Jim Gattoni - President and CEO Kevin Stout - VP and CFO Patrick O'Malley - VP and Chief Commercial and Marketing Officer Joe Beacom - VP and Chief Safety and Operations Officer.

Bascome Majors - Susquehanna Financial Group Jason Seidl - Cowen Securities Jack Atkins - Stephens, Incorporated Scott Group - Wolfe Research Todd Fowler - KeyBanc Capital Markets, Inc. Amit Mehrotra - Deutsche Bank Benjamin Hartford - Robert W. Baird Matt Brooklier - Longbow Research LLC Daniel Hultberg - Oppenheimer Matthew Young - Morningstar.

Good morning and welcome to Landstar System, Incorporated Year-end 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 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 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 2000 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 for 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.

Our 2016 fourth quarter performance significantly exceeded our expectations. During on October 20, third quarter earnings conference call we provided fourth quarter revenue guidance to be in the range of $800 million to $850 million and diluted earnings per share to be in the range of $0.85 to $0.90.

Revenue in the 2016 fourth quarter was $893 million and diluted earnings per share was $0.94, both above the high-end of the guidance. Revenue exceeded our expectations almost entirely due to increased loads hauled via truck.

Loads hauled via truck in the 2016 fourth quarter increased 11% over the 2015 fourth quarter, significantly ahead of our low single-digit growth expectation. In comparing 2016 fourth quarter truck loadings to the 2015 fourth quarter, the 2016 fourth quarter included 14 weeks, while the 2015 fourth quarter included 13 weeks.

And at the time of Christmas Day, on Sunday in 2016, versus Friday in 2015 was more favorable for increased productivity than in the 2015 fourth quarter. We estimate that the favorable timing of Christmas in 2016 plus the extra week contributed approximately 30,000 loads to the 2016 fourth quarter.

Additionally the 2015 fourth quarter included 19,000 loads hauled via flatbed equipment under a special project for an automotive customer that ended at the end of 2015.

Excluding the estimated loads hauled due to the favorable time of Christmas and the extra week in 2016, and the loads haul for the special project in 2015, most hauled via truck in the 2016 fourth quarter increased approximately 8% over the 2015 fourth quarter. That increase was broad based among many customers and industries.

Revenue from our top 100 customers based on 2015 revenue was slightly higher than 2015, excluding the revenue from the special project, while revenue from all other customers increased 17% in the 2016 fourth quarter over the 2015 fourth quarter.

The increase in truck loadings over our previously issued guidance was mostly generated in December, however both October and November loadings were also slightly higher than we had previously forecast. We expected loadings hauled via truck in October and November to be at or slightly below prior year's October and November loadings.

Actual October and November truck loadings were almost 3% higher than the prior year's same period. December truck loadings increased 24% over the prior year December, driven by a surge in e-commerce related freight, an extra business week in 2016, the timing of Christmas and the momentum carried over from the two prior months.

Productivity in the last two weeks of December was much higher than we expected, the growth in loadings from customers that drive e-commerce related revenue also exceeded our expectations. Revenue from those customers contributed 8% of revenue in the 2016 fourth quarter.

Through the first nine months of 2016 those same customers contributed 4% of revenue. As it relates the revenue per load, we expected revenue per load unloads hauled via truck to be below the 2015 fourth quarter in a mid-single digit percentage range.

Revenue per load unloads hauled via truck in the fourth quarter was at the high end of our range of guidance just 4% below the 2015 fourth quarter. Revenue hauled via rail, air and ocean cargo carriers was in line with expectations, as 2016 fourth quarter load volumes increased 6% over the 2015 fourth quarter.

Revenue per load, unloads hauled by each of these modes in the 2016 fourth quarter were below prior year. We experienced lower quarter over prior year quarter revenue per load on each of these modes throughout 2016. Revenue per load unloads hauled via van equipment and unsided/platform equipment were both 3% below prior year's fourth quarter.

Given that the 2016 fourth quarter have an extra week and the favorable timing of Christmas Day as compared to 2015 fourth quarter, the number of load hauled via van equipment during the 2016 fourth quarter was 18% above the 2015 fourth quarter, while unsided/platform loadings decreased 5%.

Excluding the loads hauled via flatbed equipment in 2015 related to the automotive project, the number of loads hauled via flatbed increased 12% in the 2016 fourth quarter over the 2015 fourth 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 in drop-and-hook operations was 34% of truck loadings in the 2016 fourth quarter, and increased 17% over the prior year.

As it pertains to sequential revenue trends, revenue per load unloads hauled via truck increased 1% over the 2016 third quarter, which is consistent with the growth in revenue per load unloads hauled via truck in recent years when moving from the third quarter to the fourth quarter.

Gross profit increased 5% compared to the 2015 fourth quarter, gross margin ended 2016 fourth quarter was equal to the 2015 fourth quarter at 14.9%. Here's Kevin with his review of other fourth quarter financial information..

