Q3 2019 Earnings Call

October 24, 2019

Good morning, and welcome to Landstar system in corporations third quarter 2019 earnings release conference call all lines will be in listen only mode until the formal question and answer session. Today's call is being recorded if you have any objections you may disconnect at this time joining us today from.

Landstar, our Jim Gattoni, President and CEO .

Having scout Vice President and CFO , Rob Brasher, Vice President and Chief Commercial Officer, Joe Beacom.

<unk>, President and Chief Operations Officer, now I would like to turn the call over to Mr., Jim Gattoni, Sir you may begin.

Thank you yes.

Good morning, and welcome to Landstars 2019 third quarter earnings Conference call.

Before we begin let me read the following statement.

Following the Safe Harbor statement, none of 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 contain forward looking information that relates to last year'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 on last quarter's Form 10-K for the 2018 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 historic results are those anticipated investors should not place undue reliance on such forward looking information and lesser undertakes no obligation to publicly update or revise any forward looking information.

During the first nine months of 2019, both truckload volume and revenue per load on loads hauled via truck were impacted by softening conditions in the spot market.

As we discussed on our 2019 second quarter earnings Conference call on July 25th.

Year over year growth in both revenue per load and the number of loads hauled via truck akin to decelerate during the 2018 fourth quarter.

These trends continued into 2019 with revenue per load beginning a decrease on a year over year basis in January and a number of loads hauled via truck beginning the decrease on a year over year basis in April .

We believe this softening has been due to slowing U.S. manufacturing and increase available truck capacity.

Also as we anticipate into the beginning of the year Landstars exceptional financial results. During 2018 have made for very difficult year over year comparisons.

During our 2019 second quarter earnings Conference call, we provided revenue guidance of $1.010 billion to $1.060 billion.

Or 12% to 16% below the 2018 third quarter.

2019, third quarter revenues $1.012 billion or 16% below the 2018 third quarter.

We also provided diluted earnings per share guidance $1.40 to $1.54 or 6% to 9% below the 2018 third quarter 2019 third quarter diluted earnings per share was about 35 or 17% below the 2018 third quarter.

On September 11th we announced in the form 8-K filed the FCC that we're more comfortable at the low end of our third quarter revenue guidance and we expected to be below the low end of our earnings per share guidance provided on July 24th.

Our Upticked revenue guidance in early September stated the truck revenue per load and number of loads hauled via truck through the first two physical months of the quarter, we're trading at the lower end of our revenue guidance.

Our update the diluted earnings per share guidance reflected lower than anticipated truck volumes attributable to softer overall market conditions and the impact of a tragic highway accident that involved the landstar Bcl in early September .

Through the first half in 2019, I believe we're in a relatively healthy freight environment.

The first half of 2019 was by far West Our second Best January through June performance in the company's history second only to the first half of 2018.

More recently, though weaker economic conditions, especially in the U.S. manufacturing sector appear to have led to seasonal softness in landstars truck volumes.

We experienced softness, particularly in September and into the first several weeks of October .

On a comparative month over prior year month basis truck volume was 4%, 3% and 6% below July August and September of 2018.

As it relates to the 2019 third quarter, the 5% decrease in load volume can to compared to prior year was mostly driven by decrease load volumes in the automotive foodstuffs and metal sectors.

Partly offset by an increase in consumer durable loadings.

Automotive load count fell approximately 14% compared to the 2018 third quarter.

We attribute this to a decision by the company has ceased providing service on certain nonprofitable lanes and more recently and to a lesser extent the strike at general Motors and lower U.S. automotive production.

Food stuff load count decreased approximately 29% almost entirely due to one customer who in prior year awarded Landstar significant volumes due to unique onetime issues that have not been resolved by that customer.

The decrease in truck volumes on a metal sector was probably six approximately 16% do most mostly the overall softness in that sector.

On a more positive note, although revenue at the consumer durable sector was down approximately 11%.

He was above the prior year quarter by 3%.

Although the current macro environment makes long term trend somewhat unpredictable in the near term we expect the more recent pricing trend to continue through the fourth quarter.

This batch truckload volume in the first weeks of October compared to the same pair of 2018 is trending somewhat below the volume variance we experienced in September we expect the seasonal softness in truckload volumes to continue through the remainder of the year.

Overall 2019 third quarter truck revenue per load was 13% lower than in 2018 third quarter.

