Q4 2019 Earnings Call
Good morning, and welcome to Lester system incorporation your 2019.
These conference calls all lines will be no listen only mode until the formal question answer session.
Call is being recorded if you have any objections you may disconnect at this time, joining us from Landstar Argenta Tony.
Kevin <unk>, Vice President and CFO .
Rob Brasher, Vice President and Chief Commercial Officer, Joe Beacom site.
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And operations Officer, now I would like to turn the call over to Mr. Jim to Tony.
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Thank you yes.
Good morning, and welcome to last years 2019 fourth quarter earnings Conference call before we begin let me read the following statement.
The following the Safe Harbor statement under the private Securities Litigation Reform Act of 90 95.
Statements made during this conference call, they're not based on historical facts or forward looking statements.
During this conference call. We may make statements that contain forward looking information that relates to landstars 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 Landstars Form 10-K for the 2018 fiscal year. The strike described in the section risk factors and other had SEC filings from time to time.
[laughter].
These risks and uncertainties could cause actual results or events to differ materially from historical results, where those anticipated investors should not place undue reliance on such forward looking information unless or undertakes no obligation to publicly update or revise any forward looking information.
[laughter] throughout 2019, both truckload volume and revenue per load unloads hauled via truck were impacted by softening conditions in the spot market.
In particular left or was impacted as we move deeper into 2019 by the slowing U.S. manufacturing sector.
During the first half of 2019, I believe we run a relatively healthy freight environment.
The first half of the year was by far less our second best January through June performance in the company's history second only to the first half 2018.
Throughout the second half of 2019, however, weaker economic conditions, especially in the U.S. manufacturing sector, let the seasonal softness in Landstars truckload volumes.
The softness began mostly in September and continued through the end of the 2019 fourth quarter.
Well first quarter 2019, truckload volumes exceeded the 2018 first quarter by 2% truck volumes over the next three quarters in 2019 decreased by 1%, 5% and 7% compared to the 2018 second third and fourth quarters, respectively.
In spite of these challenging market conditions, and very difficult year over year comparisons due to Landstars exceptional 2019 financial results Blendstar very because business model performed relatively well in 2019.
Full year 2019 revenue gross profit operating income and diluted earnings per share where each of the second best financial performance and lift our history behind only 2018.
Also in 2018 free cash flow was $288 million an annual record during 2019, LER landstar purchased over $88 million of its common stock and declare dividends totaling $104 million 79 million of which was paid in January 2020.
Cash and investments grew $113 million during 2019 to over $352 million at fiscal year end 2019.
Focusing on the 2019 fourth quarter.
As part of our 2019 third quarter earnings Conference call.
We provided revenue guidance of $970 million to 1 billion $1.020 billion or 14% the 18% below the 2018 fourth quarter.
2019 fourth quarter revenue was $995 million were 16% below the 2018 fourth quarter at the midpoint of our previous you'd revenue guidance.
Our revenue guidance anticipated the number of loads hauled via truck to be below the 2018 fourth quarter in a high single digit percentage range.
The actual number of loads hauled via truck into 2019 fourth quarter was 7% below the 2018 fourth quarter.
The 7% decrease in load volume compared to the 2018 fourth quarter was due to a 9% decrease in truck loads hauled via van equipment, and a 4% decrease in truck loads hauled via on slide it platform equipment.
Partially offset by a 3% increase in less than truckload volume.
From a sequential viewpoint, well historically, we have experienced truckload binds relatively flat to slightly increasing from the third quarter to the fourth quarter over the past five years truckload volume into 2019 fourth quarter was almost 3% below the 2019 third quarter.
We believe the sequential weakness can be traced back to the weakness in the U.S. manufacturing sector. During the 2019 fourth quarter.
Our guidance also anticipated revenue per load to be below the 2018 fourth quarter in a high single digit percentage range.
Revenue per load unloads hauled via truck into 2019 fourth quarter was 9% below the 2018 fourth quarter.
Consistent with our expectations and better than the 13% decrease when comparing the 2019 third quarter to the 2018 third quarter.
On a monthly basis revenue per load unloads hauled via truck was 8%, 10% a 9% lower in October November and December of 2019 compared to each corresponding month of 2018.
We also provided diluted earnings per share guidance $1.40 to $1.46 or 13% to 17% below the 2018 fourth quarter.
2019 fourth quarter diluted earnings per share was $1.27 or 24% below the 2018 fourth quarter.
Our diluted earnings per share guidance assume that insurance claim costs into 2019 fourth quarter would approximate 3.6% of DCIO revenue based on the average of insurance and claim costs as a percent of bcr revenue over the preceding five years.
Insurance and claims cost was 5.7% of Bcr revenue into 2018 fourth quarter, well above our 3.6% assumption.
Tourism claims and in 2019 fourth quarter included $7.2 million or 14 cents per diluted share of on several development of prior year claims.
We believe landstar as one of the safe to operate as an industry based on our low frequency of accident in recent periods, even though our fragrances frequency has remained relatively consistent.
We've been experiencing elevated insurance and claims costs.
