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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning and welcome to Landstar System Incorporation's Year End 2018 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 Jim Gattoni, President and CEO; Kevin Stout, Vice President and CFO; Pat O'Malley, Vice President and Chief Commercial and Marketing Officer; 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, operator. Good morning and welcome to Landstar's 2018 fourth quarter earnings conference call. 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 2017 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 any forward-looking information.
Landstar's record financial performance during the first three quarters of 2018 continued through the 2018 fourth quarter. Fourth quarter revenue, gross profit, operating income and diluted earnings per share each set fourth quarter records.
During our third quarter earnings conference call we provided 2018 fourth quarter revenue guidance to be in a range of $1.180 billion to $1.230 billion. Revenue in the 2018 fourth quarter was $1.182 billion, approximately 12% above our 2017 fourth quarter.
My prepared remarks during the 2018 third quarter earnings conference call included our anticipated gross profit margin for the 2018 fourth quarter to be in a range of 14% to 14.3%. Actual gross profit margin in the 2018 fourth quarter was 14.3%. Our fourth quarter guidance called for diluted earnings per share to be in the range of $1.56 to $1.62. Actual fourth quarter diluted earnings per share was $1.68.
During the 2018 fourth quarter, guidance - the 2018 fourth quarter guidance reflected income taxes of an effective tax rate of 24.5%. The 2018 fourth quarter included certain tax items not anticipated in our fourth quarter guidance, which favorably impacted diluted earnings per share by $0.09.
Our 2018 fourth quarter revenue guidance anticipated a number of loads hauled via truck to be in 8% to 10% above the prior year fourth quarter. 2018 fourth quarter truck load volume increased 4% over the 2017 fourth quarter.
During the 2018 fourth quarter, truck loadings increased over the prior year month by 6%, 3% and 4% in October, November and December respectively. Our fourth quarter guidance anticipated revenue per load on loads hauled via truck to exceed prior year in an upper-single-digit range. Revenue per load on loads hauled via truck in the 2018 fourth quarter, increased 7% over the 2017 fourth quarter.
As mentioned in our 2018 third quarter earnings release, truck revenue per load in the first few weeks of October was trending slightly below normal seasonal patterns. Nevertheless, truck revenue per load was 10%, 8% and 4% above October, November and December 2017 respectively. The slowing rate of growth as we move through the quarter was attributable to more difficult year-over-year comparisons and continued seasonal softness.
The number of loads hauled via rail, air and ocean carries was 1% above the 2017 fourth quarter. The slight increase in rail, air and ocean loads was driven by a 6% increase in air and ocean loads, almost entirely offset by a 1% decrease in rail loads.
Revenue per load on loads hauled via air and ocean carriers increased 22% over the 2017 fourth quarter. Revenue from new agents defined as agents who joined last or within the past 2 years was $149 million in fiscal year 2018, the highest annual revenue from new agents since 2011. New agents added $22.1 million of revenue to the 2018 fourth quarter.
We continue to attract qualified agent candidates to the model and the agent pipeline remains full. In fact during 2018, we had a record 608 agents generate $1 million or more of Landstar revenue.
We ended the quarter with a record 10,599 trucks provided by business capacity owners, 903 trucks above our year end 2017 count. The net increase on the number of BCO trucks in fiscal 2018 was our highest ever annual net increase.
We had a record number of third-party carriers operate on our behalf during the 2018 fiscal year. Our network is strong, continues to attract qualified owner-operators and other third-party truck capacity. Gross profit increased $19 million or 13% compared to the 2017 fourth quarter. Here is Kevin with his review of other fourth quarter financial information.
Thanks, Jim. Jim has covered certain information on our 2018 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 increased 13% to $168.9 million and represented 14.3% of revenue in the 2018 fourth quarter, compared to a $149.7 million or 14.2% of revenue in 2017.
The cost of purchased transportation was 77.1% of revenue in the 2018 quarter versus 77.5% in 2017. The decrease in purchased transportation as a percent of revenue was primarily due to decreased rates paid to truck brokerage carriers. The rate paid to truck brokerage carriers in the 2018 fourth quarter was 137 basis points lower than the rate paid in the 2017 fourth quarter.
Commissions to agents was 8.6% of revenue in the 2018 fourth quarter versus 8.2% in 2017. The increase in commissions to agents as a percentage of revenue as compared to 2017 was due to an increased net revenue margin, revenue less the cost of purchased transportation divided by revenue, on loads hauled by truck brokerage carriers.
Other operating costs were $7.6 million in the 2018 fourth quarter compared to $6.2 million in 2017. This increase was primarily due to increased trailing equipment costs and increased contractor bad debt.
