Good afternoon, and welcome to Landstar System, Inc. Year End 2015 Earnings Release Conference Call. All lines will be in a 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 are Mr. Jim Gattoni, President and CEO; Mr. Kevin Stout, Vice President and CFO; Mr. Pat O'Malley, Vice President and Chief Commercial and Marketing Officer; Mr. Joe Beacom, Vice President and Chief Safety and Operations Officer. Now I would like to turn the call over to Mr. Jim Gattoni. Sir, you may begin.

Thank you, Olive [ph]. Good afternoon, and welcome to Landstar's 2015 Fourth Quarter Earnings Conference Call. This conference call will be limited to one hour. Due to a high level of participation on these calls, I'm requesting that each participant have a two question limit. Time permitting, you can circle back for additional questions. But before we begin, let me read the following statement. The following is a Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts are forward-looking statements. During this conference call, we may make statements that contain forward-looking information that relates to Landstar's business objectives, plans, strategies and expectations. Such information is by nature subject to uncertainties and risks, including but not limited to the operational, financial and legal risks detailed in Landstar's Form 10-K for the 2014 fiscal year described in the section risk factors and other SEC filings from time to time. These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking information. And Landstar undertakes no obligation to publicly update or revise forward-looking information. Before I go into my more detailed prepared remarks, let me touch on a few fourth quarter highlights. New agent revenue exceeded $25 million in the 2015 fourth quarter, the highest quarterly new agent revenue in the past 16 quarters. During 2015, we had 512 agents generate $1 million or more of Landstar revenue. We ended the year with 9,500 trucks provided by BCOs, the highest number of trucks provided by BCOs in Landstar history. BCO turnover was a low 25% in fiscal year 2015. The number of loads hauled via truck increased 7% over the…

Thanks, Jim. Jim has covered certain information on our 2015 fourth quarter, so I will cover various other financial information included in the press release. Gross profit, defined as revenue less the cost of purchased transportation and commissions to agents, increased 1% to $126.4 million and represented 14.9% of revenue in the 2015 fourth quarter compared to $124.7 million, or 14.4% of revenue in 2014. The cost of purchased transportation was 76.7% of revenue in the 2015 quarter versus 77.5% in 2014. The rate paid to truck brokerage carriers in the 2015 fourth quarter was 110 basis points lower than the rate paid in the 2014 fourth quarter. The decrease in the cost of purchased transportation was mostly due to the effect lower diesel fuel costs have on revenue and the cost of purchased transportation on freight hauled via truck brokerage carriers. Commissions to agents as a percentage of revenue were 32 basis points higher in the 2015 quarter as compared to 2014 due to an increased net revenue margin, revenue less the costs of purchased transportation on loads hauled via truck brokerage carriers. Other operating costs were $7.2 million in the 2015 fourth quarter compared to $6.4 million in 2014. This increase was primarily due to increased trailing equipment maintenance costs. The company has increased its company controlled trailer fleet to 10,723 trailers, a 9% increase over prior year as the number of BCOs hauling Landstar trailing equipment has increased with the increased demand for drop and hook services. Insurance and claims costs were $11.1 million in the 2015 fourth quarter compared to $8.5 million in 2014. Total insurance and claims for the 2015 quarter were 2.9% of BCO revenue compared to 2.2% in 2014. The increase in insurance and claims in the 2015 period was mostly due to…

Thanks, Kevin. Overall, considering recent industry fundamentals of low demand and looser truck capacity, Landstar had a very good fourth quarter. I expect the current freight environment to continue throughout the first quarter. And I expect 2016 first quarter pricing environment to be somewhat challenging as compared to the 2015 first quarter, which includes the impact of slightly lower diesel fuel costs and the looser capacity environment. Based on the continuation of recent revenue trends, I currently anticipate 2016 first quarter revenue to be in a range of $720 million to $770 million. In comparing the 2016 first quarter diluted earnings per share guidance with the first quarter of 2015, the 2016 first quarter will be favorably impacted by approximately $0.03 per diluted share related to the company's annual Asian convention scheduled to be held in the 2016 second quarter, compared to 2015 when it was held in the first quarter. However, we expect incentive compensation in the 2016 first quarter to mostly offset the variance caused by the timing of the agent convention as we had a minimal provision for incentive compensation in the 2015 first quarter. Based on the range of revenue estimates and considering the timing of Landstar's annual agent convention and impact of incentive compensation, we anticipate 2016 first quarter diluted earnings per share to be in a range of $0.70 to $0.75. As we move forward in 2016, I believe there is opportunity for Landstar to continue to see profitable volume gains even given the low growth environment we are now experiencing. We continue to invest capital into our trailer fleet and anticipating approximately $55 million in 2016 in new trailing equipment, representing some growth to the existing fleet plus to replace older equipment. Today, we execute more drop and hook business than at any…

Thank you very much, sir. At this time we will begin the question-and-answer session. [Operator Instructions] Our first question comes from Alex Vecchio of Morgan Stanley. Your line is now open.

