Landstar System Inc (LSTR) 2016 Q4 法說會逐字稿

Good morning and welcome to Landstar System, Incorporated year-end 2016 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 Jim Gattoni, President and CEO; Kevin Stout, Vice President and CFO; Pat O'Malley, Vice President and Chief Commercial and Marketing Officer; and Joe Beacom, Vice President and Chief Safety and Operations Officer.

Now I would like to turn the call over to Mr. Jim Gattoni. Sir, you may begin.

Thank you, Danica. Good morning and welcome to Landstar's 2016 fourth-quarter earnings call. This call will be limited to one hour.

Due to a high level of participation on these calls, I'm requesting that each participation 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 2000 (sic - see website, 2015) fiscal year described in the section risk factors and other SEC filings from time to time. These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not take place undue reliance on such forward-looking information and Landstar undertakes no obligation to publicly update or revise any forward-looking information.

Our 2016 fourth-quarter performance significantly exceeded our expectations. During our October 23rd quarter earnings conference call we provided fourth quarter revenue guidance to be in a range of $800 million to $850 million, and diluted earnings per share to be in range of $0.85 to $0.90. Revenue in the 2016 fourth quarter was $893 million and diluted earnings per share was $0.94. Both above the high end of the guidance.

Revenue exceeded are expectations almost entirely due to increased loads hauled via truck. Loads hauled via truck in the 2016 fourth quarter increased 11% over the 2015 fourth quarter, significantly ahead of our low single-digit growth expectation. And comparing 2016 fourth quarter truck loadings to the 2015 fourth quarter, the 2016 fourth quarter included 14 weeks, while the 2015 fourth quarter included 13 weeks, and the timing of Christmas day on Sunday in 2016 versus Friday in 2015 was more favorable for increased productivity than in the 2015 fourth quarter.

We estimate that the favorable timing of Christmas in 2016 plus the extra week contributed approximately 30,000 loads to the 2016 fourth quarter. Additionally, the 2015 fourth quarter included 19,000 loads hauled via flatbed equipment under a special project for an automotive customer that ended at the end of 2015. Excluding the estimated loads hauled due to the favorable timing of Christmas and the extra week in 2016, and the loads hauled for the special project in 2015, loads hauled via truck in 2016 fourth quarter increased approximately 8% over the 2015 fourth quarter.

That increase was broad-based among many customers and industries. Revenue from our top 100 customers, based on 2015 revenue, was slightly higher than 2015, excluding the revenue from the special project. While revenue from all other customers increased 17% in the 2016 fourth quarter over the 2015 fourth quarter.

The increase in truck loadings over our previously issued guidance was mostly generated in December. However, both October and November loadings were also slightly higher than we had previously forecasted. We expected loadings hauled via truck in October and November to be at or slightly below prior year's October and November loadings.

Actual October and November truck loadings were almost 3% higher than the prior-year same period. December truck loadings increased 24% over the prior-year December, driven by a surge in e-commerce related freight, an extra business week in 2016, the timing of Christmas and the momentum carried over from the two prior months. Productivity in the last two weeks of December was much higher than we expected.

The growth in loadings from customers that drive e-commerce-related revenue also exceeded our expectations. Revenue from those customers contributed 8% of revenue in the 2016 fourth quarter. Through the first nine months of 2016, those same customers contributed 4% of revenue.

As it relates to revenue per load, we expected revenue per load on loads hauled via truck to be below the 2015 fourth quarter, in a mid single-digit percentage range. Revenue per load on loads hauled via truck in the fourth quarter was at the high end of our range of guidance, just 4% below the 2015 fourth quarter. Revenue hauled via rail, air, and ocean cargo carriers was in line with expectations as 2016 fourth quarter load volumes increased 6% over 2016 fourth quarter. Revenue per load on loads hauled by each of these modes in the 2016 fourth quarter were below prior year.

We experienced lower quarter over prior year quarter revenue per load on each of these modes throughout 2016. Revenue per load on loads hauled via van equipment and unsided/platform equipment were both 3% below prior year's fourth quarter. Given that the 2016 fourth quarter had an extra week and the favorable timing of Christmas day as compared to 2015 fourth quarter, the number of loads hauled via van equipment during the 2016 fourth quarter was 18% above the 2015 fourth quarter while unsided/platform loadings decreased 5%.