Insurance and claims costs were $18 million in the 2018 fourth quarter compared to $16.2 million in 2017. Total insurance and claims costs was 3.7% of BCO revenue in both periods. The increase in insurance and claims as compared to 2017 was primarily due to increased severity of claims in the 2018 period.
Selling, general and administrative costs were $47.3 million in the 2018 fourth quarter compared to $47.4 million in 2017. The slight decrease in SG&A cost was mostly attributable to a decrease in the provision for bonuses under the company's incentive compensation plans, partially offset by an increase in stock compensation expense and increased wages.
Stock compensation expense was $5.3 million and $4.1 million in the 2018 and 2017 fourth quarters respectively, with the increase mostly due to the impact of increased earnings on our performance-based equity compensation arrangements. The provision for incentive compensation was $4.6 million in the 2018 fourth quarter compared to $6.9 million in the 2017 fourth quarter.
Quarterly SG&A expense, as a percent of gross profit, decreased from 31.7% in the prior year to 28% in 2018.
Depreciation and amortization was $11.1 million in the 2018 fourth quarter compared to $10.6 million in 2017. This increase was primarily due to the increase in the number of company-owned trailers.
Operating income was $86.1 million or 51% of gross profit in the 2018 quarter versus $70 million or 46.8% of gross profit in 2017. The increase in operating margin was driven by increased gross profit. Operating income increased 23% year-over-year.
The effective income tax rate was 19.8% in the 2018 fourth quarter compared to 6.9% in 2017. The effective income tax rate was favorably impacted in both periods by resolution of certain tax items, tax benefits resulting from equity compensation arrangements and the Tax Cuts and Jobs Act enacted in December 2017.
The act reduced the federal income tax rate from 35% to 21% its effective for 2018 favorably impacting the 2018 fourth quarter as compared to 2017. Additionally, the 2017 quarterly provision for income taxes was significantly favorably affected by the revaluation of the deferred tax liabilities as a result of the enactment of the Tax Act.
Looking at our balance sheet, we ended the quarter with cash and short-term investments of $240 million. Cash flow from operations for 2018 was $298 million and cash capital expenditures were $10 million. There are currently 2 million shares available for purchase under the company's stock purchase programs. Back to you, Jim.
Thanks, Kevin. Seasonally, we generally experienced a sequential decrease in truck revenue per load from the fourth quarter to the first quarter. In 2015, 2016 and 2017 first quarters, truck revenue per load decreased in a range of 4% to 9% from immediately preceding fourth quarter. The 2018 first quarter was an anomaly from the seasonal trend with truck revenue per load growing almost 3% from the 2017 fourth quarter.
During the first two weeks of the 2019 first quarter, revenue per load on loads hauled via truck show signs of the normal seasonal pattern consistent with the trends experience in the first quarters of 2015, 2016 and 2017. Assuming current trends continue to the 2019 first quarter, I expect truck revenue per load to be below the 2018 first quarter in a low-single-digit percentage range.
With respect to truck volumes, Landstar achieved significant year-over-year truckload volume growth in both 2017 and 2018 first quarters. In fact, 2018 first quarter truckload volume was 23% greater than the 2016 first quarter volume. I expect lower rate of volume growth in 2019 first quarter as demand is not as strong as compared to the 2017 and 2018 first quarters and year-over-year comparisons have become more difficult.
During the first two weeks of January, year-over-year truckload volume growth was slightly higher than load volume growth experienced in the comparable period of 2018. Assuming there are no significant freight load disruptions from severe weather during the remainder of the 2019 first quarter, I anticipate the number of loads hauled via truck in 2019 first quarter to exceed the 2018 first quarter in a low-single-digit percentage range.
Based on the continuation of recent revenue trends, I currently anticipate 2019 first quarter revenue to be in a range of $1.025 billion to $1.075 billion. I expect to more normalized provision for incentive comp in 2019 first quarter, which will be lower than 2018 first quarter by approximately $2 million.
Our guidance assumes insurance and claims were 3.6% of BCO revenue and expect our first quarter effective tax rate to be 21.1%, which is lower than our estimated annual effective tax rate due to the anticipated and excess tax benefits on stock based compensation arrangements specific to the 2019 first quarter. Based on those revenue cost assumptions, I anticipate 2019 first quarter diluted earnings per share to be in a range of $1.51 to $1.57.
2018 was another historic year for Landstar highlighted by many financial operational records. Revenue, gross profit, operating income, net income and diluted earnings per share were all annual financial records, while a number of loads hauled via truck, truck revenue per load and a number of trucks provided by BCOs were all annual operational records.