The volatility in the cost of claims is driven by the company's high self insured retention and the unpredictable nature of occurrences and estimating the cost of each occurrence.
In recent years, a news our industry has been fill with stories of unusually large verdicts and the related challenges faced by motor carriers and their ensures in settling claims.
Magnitude of the cost of a single accident will continue to play not only last our but the entire industry.
As with the 2021st quarter, we've begun to use a three year annual average reinsurance and claim costs as a percent of bcl revenue rather the five year average to estimate quarterly insurance and claims cost for purpose of our quarterly guidance. We believe a shorter look back period is more appropriate in the current environments.
As we look ahead, we believe the first quarter will be the most difficult quarter over prior year quarter comparison to fiscal year 2020.
Seasonally the 2019 first quarter was the strongest quarter over the year. The 2019 first quarter delivered record first quarter gross profit operating income and diluted earnings per share.
Subsequent to the 2019 first quarter the effects of softening demand and more readily available capacity that started in late 2018 began to slow lessors revenue and earnings growth.
Subsequent quarters revenue gross profit and diluted earnings per share decreased sequentially from the second quarter to the third quarter and again decreased in the fourth quarter.
2019.
Based on recent January trends, we expect truck loadings, and a 2021st quarter to be lower than the 2019 first quarter in a mid single digit percentage range.
With respect to price beginning a middle of the second quarter of 2019, and continuing through December truck revenue per load fluctuated that rate somewhat consistent with historical month to month patterns.
Although the current macro environment makes long term trends somewhat unpredictable in the near term, we expect us relatively stable pricing trend to continue through the 2021st quarter.
Accordingly, we expect revenue per load in the 2021st quarter to be below the 2019 first quarter in a mid single digit percentage range.
This would represent an improvement from the 7% decrease we experience from the 2018 fourth quarter to the 2019 fourth quarter.
Based on those expectations or revenue per load a number of loads hauled via truck first quarter 2020 revenue guidance calls for $915 million to $965 million.
Compared to $1.033 billion of revenue into 2019 first quarter.
Our diluted earnings per share guidance calls for diluted earnings per share in a range of $1.10 to $1.20 compared to $1.58 in the 2019 first quarter.
The decrease in revenue that learnings per share when comparing the 2019 first quarter to the 2021st quarter guidance is due to last year's record 2019 first quarter results and the relatively soft macro environment, but expect will continue through the 2021st quarter.
From a sequential perspective, our guidance anticipates, a somewhat normal seasonal decrease in revenue and gross profit moving from the 2019 fourth quarter.
Through the 2021st quarter.
Also keep in mind that typically other than in 2019, the first quarter of any are seasonally softer than any other quarter there.
With respect to insurance and claims and our guidance for diluted earnings per share in early January a bcl involved in a tragic accident involving a fatally.
Although it is probable this accident adversely impact the financial results of the company's 2021st quarter, we're still on the price of investigating that accident determining a range of ultimate costs.
While our valuation is still preliminary and our investigation continues the company's pre tax loss exposure at the time of this accident included our 5 million self insured retention and up to $3.5 million relating to aggregate losses above our self insured short attention during an annual policy period.
As I just discussed earlier my first quarter guidance includes an estimate of insurance and claim costs at 4% of Bcr revenue, which is higher than what we have been using and our guidance over the past few years.
Please note however that our 2021st quarter estimate does not include amount specifically related to an estimate for this tragic accident and it is highly likely that once all facts are determined the estimated ultimate cost of this accident reduced first quarter diluted earnings per share to her mouth below the low end of our first quarter guidance.
As it relates to the full year I expect the operating environment and the first ever 2022 continue to be challenging with continued softness in U.S. manufacturing and readily available truck capacity.
Although it is difficult to predict the economic environment. The back half of 2020, our year over year financial comparisons begin to east starting with the second quarter.
Additionally, with a hardening insurance market combined with a combined with an ongoing soft macro environment that began in late 2018, I expect capacity could tighten later in near as trucks leave the market.
Let's start remains focused on profitable load volume growth and increasing capacity to hold those loads.
With our ongoing efforts to invest in in a power a network of small business owners, a lot or they're healthy balance sheet I believe the company's light asset Vitacost business model is performed relatively well in the current environment.
Let's start continues to be confident our positioning within the transportation logistics marketplace.
We're also well known for returning capital to our stockholders through a combination of stock buybacks and dividends.
Our tend to continue with our historic across the buyback our stock on the open market on an opportunistic basis.
And with that I will pass it to Kevin.
Thanks, Jim.
Jim has covered certain information on our 2019 fourth quarter. So I will cover various other fourth quarter financial information included in the press release.
Gross profit defined as revenue less the cost of purchased transportation and commissions to agents decreased 12% to $148.7 million.
And represented 14.9% of revenue in the 2019 fourth quarter compared to 168.9 million or 14.3% of revenue in 2018.
The cost of purchase transportation was 76.6% of revenue in the 2019 quarter versus 77.1% in 2018.
The decrease in purchase transportation as a percent of revenue was primarily due to an increase in the percentage of revenue contributed by visco independent contractors.