Excluding the loads hauled via flatbed equipment in 2015 related to the automotive project, the number of loads hauled via fat bed increased 12% in the 2016 fourth quarter over the 2015 fourth quarter. Overall, we have maintained stable unsided/platform volumes in a difficult flatbed environment. The number of loads hauled via Landstar-controlled trailing equipment, mostly van equipment hauled by BCOs and drop-and-hook operations, was 34% of truck loadings in the 2016 fourth quarter, and increased 17% over the prior year.

As it pertains to sequential revenue trends, revenue per load on loads hauled via truck increased 1% over the 2016 third quarter, which is consistent with the growth in revenue per load on loads hauled via truck in recent years when moving from the third quarter to the fourth quarter. Gross profit increased 5% compared to the 2015 fourth quarter. Gross profit margin into 2016 fourth quarter was equal to the 2015 fourth quarter at 14.9%.

Here's Kevin with his review of other fourth quarter financial information.

Thanks, Jim. Jim has covered certain information on our 2016 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 5% to $132.8 million, and represented 14.9% of revenue in the 2016 fourth quarter, compared to $126.4 million or 14.9% of revenue in 2015.

Excluding the effect of the extra week and the timing of Christmas in the 2016 period, and excluding the effect of the automotive award from the 2015 period, gross profit grew approximately 4% in the 2016 fourth quarter. The cost of purchased transportation was 76.7% of revenue in both the to 2016 and 2015 quarters. The rate paid to truck brokerage carriers in the 2016 fourth quarter was nine basis points higher than the rate paid in the 2015 fourth quarter.

Commissions to agents were 8.4% of revenue in both the 2016 and 2015 fourth quarters. Other operating costs were $8.2 million in the 2016 fourth quarter, compared to $7.2 million in 2015. This increase was primarily due to increased trailing equipment costs and increased contractor bad debt.

The Company has increased it's Company-controlled trailer fleet to 11,305 trailers, a 5 % increase over prior year, as the number of BCOs hauling Landstar trailings equipment has increased with the increased demand for drop-and-hook services.

Insurance and claims costs were $14.5 million in the 2016 fourth quarter, compared to $11.1 million in 2015. Total insurance and claims for the 2016 quarter were 3.6% of BCO revenue compared to 2.9% in 2015. The increase in insurance and claims and in the 2016 period was mostly due to increased severity of commercial trucking accidents.

Selling, general and administrative costs were $37 million in the 2016 fourth quarter, compared to $37.9 million in 2015. The decrease in SG&A costs was primarily attributable to a decreased provision for bonuses under the Company's incentive compensation program and decreased stock compensation expense, partially offset by increased costs associated with the Company's multi-year project that we believe will increase efficiencies primarily through technology and improve the processing of transactions from order to delivery at both the agent's office and at Landstar. SG&A expense as a percent of gross profit decreased from 30% in the prior year to 27.9% in 2016.

Depreciation and amortization was $9.7 million in the 2016 fourth quarter, compared to $7.8 million in 2015. This increase was due to the increase in the number of Company-owned trailers and the fact that only 10% of our fleet was fully depreciated at the end of 2016, when historically, we've been at 20%.

As it relates to operating leverage, operating income was $63.8 million, or 48% of gross profit in the 2016 fourth quarter, versus $62.6 million or 49.6% of gross profit in 2015. Operating income increased 2% year over year.

The effective income tax rate was 36.9% in the 2016 fourth quarter, compared to 38.9% in 2015. The effective income tax rate, which has historically approximated 38.2%, was impacted in the 2016 fourth quarter by favorable state tax true ups. The 2015 fourth quarter tax rate was impacted by unfavorable state tax true ups.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $245 million. Cash flow from operations for the 2016 year-to-date period was $190 million, cash capital expenditures were $23 million, and the Company acquired $62 million in trailing equipment financed under capital leases. Cash capital expenditures include approximately $17 million related to the Company's new transload facility in Laredo, Texas.