On a monthly basis revenue per load on loads hauled via truck was 14%, 14% an 11% lower in July August and September of 2019 compared to each corresponding month or 2018.

The decreasing shortfall the prior year was due to less difficult year over year comparisons as we move through the quarter rather than an uptick in rates.

On a sequential month to month basis, beginning in the middle of the second quarter and continuing through September truck revenue per load fluctuate at rich somewhat consistent with historical seasonal patterns.

Based on recent October trends that continue to show seasonal softness we expect trouble truckload into 2019 fourth quarter to be lower than the 2018 fourth quarter in an upper single digit percentage range.

We expect revenue per load to 2019 fourth quarter to be below the 2018 fourth quarter and a high single digit percentage range.

This would represent an improvement from the 13% decrease we experienced from 2018 third quarter to the 2019 third quarter, mostly due to easier year over year comparisons in the fourth quarter.

Based on those expectations I anticipate revenue into 2019 fourth quarter to be in a range of $970 million to $1.020 billion.

Assuming that estimate range of revenue I anticipate diluted earnings per share for the 2018 fourth quarter debris in a range of $1.40 to $1.46.

We knew it be facing difficult year over year comparisons 2019, do the exceptional freight environment and extra ordinary financial results of the company in 2018.

Although recent truck volume trends have shown seasonal softness 2019 continues deliver the second best financial performance in the company's history behind only 2018.

To put our 2019 third quarter results in historical perspective gross profit in 2019, Curt third quarter was 19 million lower than during the 2018 third quarter, yet 2019 third quarter gross profit exceeded the 2017 third quarter previously second highest third quarter gross profit in company history by $13 million or 9%.

2019 third quarter operating was $70.6 million also far exceeding any other third quarter to quarter in the company's history other than the 2018 third quarter.

Diluted earnings per share in the 2019 third quarter $1.35 was the highest diluted earnings per share of any third quarter in last our history other than the 2018 third quarter.

Similarly revenue gross profit operating income net income and I do learnings diluted earnings per share for the nine months ended 2019 is significantly exceeded the amounts less our chief during the first nine months of 2017 briefs and second best year last our history.

Particular operating income in the first nine months of 2019 exceeded that of 2017 by 34%.

In the context of this longer term perspective, I believe the company's light asset variable cost business model is performing relatively well in the current environment.

We're also well known for returning capital to our stockholders through a combination of stock buybacks and dividends is our intent to continue with our historical approach to buyback stock on the open market on an opportunistic basis.

Lesser remains focused on profitable load volume growth and increasing capacity to all those lives with our ongoing efforts to invest in and empower our network of small business owners, along with our healthy balance sheet.

There continues to be common our positioning within the transportation was this a logistics marketplace.

Here's Kevin to provide additional commentary on the third quarter financials.

Thanks, Jim.

Jim is covered certain information on our 2019 third quarter. So I will cover various other third quarter financial information included in the press release.

Gross profit defined as revenue less the cost of purchase transportation and commissions to agents decreased 11% to $153 million and represented 15.1% of revenue in the 2019 third quarter compared to 171.3 million or 14.3% of revenue in 2018.

The cost of purchase transportation was 76.6% of revenue in the 2019 quarter versus 77.5% in 2018.

The decrease in purchase transportation as a percent of revenue was primarily due to a decrease in the rate paid to truck brokerage carriers and an increase in the percentage of revenue contributed by Visco independent contractors.

The rate paid to truck brokerage carriers and the 2019 third quarter was 116 basis points lower than the rate paid and the 2018 third quarter.

Commissions to agents was 8.4% of revenue in the 2018 third quarter versus 8.3% and 2018 due to an increase net revenue margin revenue less the cost of purchase transportation divided by revenue on loads hauled by truck brokerage carriers.

Other operating costs were $10.4 million into 2019 third quarter compared to 9 million in 2018.

This increase was primarily due to increased trailing equipment costs and increased contractor bad debt.

Insurance and claims costs were $24 million in the 2019 third quarter compared to 18.8 million in 2018.

Total insurance and claims cost for the 2019 quarter were 5.1% of Visco revenue.

Compared to 3.6% in 2018.

The increase in insurance and claims as compared to 2018 was due to the adverse impact of a tragic accident involving landstar that occurred during the 2019 third quarter and unfavorable development of prior year claims in 2019.

Unfavorable development of prior year claims was $3.4 million and $6.6 million in the 2018 in 2019 third quarters, respectively.