And decreased purchase transportation rates paid to truck brokerage carriers.
The rate paid to truck brokerage carries into 2019 fourth quarter was 44 basis points lower than the rate paid and the 2018 fourth quarter.
[noise] commissions to agents was 8.5% of revenue in the 2019 fourth quarter versus 8.6% in 2018.
The decrease in commissions to agents as a percentage of revenue.
As compared to 2018 was due to reduce commission incentives on Bcr revenue.
Partly offset by increased commission rates on revenue generated by truck brokerage carriers 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 $8.7 million into 2019 fourth quarter compared to 7.6 million in 2018.
This increase was primarily due to an increased provision for contractor bad debt.
Increased trailing equipment costs.
Insurance and claims costs were $25.1 million in the 2019 fourth quarter compared to 18 million in 2018.
Total insurance and claims costs was 5.7% of easier revenue in the 2019 period and 3.7% of Bcl revenue in the 2018 period.
The increase in insurance and claims as compared to 2018 was primarily due to increased unfavorable development of prior claims.
Selling general and administrative costs were $38.2 million on the 2019 fourth quarter compared to 47.3 million in 2018.
The decrease in SDMA costs was mostly attributable to a decrease in the provision for bonuses under the companys incentive compensation plans and a decrease in stock compensation expense.
Actually offset by increased wages.
Stock compensation expense and the provision for incentive compensation were both insignificant in the 2019 fourth quarter.
In the 2018 fourth quarter stock compensation expense was 5.3 million.
Dollars and the provision for incentive compensation was $4.6 million.
Quarterly.
As DNA expense as a percent of gross profit decreased from 28% in the prior year to 25.7% in 2019.
Depreciation and amortization was $11.4 million into 2019 fourth quarter compare compared to 11.1 million in 2018.
This increase was entirely due to increased depreciation on technology tools, resulting from the recent deployment of new and upgraded applications for use by agents in capacity.
Operating income was $66.5 million or 44.7% of gross profit in the 2019 2019 quarter.
Versus 86.1 million or 51% of gross profit in 2018.
Operating income decreased 23% year over year.
The effective income tax rate was 23.8% and the 2019 fourth quarter compared to 19.8% and 2018.
Active income tax rate was favorably impacted in both periods by resolution of certain tax items and tax benefits, resulting from equity compensation arrangements.
Looking at our balance sheet, we ended the quarter with cash and short term investments of $352 million.
Cash flow from operations for 2019 was $308 million and cash capital expenditures were $19 million.
There are currently 3 million shares available for purchase under the company's stock purchase programs.
Thank you Jim.
Thanks, Kevin and with that units, we will open to questions.
Thanks, 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 and your touched on selling once again.
The question you cancel your request please press star.
Our first question is from the line of Jack Atkins Stephens. Your line is now open.
Good morning, Thanks for taking my question sure Jack.
Jim if I could maybe just start with.
A little bit of additional commentary on the market and what you're seeing in January .
Could you maybe comment on.
How the first call. It three four weeks of a month have gone relative to expectations and then you know when you'd kind of think about the van side of the business relative to the Unsided equipment and flatbed are you seeing.
No one side really performing better than than the other just trying to get to get a sense. If you are seeing any sort of tightening in the market.
It was January so it's hard to draw any conclusions, but we'll just be curious on any commentary there.
Yes, yes, if you want to talk van and flatbed flats are a little bit softer in January it almost every year. So it's a that's a difficult comp just just for this four week period, there were sitting in all but I think when you look at our trends in the first three to four weeks of January what we're seeing on load volumes plus rates, we're comfortable with what we put out in our guidance because what were.
Seeing as a consistent trend with stability in our pricing.
Where you see the pricing kind of traveling sequentially from December to January consistent what we've seen.
In the past and actually it might be a slight I'd like I don't want to say, it's a lot better buck that trend that we.
That we forecasted for the guidance out on a rate is slightly better what you saw the average left.
For years, and then on the volume it's a similar situation. Yes. There are trend is a little bit better than what you'd see from a fourth quarter to through first quarter trend on volumes.
I think our.
We believe that what we guided to is really coming off the January results, which were seeing some stability in volume and stability and price right now, but it's a sluggish environment sure no bad, but it's encouraging that you're seeing that stability show up so I guess kind of thinking through the bridge to the earnings guidance for a moment.
The revenue numbers that you provided for your guidance ranges there relative to the earnings outlook. It certainly feels like maybe there's some additional costs that are present in the first quarter could you Kevin could you maybe kind of talk about some of those different cost items.
Seeing.
Some some pressure on the DNA side, maybe incentive comp is coming back could you just kind of walk us through that for a moment.
Sure Jack this is Kevin.
Annually list, let's just talk annually first we do expect an increase in the SGN a line.
Let's say in the range of $19 million to $20 million annually.
That is I split that into two pieces, the first being incentive comp and stock comp and that's about half of the 19 to 20 million, okay, everybody knows about that.
The remaining nine to 10 million I would say split also evenly between.
Hey.
Wage increases and and inflationary increases that's about half of the remainder and the rest, let's say four to 5 million increase in tech spend. So you know if you're looking at on a quarterly basis.