During the 2016 year-to-date period, we purchased approximately 773,000 shares of Landstar common stock at a total cost of $51 million, and there are currently one million shares available for purchase under the Company stock purchase program. Back to you, Jim.

Thanks, Kevin. Overall, I am pleased with the full-year 2016 results. Full-year revenue decreased approximately 5% compared to 2015 on a 3% increase in the number of loads hauled, which was more than offset by decreased revenue per load on all modes.

Considering the soft US economic environment during 2016, and the difficult year-over-year comparison due to the 51,000 loads hauled in 2015 from an automotive customer for the special project, we produced the second highest annual gross profit in the Company's history. More readily available truck capacity and lower fuel cost contributed to the 7% decrease in revenue per load on loads hauled via truck during 2016.

Although there is uncertainty in the US economic environment in 2017, I expect, given recent economic conditions and higher fuel cost to start the year, we will see a low single-digit revenue per load increase in 2017, with little impact from the ELD mandate until later in the year.

Gross profit margin expanded during 2016 due to the more readily available capacity and an increased percentage of revenue hauled via BCOs in 2016 compared to 2015. I expect truck capacity to continue to be readily available given no expectation of a significant increase in demand.

We continue to attract qualified agent candidates to the model. Revenue from new agents exceeded $100 million for the third consecutive year. During 2016, 502 agents generated $1 million or more of Landstar revenue.

We began 2016 with a record number of trucks provided by business capacity owners. During 2016, we recruited more BCOs than we have in many years. However, we also experienced a slightly elevated BCO turnover rate. BCO turnover in 2016 was 35%. We expect continued strength in recruiting in 2017.

We had a record number of third-party broker carriers haul freight on behalf of Landstar during 2016, and exceeded 47,000 approved truck broker carriers for the first time in our history. Our network is strong and continues to attract third-party truck capacity.

We had a challenging 2016 in relation to insurance and claims costs. Increased severity of accidents and increased insurance premiums on our commercial trucking liability coverage caused by decisions of two large insurance carriers to leave the trucking casualty market in early 2016, drove insurance and claim costs to the second highest amount in Landstar history.

In 2016, accident frequency was slightly higher than our historical annual frequency experience. Although accidents in the trucking industry can be severe and occurrences are unpredictable, I continue to believe that insurance and claim cost will approximate 3.3% of BCO revenue over the long term.

We continue to see increased demand for our trailer drop-and-hook services where we drop a trailer or pool of trailers with a customer who desires flexibility with loading time. In response, we have increased the number of Company-owned trailers in 2016.

Additionally, to comply with California Air Resource Board carbon emission standards, over the past five years, we swapped older non-compliant trailing equipment with new equipment at a faster pace than we would have under normal circumstances. Satisfying the carbon requirement, along with the recent growth in the number of trailers owned, drove the average age of a trailer down, resulting in a lower percentage of our trailers being fully depreciated. Although we plan to buy fewer trailers in 2017 than we have in the past five years, we expect to see depreciation increase through 2017, as we replace approximately 800 older, fully-depreciated trailers with new equipment, and also due to the impact of the age of our existing fleet.

Truck conditions tightened slightly during December, mostly due to the surge in e-commerce activity. I expect truck capacity to become more readily available in the 2017 first quarter as compared to the 2016 fourth quarter as the surge in e-commerce subsides. I expect gross profit margin to be in the range of 15.5% to 15.8% in the first quarter, assuming fuel prices remain relatively stable and truck capacity remains more readily available during the first quarter.

Seasonally, revenue per load on loads hauled via truck in the first quarter is typically lower than the second, third and fourth quarters. During the first few weeks of January, revenue per load on loads hauled via truck is slightly below January 2016. Truck capacity seems to be holding at a consistent level.

I expect the number of loads hauled via truck in the 2017 first quarter to increase over the prior-year first quarter to mid to high single-digit percentage range. Based on the continuation of recent revenue trends, I currently anticipate 2017 first quarter revenue to be in a range of $725 million to $775 million. Based on that range of revenue, and assuming insurance and claim costs are approximately 3.3% of BCO revenue, I anticipate 2017 first quarter diluted earnings per share to be in a range of $0.70 to $0.75.