Revenue grew $969 million over 2017, while gross profit grew $123 million. During 2018, 71% of the incremental gross profit was passed to the operating income, resulting in an operating margin of over 50%, when excluding approximately $8 million of incremental costs related to our technology initiatives.
Once again 2018 demonstrated that Landstar's light-asset based business model generate significant cash flow and outstanding returns in most economic environments. At December 29, the company had a strong balance sheet with cash and short-term investments of $240 million and borrowings available under revolver credit facility totaling $216 million.
During 2018, we purchased 2 million shares of common stock at a total cost of $208 million. 2019 follows the back-to-back record financial performance of 2017 and 2018. It will be difficult to expect the overall environment in 2019 to be as robust as we experienced during 2018 at its exceptional highs. We believe truck capacity has been more readily available in the marketplace and spot market pricing once again appears to be moving in line with historical seasonal trends.
With that said, the overall environment for Landstar continues to be strong by historical standards. We expect 2019 to be another successful year of Landstar as we remained focused on profitable load volume growth, increasing our available capacity to haul those loads, investing in technology and delivering value to our stockholders via share buybacks and dividends.
And with that, we will take questions.
Thank you very much, sir. At this time, we will begin the question-and-answer session. [Operator Instructions] Our first question comes from Jason Seidl of Cowen and Company. Your line is now open.
Hi, this is Adam on for Jason. Thank you for taking our question.
Yeah, sure, Adam.
I guess, first question is, I guess, just kind of simply as spot rate has been falling kind of now through last four or so months, has it been harder for you guys to recruit BCOs just given this environment that we're in?
Adam, this is Joe. No, not really. I think both our recruiting initiatives as well as our retention initiatives have really been impacted by - in 2018, the market. And early in 2019, we've not seen any impact due to what's happening in the way of rates in the last few weeks. But clearly the rate environment, say, a big win for BCOs, as they're paid on the percentage. And that's been a large part of the attraction to the model in 2017 and 2018 each of them on their own.
And to put it in perspective, we had - there was record revenue per BCO in 2018, over $197,000. I mean, that's a record. I think a little pull back is not going to deter the BCOs from coming onboard or staying with us.
Got it. Thank you, guys, for that. And then, I guess, maybe just a quick follow-up here as well. I guess, just broadly what do you guys see in terms of expectations for pricing in 2019? How bid season is looking from your guys' vantage point? Just maybe a little bit on higher level on pricing that you guys see.
Our assumption - and you know the volatility in spot pricing - but our assumption now is that we would be in the low-single-digit throughout the remainder of the year based on what we are looking at. Coming into January, as we said, we had seen some seasonal softness going into October, November, December, where historically we would see an uptick in the rates and it wasn't ticking up as high as it was.
But as we pull into January, it looks like it's more consistent on a month-to-month for the January rate. And if we hold that consistency, we still think we're - we're going to be below the 2018 rates, but somewhere, maybe low mid-single-digits what the expectation would be.
Got it. Thank you, guys, so much for the time.
Thank you. Our next question comes from Jack Atkins of Stephens. Your line is now open.
Jim, Kevin, Pat, Joe, good morning, guys. Thanks for the time.
Sure, Jack.
Hi, Jack.
Good morning, Jack.
So maybe we just kind of start with a macro question if I could, Jim and Pat, I'd love to get you weigh in on as well in terms of what you're seeing on the customer side. But, Jim, what are you feeling out there from a freight perspective? Obviously, things are moderating versus the strong levels we saw in 2019.
But there was lot of concern I think going into the year about a freight pull forward. Have you seen any indications of that? And then, I would just be curious to get a feel for specific customer verticals, where you're seeing particular strength and perhaps maybe some weakness.
Clearly, demand has softened. It was, right, and we think it's more of a demand than a supply side. We do expect that there is probably more capacity in the system today, moving freight. But we're very diverse, so it's hard to point to a specific industry or a specific customer that drives our decelerating growth rate I would say. So I don't really have anything real specific on what's driving the slowdown other than overall economic trends. But we still feel like we can put some volume through and then we're coming off a tough comps.
So from an industry standpoint, a geographic standpoint, Pat may have maybe more deeper dive, but typically we're more of a - we're so diverse based on the way the agents who are geographically dispersed around the country and then all the different industries. It's kind of an overall economic and industrial production effect.
Got you.