Selling general and administrative costs were $38.2 million in the 2019 third quarter compared to 46.7 million in 2018.

The decrease in as DNA costs was attributable to decrease in the provision for bonuses under the company's incentive compensation plans and decreased stock compensation expense, partially offset by increased provision for customer bad debt.

Stock compensation expense was $1.1 million and $4.9 million into 2019 in 2018 third quarters, respectively, mostly due to the impact of decreased earnings on our variable cost equity compensation arrangements.

The company's accrual for incentive compensation was reduced by $300000 into 2019 third quarter compared to an expense of $5.2 million in the 2018 third quarter.

Quarterly EPS DNA expense as a percent of gross profit decreased from 27.3% in the prior year to 25% in 2019.

Depreciation and amortization was $10.7 million in the 2019 third quarter compared to 10.8 million in 2018.

Operating income was $70.6 million or 46.3% of gross profit in the 2019 quarter versus 87.1 million or 50.8% of gross profit in 2018.

Operating income decreased 19% year over year.

The effective income tax rate was 23.8% in the 2019 third quarter compared to 22.4% and 2018.

The effective income tax rate was favorably impacted in both periods by excess tax benefits recognized on stock compensation arrangements.

Looking at our balance sheet, we ended the quarter with cash and short term investments of $316 million year to date cash flow from operations was.

Year to date cash flow from operations for 2019 was $261 million and cash capital expenditures were $15 million.

During the 2019 third quarter. The company purchased approximately 175000 shares of its common stock at an aggregate cost of approximately $19 million.

There are currently 1.151 million shares available for purchase under the company's stock purchase program.

Thank you Jim.

Thanks, Kevin with AD units, we will open the questions.

Thank you very much Sir at this time will begin to question and answer session. If you would like to ask a question. Please press star one on your Touchtone selling once again that is far one to ask the question to cancel your request. Please press star.

Our first question came from the line of Jack Atkins Stephens. Your line is now open.

Good morning, Jim Kevin Rob Joe They are more than the question going back.

I guess to start.

Load count.

Generating.

We're versus what you saw in.

In the third in the third quarter, what do you have what do you make of AD. I mean is that is that a function of pmires deteriorating.

When we think about what we saw in September without reading or are you seeing a step down in the broader economy would just be curious to get did you feel for that and then and then I've a follow up question.

Around the impact of those customer.

Losses, and how that's impacting load count I guess as we look into October .

Yes.

Look we diversified our customer bases and typically we don't even talk about sectors.

But this time I think clearly there was some sectors that we saw some load volume.

Decreases through the quarter that otherwise we may not have spoke of so that's why we spoke specific to some of those sectors, but.

Like I said, we're highly diversified so when when manufacturing turned negative in you thought negative growth in July August and then then followed into September attribute most of our load volume to that and then some of the specific steps as it relates to the sectors that we mentioned, but you know where our.

Our volumes come from its really the manufacturing sector in the us driving the general drop off in our volumes and the increase in the trend into October is just a continuation of the softness I think we saw from August in the September because that was sequentially a little softer and just carried into October to drive that into more of a higher sand.

Digit drop off than the where because we were running at a 6% in September yes, we'll look and 78% now as we rolled in October and that small percentage increases hard really put our hands around it but it's just continuation of seasonal softness.

Okay got you and what do you think about those those specific customer losses, whether it was the automotive customers that sounds like you guys walked away from more of the foodstuff customer that sort of.

Their supply chain is there any way to think about how that's impacting load count only on a year over year basis.

Yeah on the foodstuff side that we give the revenue percentages that presentation, but that 29% that was one that that was is that one customer I think that rolls off.

Fourth quarter or maybe first quarter next year, so that comp is better so, let's just say first quarter 2020.

The the other stuff is just automotive production, which we felt a little softness.

Our low demand a little bit different than it was a year ago little bit lower we're putting fewer loads out publicly to the public load boards and that and when you put fewer loads out than you've got fewer carriers, who may be.

And our active proud as well it just we just haven't needed to reach into the marketplace as far I don't necessarily attribute that to eight and exit if.

Especially when you hear some of the conflicting information about the truck sales and that kind of thing. So we don't see that theres really a lot of capacity that exited the marketplace.

Just think that our need to.

And the way the model works to grow that count to satisfy our our needs hasn't been there yeah. Jack if you look at the quarter.