Our 2016 results reflected a soft environment and low economic growth in US that negatively impacted revenue per load on loads hauled via truck. Even with these challenges and difficult year-over-year comparison, 2016 earnings per share was the second-highest earnings-per-share in the Company's history. We continue to focus on profitable load line growth and increasing our available capacity to haul those loads.

With continued load volume growth, we're well-positioned for when the pricing environment improves. And with that, Danica, we will open to questions. Danica?

Thank you very much, sir.

(Operator Instructions)

Our first question is from Bascome Majors of Susquehanna Financial Group.

Hey, Bascome.

Good morning. It feels like you have an excellent opportunity this year to grow your gross net revenues, but as you lay out in the release and some of your commentary, you are also facing some fairly large operating cost headwinds, as incentive comp comes back and the IT spend gets a little bit higher.

Is your long-term target for the 70% incrementals, is that going to be within reach this year, do you think? Or are these SG&A expenses going to push the opportunity for this type of incrementals out to 2018 or 2019?

Over a longer period of time, yes, I think we get back to the 70%. We look at averages over three to five year periods. In 2017, whenever we miss a year when it's target -- when the ICP doesn't -- where there's no bonuses basically in a prior year, that makes the 70% a little more difficult to achieve.

But over a three-year period as that evens out, yes, we do expect to be back at it. In 2017 I think it's going to be difficult with some of these costs coming in.

Thank you for that. And just -- you mentioned buying fewer trailers this year, year-over-year, but still replenishing that fleet. Can you give us a sense over what CapEx is going to look like this year, including what sort of capital lease expense that we should have in there?

Bascome, that came in all choppy. I heard something at the end of capital leases. You were breaking up a lot. Something about trailers was it?

I apologize. Some thoughts on CapEx this year and sort of --

You are breaking up. You are not coming through.

Apologies.

Next. We will go to the next question.

Our next question is from Jason Seidl of Cowen Securities.

Good morning and thanks for taking my question. Wanted to concentrate a little bit on the flat bed side of the business. How do you think 1Q is shaping up, looking at just that area, versus 4Q?

I know energy is not a big portion of what you do. However, we are hearing that the energy market is sapping up a lot of capacity here early on this year. I would love to hear your thoughts.

Jason, this is Pat. We have seen some movement in the energy markets. But, again, it's off a very, very low base.

But if you think about Landstar and the natural diversification of our business, not only energy but, and I think Jim outlined it nicely in his opening remarks, 17% growth in those accounts below are top 100 gives you an idea of just that wide diversification. Whether it's energy markets or it's machinery or it's building materials, again, that wide diversification of business that we handle, I think makes us well-positioned on that platform side.

And when you think of the building material side, could you remind us of your exposure to that end market? Clearly, not only for just residential but I think for commercial as well, with a lot of the infrastructure projects potentially being green lighted at the end of this year?

I think that flat bed capacity could tighten even further as we look out into 2018. Just love to get a reminder there.

Yes, Jason, on the building material side, it's about 8% of our total business. So, we don't have tremendous exposure on that side.

Okay. And I think looking on the CapEx side, I know you said you're going to be replacing a lot of your trailers here in 2017.

That's why we should expect depreciation to keep ramping up. I didn't catch a total CapEx budget for 2017. I might have missed that.

Yes, Jason. On the trailers, because of the carb initiative, we've had to replace a lot of our trailers. The reason the depreciation is going to go up, at the end of 2016 only 10% of our fleet were fully depreciated. That normally runs of the 20% range.

So, I expect depreciation, on a quarterly basis, to go from about $10 million to just under $11 million in the fourth quarter of 2017. That will ramp up a little bit.

We only expect to replace about 700 trailers this year. So, that impact will taper off in 2018 and 2019, but we're going to have a peak here of depreciation in 2017.

All right. So it's more of just the depreciation schedules and now they head versus the overall CapEx spend for 2017?

Correct. And as far as the CapEx for the year, the cash CapEx, we continue believe about $8 million -- $5 million to $8 million on an annual basis is a good number there. That does not include the capital leases for the trailers. At about -- say we do 700 trailers next year, vans run about $31,000 -- (technical difficulty)

Hello? Hello?

One moment, please. It seems there is a technical difficulty.