Jack, I would agree with Jim that this is more of a demand driven than a supply driven case here. I would also say that, again, to echo what Jim said, when you think about the diverse nature of our agent base, it's kind of difficult to say what particular industry. Again, if you look at what the comps are and if you look at - I think Jim in his opening remarks, I think said it very well about this quarter versus - excuse me - 2018 versus 2016 quarter, we're up 23% in that two-year period. So if you think about it, it was a little softer. It's still a pretty robust market.
Yeah. And you're still driving volume growth even if things aren't as robust just from a backdrop perspective.
Right.
Okay. All right, that's great. Second question, Jim, and you mentioned technology in your prepared comments. But could you just give us an update on your technology initiatives, sort of where we are in terms of the rollout of the new operating system for your agents and what's the initial feedback been on that thus far?
It's all positive. I mean, it's taking longer than we anticipated. Now, that we're doing - I would break down our technology into about four, five categories. And the operating system or the TMS as we call it is one specific area that we're investing in. And that project was one of the first things we jumped on about three or four years ago, to convert our 1980s legacy systems into a more robust order entry to delivery system.
That is going well. I mean, the agents, we have about 100 agents using it today. And it's mostly positive feedback. Clearly, you get some negative feedback. It's really mostly positive, because it has some capabilities that our current order entry system and delivery system doesn't have. And we anticipate it's probably going to take - we originally launched this as a three to five year project. Year five is over in 2019. But looking like probably going to take another 2 to 3 years to get all the agents on the system.
The complexity of putting an agent on and putting a customer on it is probably a little more complex than we thought it would be. But there are all the other things that we're looking, tools we're working on and the tools we delivered over the past year-and-a-half is load boards and pricing tools, and agent analytics for - so agents can better manage our business. It's the whole suite of tools we're rolling out, that where we say we spend $8 million to $10 million.
And some of those tools are - to us more important than TMS. So it's - yeah, we've got a lot of balls in the air right now and getting very positive feedback. And to tell you the truth, for the first time ever I heard one of our capacity guys say that, maybe the reason that the BCOs are staying longer or recruiting more is because we rolled out better available load tools in our Landstar Maximizer.
Okay. That makes sense. That definitely - it's good to hear. One last, if I could squeeze one last quick one in for Kevin. Kevin, could you give us a sense for where free cash flow ended for 2018 and any preliminary thoughts on free cash flow for 2019?
Yeah, the free cash flow for 2018 was about $244 million if you take out the capital lease payments that we made in 2018. So $250 million is probably the low-end for 2019, I'd say $250 million to $275 million as, sitting here in January, as a guess for 2019.
Okay, that's great to hear. Thanks again for the time.
Sure, Jack.
Thank you. Our next question comes from Ravi Shanker of Morgan Stanley. Your line is now open.
Hi, this is actually Shaked here for Ravi. I wanted to ask a quick question about loads per BCO. What exactly drove the deceleration on loads per BCO? Is it just seasonality or something else?
I don't think it's necessarily seasonality. I think it's a function of the very strong year. I think you heard Jim mention $197,000 per BCO truck in the year. I think it was a function of the fact that they had a very good year. And things just - they just slowed down towards the back-half of the year.
Got it. And another question about the rev per load, it was very strong as you noted, even though spot rates for both dry van and flatbed decelerated this quarter. Considering that you're entirely spot can you explain why there is a lag in your pricing versus market rates? And can we expect that into 1Q?
Yeah, we tend to not be as volatile. Although we're spot market, we access our capacity in the spot market. We do have contracts with customers that have contract rates. And they - some of them tend to hold longer into a cycle, even if there is a downturn in price. We have - about 30% of our business is drop and hook. So we have a trailer at - we have trailers in locations at shippers and they tend to not just kick us out of there, because they want to get an - drop their price by $0.05 or $0.10.
So we're a little more sticky when it comes to the pricing than true spot market. Heavy haul too, some of that special stuff, the rates stay a little more firm into a cycle that we're in right now. So that's why, it's not - yes, we're a spot business, but we're also a little bit of a mix of we have contracts with a lot of our customers and stick a little bit longer into a downturn cycle.
So did you see how much of your business is contract? Or…
We - I would guess 60% to 70% of our customer contracts have some pricing mechanism. But in our work, we don't guarantee a truck, right. So that's why people refer us to be at the 100% spot. We don't dedicate capacity at a price where that regardless of what happens in the environment, $2 a mile will do it for 12 months. We'll give you a price, but the truck is not going to haul it, the shipper generally goes and gets a different carrier in there.
It makes sense. Thank you for your time.
Sure.
Thank you. Our next question comes from Todd Fowler of KeyBanc Capital Markets. Your line is now open.
Great. Hey, good morning, everyone.
Good morning.