I My SDMA lets say run rate 43 to 44 million.
Obviously.
Depreciations up a little bit I think we're like 11 for in Q4.
Your best number there's probably 11 five to 12 million.
For the rest of 2020.
Okay. That's that's great. Thank you for that and just one quick follow up on the on the.
Yeah, I detect spend could you maybe just comment on sort of what sort of project that's going towards I mean do you feel like.
It's almost like an arms race on that.
Tech side within logistics do you feel like that you're investing enough.
What's happening.
On the competitive front there.
Absolutely next question.
Yes.
No.
Yes, we have breakdown, what we're spending on.
We were you know up until about five years ago, we're sitting on a idea my serious from the Eightys right. So there's a little bit of building efficiencies into the organization. When we do remember about two maybe three or four years ago, We announced we're going to rollout of new Tms. We're in the middle of doing that so theres significant spending on rolling that out from converting off our legacy systems into a more agile.
While flexible better functioning Tms.
On top of that is all the pieces of phase out to the customers in the shippers and and the carriers, where you have your apps right where in the App World, where we're moving into the cloud NOLA stuff is linked into our IC are you still middleware right. So we got spending just to create that infrastructure to create that plug and play atmosphere, the plug and play environment, where we you can take.
Any app, you want and plug it into our systems and had a feed the data to any any source you want so theres some spending on there and building up that middleware. So that we can create the plug and play atmosphere and that is actually in place as of last year.
And that gives us the capability of the Lincoln our pricing tool, which was just released over the last year and a half our our new available loads mobile app, that's in the hands of our carriers today.
And our new maximize our so it's it's across the board, but when you think of our model. It's we were we've been sharing information between agents cut capacity and customers since since the inception, and we've always used the latest technology. So when you talk about what we do we weren't that far behind the curve on a lot of what we had to do you know.
Pricing was one thing we didn't really have a good pricing tool. We have one now so we can push pricing directly out it's things like that so were more although technologies not cheap. So we are we're more tweaking all our applications and creating this environment. This more flexible and agile where we can plug and play the best tools into our system in the future as a.
Well as to having to worry about a legacy series. Okay. That's great to hear thanks very much from the time guys sure.
Thank you next question is from Scott Group Buffalo for Research. Your line is now open.
Hey, Thanks morning, guys warrants, so so I understand sort of feels normal to start the year. There's this view from from the from the T cells. The market is going to tighten maybe is in the second quarter.
Do you agree with that.
Yeah.
I look at certain things and I don't see any as we would call green shoots or catalyst that it's going to jump in the second quarter and I'll tell you why.
This is probably worse it and the probably the in the last 30 years, we're sitting in a manufacturing environment, where they are shrinking manufacturing and when you look at the three or four times. It happened it took anywhere from six to seven quarters to reverse itself.
I don't know when this one started April was negative manufacturing in the U.S., but really started consistently in July you were negative all the way the now so if you're counting quarters.
I'm somewhere if it's six quarters were towards the end of 2020. So that's one side of what I'm, saying right. So you're looking at that and I'm looking at what's going to happen to the manufacturing environment because were really impacted by us manufacturing and it's it's been shrinking since July you on a year over year on the other side you got the trucks right, so what's going to happen with trucks and their direction.
Maybe coming from the fact that you're going to see you had lower truck orders last year. So that should help reduce the number of trucks in the system and our thing here is how is insurance going to impact the trucking industry with what's going on and and some of these large verdicts, we're dealing with and it's not even the large verge. It's the if some of the even the smaller verdicts way or settlements way yet.
You look like you thought yet offend a better next to you know cost a couple of million dollars, what's that going to due to capacity over next 612 months and renewals in the insurance.
The shorts area.
And then when did the small guys have to renew so it's the.
Does that happen sooner than actually the economy, turning I think it does but let's I'm I'm going to wait and see.
Okay. So you feel better about supply than demand I guess.
The the Bcl count that was down to a bunch sequentially. What are you seeing so far to start 2020 the.
Yes, Scott this is Joe we see is that.
Interest and demand and trucks coming in the door still remains.
Pretty strong but in in January we were off about 20 trucks. We declined about 20, which is not unusual excuse me on January not unusual in the first quarter seven on last 10 years, we've been negative in the first quarter I wouldn't expect that to change.
But hopefully not too much.
More.
And I just think they environment is such that we had.
We lost 356 trucks in 2019, and Thats, a pretty big number, but I think.
One way to look at it is we retain 70% of the.
The ads that we created in 17 and 18, we grew up 1100 60 trucks in 17, and 18, we were able to retain 70% of them in an environment that really switched pretty quickly and I. Just think you have a small businesses. Some that are able to adapt to change quickly and others less so and those that didnt adapt and couldn't pay.
Hang in there are either doing something different are doing it somewhere else but.
But I think that comes back, but I don't tell what Jim said I don't think it comes back in the first quarter. Our second quarter of this year I think your it's going to be further out than that before the supply demand dynamic changes and capacity begins to net grow again.