Hi, we're back. We had a technical malfunction. Are people on, open up to a question?

Guys, can you hear me? It's Jason.

Actually, yes. We can hear much better. It was coming in pretty bad.

Perfect. Well listen, guys, I'm just going to have to say I'm glad to say that your fourth quarter performance was better than that of your conference call providers. (Laughter) You guys kind of cut out when you were answering your capital leases and what you plan to do and that's when I completely lost you.

Right, Jim, threw out the about 700 trailers. No growth anticipated for next year but we will trade down about 700 vans at $31,000 or thereabouts.

That would be what the capital lease adds would be for next year. The cash would be probably $5 million to $8 million. That's what we average, so --

Perfect. Thank you for the time, as always.

Thank you. Our next question is from Jack Atkins of Stephens, Inc.

Hey, guys. Good morning, and congrats on a very nice quarter here. I guess to start off with, Jim, could you maybe comment a little bit about your cross-border business.

I know you all just completed a new service center in Laredo to service the US/Mexico cross-border business. But curious how big of a business that is for Landstar and how do you sort of see that developing in light of the potential policy changes coming out of Washington?

Hey, Jack, this is Joe Beacom. I will just talk for a second about the center. We've had a facility down there since the late 1990s.

We've been in the facility that we were in since 1999, and we do about 120,000 loads north or south in a given year, approximately $300 million worth of business. It became pretty evident back in 2014 that we were outgrowing the facility that we were in. We had to lease additional space to house our platform trailers because we do a lot a platform business across the border as well as van business.

And so we started the process of looking how to expand the facility to be a little bit more attractive for our service providers as well as bringing efficiencies to the operation. And we also identified opportunities to service customers better with an ability to transload shipments. So, that's really the essence of why we started the process to invest in a new service center there and we think the center we've got now is state of the art.

It's got a lot of space for growth into the future. At this point, there hasn't been any significant reduction in volume as a result of all of the rhetoric that's going on. If you think about -- there's hundreds of billions of dollars of trade -- I don't think that stops.

I think our investment just positions us better to service a broader range of customers a little bit more efficiently, and to be a little bit more timely in our servicing of capacity providers who come in and out of the property on the 11 hour clock. So, we think it's a good investment. And to this point, a lot of talk about NAFTA and renegotiating NAFTA, but at this point I think it's pretty much premature to think that will have any dramatic impact in the short-term.

Okay, Joe, that's really helpful. Thanks for that, that color. And then as my follow-up question, just sort of curious, Kevin and Jim, when you think about the growing net cash balance here, it's at its highest level it has been in several years.

I know the plan is to most likely continue to buy back stock over the course of this year, but given the cash flows of the Company, given the way the balance sheet is situated, which is very strong, any possibility of accelerating that or maybe doing something different with the dividend?

Yes, we actually have that conversation at every Board meeting. At this point, the $250 million or so we have on the balance sheet isn't cause to react. If it continues, clearly we prefer the stock buyback program.

We've always been that way -- we've been buying stock back forever. But with the recent run up, we don't chase run ups in stock, right? It's run up since the summer up to year-end.

So if it continues to run up and we see an opportunity, we will look at special dividends the way we have over the last four years. So those are the two options we typically look at, but we're not really committing to anything other than to continue our stock buyback program for now. And then we will make a decision over the next three to six months on whether we make any dividend decisions.

Great. Thank you for the time, guys.

Next question?

Thank you. Our next question is from Scott Group, Wolfe Research. Your line is open.

Good morning, Scott.

Thanks, good morning, guys. Wanted to ask about the BCO count. Jim, I think you said that you are seeing kind of a pickup and turnover at the BCO level.

So, what do you think is driving that? Is that just kind of the environment here? And can you just give us an update on what percent of your BCOs have ELDs? And maybe the difference in productivity you see from a BCO with an ELD and one without an ELD?

Scott, this is Joe Beacom. I will take that question. Yes, we did see a little bit up-tick in turnover in 2016.

The recruiting year was very strong, as Jim mentioned in his comments, but I do think that a lot of the BCOs coming into the system, it was a little bit of a tough year if you think about it. We did see some turnover in the newer BCOs, and the turnover, we lost 60 trucks in December. Of those 60 that we lost in September (sic - "December"), almost half of those were just in the Christmas week and the New Year's week.