Hey, Jim, I was just hoping, if you can talk a little bit about the volume growth that you've been experiencing and you made some comments at end of your prepared remarks about being focused on profitable load growth in 2019? I guess a couple of things, first, I mean, do you think that you're taking share in the market? And then, secondly, do you think about focusing on volume growth into 2019? How do you incentivize the agents for what's the mechanism that you're able to kind of enforce to put that in place?
Todd, this is Pat. A couple of things, if you think about the volume growth and the obligation that we have the mechanisms that we have, there are certain things that we can do from a field management and a sales management perspective to make sure that we are maximizing the opportunity in each one of these accounts. Jim talked about the agent analytics tools that we now have the agents are able to look inside their business better to identify where the opportunities are to grow their business.
And I would say to that, I think in certain markets we are taking market share, whether that's on the platform side, whether that's on some dedicated van business. If you think about those accounts whether it's our expertise and execution is valued, we do very well with those accounts. And if you look at the commodity list in the exhibits in the release, you'll note that, for example, in the automotive world, we're taking market share there, because the requirements that are inside that industry that we were able to do very well.
There is another thing too is, one thing that we get concerned about it, when pricing starts turning down, is that the agents don't act fast enough, they don't realize what's going on, and shippers are looking for better deals. We're doing a much better job, we rolled that a pricing to 12 months ago to give them information more readily available of, hey, here's the trends we are seeing, so they can react in this environment. They're not holding their $2 of load. They're seeing what's going on in the industry and they can react. So instead of losing the load, you renegotiate the pricing and you haul for less.
So there's - we've got a little bit of confidence there too based on the information we've been sharing. And so that pricing tool we rolled out to the better data. So they can react to changing market conditions.
Got it. Okay. So you're not saying, hey, you've got to go after volume, it's giving them the tools in place to manage the business better and one of the byproducts, so that becomes the volume growth that you've been experiencing?
Correct. Better knowledge about the marketplace allows them to grow and capture market share.
Okay. Got it. And then just my follow-up, Jim, I think, usually give some comments on your expectations for gross profit margins on a quarterly basis. It feels like in the fourth quarter there was a little bit of mix shift, whether it was probably a higher net revenue margin on some of the broker freight since that pushed up agent commissions. What would your thought be for first quarter gross profit margins? And then maybe some expectations if you wanted to share on for how that should trend throughout 2019?
Yeah, the first quarter we're probably sitting about 49 to 52.
Okay.
And generally upstream, because I think there is a little more BCO business, the cycle little bit softer in the first quarter and the broker carries are charge a little bit less. So from that point on and it generally tends the cycle a little bit down after the first quarter. I don't have the - but I would guess that if you follow the history, I wouldn't - if you're going from 49 to 52 in the first quarter follow the historical trends from that point for the rest of the year. I don't expect anything that would change unless the capacity loosens up even more. Yeah, you might see that raise that gross margin holding for a little while through maybe even to the second quarter.
Okay. Yeah. That makes sense. I was just looking for something little bit more directional for the rest of the year, so that helps. So stay warm guys.
Almost 37 here this morning, we're freezing.
Yeah, all right. So, yeah, thanks a lot.
Yeah, sure, Todd.
Thank you. Our next question comes from Stephanie Benjamin of SunTrust. Your line is now open.
Hi, good morning. Thank you for the question. I was really just hoping if you could provide an update just on your e-commerce related loads during 4Q and really how that performance compared to the 2017 fourth quarter or this kind of your expectations, any color there would be great? Thanks.
Stephanie, this is Pat. Our fourth quarter peak business was not as robust as it was in 2017.
Got it. And you think that's just the nature of tougher comps? Or did you see any kind of shift or any change for that?
It was more of a shift in one account.
All right. Great. Well, thanks so much for your question - for the question.
Thank you. Our next question comes from Matt Brooklier of Buckingham. Your line is now open.
Hey, thanks. Good morning. So your revenue per load guidance for first quarter expected to be, I think, down low-single-digits. I'm assuming there's some impact from fuel surcharge also being down. Do you have that number when you axe out fuel surcharge?
No, Matt. We don't have that. We wouldn't have assumed very much of a change with respect to fuel. I think, barrel is, what, $54 to $60, somewhere in that range. Yeah, we wouldn't have assumed any delta from Q4 to Q1 on that.
And if you remember, fuel is excluded from the BCO freight, so half of the freight doesn't even have fuel in it.
Right, but included on the brokerage side?
Yeah. We don't anticipate a big change from the fourth quarter to first quarter.