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

Yes. That is our expectation.

Okay. That's helpful. And then on the guidance, I realize there are a few puts and takes here, but I do believe that in the first quarter of 2015, you had about $0.06 of a headwind from an unusual legal settlement, which would kind of suggest maybe on an apples-to-apples basis EPS kind of flat organically. And given the headwinds you might face in the back half, given the lack of the auto customer as well as the IT investments, I know you're not giving full year guidance, but at this point, do you feel comfortable that earnings can actually increase on a year-over-year basis in 2Q, 3Q, and 4Q given kind of those dynamics there?

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

Okay.

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

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

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

Okay. Got it. All right. Thanks for the time.

Thank you. Our next question comes from Jack Atkins of Stephens. Your line is now open.

Great. Thanks, guys, and thanks for taking the questions.

Sure.

So, Jim, I guess just to start off, if we can go back to the investment that you guys had been making in your trailing equipment. It's clearly paying off for you in terms of incremental van demand. You talked about investing again in 2015 in your trailing equipment. Could you maybe comment on the impact this is having on your customer's preference for your services. And would you expect a similar type of volume tailwind in your van business this year from your investments in the trailing equipment?

Jack, this is Joe. You know what we do as we've grown BCO count, those BCOs that look to haul van for us, we buy, essentially provide a trailer for them to haul and a trailer to put at a customer. And then as we've seen that demand come, we've had the capacity behind it to support that. So as additional demand comes from the customer base, we think we are pretty well-positioned from a capacity standpoint to satisfy that. So as that demand exists, we think we're pretty well positioned to satisfy it.

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

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

Okay. And into January, Jim?

We're looking at low to mid-single-digits, really, is what we're looking.

Okay. Thanks very much for the time, guys.

Great.

Thank you. Our next question comes from Rob Salmon of Deutsche Bank. Your line is now open.

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

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

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

Yes, because we don't use the current run rate. What we do is use the last five years. So we're still at 3.3%. 3.3% of BCOs is what we use in this projection that we're putting out in the guidance.

Appreciate the clarifications. I'll hop back in.

Okay.

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

Hey, Scott.

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

I think we have that.

This is just for the flatbed. This is Kevin, Scott. The flatbed...

Well, overall...

I can tell you for the whole quarter it was down 4%, and it's going to be consistent for each of the months there.

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

Okay. But the trend was steady through the quarter is the bottom line?

Yeah.

Okay. Thanks, guys. Appreciate it.

Yup.

Thank you. Our next question comes from Matt Brooklier of Longbow Research. Your line is now open.

Hey, Matt.

Hey. Thanks. Good afternoon. So I wanted to circle back to this technology initiative that you guys talked to, get a little bit more color in terms of what are the benefits. What's kind of potentially the volume growth benefits? Maybe you could talk to if you're expecting margin benefit. I am just trying to get a better feel for how this project could have positive impact. And then if you could also talk to, you talked to the initial cost of the project in 2016. But it sounds like it's a multi-year project. So I'm just trying to get a feel for what the total investment could look like over the life of the project.

This project actually started two years ago. And when I started the project, it was really just - what we did is we pulled together about fifty agents and just started asking them questions. How is the technology in your office today? What would you need better than what you have? So we spent the first year just dealing with what we called the focus group agents. We showed them some tools, we showed them some additional stuff that we might be able to provide. And then we went out to the market and started looking at third-party packages that we could give them to use for what we're referring to as order delivery. Internally here, we're talking about the agent work flow product. Right? So it's strictly to make them more efficient within their office. And it should also at the same time, it's a tool that will give them the ability to provide better information to their customers. When you talk about - so when you talk about revenue metrics and adding volume and stuff like that, it's really, right now, we're just trying to upgrade the technology they have in their office. We believe that it'll help us recruit more agents into the system. We believe when the agents get more efficient they'll have more time to do sales, but I'm not going to put a number on what that is.

Okay.