Okay, and then last won the so net operating margin guidance for the first quarters in that what 42% to 44% range any thoughts on how to think about the rest of the year.
And we think that revenue in flex positive in the third quarter can you see earnings inflect positive two or because of some of the cost things do you think that the earnings inflection takes longer.
Yes, Scott. This is Kevin obviously is first quarters are our toughest number when it comes to that margin number.
Yes, what you gave is about where we're looking at obviously if demand comes back in Q2 Q3.
That will help that number.
But again, we do have some other cost pressures out there.
Like I laid out on the SGN a lines, but it's all about demand and increasing the gross profit number.
Okay. Thank you guys.
Thank you.
From the line of Jason Seidl of Cowen and company. Your line is now open.
Thank you operator morning, guys I want to drill down a little bit on your comments on expected capacity when I look at your truck brokerage business.
Sure approved an active guys dropped sequentially, but for just over 450, and I think year over year, you're down over 1500.
Is this the reflection of the capacity that you're seeing coming out of the marketplace have you heard why is this all higher insurance cost and do you expect that trend to continue.
Yeah, Jason This is Joe while you're correct, we dropped about 1500, 72 carriers or year over year or through the year I don't see that necessarily as a reduction of capacity in the marketplace. What I, what I attribute that to largely is the fact that because of the demand environment, we're putting.
You are opportunities out on public load boards, and there's fewer reasons for those carriers to remain qualified and keep their insurance up with us in order to haul freight because they're just not as many loads being.
Transported by up to a broader base of carrier. So I I don't see it as necessarily an exit this yet, but I do see it as as our volume declines and the number of carriers that are going to be there to haul our volume is going to decline. If you look at our active count it's really was down a far less.
About a 1%.
So I think where we have good relationships and where we have business relying on certain carriers I think thats pretty much intact. I think it's the other stuff that maybe that overflow are those additional volume that we had a year ago that we don't have today its effect on the other.
Carriers, who maybe didnt call much for US there is no need for them to re up their insurance and provided to us and and go through that exercise I think thats kind of what how I would interpret it at this point.
Okay, well not when I look at some year end markets, obviously automotive was down a ton I'm, assuming that's all the GM strike just wanted to know sort of how that looks now post the strike in into one Q.
Yes. So this is Rob Jason.
Automotive kind of taking look at from 2018 to 2019.
Rates came down tremendously the automotive manufacturers put put their pricing out to bid.
And quite frankly, we are agents, we didnt chase, we didnt shakes the price we Didnt chase.
We didn't change that downward we focus more on freight that we could move it profitable levels and thats kind of where we saw automotive go to strike did have an impact in the fourth quarter.
But but again I think it was the bid in the rebid of more of the contracted rates moving through the goods through the year.
And I see you guys have any.
What you guys have a financial impact for the for that strike or no.
On the us as it relates to negative revenue, we can't really quantify the direct impact of what the drop off in revenue was related to the strike, but just dropped off.
Okay that makes sense I guess lastly looks like the industry got to stay away from that California law that's out there.
Any thoughts from you guys going forward about that and about that potentially catching on and other states.
Yes, actually what happened out there was a positive for us I mean, it was it was kind of negative for awhile, but the fact that they jumped on the federal rules.
To basically put an injunction in to make sure that California wasn't overruling.
Over rolling what the federal rules are about Interstate commerce that was actually.
Although the dilute the legislation coming out of California was negative the resulting decision coming out of there in January was positive for us with the injunction and the injunction specifically on the federal side, saying you know you can't put rules in place that kind of overall with the federal says about Interstate commerce, and I think that kind of makes the other states, although they may roll through.
Things out.
To limit independent contractor work for various other industries within states. They really have to take a closer look at the truck transportation industry, and how they're going to handle that from an interstate commerce and not and comply with the federal ranks.
So this pretty much can provide a blanket cover at least for now with federal regulations. So it doesn't matter that much what the other states put out right. The other states and should be watching and make sure that that they're not going to.
Conflict with what the federal Regs are and that's kind of where we expect the California is probably going to appeal, we haven't heard anything yet so we'll see how this plays out over next couple of years.
Sounds fair appreciate the time is always guys.
Thank you.
From the line of pod.
Your line is now open.
Great. Thanks, good morning.
Hey, Jim So I wanted to ask on the gross profit margins in the quarter or 14.9 was up from the 14.3 in the in the fourth quarter of 18, but specifically can you talk about what you're seeing on gross margins with respect to brokerage loads and obviously the questions related to give some of the pure transactional brokers are seeing some more pressure there.
I'm curious kind of what your experiences in what you're seeing and kind of any impacts in the marketplace from a competition standpoint.
Hey, Todd this is Kevin.
The buy rate on the brokerage.
As we move throughout the year in 2019, a 177 basis points better in Q1 hundred 68, better in Q2 116, better in Q3, and then in Q4, it's only 44 basis points. So I don't know if I would characterize that as tightening but.
We are definitely paying the broker carrier more.
My My Best guess right now for Q1.
And this you know it obviously depends a lot on mix and how much is visco and how much brokerage comes back, but I would use of 14 nine to 15 too.