We were volume growth was we were down 5% volume it was 9% on truck brokerage, but bcl was up 1%. So just the need to put the brokers on that loads is kind of soft or not and it was a year ago. Our active count I think Jack went down like maybe not even a third of a percent I think 134 carriers. So it's pretty our active clients.

Again, we're not needing to expand it and as Jim pointed out DCIO load count growth is positive okay. Great. Thank you for the time guys yes.

Thank you.

One is from the line of Macquarie.

Your line is now open.

Thanks, Good morning, guys, how are you going and it's good good.

I just maybe the first question I just wanted to talk about if you could talk about the volumes related to.

I would imagine that you start getting some some orders or request for volumes have kind of the busier season, maybe we can read something from from what you say on what the peak season is going to look like on that particular piece of the business.

This is Joe I mean.

Business on our trailers still runs in that low 30% of our overall truck loadings.

We have seen a little bit of a softer request for trailers going into the peak season than we did a year ago.

Not exactly surprise.

And what was the rest of your question.

I'm just trying to understand if you just isolate that 30% I mean is that 30% piece of the business.

Is it up year over year is is it is it.

I would not say, we're getting more requests on the like the drop and hook spotted trailer business in the in the quarter. We have no I would say that's actually a little bit softer some of that could be a function of the automotive that Jim spoke of.

As well I would say that it's not what it was last year.

But still formidable and I think you'll see that in the bcl load count on the van side, which is flat year over year in a lot of those be seals on the van side are participating in the drop and hook business.

Okay.

The incremental gross profit to the EBIT line I'm, just trying understand maybe Kevin can you talk about this but thinking about it. The other way you know how should we think about like the decremental margins on the gross profit because you obviously show some really.

70% is not a stretch goal, we should be able to do that.

This this this environment, though it's impossible to to make that comparison.

Yes, maybe not necessary again 18, because it was still relatively strong and then really our softness on a volume side started about April . So if you go if you roll that out 12 to 18 months, yet we should see something turn next summer, but I think there's a lot of things going on you know when you when you look at what what's going on politically.

This year.

In an attack and into into into the Tech World, where your spend a little bit more money today than you wire in prior years, but incrementally I don't think you're going to see that creep up or be that noticeable into the SDMA at 2020.

Thank you operator, and hey, good morning, guys.

I'll talk a little about BC goes as we look out to 2020 theres been a lot of talk about huge increases in insurance costs for some of the smaller carriers do you think that's going to push people to look at the Landstar model to drive for you. This.

Yes, Jason This is Joe I think there probably is some of that I think it's hard for us to to read through to know how much of that's driving People's decisions I think it's one factor of probably among many if somebody's out on their own authority.

I think it's too early to tell because I think on the other side of that equation is kind of the market that we're in right and we've seen we saw some decline in our truck count in the third quarter I think thats, a just a function of the demand environment. That's out there now and the pricing environment. That's out there now so I think you've got you've got a little bit of that to factor into.

And where are these guys going and what are they doing and the other thing too as we were really focused on bringing in the higher quality base the owner operator in the network, which kind of.

It makes sense follow up on on some of your end markets. Just so I understand when you when you look at your your foodstuffs excluding that customer.

Let's say the top 25, which that customer the top 25 customers in that were down 36% overall it was down.

30 is it mostly because that customer.

So roughly flat.

Yes, okay.

Okay and on the energy side.

That was the one loan bright spot I know, it's a large percentage of your business, but but just curious whats going on there since it was the one positive.

This is rob.

Oh, we continue to see very positive.

Market. There we continue we're training that at least through the first half of next year. So.

Okay. Appreciate the time has always gentlemen.

If you even if you take that customer out.

Thank you.

Thank you. The next question is from the line of Todd Fowler of Keybanc capital markets. Your line is now open.

Great Hey, thanks, good morning.

Jimmy fielded a lot of questions. So far in the volume performance here in the quarter, but it sounds like that pricing is pretty much consistent on a month over month basis with normal seasonal expectations.

If you look at this point that the spot markets kind of found a floor and then do you have any thoughts kind of on pricing as you move into 2020.

No that you're definitely more of a function of the spot market, but what would your expectations be offer pricing trends moving forward from these levels.

What.

I'll tell you that yes.

I get very comfortable when we see our pricing stabilize since since may to June .

The one concern I would have as the volume side.

