Jim Gattoni - President and Chief Executive Officer Kevin Stout - Vice President and Chief Financial Officer Patrick O’Malley - Vice President and Chief Commercial and Marketing Officer Joe Beacom - Vice President and Chief Safety and Operations Officer.

Jack Atkins - Stephens, Inc. Scott Group - Wolfe Research LLC Todd Fowler - KeyBanc Capital Markets, Inc. Matt Brooklier - Longbow Research LLC Benjamin Hartford - Robert W. Baird & Co., Inc. Ryan Mueller - Buckingham Research Group, Inc. Matthew Frankel - Cowen Group, Inc. Matthew Young - Morningstar, Inc..

Good afternoon and welcome to Landstar System, Incorporated Third Quarter 2016 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; and Joe Beacom, Vice President and Chief Safety and Operations Officer. Now I’d like to turn the call over to Mr. Jim Gattoni. Sir, you may begin..

Thank you, Danica. Good morning, and welcome to Landstar’s 2016 third 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 we can circle back for additional questions.

But before we begin, let me read the following statement. The following is a Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts are forward-looking statements.

During this conference call, we may make statements that contain forward-looking information that relates to Landstar’s business objectives, plans, strategies and expectation.

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 2015 fiscal year described in the section Risk Factors and other SEC filings from time to time.

These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking information and Landstar undertakes no obligation to publicly update or revise any forward-looking information.

Landstar continue to execute well on the 2016 third quarter considering the ongoing slow growth in the U.S. Industrial sector. Industry fundamentals during the 2016 third quarter remains similar to those experienced in the 2016 first-half, with truck capacity continuing to be more readily available than experienced in either of the past two years.

Keep in mind, however, that 2014 and 2015 were two of the best years of performance in Landstar’s history. During 2014 and 2015, Landstar experienced significant growth on strong execution along with very favorable spot market conditions, particularly in 2014.

The softer freight conditions in 2016 along with diesel fuel prices though are an average 10% lower than last year’s third quarter, have resulted in lower revenue per load on loads hauled via truck as compared to 2015. Let me point out a few highlights from the quarter.

Even it is comparability soft spot market environment, Landstar increased the number of loads hauled via truck during the 2016 third quarter over the prior year quarter, when excluding loadings related to the now completed special project for an automotive customer from the 2015 flatbed load count.

We generated the second highest third quarter gross profit in Landstar history. We ended the quarter with 9,510 trucks provided by BCOs, the highest quarter in truck count in Landstar history.

We had a record number of truck brokerage carriers hauled freight on Landstar’s behalf during the 2016 third quarter, as the model continues to attract quality truck capacity to the system.

The 2016 third quarter had the second highest number of loads hauled via truck in any third quarter in Landstar history, behind only the 2015 third quarter, which included 20,000 loads hauled via flatbed equipment related to the now completed project, I previously referenced. Landstar provided third quarter revenue and earnings guidance on July 20.

That guidance implied revenue of approximately $775 million in the 2016 third quarter, and diluted earnings per share guidance of $0.79 to $0.84. Third quarter revenue of $788 million was slightly above our revenue guidance, diluted earnings per share of $0.86 was above the high-end of our guidance.

As it pertains to year-over-year revenue trends, revenue declined 6% during the 2016 third quarter compared to the 2015 third quarter. This revenue decline was only 2%, when excluding the $35 million in revenue from the automotive project from the 2015 third quarter.

This decrease compares favorably with the 7% decrease in quarter over prior quarter revenue we saw in the 2016 first quarter, and the 8% decrease in the quarter over prior year quarter revenue, we saw in the 2016 second quarter, excluding the revenue from the automotive project from the 2015 second quarter.

The revenue shortfalls in 2016 compared to the prior year were almost entirely due to the decreases in revenue per load across all modes.

As per year-over-year revenue per load comparisons revenue per load on loads hauled via van equipment was 5% below prior year’s third quarter, and revenue per load on loads hauled via unsided/platform equipment was 1% below prior year’s third quarter.

Truck capacity continued to be more readily available than it was in the 2015 quarter, resulting lower spot market pricing. Additionally, revenue per load was negatively impacted by a lower cost per gallon of diesel, which is almost 10% lower in the 2016 third quarter as compared to the 2015 third quarter.