As your gross profit margin range for Q1 did that answer your question.
Yeah, and I guess, Kevin just a follow up I mean, so with what you're seeing just on that on the brokerage piece. It sounds like that you're still within the range of what you've experienced historically, you're not seeing anything that's that's unusual from from a brokerage margin standpoint no no.
And I think Kevin that it's true that the reason that was decelerating that the basis point pick up in the fourth quarter is because the deceleration started than the that's got a little bit tougher right Thats correct answer because it's what are tightening we're just seeing a comp that got a little tougher another tightening in the fourth quarter that is correct.
Okay. Good that helps and then you just just on the insurance piece and I understand shifting to that that three year versus the five year analytic there is going to be some impact from that.
Think about that ruling forward.
Into 2021 or beyond.
The insurance costs are going up it feels like that that's going to be incremental cost pressure for the business is there anything that you can do to mitigate that cost as it's something that you can work with either you know how you are proving qualifying viscose. This is something you know I don't know on the rate side, but how do you think about kind of mitigating that the incremental unsure.
<unk> costs that you could have on just based on the trends going forward well one thing one thing this difficult for an organization like ours, when you're running independent contractors as you can't in for certain safety rules or safety equipment that would otherwise benefit them and the organization right. So.
We rely on them the by the safe equipment, we make sure that they get their equipment inspected we do believe we have the best safety programs on the industry right now in our qualification standards are really high already.
So from that perspective, we believe we do everything we can right now to remain safe and I'm not sure it's necessary.
Yes, it's how do we reduced the accident frequency accidents, which are like I said already pretty low from an industry standpoint, it's those one or two accidents, which is going to you is going to pop on yet that.
It's hard to determine when you when that that's going to happen in which trucks going to have it could be guy with 40 years experience it could be a guy, but two years experience so trying to get our hands around how to limit the exposure to what's going out in the insurance market.
I'll admit has been a little bit of a challenge.
Over the last couple of years, we got our eyes on it we're trying to figure out what we can do to the equipment without stepping over the independent contractor line and there's more to come on that.
As you know, where if you didnt know we used to be able to ensure.
Our large losses over our 5 million dollar self insured or $5 million to $10 million layer, we must be a per occurrence covered. So every time. There was an accident. We were covered for everyone within the policy period. The insurance companies took that away last year. So thats why were seeing a little bit of an uptick as it relates to costs from the five to 10 layer.
So I think thats, where you're seeing some of the pressure coming from and the industry and the when you turn and Fender benders into million dollar accidents.
It's hard to figure out how we're going to how that gets controlled other than bye.
Trucks are going to shrink I mean, the market, we're sitting in eventually trucks or not.
Yes, it is going to shrink and they'll drive rates up and maybe you get it through the maybe you get it through the revenue line.
Okay, Yeah, I know, Jim all that makes sense I mean, those are good thoughts and I'd have to think that you guys are better positioned than most but it does definitely us feel like a pressure here in the in the interim until there is kind of Oh solution to the cost side of the problem right. Okay. Thanks for the time this morning Yep.
Thank you we have more questions on Q and our next question is from the line of Bascome majors.
Your line is now open.
Thanks for taking my questions here.
Kevin I don't want to beat a dead horse on the cost, but even after the pretty detailed explanation you gave it feels like there might be some more baked into the gas you in a year or other operating student for the first quarter, just based on getting to the guidance from the bottom subcomponents.
We do this maybe walk forward item by item for Q1, Q or or year over year I. Just I think it would be helpful to understand kind of a little more precisely how we're getting from may to be.
Sure sure.
Let's just say at the midpoint for Q1 will start with gross profit.
Probably given the range 14, nine to 15 to we're looking at and a decline in revenue.
You are looking it probably $7 million to $8 million decline sequentially from Q4 to Q1.
That flows down to the operating income line because once you get underneath that you're going to have slightly higher other operating let's say to the tune of about a million dollars.
But you're going to pick up on insurance of about $8 million.
That's assuming 4% of RBC revenue in Q4 versus the 25 million that we had.
Excuse me in Q1 versus the 25 million we had in Q4.
And then as DNA, let's say an increase of four to 5 million and then depreciation.
That's we're probably looking at 11 and a half the 12 on a quarterly basis going forward.
So thats going to be a slight decline as well so those those items underneath gross profit pretty much net to each other.
And then you get the gross profit flow through the decline downtown operating income.
Yes. Thanks.
Thanks, Charlie I really appreciate that walk through the I'm the one piece.
Just I guess you on a sequential increase you typically from Fourq you to one Q Dutch.
That's down from one to 3 million in that four to 5 million increase is just kind of way out in line with history even.
Even considering that incentive comp it needs to come back this year.
I mean.
On the text yeah, maybe we could just focus on that piece of it because I'm sure I think that's what people are trying to get their arms around.
The reason as Jim you gave for for elevated to expand weren't that referred in the water stuff you guys had been talking about for for three years now.
What what does the incremental 2020 step up will look like on the ground and is that some sort of temporal project related spin or is that more of a structural increase thanks.