Overtime, if the volumes stay where they are does that does that cause a double dip where we're going to see pricing drop off again sometime early into next year. So that's where my concern would be since we've held it for four or five months and we've seen volumes drop up I think we're okay, and we're going to be stable.

Throughout the rest of the year and into the into this first quarter speaking beyond that it's really hard to predict based on where the where the demand is going to come from can we get the automotive sector to pick back up and Queen get the manufacturing secular pick back up and that I do think we're back into the normal cycle, where we'll see the increases in spot pricing mid half what halfway through the year.

Hey, good yes, no thats helpful. I mean, just it feels like that relative to your guidance the shortfall spend.

Tied into this quarter in particular versus the.

Yes, absolutely absolutely as the pricing came in pretty much where we thought it was going to come into the and then the the drop off in September and the volumes was where we saw the.

Where we Didnt, we didnt anticipate at the drop off 6% and that's what we're seeing into October .

Yes, Okay and then just for my follow up Theres been a lot of commentary here in the early part of the third quarter earnings season about competition within the brokerage space and I I know that your niche is a little bit difference, where you may not be going up against some of the.

He is in the market. Thanks.

I think there is a little bit of impact on the overall brokerage market by those new entrants I don't think there's any question that they're getting some kind of traction or theyre doing their marketing campaigns or are fantastic as it relates to marketing to the investment community.

But as it relates to directly hitting our business I think.

No I don't know of a significant amount of customers anything we've lost to the to those.

I would refer to the digital guys, who are coming into the marketplace, but yeah, I think everybody's focused on it and they want to see what they can do and they're getting traction I think they you know.

One of them has come across to say that you know they they're not making great margins now, but over time, they're going to get the 15% to 20% and my personal opinion, I think those 15 or 20% margins aren't realistic in a future that these digital guys aren't compete against each other for pricing.

So I think in a long term will be Watson, our margins and and that's kind of where the the whole industry is going to be on the brokerage side. You know is is that 15%. The people talk about margin is that going to continue into the future.

It's possible and for US we believe it is probable, especially in southern niche markets were in because there's a value added on top of flatbed and heavy haul and drop and hook and all that stuff that we do that isn't necessarily that just AD hoc business on a driver.

Yes, no I certainly understand your niche and and the comments just about the general market are definitely helpful and I think something that everybody's kind of dialed into at this point, especially given some of the recent commentary so.

Thats, what I had this morning, thanks, a lot for the time sure at that Okay. Thanks, Jim.

Thank you then next question is from the line of Scott Schneeberger of Oppenheimer. Your line is now open.

Thanks, Good morning, guys.

Just curious as we as we head into the holiday season, your thoughts on E Commerce and the consumer this time of year, how it compares to previous years and and then how that I assume that mostly ties into consumer durables I don't know how you measure it but any any any commentary on that as well. Thanks.

Yes, Scott this is Rob as we as we enter into the peak season E Commerce.

We are kind of seen at flat year over year to what we're seeing that we're still waiting for orders come in for sort of a bit customers and kind of tell us what their expectations are for the season, but based on kind of what Joe said earlier about trailed request and things like that we're kind of flat as we work to last year.

Hi, Thanks appreciate it and then just as the kind of clarify the question on consumer Durables, how are you feeling about that into.

In the into the fourth quarter trend, you're seeing being your your largest that marketed it sounds to overall in the economy like the consumers still strong do you feel solid there and how much visibility the have maybe fourth quarter would be on thanks.

As you know we don't have much visibility into the is that that sector is highly diversified it from a customer standpoint for the visibility is more general economic so.

Based on the consumer confidence and all things are going on you'd expect us to be a little confident on the doorbells side going through the end of the quarter.

Is where it is and I think we have a little bit of confidence it'll kind of hang through the quarter.

So we got the year end.

Thank you. The next question is from the line of Matt Brooklier Buckingham Research. Your line is now open.

Thanks, Good morning.

By month again.

It was 4%, 3% and 6%.

July through September .

And then you said October's Rite aid.

Yeah higher single digits.

You have those numbers for for van.

And also the.

On the Unsided platform business.

And then.

Higher end of your expectations is that is that just a function of the model and where we're at in the cycle is there anything I guess unique about you know that number and then I guess what are your expectations for.

Your gross yields in fourth quarter.