The number of loads hauled via van equipment during the 2016 third quarter was 6% above the 2015 third quarter, while unsided/platform loadings decreased 14%.

Excluding the loads hauled via flatbed equipment in 2015 related to the automotive project, the number of loads hauled via flatbed increased 1% in the 2016 third quarter over the 2015 third quarter. Overall, we have maintained stable unsided/platform volumes in a difficult flatbed environment.

The number of loads hauled via Landstar controlled trailing equipment, mostly van equipment hauled by BCOs and drop-and-hook operations was 34% of truck loadings in the 2016 third quarter and increased 8% over the prior-year quarter.

As it pertains to sequential quarterly revenue trends, we are encouraged by improvement we saw in the quarterly revenue trends as the 2016 third quarter compared to the 2016 second quarter was slightly better than the normal seasonal pattern.

In recent years, we have typically seen low-single-digit decreases in loadings in the third quarter compared to the second quarter. This year the number of loads hauled via truck in the 2016 third quarter was about equal to the 2016 second quarter, better than the recent historical trend.

Similarly, revenue per load on loads hauled via truck increased 2% over the 2016 second quarter, slightly ahead of the typical recent years when moving from the second quarter to the third quarter. Landstar has a highly diversified customer base in a wide range of industries primarily operating in the U.S. manufacturing sector.

The company’s top 100 customers accounted for 42% of revenue in the 2016 third quarter. From an industry standpoint, revenue from the automotive sector was 33% below the 2015 third quarter, entirely due to $35 million in revenue in the 2015 third quarter, driven by the project I previously referred to.

Also, freight relating to the energy sector, which is approximately 4% of revenue in the 2016 third quarter decreased over 24% compared to the 2015 third quarter. Other sectors showing notable revenue declines during the 2016 third quarter were machinery and metal.

The machinery and metals revenue decrease were mostly driven by overall market conditions, and not related to any specific account, as the company’s customer base in those sectors is highly diversified. Gross profit decreased 4% compared to the 2015 third quarter on a 6% quarter-over-quarter decrease in revenue.

Gross profit margin expanded 40 basis points in the 2016 third quarter compared to the 2015 third quarter. The rate of purchased transportation paid to truck brokerage carriers in the quarter was relatively equal to prior year’s third quarter, yet at the lower-end of the historical range.

Here’s Kevin with his review of other third quarter financial information..

Thanks, Jim. Jim has covered certain information on our 2016 third 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, decreased 4% to $121.8 million and represented 15.5% of revenue in the 2016 third quarter compared to $126.8 million or 15.1% of revenue in 2015. The cost of purchased transportation was 76.3% of revenue in the 2016 quarter, versus 76.7% in 2015.

The rate paid to truck brokerage carriers in the 2016 third quarter was 8 basis points lower than the rate paid in the 2015 third quarter.

The decrease in the cost of purchased transportation was mostly due to an increase in the percentage of revenue contributed by BCO independent contractors, which typically have a lower rate of purchased transportation, than revenue on loads hauled by truck brokerage carriers.

Commissions to agents as a percent of revenue were 4 basis points higher in the 2016 quarter as compared to 2015. Other operating costs were $7.5 million in the 2016 third quarter compared to $8.7 million in 2015. This decrease was primarily due to increased gains on the sale of used trailing equipment and decreased trailer rental costs.

The company has increased its company-controlled trailer fleet to 11,057 trailers, a 10% 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 $12.5 million in the 2016 third quarter compared to $10.5 million in 2015.

Total insurance and claims costs for the 2016 quarter were 3.3% of BCO revenue, compared to 2.7% in 2015.

The increase in insurance and claims compared to the 2015 period was due to increased severity of commercial trucking accidents in the 2016 third quarter as compared to the 2015 third quarter, partially offset by increased net favorable development of prior year’s claims in the 2016 period.

Selling, general and administrative costs were $34.7 million in the 2016 third quarter compared to $36.8 million in 2015.

The decrease in SG&A costs was primarily attributable to reduced incentive compensation expense and a decrease in stock compensation expense, partially offset by costs associated with the company’s multiyear project that we believe will increase efficiencies and improve the processing of transactions from order to delivery at both the agent’s office and at Landstar.

Included in SG&A expense in the 2016 and 2015 third quarters is $2 million and $0.5 million respectively related to the agent workflow project. SG&A expense as a percent of gross profit was 28.5% in the current year compared to 29% in 2015. Depreciation and amortization was $9 million in the 2016 third quarter compared to $7.2 million in 2015.