It's kind of like they planned to shut down for some period of time. We are unsure as to whether they come back. That happens quite frequently where guys will terminate and then take care of some business or maybe fix their truck or whatever and then come back.

That's not for sure, but the recruiting environment remains good in the first month of the year. Interest is high, [adds] are strong. We clearly need to continue to focus on retention and produce some net growth there in 2017, that's our aim.

About 75% of our fleet is ELD compliant and we are in the process, starting here in a week or so, to canvas the remaining 2,000 to 2,200 BCOs about what their plans are to implement ELDs. If you remember how we approached the ELD mandate, if you were a BCO and you were violation free, you didn't have to get an ELD. You could get an ELD but you didn't have too.

And that's still the way we are operating. We have a couple of thousand guys who have not had a log violation of any significance in the last couple of years. We have programs too migrate them to ELDs and we are beginning those conversations now in order to make that occur.

And then just do you see a productivity difference between the 75% of guys with ELDs and the 25% without?

Yes, Scott, we've looked at that a couple of different times of the last couple of years and we've not seen any degradation in productivity from the pool with ELDs against those without. There isn't a difference.

Does that tell you that we shouldn't expect a big impact from ELDs? Or do you think there's something specific about your BCOs, why they would be, even ones without ELDs, would be compliant? And --

I think it's more about our model and how our guys go about finding their loads, right? They're planning their future. They're planning their next load and I think they are in a much better position to make load selections based on their available hours. They're not trying to be placed into a fixed solution for a customer.

They're just better at managing their time and managing their way through the hours of service. So, I think that's probably more consistent with how we operate.

I would not attribute that to the rest of the industry. I think some of the productivity challenges that are cited by others in the company [iron] world are probably very real.

Okay. And then just last thing real quick, in terms of the first quarter tonnage -- first quarter volume outlook, so I know there's a favorable calendar versus a year-ago. How much do you think that's helping volumes in the first quarter? And have you factored that into the guidance?

It's probably worth 7,000 or 8,000 loads that first week of January because of timing. New Year's day was on Sunday this year, last year I think it was on Tuesday. So we pretty much had that first week of January as pretty much a fully productive week. I would say it's about adds 7,000 or 8,000 loads to the first quarter.

Okay, thank you, guys.

Todd Fowler, KeyBanc Capital Markets. Your line is open.

Great, good morning, everyone. Jim, just on the growth that you saw with e-commerce, particularly in December. I know that you've had some exposure there in the past but it seems it was pretty strong here this year.

Is there anything specific that drove that? And is that something that is handled at the agent level?

Or is more a strategic initiative? And then can you also talk about is most of that done at a spot rate or are there contracts in place for some of that pricing?

Todd, this is Pat. You are correct. We have been performing in that market for one large provider for over 20 years.

As we have expanded the number of accounts that we cover in that space, it is largely driven by a corporate sales initiative and executed by the agent. So, we have a corporate representative kind of driving that through those e-commerce companies, and then, of course, in the model the agents execute. I think that's a big difference maker in that business.

And Pat, is most of that done it a spot rate? What's the margin profile on that compared to maybe more traditional non e-commerce type business?

The overwhelming majority of that is done at a set price.

Okay, great. And just for my follow-up, on the flatbeds side and given where your exposure is, what are some the leading indicators that you're focused on that would really help drive you to the volume improvement in those end markets as well as the rate side? What are some of the things that you're paying attention to, to anticipate either an up tick on the flat bed or the unsided business.

Oil and gas, infrastructure spend, commercial and residential building, right? That's the thing that absorbs the flatbed market, right? Not that we participate directly in those.

Right.

But it would tend to tighten up capacity. Those are the three we look at.

So not some of the shorter-cycle stuff but a bit of the longer cycle.

Yes.

Okay. Nice quarter today, guys. Thanks for the time.

Amit Mehrotra, Deutsche Bank.

Thanks for taking the question. I wanted to understand the Company's ability to retain and grow the BCO count in maybe a very tight truckload market or maybe a fast increasing rate environment?