Thank you, Jim. Jim has covered certain information on our 2016 fourth quarter, so I will cover various other financial-information included in the press release.

Gross profit, defined as revenue less the cost of purchase transportation and commissions to agents increased 5% to $132.8 million and represented 14.9% of revenue in the 2016 fourth quarter compared to $126.4 million or 14.9% of revenue in 2015.

Excluding the effect of the extra week and the timing of Christmas in the 2016 period, and excluding the effect of the automotive award from the 2015 period, gross profit grew approximately 4% in the 2016 fourth quarter. The cost of purchase transportation was 76.7% of revenue in both the 2016 and 2015 quarters.

So rate paid to truck brokerage carriers in the 2016 fourth quarter was 9 basis points higher than the rate paid in the 2015 fourth quarter. Commissions to agents were 8.4% of revenue in both the 2016 and 2015 fourth quarters. Other operating costs were $8.2 million in the 2016 fourth quarter compared to $7.2 million in 2015.

This increase was primarily due to the increased trailing equipment cost and increased contractor bad debt. The company have increased its company controlled trailer fleet to 11,305 trailers, a 5% 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 cost were $14.5 million in the 2016 fourth quarter compared to $11.1 million in 2015. Total insurance and claims for the 2016 quarter were 3.6% of BCO revenue compared to 2.9% in 2015. The increase in insurance and claims in the 2016 period was mostly due to increased severity of commercial trucking accidents.

Selling general and administrative costs were $37 million in the 2016 fourth quarter compared to $37.9 million in 2015. The decrease in SG&A cost was primarily attributable to a decreased provision for bonuses under the company's incentive compensation program and decreased stock compensation expense.

Partially offset by increased cost associated with the company's multi-year project that we believe will increase efficiencies primarily through technology and improve the processing of transactions from order to delivery at both the agent's office and at Landstar.

SG&A expense as a percent of gross profit decreased from 30% in the prior year to 27.9% in 2016. Depreciation and amortization was $9.7 million in the 2016 fourth quarter compared to $7.8 million in 2015.

This increase was due to the increase in the number of company owned trailers and the fact that only 10% of our fleet was fully depreciated at the end of 2016, when historically we've been at 20%.

As it relates to operating leverage, operating income was $63.8 million or 48% of gross profit in the 2016 quarter versus $62.6 million or 49.6% of gross profit in 2015. Operating income increased 2% year-over-year. The effective income tax rate was 36.9% in the 2016 fourth quarter compared to 38.9% in 2015.

The effective income tax rate which has historically approximated 38.2% was impacted in the 2016 fourth quarter by favorable state tax true ups. The 2015 fourth quarter tax rate was impacted by unfavorable state tax true ups. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $245 million.

Cash flow from operations for the 2016 year-to-date period was $190 million, cash capital expenditures were $23 million and the company acquired $62 million in trailing equipment financed under capital leases. Cash capital expenditures included approximately $17 million related to the company's new transload facility in Laredo, Texas.

During the 2016 year-to-date period, we purchased approximately 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. Overall I am pleased with the full year 2016 results. Full year revenue decreased approximately 5% compared to 2015 on a 3% increase in the number of loads hauled, which was more than offset by decreased revenue per load on all modes. Considering the soft U.S.

economic environment during 2016 and the difficult year-over-year comparison due to the 51,000 loads hauled in 2015 from an automotive customer for the special project we produced the second highest annual gross profit in the company's history.

More readily available truck capacity and lower fuel cost contributed to the 7% decrease in revenue per load on loads hauled via truck during 2016. Although there's uncertainty in the U.S.

economic environment in 2017, I expect given recent economic conditions and higher fuel cost to start the year we will see a low single-digit revenue per load increase in 2017, with little impact from the ELD mandate until later in the year.

Gross profit margin expanded during 2016 due to the more readily available capacity and an increased percentage of revenue hauled via BCOs in 2016 compared to 2015. I expect truck capacity to continue to be readily available given no expectation of a significant increase in demand.

We continue to attract qualified agent candidates to the model; revenue from new agents exceeded $100 million for the third consecutive year. During 2016, 502 agents generated $1 million or more of Landstar revenue. We began 2016 with a record number of trucks provided by business capacity owners.

During 2016 we've recruited more BCOs than we have in many years, however we also experienced a slightly elevated BCO turnover rate. BCO turnover in 2016 was 35%. We expect continued strength and recruiting in 2017.

With a record number of third party broker carriage haul freight on behalf of Landstar during 2016 and exceeded 47,000 approved truck broker carriage for the first time in our history. Our network is strong and continue to attract third party truck capacity.

With a challenging 2016 in relation to insurance and claims costs, increased severity of accidents and increased insurance premiums on our commercial trucking liability coverage, caused by decisions of two large insurance carriers to leave the trucking casualty market in early 2016, drove insurance and claim costs to the second highest amount in Landstar history.