This increase was due to the increase in the number of company-owned trailers. As it relates to operating leverage, operating income was $58.5 million or 48% of gross profit in the 2016 quarter versus $64 million or 50.4% of gross profit in 2015. Operating income decreased 9% year-over-year.

The effective income tax rate was 36.9% in the 2016 third quarter compared to 37.8% in 2015. The effective income tax rate includes federal tax credits realized in the 2016 period and includes tax benefits resulting from the disqualifying disposition of the company’s common stock in both period.

Assuming an effective income tax rate of 38.2%, the tax credit has favorably impacted 2016 third quarter diluted earnings per share by $0.02. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $227 million. Cash flow from operations for the 2016 year-to-date period was $171 million.

Cash capital expenditures were $18 million, and the company acquired $46 million in trailing equipment financed under capital leases. Included in the $18 million of cash CapEx is $14 million related to the ongoing project to build a new freight staging and transload facility in Laredo, Texas.

During the 2016 period, we purchased 773,000 shares of Landstar common stock at a total cost of $51 million and there are currently 1 million shares available for purchase under the company’s stock purchase program. Back to you, Jim..

Thanks, Kevin. I expect capacity conditions experienced in the 2016 third quarter to continue to persist throughout the 2016 fourth quarter with the rate of purchased transportation paid to truck brokerage carriers to be similar to the 2016 third quarter.

However, I expect gross profit margin to be lower than the 2016 third quarter gross profit margin, as I expect the higher percentage of revenue contribution in the fourth quarter from truck brokered carriers, which has a higher cost of purchased transportation.

Seasonally, revenue per load on loads hauled via truck on October is typically slightly higher than September. During the first few weeks of October, revenue per load on loads hauled via truck has increased slightly from September, indicating that spot market continues to hold through a more seasonal pattern.

I believe we will maintain this normal seasonal pattern as we move through the remainder of the year. Thus far, the price of fuel has been fairly stable and truck capacity, although clearly more readily available then during 2015, it seems to be holding at a consistent level.

Therefore, I expect revenue per load on loads hauled via truck in the 2016 fourth quarter [Technical Difficulty]. And I think we’re back. I think our - I think the phone lines here at Landstar died, but we don’t know what just happened there, but hopefully everybody is back on. I will continue.

Therefore, I expect revenue per load on loads hauled via truck in the 2016 fourth quarter to be slightly lower than the 2015 fourth quarter in a mid-single-digit percentage range. The company’s 2016 fourth quarter includes one extra week of operation.

Including the impact of the extra week, I expect the number of loads hauled via truck in the 2016 fourth quarter to increase over the prior year fourth quarter in a low-single-digit percentage range.

Based on the continuation of recent revenue trends plus the extra week, I currently anticipate 2016 fourth quarter revenue to be in a range of $800 million to $850 million. Note that the 2015 fourth quarter included approximately $0.09 in diluted earnings per share attributable to the project for the automotive customer.

Based on the range of revenue estimate and assuming insurance and claims costs are approximately 3.2% of BCO revenue, we anticipate 2016 fourth quarter diluted earnings per share to be in a range of $0.85 to $0.90. So far, our results have reflected the softening operating environment and low economic growth in the U.S. economy.

With that said, however, the model performed well and we are encouraged by the improving sequential trend. We continue to add agent’s capacity to the network and are our well-positioned for when the market improves. With that, Danica, we can open to questions..

Thank you very much, sir. At this time, we will begin the question-and-answer session. [Operator Instructions] Our first question is from Jack Atkins of Stephens. Your line is open..

Hey, Jack..

Hey, guys, good morning, and congrats on a great quarter..

Thanks..

So, I guess, Jim, just first off here on the extra week, could you - in the fourth quarter. Could you walk us through the mechanics of that? Is that pulling from 1Q 2017? And then, obviously that week is in a seasonally soft period of the calendar.

But how should we think about what’s assumed in the revenue guidance from that extra week you got?.

It has no impact on the 2017. It’s really just the extension of 2016. But we see it, it’s a slow week, right, it’s Christmas week, and comparable, we are saying it’s $25 million plus or minus a couple of million of revenue..