Okay. It just looks like fuel for some productions price year-over-year is expected to be down. So I was just trying to get a sense for maybe how much that's potentially weighing on your yield guidance, if it's maybe taking a little bit away, because it just seems like a pretty drastic shift, right, it terms of what you put up in the fourth quarter and then going to negative in the first quarter if fuel is contributing to that?
And then second question, Jim, you mentioned that we're still in the midst of this IT rollout. Did you talk to the expected expenses around that program in 2019, I think in 2018 was something like $8 million?
Yeah, we're looking about $8 million to $10 million again this year. It's probably going to go out for a little while. We have a lot of good things going on here that we just want to keep advancing our technology and the tools for the agents in the BCO. So $8 million to $10 million is what we plan for 2018 - 2019, I'm sorry.
Okay, great. I appreciate the time.
Thank you. Our next question comes from Scott Group of Wolfe Research. Your line is now open.
Hey, thanks. Good morning, guys.
Good morning.
So big picture, if this quarter flattish revenue, mid-single-digit profit, double-digit earnings growth. Is that sort of revenue environment continues all year of flat revenue maybe even slightly negative revenue? Do you think you can maintain that sort of profit growth the rest of the year?
Yes. And the reason why I think there's a whole bunch of tailwinds we have in 2019, whether it be incentive comp or equity comp. And I don't - we don't count on insurance, but in 2018, we had $14 million of unfavorable development in 2014 - in 2018. That hope you don't have push through into 2019 again. It's unpredictable, but so I see our share count is down about 3%, so you've got some of that. So when you drive all those things through and you're thinking you're going to be flat on the gross profit line, yeah, we can still drive operating income and EPS growth through the model, just because for people who understand our model, we're a variable cost business model.
And if we go if the agents are making a lot of money in either the way and the bonus is kind of fade away. So we kind of the variability of the model goes right through the comp line too. So in a good year like 2018, we have a lot of equity comp and incentive comp, and if 2019 slows down, that number comes down, so that's we get the benefit and that's how the model works.
But just to note, first call has a consensus out, and we're comfortable with the consensus of the first call of the analyst estimates for the year.
Okay. That's helpful. And then, I know it's very early, but maybe can you talk about sort of impact you're seeing from the weather out there. And do you think this is the sort of event that can have a more prolonged impact on the market?
We're believers - unless the plant shutdown that the freight comes back that the freight is going to be sitting, but in this environment, I think plants might be shut down, so there might be some freight opportunities being lost and push may be later into the quarter. But since it's happening right now, it's actually this week, we get daily load reports. And it is impacting our load volumes. Clearly, we're in this week right now, which wasn't included in our opening comments was that, we're a couple of thousand load short in the first couple of days this week, because of the weather.
And if it eliminated some planned production, it could affect the quarter, but we always anticipate those plants get back up and running and by the end of the - we still have 1.5 month and have to make up on volume. So I don't think, we're thinking that the couple of thousand loads we've lost in the last couple of days isn't going to come back.
And I was thinking maybe from the other way, do you think this is enough to like really retighten in the market and have a prolonged impact in terms of higher rates?
I don't know if it's prolonged, but I do think there's probably a short-term impact, because some of that freight probably turns into sport market, you got to go and get trucks and when - the guys who are on schedule routes now or holding the schedule route, but there's more freight sitting on the sideline, because it didn't get moved for a couple of days. I don't believe it's a long-term. But short-term affect the quarter possibly on spot rates maybe.
Okay. Thank you for the time, guys.
Thank you. Next is from Amit Mehrotra of Deutsche Bank. Your line is now open.
Thanks. Good morning, guys. How are you?
Good.
It's 5 degrees in New York today. So we'll take [a38a] [ph] any day.
Yeah, it'd be down here in a bathing suit, it'd be fabulous.
I wanted to go back to the gross profit question maybe come at it more conceptually. Obviously, the beauty of the Landstar model is really the variability of the cost structure as you said. But wondering, how should we think about it as how that maybe evolves as volume growth slows? How - the mix in that environment whether it's your broker carriers or the rate you paid to the brokerage carriers maybe a little bit less that allows you to take that gross profit towards that mid 15% level, where it was back in 2016 in a weaker volume environment, so maybe that could have offset some of the possible gross revenue headwinds? Any thoughts there just conceptually how we can think about that?
We'd actually preferred have a 14% gross margin, because that means we're driving more brokerage revenue through the system and the BCOs are still hauling. We don't really focus so much on that margin to tell you the truth. If you look at 2009, our margin was 16.7%, our gross profit margin - and that's because the BCOs hauled more of our freight. When in an environment that we're dealing with now, the way the gross margin works, if we can put more brokerage business over the model. We will see the 15% go to 14.5% or 14%. But that's okay, because there is not a lot of infrastructure cost for the brokerage freight, yeah.