I don't want to call it type, but we thought we saw the rates go up a little bit into the third quarter, but there's still very good. So I think it's more cyclical I don't think theres anything unique about what happened in the in the quarter generally we see a little bit more squeeze on margins coming into the into the fourth quarter as as the trucks get more busy during the peak time.

I think we anticipated a slight uptick but nothing much moving from the PT rate, we saw a covenant through the third quarter.

Yeah that were we should probably put in 14 seven to 51 on the gross profit margin from Q4.

Most of my questions have been answered, but I do I take a step back to talk a little bit about some of the technology initiatives that have been rolled up the last couple years, maybe you can provide an update on I know there were a lot done from a pricing standpoint, and any anecdotes benefits that you're seeing or how we should think about to Steven the timeline of those investment.

When we should start to see some returns or even steps stepped up investments going forward.

Helpful. Thanks.

Yes, I think they'll continue to be investments into the technologies that we used today as you mentioned will walk through as a pricing tool, which we didnt really have which landstar didnt really have.

We had to it was kind of a very.

Manual process to do pricing about I would say about 18 months ago, we rolled out a pricing tool where you get prices within seconds, we've put in lane information.

We also rolled out what we did as we are mobile app was significantly enhanced for available loads, so that where the trucks can see our loadings.

It also has rolled out I'd say 12, 18 months ago 64000 downloads 12000 users per day, so high high volume activity on that.

And the continued on the road as you know we still have we rolled out the Max we call. It the last our Maximizer, which is where the that was about 12 months ago, where the.

Well the loads request and that'll give you a routing guide the what loads you can pick up to do that and what the revenue is for those loadings.

And there's a cost of that it's probably eight to 10 million a year, maybe not that five to 7 million year on that to get that rolled out.

Thank you next question is from Bascome majors Susquehanna. Your line is now open.

Can you give us a finer point on that specifically where in the 2019 full year accrual stands as of today for the annual incentive and stock comp what a return to target for both the annual incentive and stock comp might look like.

Stock comp is running in the $5 million to $6 million range.

Obviously with increased earnings soon for next year that that number is going to go up I'd say, you know anywhere between five and 10 would be a good number there.

The ended the year.

Okay and.

I know you're working on your targets now for the budgeting process and you.

You wouldn't share the internal target with us anyway, but I suspect that include some level of earnings growth in line or approaching your your your historic kind of 10 to 15 target as it is that a fair assessment from the outside looking in with limited information here.

I think what we do is the first approach. We take is what do we think revenue is going to do and we look at what we think the market is going to do so by saying that it's not necessarily true that we would have a target thats higher than this year, especially if you're if you. If you believe you're heading into and I'm not saying this is what's going on but if you believe you're heading into a down market going into 2020, we may not have a target of revenue that's higher than.

The prior year, Okay. So we look at market conditions I think what the what the organization tries to do is if we're if we're performing at market or better we should be rewarded even if the even if the results are a little bit lower in the subsequent year on the topline and then there's other things we have to take into consideration. It did we have a good or bad insurance here in 2019. So you may have a an earnings.

Those are kind of the factors you got to really look at.

Typically yes, I I don't recall year, where we actually had a plan that was lower than the subsequent year, but it doesn't mean that that can't happen looking at market conditions or specific items within.

Full year. Thank you.

Thank you next question is from British Shannon of Stifel. Your line is now open.

Pretty good shape here, but I did want to maybe get an update on how you're thinking about the regulatory framework I know Jim you did mention the political situation.

But first on California, maybe five and the IC classification issue you have any updates there on how your responding to that and how you're thinking about the potential cost effects.

We would.

The system at that either to get their own authority or leave the business or or what have you. Once we have which we have a little bit of a chance to have those conversations will have a better understanding of to how that might affect the truck count for us.

For example, the previous yields the phase.

I think mid year, there was a lot of concern over whether that transition would actually occur or would there be some severe disruption I think more recently.

I understand that most carriers are doing the right thing and moving forward on making that making themselves ready for that conversion. So I don't see quite the disruption.

Moving from a our it'll be our d. the ERP.

The program in place to make sure that you adhere to the rule.

Going forward, so again, not big cost us more preparation and having your ducks in a row to make sure that you comply come 2020.

Okay. That's great really helpful. And then just one final question here, if I'm not mistaken we're lapping.

Some of the lost Amazon business from the in sourcing last year.