Okay, okay. That’s helpful. Thank you for that clarification. And then, but from a follow-up on the operating expense side, I know that you guys did a really fantastic job managing G&A expenses in the quarter. I think you’re able to actually see G&A as a percentage of net revenue decline year-over-year, despite lower net revenue in the quarter.

Could you maybe talk to the actions that you guys were able to take to sort of affect that?.

Well, Jack, our - one is our bonus program is variable, right. If we are not in our targets there is no bonus. So if you look to prior year, it’s basically mostly the incentive comp coming out, because we are not hitting our targets this year.

And if you go sequentially, if you look at second quarter to third quarter, that pieces - the Agent Convention was held in the second quarter and there is no Agent Convention in the third quarter. So that’s really the majority of what you are seeing on the SG&A line..

Okay, okay, great. Thanks, Jim..

Yeah..

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

Good morning, Scott..

Hey, thanks, good morning, guys.

So just quickly on the extra week in the fourth quarter, on that 25-or-some-million of revenue, should we just assume kind of an average margin on that? Is that the best way to think about the EPS impact?.

Yes, absolutely..

Okay. So I wanted to ask you about the sequential pricing trend. So it looks like we saw a much kind of bigger sequential uptake on flatbed than dry van, which is surprising kind of given the spot data up there.

So can you help us understand why the bigger uptick in flatbed this quarter?.

Hi, Scott, this is Pat. It’s really a mix in the type of freight that we are transporting. As you know high, wide, heavy dimensional freight carries a higher revenue per load, so it’s kind of a mix of the business that we are transporting..

So is that kind of somewhat - is like the wind energy stuff picking back up or something like that or do you think this mix benefit in the third quarter is sustainable?.

We don’t have a line of sight into that. Some of that was wind, but it was just - I think Jim’s opening remarks are worth repeating here. It was broad-based across a number of industries. And so, we don’t see any resurrection in oil and gas. We don’t see any resurrection in energy.

But we, I think, continue to execute and I think our expertise around that platform business is what puts us in a pretty good position, when it does recover..

Okay. And then just lastly, Jim, kind of the comments in the release said, I think volumes in October better than normal. I think, your comments today on the call were more kind of normal seasonality, just unless I missed that.

Can you just follow-up on that and to the extent that it’s better than normal, kind of where you’re seeing that?.

Yeah, I think what we are talking about is slight improvements to growth rates, right. So we generally see the September and October, say, peak maybe 1% of volume growth and we’re slightly above that. It’s not - we’re not by any means blown out of the water. It’s good to see that trend. It’s a trend we hadn’t seen, yeah.

We started seeing in the third quarter when the sequential trends were getting better. And the point is those sequential trends keep on going and then we’re seeing a little bit better in sequential in October..

Okay. Thank you guys..

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

Great, thanks. Good morning and nice quarter. Jim, I guess, I just want to make sure I understand where you’ve answered the questions about what you’re seeing on the volume side, the third quarter volumes were stronger than what we were looking for in I think some initial commentary.

So is that mostly the growth in the trailers and the drop-and-hook operations or is there something else that you’re seeing specific to drive the share here this quarter?.

It’s really just very broad based, Todd. It’s hard to put your hands on specifically what it is. You could see clearly our freight on our trailers has grown. We continue to see that as being favorable to us. And we keep putting more trailers in the system.

And clearly if we had more BCOs we’d put more trailers in the system, because demand there is probably more than we can handle. At this point, we keep working on putting more trailers in the system, keeping up with that pace. And plus, I think even on our side, I got to tell you that the flatbed turned out a little bit better.

We thought it was going to be - I wouldn’t have expected it to be positive, slightly positive, assuming we take out the automotive project. So I think, some of that heavy haul, looking at the heavy haul stuff, I think we ratcheted back to being flat the prior year, where that’s been dropping every quarter for the last probably 8 to 12 quarters.

And we saw the flatbed come back a little bit this quarter, which was a nice surprise. I think you got a little bit of - it’s not like we’re growing at 10% or 15% load volumes, but it’s nice to see these upticks where we haven’t seen them before, especially on the heavy haul side like Pat had mentioned..

Yeah, no, I definitely agree with that. Again, I’m just trying to get a sense of kind of where you’re seeing it. I know you’ve said it a couple of times. But it definitely seems like it’s across the board and kind of maybe no one specific area that we can point to.