So when we're doing third-party truck freight, you basically pay the truck, you pay the agent and then we've got some receivables flow, but there's not a lot of infrastructure here to excess cost below the gross profit line. So that's kind of how we look at it, and depending on the most of the time when you see the margin move, it's because of mix, how much was BCO and how much was brokerage.
So the extent, we can push more brokerage and maintain our BCO fleet or grow our BCO fleet. You'll continue to see that margin drop, but in a good way, because that means, gross profit's climbing from a dollar standpoint.
Okay. Right. And just the volume environment and the mix in that at all change the way you guys think about incremental EBIT margins? I think, you've talked about 70% of net revenue. Does that change at all in terms of our expectations of that, it seems the lower it goes the higher that could go just based on what you just said?
Yeah. Our expectation on 70%, it kind of moves up the year, right, because it's a comparative to prior year, in 2018, we had significant amount of the incentive comp and equity comp. It should - our 70% in 2019 should be significantly higher, because you're taking some of those costs out with a - even if a flat gross profit, we should be able to push about 80% to 90% of that growth in operating income - not growth in operating income, but our operating margin should climb.
Got it. Okay. And then another question maybe more conceptually is, one of the things that we're hearing from people that are maybe a little bit more bullish on the sustainability of the trucking market, is the fact that ELDs have maybe structurally rerated the spot market a little bit higher, because the thought being in prior cycles, independent owner-operators would maybe drive more miles to make up the lower rate per mile and go in excess of their hours of service rules, and now obviously, they can't do that with the ELD. I mean, obviously maybe we have to see it to believe it over a cycle. But does that thesis kind of make sense to you? And are you may be seeing some of that in the marketplace?
Hey, Amit. This is Joe. I think, the impact from ELDs and its impact on productivity, we probably saw that in 2018. I don't think you'd see any more exaggeration of the pricing impact of ELDs. The only thing that's forthcoming that could play any kind of role, and I think it would be very minimal is the movement from AOBRDs to ELDs at the end of this year, which does change some of the personal conveyance rules. It does affect productivity just a little bit. But I wouldn't think that would be a real material change in productivity or its impact on price.
Well, I guess, my point was not change in the perspective tightness of the market. It's just that do ELDs now kind of raise the floor, but either trough rates could be relative to what they were in past cycles maybe that's too big of a statement, and we just haven't seen enough evidence yet, but that's really what the question was about.
Yeah. Conceptually, I see what you're saying. I guess, we'll have to wait and see. I think it did raise some awareness as to the impact of declining productivity, and I think so to that extent, yeah, maybe it did raise the - what the expectations of purchased transportation should be.
Can I just ask one last question before I hop off on the volume environment? And you might have addressed this before, because I hopped on a little bit late. But you just talked about volumes in the fourth quarter, they end - where they ended up versus kind of the 8% to 10% that you'd expected, I mean, the implication or the way you talked about in October, I believe. So there seems like there was a big drop-off in November and December relative to maybe your expectations. Can you just give us the cadence of volume growth in the quarter, if you haven't already? And what drove that seemingly maybe large deceleration over the last couple of months of the year?
Yeah, October was 6% and November was 3% and December was 4%. And I think our anticipation going into the quarter that we would have a stronger e-commerce environment. And plus there was one customer that caused about 30% of our miss, like we hit 4%, our low-end was 8%. 30% of that to the bottom range was one customer that dropped off.
Right, okay.
Not dropped off, just the [loads] [ph]. So it's a combination of that demand on the e-commerce we've had for the last three or four years was not near as strong as we anticipated, plus a single customer.
Okay, that's very helpful. Thanks very much guys. I appreciate it.
Thank you. Our next question comes from Bruce Chan of Stifel. Your line is now open.
Yes, good morning, gentlemen.
Good morning.
Just a quick follow-up here on the drop-and-hook question from earlier. Jim, I think you said that percentage of truck business was floating around 31% right now, which I think is roughly sequentially flat over the third quarter. And I know the returns on that business generally seemed to be pretty good. I'm wondering if you guys have a target mix of drop and hook in mind as you sort of plan the business, and whether - as the capacity environment loosens that affects your strategy as far as how you're deploying that trailing capacity.
Well, our drop-and-hook business really ties to customer demand and then how many BCOs we have that haul our trailers. Not all of our BCOs haul drop-and-hook. And, Kevin, do you have the number, 7,000, 8,000…?