And about going forward, too, I would expect, this isn't an SAP implementation. We're not spending $100 million. And the reason we put this out there is to kind of indicate $0.05 to $0.10. That's about $3.5 million to $7 million we're going to spend this year. Hopefully part of that cost is for launch costs. If you think about, we have 1,200 independent agents all around the country. We have to launch them individually one him at a time. So it's a little bit of training and working with the agents to launch it. The launch is probably going to take, once we get it up and running, there's an agent on it today, loves it. But it's going to take - launch is going to take a very long time, probably two years. So that's why we've spent two years developing and designing and coming up with a prototype. We're kind of in beta with one agent now. And hopefully by the end of the year, we're kind of in launch mode. And then for about a year or two, it's going to take launch. Some of our agents may take a month or two just to launch an individual agent. But I would expect when you look at a $0.05 to $.10 this year, I don't think you're not looking at this similar number next year until we're fully launched. Hope to be fully launched sometime in mid-2018.

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

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

Okay. And then once you work through the project, you garner kind of the anticipated benefits from the project, what are your thoughts on the 50% net operating margin target that you had previously? I think you talked to it a little bit in your prepared remarks. Should we assume that 50%, we can do better than 50% moving forward? And it's probably hard to quantify what that number could look like, but if you could just talk to the potential benefits from the program and if we should be thinking about a higher net operating margin moving forward once the project's complete.

Yes. Once the project is complete, I think we should clearly have a higher one. But I think we said that 50% margin by the end of 2015. And with some of these costs we're spending, we still have a chance to hit that 50% operating margin. It makes it a little tougher with some of this cost we have in there. So we may, when we're done with the project, I clearly believe we're going to be at 50%. And then from there, we'll just ramp up. I don't want to give a number where we'll end up until we're done.

Gotcha. Okay. Appreciate the time.

Yup.

Thank you. Our next question comes from John Barnes of RBC Capital Markets. Your line is now open.

Hey. Thank you, guys, for taking the questions.

Sure, John.

Just a couple of things. On the technology implementation. Could you talk a little bit about, I mean, what do you derive out of that that helps you get to that margin target? Or am I thinking, I mean, it seems like there's something there with the technology implementation that helps you achieve that 50% other than just recruiting more agents into the system. Is there something else there?

Well, once we're done spending the implementation and getting it launched, then we think we save in efficiencies and also we actually cut expenses going forward. I haven't quantified it yet, but I think there's a lot of efficiencies we can gain inside this building. And I also think that the product we're putting in place is probably a little bit cheaper than what we're paying today to run our systems. Because right now, we're running five disconnected systems and we're supporting five disconnected systems that the agents are using. Now they're not all using every one of them, but we do have agents using five different systems, whether it's LTL, whether it's truckload, whether it's air, ocean or forwarding. So we're trying to consolidate it to one to simplify the process for not only the agents in the field but here internally. So I think we we'll build efficiencies once we're done with the implementation of the launch. And I think we should see, I'm not saying we're going to cut a lot of cost, but we should maintain the cost levels we have but grow the business, but get new agents in the system. I think that's how you get there. Like I said, the only piece that could impact us not reaching the 50% is the implementation stage. Once we're launched, we're back into the cost structure we have today.

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

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

Okay. All right. I just wanted to clarify that, that one was not dependent on the other.

No. No.

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

That's the main reason why said it.

Okay. All right. Great.

Look it. Between - the incentive comp is a wash to the convention in the first quarter. So it's a plus and minus in the first. It doesn't really affect the first quarter. Really it was delivered comment just to let everybody know that in the second quarter we're going to have - that's when the convention is going to hit.

Okay. All right. I appreciate it.

Thank you. Our next question comes from Scott Group of Wolfe Research. Your line is now open.

Hi, Scott.

Hey. Thanks. Good afternoon. So could you just remind us the quarterly revenue from the auto contracts in each quarter last year? And I'm not sure if it was BCO or brokerage business. I guess I'm not sure if it's better or worse than average margin business, if you have any color there.

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

Yes.

40% BCO?

Yes.

And then it flipped.

Yes.

Then at what figure?

About 50/50.

It's about 50/50 BCO brokerage.

And thoughts on margin, if it's better or worse than normal or average?

It's about normal.

Okay.

So the mix, so if it's a 50/50 and our business is about 50/50, you kind of get back to that normal margin.

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

Yeah, Scott, this is Joe. I don't know that I'd read much into one quarter. I don't really have a great sense. I know that interest from perspective BCOs has remained pretty strong. I think the additions, as you pointed out, have kind of tapered throughout the year. Right? The first quarter of any year, typically we're flat to down to a decline in net growth. So that's kind of where we're seeing it. How things look from an individual owner operator getting his own authority into 2016, it's pretty fuzzy for me. I'm not exactly sure, if you look out at the environment, if it's all that attractive as it was back and 2014 and early 2015.