I guess, just from my follow-up at the end of your prepared remarks you made some comments on the gross profit trends, your expectations in the fourth quarter and it sounds like you’re expecting gross profit to come down, the margin to come down a little bit sequentially.

But it sounds like most of that is mix related to more brokerage revenue in the fourth quarter.

Is that - do I understand those comments right and maybe you could just clarify that?.

Yes. Absolutely, typically what you see is brokerage as a percent of revenue picks up into the fourth quarter as compared to the third quarter. And brokerage has a higher PT rate - I mean, a lower gross margin, I’m sorry. And therefore it will just have an impact. We’re not seeing any trends that brokerage structure costing more, anything like that.

That’s really doesn’t….

Got it, okay.

And that’s also because the BCOs dial it back a little bit towards the end of the year and that’s why the brokerage piece steps up?.

Yeah. Slightly, but I’m not sure that’s as big an impact, yes. I mean, we do run a lot of business from about mid-November to the end of December and a lot of that is BCO business..

Okay, got it. Thanks for the time this morning..

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

Thanks. Good morning, so just an additional question on the volume side and specifically with your BCO segment. And you talked a broader based, I guess, sequential pick up.

Were there any big customer wins in 3Q that maybe potentially move the needle a little bit?.

Matt, this is Pat. No, there were not any major customer wins in the quarter that move the needle. And certainly we’re out calling on customers and we’re winning business. But I think it bears repeating from Jim’s opening remarks. I mean, it’s the model and it’s the model executing it.

If you think about the market penetration that we have with our million-dollar agents, that’s 500-plus sales people out in market that are calling on customers face-to0face fundamentally different than a call center environment. And I think what you’re seeing is customers are more welcoming to sales calls.

I think there are some concerns about where does capacity line up in 2017. And so, I think we’ve been in the right place at the right time and executing around the diversification of the model..

Okay. And then, I think, the IT spend this quarter was $2 million if I heard that correctly.

I guess what are your expectations for IT-spend around the initiative for 4Q and then maybe if you could talk to your expectations for next year, if you continue to spend on the project, what roughly are you assuming in terms of the expense?.

I was looking for my notes there. Yes, Q2, the spend was $2 million, and that compares about $0.5 million last year in Q3, so from a comparative stance, about $0.5 million last year, almost $2 million this year. We are going to kind of continue on this pace and may be increase this pace through 2017.

I think what we said for this year, we were - for 2016, we expected to be within the range of $0.05 to $0.10 impact on EPS. Year-to-date, I think we’re at $0.07 and I expect we’ll probably be at the higher-end $0.10 when we get through the year. Next year, we haven’t finalized next year, yet.

But some of the preliminary numbers I am looking at, hopefully we are at launching, we are doing a lot of training and stuff like that, and there are some costs in there. So we are looking, we probably will be higher than that $0.10. But I don’t want to commit to a number right now until we finalize what are looking at for next year’s plan..

Okay. Fair enough. Thank you for the time..

Thank you. Our next question is from Ben Hartford of Baird. Your line is open..

Hey, good morning, guys. Jim, could you provide a little context to the above seasonal volumes that you are seeing here in October? You had mentioned, it sounded like you’re positively surprised about the heavy haul business stabilizing here in the third quarter.

But as we are looking in October, how much of that is hurricane relief activity, kind of just a normal sequential seasonal improvement or maybe some of the stability that we are seeing in commodity in industrial end-markets having continuation of that heavy haul effort here in the fourth?.

Yeah, I don’t believe any of it is hurricane related. The most I heard is we hauled 25 loads or some type. I don’t think that is going to be anything significant in the quarter. And I don’t think that’s the sequential volume trend, because I think we saw those trends even before the hurricane.

And we are looking at trends that looked better than the seasonal pattern from September to October. Again, when I touch on the better seasonal pattern, it’s hard to put your hands, right, it’s slightly better. It’s not - we are not talking about a huge breakout where things are getting better.

It’s just a nice sign to see, because we haven’t had that for a while. And again, it’s broad-based, it’s hard to say where it’s coming from. Again, it’s good. We saw the flatbed volumes increase over the prior year based on - taking out those automotive loads from last year.