No I think from the tech spend coming from the fourth quarter to the first quarter I mean.
The wages might be up slightly I mean, it's not there.
So it's it's not the tickets I mean, when we're going from if you look here's the thing about history.
In bonus years, and we have a good bonus year, we're playing catch up in ESG DNA, because the first quarter, we try and you'd love to have your bonuses paid equally book throughout the year right in the first at the end of the first quarter were saying, we're going to have $8 million bonuses, you've put up 2 million in the second quarter years looking better we're going to have 12 less than you.
Put up and then by the time you get to the fourth quarter, a lotta off a lot of times when the we have a big bonus year Theres a lot of bonuses in that fourth quarter and you see a more significant drop off because of that it's the equity program and it's a true up in the bonuses that happened in the fourth quarter that create that look like I went from fourth quarter of I had four.
88 million and now the first quarter is only 40 that trend always seems to make sense and a lot of that has to deal with the equity comp and the incentive comp.
Okay. That's a that hopefully that helps quite a bit yes, I think what I'm, saying, that's what when you look at the historic historical trends, it's a little difficult due to the way the incentive comp piles up during the year and we play catch up a lot as the as the year grows we got to keep catching up to the to the to the accrual. So you could have a pretty big number in the fourth quarter of ice GP.
For the catch up and then zero in like some years ago website at the end of the first quarter year doesn't look at it goes to zero and that could create that huge historical spread between Q4 Q1. We're now we're not run definitely looking at because we didn't really have bonuses in the fourth quarter. This year.
Okay last one.
The buyback.
How are you feeling about the stock here.
And what's the thought after paying a special dividend as they used to capital last year.
Well I would I would based on what I saw on the after hours I think people would know how we're going to react on the on the purchases. The board I think we're prepared the board was willing to up the available shares under the plans from I think we're sitting on a million two we now have 3 million available I don't.
He has changed.
And I think this is the cycle, where you might see some activity on the buybacks.
Thank you.
Thank you next question is from the line of Scott Schneeberger.
Your line is now open.
Good morning.
Im on for Scott.
Can you guys elaborate a little bit on the visibility within.
Human durable vertical on what you're seeing presently and what we could expect there going forward.
That's very difficult because it's we you know we don't have any customers over 3% of our business and consumer durables is our largest category, but the top 25 customers only makes up about 30% of that category. So drilling it down on a mid month basis as kind of kind of tough for us when you. When you look at where we were in the in the fourth quarter.
Our on that specific.
[noise] commodity or sector.
It's hard to draw conclusions, but if you just looking at our charts and where the where the.
Well the numbers fell off a consumer durables I believe we said that in the quarter consumer durables was down 15% you know and if I if I pull it apart a little further consumer durables yellow everybody's talking about that the consumer markets, a little bit stronger in the manufacturing sector and yes, we believe that and we can see it in our numbers I mean, we tied into the manufacturing sector, but when you break.
On the consumer durables being 15% down in revenue quarter over quarter fourth COVID-19 from fourth quarter 18.
The mix there was actually were only down 4% volume and most of was rate. So it actually did a little better than the organization. So that's how we can look at it because it is such a.
Diversified portfolio of customers within there and that's what we got now what I would expect that's best probably continue into the first couple of weeks in in January .
Got it was helpful. Thank you.
Free cash my 2020, how do you guys think about that.
Thank you.
I'll put out.
Early conservative estimate of let's say 175 to 225, and obviously once we get to Q2 I have a better feel for that but.
Let's just.
One point 200 million as an it midpoint.
Got it thank you I'll turn it over thanks, so much.
Thank you.
Next question is from the line of Stephanie Benjamin of Suntrust Robinson Humphrey. Your line is now open.
Hi, Good morning, Thank you for the question.
Sure.
I was hoping you could talk a little bit about the volumes related to your just drop and hook business.
Kind of what you saw during the fourth quarter as it related to prior year and then how that business is really holding up to start 2020. Thanks.
Yes definitely this is Joe we saw the drop and hook piece of about 34% of our business in the quarter was on company trailer, that's largely drop and hook and.
And that's pretty consistent with full year and pretty consistent with prior year.
So what we see that are continuing to be a vital part of the service offering.
Viscose or a large part of that service offering in the drop and hook into as that count goes. So does the number of trailers that we can place of customers and it's really like it is another aspect that's kind of a demand thing so as demand grows.
You know clearly if capacity growth in demand grows we'll put more trailers into those customers and into the fleet to grow that segment, but right. Now were we're kind of on a percentage of volume standpoint, it's pretty consistent in the quarter for the year end to prior year.
Great. Thanks, so much.
Thank you.
From the line of Ben Hartford.
Your line is now open.
Thanks.
Kevin maybe just.
Higher level perspective to get some expenses here, obviously from insurance claim perspective, but also as it relates to tech as you think about the model.
And.
50% EBIT margin of the person that revenue thats been thrown out in the past did that early in 2019 in minutes.
Move lower what does it.
Has anything fundamentally change to the model here with the layering of cost to prevent that or is this is simply a cycle and the overall net revenue.