And then maybe same thing just on the truck brokerage carriers. We're seeing good growth there. Are you seeing new trucking companies emerge? Or is that existing guys that you're finding?

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

Okay. All right. Thank you, guys.

Thank you. Our next question comes from Todd Fowler of KeyBanc Capital Markets. Your line is now open.

Great. Thanks. Good afternoon, everyone.

Hey, Todd.

Hey, Jim. So at this point, is your expectation that incentive compensation will be higher year-over-year in 2016? So that $0.03 in the first quarter, is that something we should assume for the balance of the year as well? Or do the comparisons change throughout the year?

Hey, Todd. This is Kevin.

Hey, Kevin.

When we built the models, we assumed a one-time payout would be about $8 million for the year, which would be about $2 million for each quarter. So we assumed the $2 million in the first quarter. And now in 2015, we didn't have that, we didn't hit are targets. And we had a minimal accrual for incentive comp in 2015 first quarter. So that's the comparison year-over-year that's causing the problem.

Okay. In then for kind of the balance for 2016, I mean assume that $2 million for now unless something changes?

Yes, for each of those quarters.

Okay. And then I wanted to ask a little bit about the gross profit margins. And I know that they were up year-over-year. They were down just a little bit sequentially. And I know there's some moving parts to there, but it seems like the commissions to the agents were a little bit higher. And it sounds like from the prepared remarks that some of that has to do with the brokerage gross margins. Can you just maybe help us think about maybe the brokerage gross margins were favorable, and the agents keep a little bit more of that on the commission side. Is that what happened here this quarter?

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

Okay.

Another thing that happens, Todd, if you're looking sequentially fourth quarter over third quarter. The BCO program, when an agent moves a load on a BCO, they do get incentives as they grow. And they get more higher commission rates as they grow beyond a certain revenue amount. So as they're hitting their targets going through the year increasing their incentives, or their commissions, I'm sorry, you'd see a little bit high - you'd typically see a little bit higher commission rate on the BCOs in the fourth quarter than the third quarter as they hit their targets and get the accelerated commission rates.

Okay. That makes...

So it's a little bit of that, too.

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

Yes.

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

Thank you. Our next question comes from Tyler Brown of Raymond James. Your line is now open.

Hey. Good afternoon, guys.

Hi.

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

Tyler, this is Pat O'Malley. Yeah, as we mentioned I think throughout the quarters last year that the agent environment or the environment for recruiting the new productive agents to Landstar was a fairly fertile ground, we don't anticipate any changes in that. The pipeline at this point in the year is very robust. And we expect the fundamentals that kind of drove that, a challenging freight environment, challenging capacity environment, will work in our favor as it relates to recruiting new agents to Landstar.

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

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

It was. 91% of the revenue is produced by those million-dollar agents.

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

There's a lot of ins and outs going on there. I will tell you, we lost - so we went from 525, we had 525 million-dollar agents during 2014. We had 512 during 2015. We lost 13 of the million-dollar agents during 2015. All right? What else is going on there, we actually had 48 agents that moved up that were agents below a million, they moved up over a million. We also 48 agents, coincidence it's the exact same number, that came down below the million dollars. Some of those guys who fell below the million dollars of the 48 guys is really because this pricing fell. Right? So if you were doing $1.2 million last year and pricing falls 10%, now you're underneath.

Oh. Okay.

$1.1 million. So then some of them fell out just because of pricing. But what's really the focus is the 13 guys who left. And there's, unfortunately, we had a couple of people pass away. We had a couple people who got in trouble with the law. And a couple left, two of them left to go out and do business outside of transportation, and three of them did go to other firms.

Okay. No. That's very helpful. Thanks, guys.

Yup.

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

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

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

Just what the mix was at this point, I'm sorry, of heavy haul, specialized heavy haul.

That is about 25% in 2015, and last year was about 28%.

Of flatbed.

Okay. That make sense. And the decline would be the markets in general. And just wondering what truck revenue per load looked like if you, in the quarter, if you exclude the lower fuel surcharges, just to get a sense of core pricing.

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

Okay. Appreciate it. Thank you.

Sure.

[Operator Instructions] Our next question comes from Jack Atkins of Stephens. Your line is open.

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

It's SG&A.

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

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

Okay. That's helpful.

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

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

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