And the 6% growth in van volumes that we got through the third quarter and that just continued through October or at least for the first three weeks of October. It’s hard to put our hands on what’s driving it. I think we have a lot of demand on our drop-and-hook operations in our trailers. You can see that - I think that grew 8% in the third quarter.

And I think we agree to 6% in the second quarter. So we are seeing acceleration of growth on our van equipment. Yeah, so it’s a combination of everything. I think there is good execution. Pat’s done a good job of bringing new agents. I mean, I think, we over $110 million in new agent revenue for the first nine months of the year.

And our target is usually $100 million, and so we are beating that. So I think it’s a combination of everything that is going on whether it’s our drop-and-hook operations. A little bit better flatbed environment for us it deals a little better.

Now, it’s still flat the last year, but that’s good, and then execution on the some of the new agencies coming on board..

Okay. That’s great.

As a follow-up, Kevin, tax rate in the fourth quarter in 2017, what are you looking at? And then as well on the share repurchase side, what type of run rate should we expect in the fourth quarter and 2017?.

The tax rate we are modeling the 38.2% that’s our effective rate we had over the year. As far as the share repurchases, we are going to do what we normally do, we are going to watch the share price and let history be your guide there. We modeled about a 1 million shares, year-to-date we’re at 773,000 I do believe or $50 million.

So I would expect something similar to that run rate. 2017 probably the same number of shares..

Okay. That’s great. Thanks..

We are probably going to budget for 1 million shares..

Okay, perfect. Thanks, Kevin..

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

Hey, good morning, this is Greg, on for Scott..

Hey..

How would you characterize visibility in your industrial end-markets? And has there been any change in any optimism from your industrial customers in recent months?.

Greg, this is Pat. No, there is not a lot of optimism in that segment of the business..

Great. Thank you, guys..

Thank you. Our next question is from Ryan Mueller of Buckingham Research. Your line is open..

Hey, guys, thanks for the time..

Yeah, morning..

Good morning.

Can you talk about what the impact of ELDs will be on your BCOs, and how many of your ELD - how many of your BCOs currently have ELDs?.

Yeah, Ryan, this is Joe. About 67% of our BCO fleet is ELD compliant, as we speak. So we don’t really anticipate much of any impact as we continue to rollout ELDs prior to the mandate with the BCO fleet next year..

Okay.

And then as a follow-up, what’s the impact on gross margin, if one were to think there is potential lower BCO count or BCO revenue generation?.

Well, so number, so amount of revenues means more towards brokerage, because there is fewer BCOs, is that your question, Ryan?.

Yeah..

I think the best way, Ryan, for you to take a look at the last five years of the percentage of contribution from BCO and the percentage contribution in brokerage. And you can see the trend of what happens to our gross margin there. And then you could probably model it to show, bring BCO down, you should be able to model what your gross profit.

We don’t specifically get into the margins on BCO or brokerage, we kind of talk about it as a whole. We don’t really discuss our margins on brokerage or BCO.

But I think if you take a look at the historical trends, you can make some assumptions, you could probably get pretty close to with that margins going to do if you reduce or increase BCO as a percent of the total..

Okay, thanks..

Thank you. Our next question is from Jason Seidl of Cowen. Your line is open..

Hey, good morning, guys. It’s Matt Frankel on for Jason..

Hey..

Hey, first thing on the agent workflow, I just want to confirm that you guys still planning on rolling this out early next year, is that still on schedule?.

I would like to say, yes. At this point, I am being told, yes. But it’s a slow rollout. So it’s not - in our business model where you are dealing with over 1,100 independent business owners being our agents, we can’t just say, here it is, use it. So it’s almost where you are rolling out - at the very beginning we are rolling out very few agents.

And then we accelerate the growth rate. It’s going to be a roll that, that take more than a year. I mean, we’re thinking two years by the time, two to three years we get every agent on as we slowly roll it out..

Sure, understood. Do you have your hands around the productivity increase? Any - you mentioned some things down in Jacksonville or down in Florida rather a few months ago when we met with you.

But is there - do you have your hands around, what kind of benefits you could see more so than you did a few months ago as you get closer to…?.

Well, in March at our Agent Convention and we had an agent stand up and he described basically his business process. And it’s the one agent that’s utilizing the system today. But he’s basically using it with one customer.

And where he was doing a lot of manual type interactions between his carriers and the customer, the system we put in place now is a lot of automated, lot of EDI, lot of electronic communications. And our goal really is to provide, to make sure that the agents have tools that they can generate, say, $2 million revenue.