Do you continue to have high turnover but it's just easier to recruit, so on a net basis you're either flat or even ahead? Just trying to understand how that changes from a cyclical standpoint? Thanks.

Thanks, Amit, this is Joe. The BCO recruiting environment. BCOs come here for a lot of reasons and -- independence, to capitalize on a strong environment. When you mentioned the rate environment, as rates improve, because BCOs get paid a percentage of revenue, they see the rate increases instantaneously with each successive load.

So, that is a large recruiting point for us and we do seem to see a lot of guys that come on for that and stay for that. But, really, it's the fundamentals of the opportunity, the freedom to make choices and to earn a good living here. I think that's really what drives it.

I think we had seen some turnover increase, up to 35%, which is still by industry standards very good. But a little bit higher than our recent performance. And that, I think, just was a function of a challenging rate environment.

And I think with capacity being more readily available, it was just a little bit tougher to perhaps get the productivity that they were looking for. You saw some turnover that we hadn't historically seen.

Just to quickly follow up on that. So, are you saying that -- does it become easier to grow the net BCO count in a very tight truckload market? Or is it not super -- I'm just to understand it, does it get easier or does it get a little harder or is it neutral?

It's never easy to net grow because our standards are pretty high, right? But I do think it's easier to retain BCOs in an increasing rate environment.

And you get an increasing rate environment when capacity is a little bit tighter. So, that's kind of how I would look at that.

Okay, thanks. And just one follow up on the BCO mix dipping below 50%. Is that just seasonal?

Maybe exacerbated by the e-commerce surge in December. Just trying to understand it that's more seasonal or structural and how that changing mix would impact the margin or maybe the variability of the operating margin?

I mean, I think it demonstrates that the flexibility of the model. So, as e-commerce business and other business opportunities increased in the fourth quarter we were able to support -- excuse me, source enough capacity to serve those customers. I think it's just a reflection of the model executing in an environment where there were many opportunities.

Right, and then just one last one on the convention. Can you just talk about the timing of the convention that could impact the cadence of the expense in the year?

Second quarter.

Second quarter. Great. Okay. Thanks, guys. Congrats on a good quarter.

Thank you. Our next question is from Ben Hartford, Robert W. Baird. Your line is open.

Good morning, guys. Kevin, could you just -- I know you outlined in the release the potential bonus provision in 2017 but can you remind us how that engages? Looking at the proxy, you look back to 2015, I believe. It looked like that you guys had achieved the target in 2015, and it looked like it assumed a gross EPS growth number of about 13% and net number ended up being about 10%.

The question is, when we think about the potential engagement of the bonus provision in 2017, the number that you had highlighted, are those metrics that are in the most recent proxy? Are those numbers that -- are those rough targets to think about for 2017? Or do those change on a year-to-year basis?

They change on a year-to-year basis. There's a lot of considerations when we put targets together.

What was economic look like? What is capacity? You got a look at what you think pricing is going to do.

You can't look at -- you can't look at like the five -- last three or four years of proxy and say, hey, we typically have a build-in of 10% growth rate. Because there's really a lot more. We're trying to do a grounds-up budget-target process.

So, yes, it doesn't work the way you'd look at it. I don't think you could determine by looking at a prior year proxy to determine what our targets are. And we don't necessarily share our targets.

Ben, the best way to look at that is, if we hit our targets for 2017, the ICP number will be about $8 million. So, $2 million a quarter is the best way to look at that.

Okay, that's good. That's helpful. The -- in that vein for the 2017 targets for the IP costs rising, kind of trending in 2016 at the top end of your initial projections, can you talk about why that mark is rising?

Are you pulling forward any spend? Or are you finding that the project is running a little bit more expensive than previously thought? Some perspective there would be helpful.

I think it's running at what we expected. As we are ramping up, there was more -- we hit the high end of our range in 2016. There was probably a little bit more software development than we thought we needed in the system.

We expect to have a similar level of that this year. And then there's some launch costs in there. And that's why it's a little bit higher.

But these are very specific costs, very -- we watch them closely. It's mostly helping us build out the product. And when we're done building out the product, it turns into training and launch costs.