And the pricing is overall for the ecommerce stop there putting pressure on pricing just so everybody else's in the marketplace. Although we've managed to keep our pricing stable for the last few months, we anticipate that will continue through the fourth quarter and that we won't get a lot of.

Much more pressure, because regardless of how soft or or or how good. The peak is still a peak and they're still be some.

Demand for trucks.

Okay, Alright, that's great color I really appreciate the time.

Sure.

Thank you next question is from the line of for Abbvie Schenker of Morgan Stanley . Your line is now open.

Thanks morning, guys.

Jim Thanks for your comments earlier on the new competitors a entry into space I wanted to follow up specifically on flatbed sounds like than you guys had been primarily focused on dry van reefer, so far but I think.

Just wondering you either entering the flat admits space right now I think you pointed out that doesn't more specialized operation can you.

Elaborate a little bit more on that on get of how specialized is it really how easy is this business do quote on quote and digitized and kind of what kind of success or not to do you think the new entrants and how does it.

Yeah, well, especially our flatbed business.

Some human intervention, you're putting big heavy equipment on on on specialized equipment. It's not just the regular flat, but so 30% of our flat but as that.

There's a little bit of value add there, it's not related to technology I mean, there's a lot of coordination on routing guides and stuff like that and Rob may actually have a little bit more to talk about on the on the fly bedside.

Probably on the flatbed side.

But again as Jim said.

Our specialized to get the more touches there are the you've got permits you've got routes you've got.

The more touches the the more human interaction.

Also as Jim said on the flat bed side there are.

Markets are there are customers I guess to say the could be taken over by the space, but again for the most part it's an AD hoc type situation, it's going to job sites. It's a lot of human interaction and a lot of on discussions that take place that can't be automated over we don't feel that can be automated over a a website or an.

Remember just havent Jay it's got to remember this whole thing is a pricing game, we have the tools that they have to do this it's just.

Understood I just wanted to that or have you heard from any other agents or partners that the new guys have been reaching out to them.

Greg Thanks for your business.

Thank you next question is from Scott Gridlock Wolfe Research. Your line is now open.

Hey, Thanks for the fall guys. So I just want to fall, but two things one on on rates, you're saying that they're sort of holding steady. The last few months you expect them to hold steady premier I, just wonder sent is that.

In mind with normal seasonality or not I would've thought that you'd see rates typically move higher in the fourth quarter. So I just want understand what you're saying.

Yes from a seasonal standpoint, yes, you're right, we expect that to continue seasonally the way it's been for the last.

Since may so seasonally.

Pricing in the pricing in the fourth quarter is typically 1% higher.

And we were 1% better than historical average in September So thats, where we that's where we landed on the pricing. So we're basically coming out seasonal we're expecting that seasonal trend.

Okay, and you're saying that September actually was a point better than normal seasonality sequentially that that's correct. Okay. Good and then.

On this the idea of Jim you mentioned earlier that maybe gross margins are going to had lower for the industry over time, how does this impact your model you right you've got some parts of the business with more fixed margins do you need to rethink how that take rates work with your BC goes in agents.

Do you need to rethink the agent model more broadly in this sort of world.

Just curious how you think about no now when we speak to that it's mostly because you know the pcls got a percent of revenue. So I do not impact there as long as these sales are well in the hall at the rates there hauling at then that spread stays the same when we talk about the margins. It's mostly on the on the third party truck side, when we use and third party capacity and what I would also when I talk about I'm talking about the AD hoc generic type freight more.

I am talking about drop and hook or flat bed or any of that type of stuff I think in the long term I think it would be unrealistic to believe that if if guys are trying to build scale using tools that to us don't add much value to the process that they are going to put pressure on pricing and margins into the future you know, they're going to try and buy trucks are higher than the normal broke.

Those are by far and are going to try and bid the shipper a bit lower than the than the than the current incumbents are doing and they're going to put a squeeze on margins and I will not hold over the long term or will it happen in a long term I'm a believer that yeah, I think everybody's going to end the playing that game when when more entrants coming to a market thats kind of what happens it's unrealistic to believe that will do I think it's significant.

From the just say the average markets today's 15%, though I think it's going to single digits, absolutely not because there is value and what everybody provides there's there's cost of funds, there's not necessary direct cargo risk, but you can get tangled up and if there's other things that you know that you have costs that you have to think about before you just give away a free service.

Okay. Thank you guys.