About 6,000.
It's about 6,000 of our BCOs, who haul the drop-and-hook freight. So we - you got the customer demand on one side, but then you have the capacity, availability on the other side. So we have 2,000 - we have 2 trailers for every one of those BCOs haul freight. We got 12,000 trailers in the network. We'd love to add more of that if we can push more BCOs to the drop-and-hook business and get more shipments.
So, yeah, we don't have a plan mix. But it is a part of our business, and we try and get more BCOs to haul the drop-and-hook freight and get more drop-and-hook opportunities. But there is no - it is our best, it is our highest margin business, because we're actually providing a - we're providing a little bit more value when you put the trailer in it and you coordinate trailers. But there is no targeted percent of revenue.
Okay, great. I appreciate that. That's helpful. And then, just back to the technology side, you talked about the TMS and how the deployment is going there. But you also mentioned that you've got a few other buckets. And I'm wondering if you can remind us, especially on the back-office side, is there anything meaningful that you have coming up that we should be looking at, especially as it relates to corporate margins?
I wouldn't say it's related to corporate margins on the - look, we only have 1,200 employees. So there is not a lot of flexibility in our - we can build efficiencies within the network. But as we grow, we probably still need the same number of people, right? So that's not we're attacking. What we're really attacking is the front-end, the customer experience, the agent experience and the capacity experience. And the tools that they use to access our systems and the way we share information is really what we're attacking. And we've always had load boards and we've always had that stuff.
But we're putting up better tools and better products to make them more effective for the BCOs to better identify the loading opportunities they want as opposed to seeing all loads, saying, hey, we see you like this.
It's kind of like, we see you like this load, you might like this one too. So we're building out - it's almost like that artificial intelligence stuff that - to push better data out to the - not just the BCOs, but even share information with the agents too and give the agents tools where they can watch their business, simply see stats on their business on a day-to-day and what capacity they're using, what customers they're - what happened with their customers yesterday, did 10 loads yesterday, how come none today, that kind of thing. That's what we're dealing with.
Okay, great. And then you did mention that pricing tool to agents. Is that - or has that been deployed network-wide or are there still some that still need to get it?
Yeah, it was fully deployed by the beginning of 2018. But it started off with just a basic sales side, then there is - then you build in a buy side. Then you build in confidence level. So we're constantly working on all that stuff to give better and better tools.
Perfect, appreciate the time.
Yeah.
Thank you. Our next question comes from Bascome Majors of Susquehanna. Your line is now open.
Yeah, thanks for taking my question here. Jim, you've talked over the years about targeting low to mid teen EPS growth for the Landstar business over time. But as you acknowledged in some of the questions, in your closing remarks, clearly 2018 was really exceptional for the business. As we look to 2019, are your annual incentive comp thresholds aligned with that longer-tem kind of low-double-digit growth expectation or would flattish earnings get you to a threshold payout acknowledging how you need - I'm sorry, 2018 really was?
They're aligned with the longer-term goals.
All right, okay.
Yeah, it's not a - yeah, we don't have a - we don't plan flat and then pay significant bonuses, so…
That's great news guys. Well, we hope you get there. Thank you.
It might be great for you.
Great for you.
Yeah, great for you.
Yeah, we'll talk in 3Q, okay.
Thank you. [Operator Instructions] Our next question comes from Matt Brooklier of Buckingham. Your line is now open.
Yeah, so just a follow-up question, the e-commerce customer, you indicated that that customer, it sounded like they shifted some volume away from you. I'm just trying to get a sense for when that shift happened. I think I can make a guess given - for the monthly numbers that you gave us. And then, is there any way to just talk about how much the impact was for the entire quarter from a revenue perspective?
We can tell you that they in-sourced, so if that gives you an idea of who it is.
Okay.
And just give me a second. We generally don't share individual customer information.
It just seems like it was more impactful as we're kind of going through the call and asking questions. I mean, you guys are talking about the overall environment moderating.
Yeah, yeah, yeah.
Yeah, it sounds like they were a pretty big contributor to that. Can I get the number offline if that's easier?
No, no, no, it was - why we don't talk about customers so much, because we're so diverse, but that one customer dropped $10 million year-over-year. So it would have impacted the quarter and it generally happened in November, December year-over-year.
$10 million was the total for the quarter?
The change, the reduction from the prior year.
Okay. Got it. Thank you.
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.
All right, thank you, and I look forward to speaking with you again on our 2019 first quarter earnings conference call. It's currently scheduled for April 25. Have a good day.
Thank you for joining the conference call today. Have a good morning. Please disconnect your lines at this time.