner operators. I think there is -- can clearly be a difference in the owner operator, we are taking people that own their own truck and have been out on their own for at least a year, so there can be a little bit of a difference there.

They might be recruiting to a little different piece of business in a different dispatch system where, at Landstar BCOs have complete independence and pick from whatever loads that we have in order to generate their income. So, I think there's a pretty big difference, perhaps in the lifestyle of a BCO or owner operator at Landstar versus other companies. And I think that's pretty well known to the operator community.

Those that want to have the freedom and the opportunity to run their own business, truly run their own business, I think tend to come to Landstar, but they have to start somewhere. So they start at other places were opportunity presents itself.

Sometimes getting into a truck is easier if a company that you are with driving as an employee driver offers you a lease purchase option. That is what some of the asset-based carriers have done historically.

That's helpful. So, maybe it is a bit of a different animal. And, just wondering, if these guys have to be able to run their own business, is there a fixed pool of Landstar appropriate BCOs? Or how do you think about growth in that in this year?

I think -- we'll draw from individuals that are out there running their own authority, running their own business, and they want a place that is a little bit more stable, or offers some benefits that Landstar offers, so we might draw from that pool. I think the growth in BCOs in 2016 just based on demand and where pricing is and so forth, doesn't -- the first quarter we were pretty flat, which is pretty typical.

There's only been once in the last six years that we've actually net grown BCOs in the first quarter. So, I guess it remains to be seen. If the economy improves and the volume of freight in the system improves, we remain a very attractive option to owner operators who want to call the shots and run their own business.

We will see where that goes. We're looking to grow. I don't think you'll see the growth this year that you saw last year.

Okay. Thanks, Joe.

Scott Group, Wolfe Research.

A couple quick things. First, on the tech rollout. Is that still $0.05 to $0.10 for the year, and can you just walk us through the cadence in terms of what is in second quarter and what is in the back half?

It should be consistent on a couple of pennies a quarter, and we're still in that range of $0.05 to $0.10.

Okay.

The $1.5 million was about $0.02 in the first quarter.

Okay. I think I heard you say that you expect the pure brokerage margins to be up a similar amount year-over-year in the second quarter as the first. I think it's a little bit more optimistic than we've heard from other guys in terms of brokerage gross margins. What are you seeing that gives you confidence we'll still see gross margin expansion there?

I think it's just the market condition and where we were last year. When you look at last year, where we were and where we came out of the first quarter, you look at sequential trends. It generally tightens up a little bit into the second quarter. But, I think what I said is somewhat similar. I don't think we're going to probably be at the level of, was it 160 basis points, Kevin?

160.

I don't think we are going to be at that 160 basis point level, but I do think we will be up somewhere between that 120, 150 range. So somewhat similar, we are still going to get margin expansion off the broker stuff. And fuel is still going to be lower compared to second quarter last year, which also drives a little bit of that pickup.

Okay. That's right.

I don't know if you just went through this with Kelly on the last question, but, on the BCO, should we make anything -- read anything into that slight sequential drop from Q4 to Q1, and is it getting any tougher to sign BCOs? I'm wondering if that is a sign to you that there's the small truckers are starting to leave the market at all?

Scott, first, we were -- I think we lost -- we were down three trucks at the end of Q1 from the year end. So pretty typical first quarter.

As I was saying to Kelly, there was only once in the last six years that we actually net grown BCOs in the first quarter. That is not abnormal at all.

The pipeline for BCOs coming into Landstar is very strong -- a long -- and there's just a lot of guys out there interested. Adds are up considerably. Deletes are also up. It is really a matter of managing the adds and the deletes, and that's what we're going to spend our time, to get the net growth as we move throughout the year.

That's helpful. Lastly can you just remind us what percent of your BCOs have ELDs and what the timeframe is for you to roll that out to everybody?

We are sitting around 65% of our BCOs have ELDs, and we are working on the timeline to get them installed before the van date in 2017. I don't think we will have a huge issue there. I think we've kind of taken the approach we've taken knowing we had the time. And we will continue to progress and be where we need to be in plenty of time. No worries from our end on that issue.

Do you see a difference in utilization or productivity from guys with ELDs versus guys without?

We haven't done the side-by-side and a lot of but when we did do it, last year, there was virtually no difference.

John Larkin, Stifel.

On page 17, you have a pretty daunting set of charts there which shows the revenue per load just cratering, more so for flats than for vans. Could you ferret out how much of that was fuel and how much of that was rates? And then, maybe another way to differentiate would be, how much of that was what you would consider the contract business versus spot business?

Yes, John. This is Jim.

I would say that beginning at the early 2015, if you listen when we did our quarter calls, remember fuel only really the broader piece.

That's right. Got it.

We're seeing anywhere between I would say 5% and 8% during any given quarter was attributable to the fuel drop-off. 5% to 8% of the decrease in the revenue per load was due to fuel. I'm sorry, the second part of the question was?