Great. Thanks for the follow up on Kevin I, just want to make sure I've got the incentive comp numbers correct. You said in the prepared remarks in the third quarter incentive comp was $300000 was that what the amount was or was that what it was down year over year I, just I want to make sure I've got that number correct. Yeah. That's what we took the accrual down by was 300000 in Q.

Three.

Okay, and so year to date right now you're expecting 2.2 for the full year, but what is it through the third quarter. It let's say, it's a million seven and 2.12 0.2 in total for the whole year.

1.7 through three quarters, and then about 2 million 2.2 somewhere in that range for it we basically have pretty quarters that you're covered.

Okay got it and then just my last one Jim as a follow up.

With the balance sheet I think that you talked about share repurchases I Didnt hear you mentioned anything on the special dividend side, you guys continue to do a great job of generating free cash and what are your thoughts on a potential special dividend right now.

Well, we always like to be opportunistic on the on the share buyback side and that's been where are our focus has been but we've done special dividends in the past.

You know typically it's related to something where you know we had that we thought the capital we thought the gains taxes. The dividend taxes were going to go up back in 2012, we bought we sold companies in 13 and did a special on that we Didnt buy stock in 2017, and then of with casualty ended the year. So it's a discussion that we have with the board coming up.

And that clearly will be considered we are sitting on.

As Kevin said $320 million, where the cash right now I don't think thats excessive.

So I.

Clearly as a management team, we like the buybacks, we'd like them since 97 would like to continue down that path, but that doesnt I wouldnt totally excluded.

Special, but I management liens on the opportunities of the of the buybacks.

Okay. That's good color. Thanks, a lot for the time this morning.

Thank you and our final question came from the line of Ben Hartford Baird. Your line is now open.

Thanks for your meal goes Jim I want to come back to your comment about the two most rolling out over the next three to five years committed you'll talk more about it in April but.

Some perspective on that is that something that's internally developed versus off the shelf.

To how flexible is that Tms going to be in terms of being able to incorporate anything off the shelves that might come about in the market over the next few years and then.

Thanks, Yeah, the definitely Tms, it's hard to get my hands around is the Tms include pricing truck visibility and everything like that.

Is it all from soup to nuts, and internally, we might what I'm afraid to Tms, it's more of our little operating system to place orders into track freight.

Just from a workflows standpoint, not necessarily from the visibility or the pricing or any of that type of stuff. So in our world and not to get to technical but weve.

But in our world and we when we talk about the Tms. It is the it's the it's the center vehicle that to process. Our freight transactions offer that we can plug and play of visibility to a pricing tool and feed information back and forth do what we call. The middleware. It's like the information highway right. So we can buy we can go out and by third party software.

Today and connected to our middleware to habit speak to the Tms or haven't speak to our visibility tool or feed back into the pricing tools and they often interconnect. They don't have to be in the same software package. It doesn't have to be the same.

Bender you know so I think the fact that over the last 12 months, we put in this middleware that helps all our systems talk to each other as very advantageous to going forward and the ability for us to add any type of functionality or any type of system to the model today that we probably couldn't have done two years ago and.

From an agents perspective, either collaboration with other agents or an individual agent what does what does this tool bring them, but they don't have today.

They were doing.

You know manual request for trailers and manual or pressed for credit and the Tms will provide them.

Our older system actually Didnt store rates they had the key the rate up a sheets every time, they put us as a little embarrassing to say, but yeah. They didnt have the rates in there the new system has rates in there and it has everything that.

The newer Tms would have that something the ability of these might not necessary half.

And then one more or less one and I know a lot of talk about a bottoming potentially in industry fundamentals and inflection.

Next year, but but given your perspective on the various cycles. What do you think that positioning is going to be in terms of.

Once in a whole over the next six months as we older brother.

And just probably not lend in enough of them because of the pricing is lower in this market than it would be in a more balanced market and next year I think we do anticipate and hope to see where were hit more of those as you know people, having more difficult define and trucks and that that and the market tightens up a little bit Tonight can I swear that thats going to happen today based on the.

Next.

You know summer, but it's just hard from an economic standpoint, I mean, it just really say, yes, thats whats going to happen.

<unk> expenses.

At this time as shown in the further question I would like to turn to call back over to user for closing remarks are that unison I'd like to thank you and I look forward to speaking with you again on our 2019 earnings conference call.

I have a good day.

[noise].

Q3 2019 Earnings Call

Request a DemoDemo

LSTR

Landstar System

Earnings