Issue it and as that comes back then that kind of natural incremental margin comes back in.
The March to 15 beyond should should resume can you talk a little bit about.
The profile of the model in aggregate and whether that's changed here. Yes, then I don't I don't see that Thats changed at all this is from my perspective, it's all about growth in the gross profit.
There aren't a lot of levers underneath gross profit that we can pull.
We do have some increase in spend.
That.
Radically that's going to drive higher gross profit right down the road. So no I haven't seen I don't see it is any change structurally and 50%.
In when we put that out that was always about.
We said that was net of the incremental temporary tech spend right.
And that's the way we look at it 50%, that's definitely where we should be but it's all about gross profit growth.
Given the context of.
Before.
Yeah understanding the injunction there.
Helped for the time being but we're seeing movement in New Jersey, and we'll see elsewhere, whether other states go forward with it but have you seen enough.
California, I know you guys took some actions lately year.
To protect yourself against.
Legislation, but.
Potentially coming on board.
But regardless of the preliminary injunction in California have you seen enough to be concerned about kind of the state of of how independent contractors are going to be viewed.
Over the next several years to thinking about.
Potentially changing the manner in which you guys conduct business.
Well, it's always a conversation and it wasn't just 85 I mean, if you look at our 10-K, we've had that risk factor in there since we first issued our 10-K I think in 90 93, so theres always a mindset around here are the things we can do to stay further and further from the line, regardless, whether it's the federal or state level. So it's kinda always on the.
It's always on our radar to pay attention to it and would they be five did we sit back and look in other ways to maybe just change this model.
Not that rapidly.
When they came out with that if we didn't have enough time to to.
To come up with any ideas or plans to get out and that there was such a strict rule. It was that it was almost impossible get out of it I mean, we had attorneys and everybody looking at stuff and you had about three or four months to react to it.
And our best our best response was to have the guys you the move out of California don't haul freight in California, or go or hall on their own and yes that is not the best answer.
But we are we're watching what's going on in the rest of the country and are working up other ideas of.
How you make slight shifts to the model to avoid any of these state regulations. If possible do it are you doing anything similar in New Jersey at the moment no. We're not we're not as exposed with a number of drivers we have there as we were in California.
And.
Well, we're kind of switching back sitting back and see what's going to happen in Jersey, if I would think they're paying attention to the California rule and they're going to implement it but that probably would be probably not might not be a strong as it was on California. They allow for trucking companies to continue to operate and Interstate commerce.
Okay. Kevin did you provide a capex number for 2020.
That's going to be this year, we are cash cap.
Spend was about 19 million I'm guessing 15 to 20 million again this year okay.
Great.
Thank you.
From the line of Barry Haimes Sage.
Your line is now open.
Good morning, Thank you at two questions one.
Back on the insurance issue for a moment and appreciate.
Going from five years to three year look back.
Makes sense, but.
It is that enough or another whereas is this was the severity in 19.
Per incident, let's say a lot higher than.
17, and 18, such that the three to look back might even still be understanding so just curious.
How you think about that and then I have one other one afterwards unrelated we look at various different ways. We look at a cost per truck, which is pretty a pretty good indicator and I would say that that 19 was just a bad year, but I would say the conditions of the industry hasn't really changed just in that one year I think it started earlier than that so I think.
That's why the basis of the three years and when would you look at insurance cost per average truck for the year relatively consistent over the three year period. If you go back a little further it was probably a little lighter on the cost per truck. So that's how we look at that so I think the three years. That's how we came up with three I think using anything less than three is a little bit.
We could we could still have a year to 2% I believe you know if we if we just be safe and we don't have any these big occurrences.
But right now it looks like the trend is more than three and a half the 4.5% range we stick before.
Got it thanks, thanks for that the color on that.
And then had a question related to.
End markets, particularly within flatbed, if you look at the fourth quarter and through January .
Are you seeing any changes up or down. So you know if you look at you know steel versus machinery versus well patch or what have you just curious if you're seeing any.
Changes in the last three four months thanks.
Barry This is Rob it's really hard to kind of predict that far out I mean, what we do in the flatbed market.
I mean, we tend to think of it as it's a little harder entry for space. So we feel pretty good about our position. It we've got great partners with wind AG power generation senior infrastructure to name a few.
We feel pretty flat come to the first quarter rate wise.
Not a great deal growth, but again, it kind of depends on where we're at capacity wise and manufacturing going forward.
My question is looking backwards and forwards and it was over the last three or four months have you seen any of those end markets.
Either move materially up in terms of freight volume or returned only down just looking for the change. Thanks.
No we've seen no.
No big swings, one way or the other looking back.
In January to tough indicator, because it's usually there is a soft january's, there's always is flat, but typically soft.
Okay. Thanks, a lot appreciate it.
Thanks.
We don't have any more questions.
Well, thank you unison.
Lastly, we'll tell you I can't wait to get through this first quarter I think it will be our most challenging quarter of the year and thank you and I look forward to speaking with you again on our 2021st quarter Earnings Conference call. Currently scheduled for April 23rd have a good day.
Thanks, Hi, Paul.
Please disconnect your lines.