So, we expect that this will continue on for the next three to five years -- not three to five, two to three years. I'm sorry. At probably a similar rate of cost.

Okay, but bottom-line is the scope of the project hasn't changed and the timeline of implementation has not changed. You still feel like it's [as you] had talked about a year-ago?

I will tell you that we are a year behind of the original plan.

Okay, that's helpful. Thank you.

Thank you. Our next question is from Matt Brooklier of Longbow Research.

Thanks, good morning. Can you talk to what percentage e-commerce represented of your revenue this quarter versus last quarter? I'm just trying to get a sense for how much it contributed too the upside here.

Yes, when we refer to e-commerce we're dealing with certain companies that our impacted by e-commerce. So we refer to that as e-commerce.

Some of that stuff that we're hauling for those companies may not be e-commerce so the way we described it was, of those companies who are highly impacted by e-commerce, which is a lot of their business that we haul them, it was 8% of our revenue in the fourth quarter. It ran 4% for the first three quarters. So, would assume that, that 4% increase for those customers was mostly for the e-commerce surge.

Okay, do you have that number for fourth quarter of 2015?

Kevin might.

I can follow-up if you don't have it right here.

We're shuffling papers.

Okay, I'll ask my follow-up question while you look.

We will have that by the end of the call.

Okay, fair enough. Were there any other big customer wins, agent additions in the quarter? Your volume was very strong in fourth quarter.

I wouldn't describe that the trucking environment as robust from a volume perspective in general during fourth quarter. So, I'm just trying to get a feel for if there are any other factors that added to the volume upside in fourth quarter and what's sustainable moving forward?

Matt, this is Pat. I think that as in Jim's opening remarks he mentioned that it was broad-based across many industries, agents and customers, and that held true in the fourth quarter as well. So there wasn't any specific large win with a customer or significant agent addition. It was just, again, that broad-based nature of the business.

Okay, so sounds like it was just good growth with your existing customer base.

That is correct.

Appreciate the time.

Hey, Matt, on the e-commerce question, the e-commerce-related customers in fourth quarter of 2015 represented about 6% of our total revenue.

Okay, thank you.

Thank you. Our next question is from Scott Schneeberger of Oppenheimer. Your line is open.

Good morning, this is Daniel in for Scott. Can you actually walk us through the end-market driving your first quarter 2017 volume guide? And if you can discuss if you anticipate any significant project work in 2017? Thank you.

This is Pat. Again, we'll go back to Jim's comments about being broad based. It continues to be broad based across a couple of number of industries, agents and customers and at this point, we don't anticipate any project work.

And project work is by nature somewhat of a surprise because the customer has disruption in their supply chain and they come to Landstar for the solution. So at this point we don't have any projects planned. And again, it remains very broad-based across the number of industries, agents, and customers.

Thank you and a follow up on the alternative energies side with wind power. Anything in that pipeline for 2017?

Line-of-sight into that business remains consistent year-over-year. We anticipate similar to what we did in 2015.

Thanks, guys.

(Operator Instructions)

Our next question is from Matt Young of Morningstar. Your line is open.

Good morning. How are you?

Good.

I had a quick follow up on trailer purchases. I think you mentioned 700 trailer range for 2017. Would that be the typical maintenance or refresh run rate longer term, outside of any major growth initiatives?

We try and turn our trailers about every eight years. We have, say, 10,000 van trailers right now. So we'd probably replace a little bit over 1,000 trailers each year.

Because if we stayed into that routine. We're up at about 1,400 or 1,500 trailers for a while to get in compliance with carb.

That makes sense.

And then just a follow up on the IT spend. I think you mentioned the cost would continue for a few more years. Would that imply that we should expect the $6.5 million to $9.5 million run rate each year or does that taper down?

Of course, we hope it tapers down but I think it's going to run at $6.5 million to $9.5 million. It's really hard for me to say right now because as you move from deployment to launch, it's a pretty big estimate on what the training is going to cost us.

But the estimates I have would be in the range we're talking about. So, that would continue until we get everybody implemented.

Fair enough. 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, Danica. And thank you and I look forward to speaking with you again on our 2017 first-quarter earnings conference call, currently scheduled for April 27. Have a nice day.

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