The second part of the question was related to how much of this was related to softness in the spot market versus softness in what you might call the contract market?

We are probably, almost all of our freight, I would say probably 80% to 90% of our freight is spot market, so there's not a lot of contract rate in here. The majority of our freight is just spot market driven. We are negotiating rates every day between our -- . Even in our contracts that have some rate information in it. When it gets soft like this, the shippers come back to you and say, hey, because we don't guarantee a truck.

Therefore, the shipper will come back and say, hey, you're going to have to take the rates down a nickel or dime. Otherwise I got the option to go someplace else. That is even in our contractual relationships it often happens that they drive the rates down. So I would just assume it's the majority mostly the spot market is what we're showing

And as a second question, you had mentioned in your laundry list of sectors that were particularly soft in the quarter, the auto sector. I think the broader perception is that auto is one of the few stronger areas in the economy. Are you saying something different, or is it particular to the plants you serve or the business you have in particular?

I think a lot of that is just because the rates were down 10%. I don't think it's a volume thing. I think automotive was, if I remember right, it was down 5%. And pricing went down to 10% -- down 10%. So I think those comments were based on revenue as opposed to volume. I think it's mostly a volume game. The other thing, too, is if automotive bills stay consistent, I don't see the growth in the automotive. You kind of flatten out.

Got it. Maybe one quick one on the ELD mandate, which everyone assumes will be fully implemented by the end of 2017, but this OOIDA lawsuit is out there right now. Historically they have had some success in either delaying or getting the rule to be revised. Do you have any particular read on how that might play out? Are you hearing anything out there in the marketplace, or are your lawyers advising you one way or the other?

John, this is Joe. I'm familiar with it to an extent. I think it was somewhat predictable. I tend to think because the ELD discussion has been going on for so long, and I think it has been vetted, and I think FMCSA's handled it a little bit differently than some of the other stuff they've tried try to throw out there. I'm not as optimistic that OOIDA will delay it, but who knows, it just depends.

It seems like there is more positive momentum from a lot of large carriers that this is good. So I think it becomes a little bit more of an uphill battle for OOIDA, but it's a wait and see. I really haven't heard one way or the other.

Thanks very much. I appreciate the time.

Matt Young, Morningstar.

Just wondering, with overall demand relatively sluggish here, do you still expect growth in your drop and hook operations or the drop and hook opportunities in the quarters ahead, and along those lines, which end markets are most likely to use that?

Matt, Pat and I are looking back and forth at each other. I'll start with the request for dropped equipment as it continues to be pretty strong. It's diversification across a growing number of customers looking for dropped equipment. From that perspective, the demand appears to be pretty strong. Moving loads in and out of Mexico is obviously an attractive part of what we're doing, and that's trailer intensive, as well.

And a big part of doing business in Mexico is providing drop and hook equipment at the border and/or in the interior. I think both of those things are driving some of our demands. I'll let Pat try to tackle the end markets if he wants to.

I think what Joe said is appropriate also. The natural diversification that the Landstar model has because of the agent network, it is not concentrated in one specific industry, but across a multitude of industries. So, we see, again, to repeat what Joe said, we see an increase in requests for spotted equipment. Our spotted equipment continues be utilized, and we anticipate that to continue through the balance of the year.

And, Matt, one thing to understand, to make clear is the majority, we generally only allow BCOs to haul our trailing equipment, unless it is in a dedicated route on a broker carrier. So, we are relying on the number of BCOs we have who want to haul our equipment to grow that drop and hook.

We've done a great job of adding BCOs to haul a drop and hook. It's the one-stop when there are capacity constraints, not that we are constrained significantly. But if we get more drop and hook opportunity, we got to get the BCOs into the network to actually haul those drop and hook opportunities.

That makes sense. And then what, of your trailer, of the business that uses your trailers, how much of that is the drop and hook, or is that most of it?

60% of what the BCOs haul is actually on our trailer, which the majority of that is drop and hook.

About 31% of the total is drop and hook.

Thanks.

Alex Vecchio, Morgan Stanley.

Hello, Alex.

Thanks for taking the follow-up. Can you remind us what the volume contribution from the auto contract was in Q3 and Q4 of 2015?

About 19,500 loads in Q3 and 18,700 loads in Q4. 51,000 for the year. If that adds up, and then I got it right.

Great. Thanks. That's is all I had. I appreciate it.

Barry Haimes, Sage Asset Management.

Thanks for taking my question. Just following up on the ELDs, within your broker carriers, have you canvassed them to see what percent are already on ELDs, what percent plan to convert and what percent, if any, plan to leave the business altogether?

Barry, this is Joe. At this point we have not canvassed our carriers. That is something that we're anticipating trying to do. But, at this point we have not started the process.

Okay. Great. Appreciate it. Thanks.

At this time I show no further questions. I like to turn the call back over to you, sir, for closing remarks.

Thank you, Olive. And thank you, and I look forward to speaking with you again on our 2016 second quarter earnings conference call currently scheduled for July 21. Have a nice day.

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