At that point they have to add an employee. And we’d like to push out $3 million. So our goal is to build efficiencies out there. And one of his comments was that before we rolled out this tool, he was probably about a $1 million - for every $1 million he had to drop in an employee. And now, he looks like it’s more of a $5 million per employee now.

You got a consider, his business was very manual, went very automated. So we are not going to see that kind of outcome with every agent. But he is our only example, but we’d like to see an agent be able to do anywhere, maybe $3 million of freight with a single employee.

That’s kind of our goal and our target and we’ll see how that rolls out as we start rolling it out to the agent base. There is more automation to it, a little bit more simplification to the process. That’s what we’re shooting for..

Understood, that’s helpful. Thanks, Jim. And the second thing is on BCOs. We’ve heard a lot of the asset-based providers talk about their desire to maintain or even shrink their fleet - their employee - I’m sorry, their owned assets; however, very happy to grow with independent contractors, because obviously it’s variable cost model.

Does that put any more pressure on you guys? Does it make it more difficult to recruit BCOs? Has it changed at all for you guys as we’ve been in the soft rate market over the last year?.

Matt, this is Joe. It really hasn’t to-date. I mean, the interest from owner operators looking to come to Landstar is at a very high level. And we continue to, again, pretty flattish from a growth rate standpoint. But the interest is very high. We are not seeing any particular signs of increased competition that we can’t meet.

We think we’re really the home of owner operators and being a completely owner-operator non-asset-based fleet, I think has its advantages in many of the programs, in the way we distribute freight and all those kind of things. I think we’re now at the end of the day against most of the asset-based models, that we’re trying to be both..

Thanks, guys. I appreciate the time..

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

Good morning, guys..

Good morning..

A quick question on the gross margin again, I think you said the total gross margin percentage softened or kind of come back a little bit, because of the mix of the brokered carrier business.

But are you not seeing hits of softening gross margin percentage on the brokerage business alone, when you consider the soft pricing in terms of the sell rate to customers?.

Yeah. I think if you look quarter-over-quarter we did have a slight increase in our PT rate..

Yeah. The brokerage buy rate was up about 48 basis points sequentially..

Okay. So there would be some softening on the brokerage front like that we should be seeing throughout the market at the time. Okay, thanks..

Yes, yes, yes..

Thank you once again. I’m sorry. Thank you once again [Operator Instructions] Our next question is from Todd Fowler of KeyBanc Capital Markets. Your line is open..

Thanks for taking the follow-up. Jim, just on the increase in the drop-and-hook, can you talk a little bit about the customer base that you’re doing that with. And I think about your business as being a little bit more transactional versus contractual.

But just drop-and-hook get you more into the contract market with certain customers or how does that change the profile of the business if it does at all?.

Hey Todd, this is Pat. Again, the customer base that we are tracking is broad-based. And if you just think about the business model and the natural diversification that the agent model kind of brings to the table, it’s not surprising that it’s very broad-based.

As it relates to contractual versus spot pricing, clearly in some of these accounts there is contracted pricing. We feel very comfortable with the pricing that we have in those situations. But in some of it, it’s also spot business.

So again it’s broad-based; it is multiple accounts; it’s many industries; and it’s just a reflection of the Landstar business model..

Okay. So, Pat, just because you’re doing more drop-and-hook, doesn’t necessarily mean that you’re doing more with like large national shippers in a contract rate-ish, just that you’re providing a different service across a very broad customer base and you have the trailer capacity to do different things at this point..

That is correct..

Okay.

And then just for my last follow-up, on the comments on the incentive compensation in the quarter or the impact, is that just the comparison versus the third quarter of last year you had incentive compensation or a higher amount of incentive compensation and you don’t have anything this quarter or was there some sort of adjustment to incentive compensation accruals as a result of where you were trending? I wasn’t sure if I followed that completely..

Hey, Todd, this is Kevin..

Hey, Kevin..

In the third quarter, the year-over-year decrease was about $2.5 million. It should be about $1.5 million in the fourth quarter..

Got it, okay, guys. Thanks for the follow-up..

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

Thank you, Danica. Thank you and I look forward to speaking with you again on our 2016 yearend earnings conference call, currently scheduled for February 2,, 2017. Have a nice day..

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