In 2016 accident frequency was slightly higher than our historical annual frequency experience. Although accidents in the trucking industry can be severe and occurrences are unpredictable, I continue to believe that insurance and claim costs will approximately 3.3% of BCO revenue over the long-term.

We continue to see increased demand for our trailer drop and hook services where we drop a trailer or pull a trailer with the customer we desire flexibility with loading time. In response we have increased the number of company owned trailers in 2016.

Additionally to comply with California Air Resource Board Carbon Emission Standards over the past five years we swapped older non-compliant trailing equipment with new equipment at a faster pace than we would have under normal circumstances.

Satisfying the car requirement along with the recent growth in the number of trailers owned drove the average age of a trailer down resulting in lower percentage of our trailers being fully depreciated.

Although we plan to buy fewer trailers in 2017 than we have in the past five years, we expect to see depreciation increase through 2017, as we replace approximately 800 older fully depreciated trailers with new equipment and also due to the impact of the age of our existing fleet.

Truck conditions tightened slightly during December mostly due to the surge in e-commerce activity. I expect truck capacity to become more readily available in the 2017 first quarter, as compared to the 2016 fourth quarter as a surge in e-commerce subsides.

I expect gross profit margin to be in a range of 15.5% to 15.8% in the first quarter, assuming fuel prices remain relatively stable and truck capacity remains more readily available during the first quarter. Seasonally, revenue per load on loads hauled via truck in the first quarter is typically lower than the second, third and fourth quarters.

During the first few weeks of January revenue per load on loads hauled via truck is slightly below January 2016. Truck capacity seems to be holding at a consistent level. I expect a number of loads hauled via truck in the 2017 first quarter to increase over the prior year first quarter to mid-to-high single-digit percentage range.

Based on the continuation of recent revenue trends I currently anticipate 2017 first quarter revenue to be in the range of $725 million to $775 million.

Based on that range of revenue and assuming insurance and claim costs are approximately 3.3% of BCO revenue, I anticipate 2017 first quarter diluted earnings per share to be in the range of $0.70 to $0.75. Our 2016 results reflected a soft operating environment and low economic growth in the U.S.

that negatively impacted revenue per load on loads hauled via truck. Even with these challenges and typical year-over-year comparison, 2016 earnings per share was a second highest earnings per share in the company's history. We continue to focus on profitable load volume growth and increasing our available capacity to haul those loads.

With continued load volume growth we are well positioned for the pricing environment improvements. And with that Danica we will open to questions.

Danica?.

Thank you very much, sir. At this time, we will begin the question-and-answer session. [Operator Instructions] Our first question is from Bascome Majors of Susquehanna Financial Group. Your line is open..

Hey, Bascome..

Hi, good morning. It feels like you have an excellent opportunity this year to grow your gross to net revenues, but as you play on the releases from your comment here you are also facing some fairly large operating cost headwinds as incentives comp comes back and the IT spend gets a little bit higher.

Is your long-term target for the 70% incrementals is that going to be within reach this year do you think or are these SG&A expenses going to push the opportunity for these type of incrementals out to maybe 2018 or '19?.

Over a longer period of time yes, I think we get back to the 70%, we look at average over three to five year periods.

In '17, whenever we miss a year when it's target - when the ICP doesn't - where there is no bonuses basically in a prior year that makes a 70% little more difficult to achieve, but like over a three year period as that kind to be evens out, yes, we do expect to be back of it, in '17 I think it's going to be difficult with some of these cost coming in..

Well, thank you for that.

And just you mentioned buying a fewer trailers this year year-over-year but still bunching that fleet, can you give us a sense of what CapEx is going to look like this year and including what sort of capital lease expense that we should have in there?.

Bascome that came a little choppy, other than I heard some at the end of the capital leases, you were breaking up a lot, something about trailer..

Yes I apologize so, just some thoughts on CapEx this year and what sort of….

You are breaking out, you are not coming through..

All right apologies..

Next, we'll go to next question..

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

Hey, gentlemen. Good morning and thanks for taking my question.

Wanted to concentrate a little bit on a slippage [ph] side of the business, how do you think 1Q is shaping up looking at just that area versus 4Q? I know energy is not a big portion of what you do however we are hearing that the energy market is sapping up a lot of capacity here early on this year I love to hear your thoughts..

Hi, Jason this is Pat. We have seen some movement in the energy markets, but again it's of a very, very, very low base.

But if you think about Landstar in the natural diversification of our business not only energy, but - and I think Jim outlined it nicely in his opening remarks, 17% growth in those accounts below our top 100, gives you an idea of just that wide diversification.

So whether it's energy market or it's machinery or it's building materials again that wide diversification of business that we handle, I think makes us well positioned on that platform side..

And when you think about the building material side, could you remind us about your exposure to that end market.

I mean we clearly not only for just residential and I think for commercial as well with a lot of the infrastructure projects potentially being green lighted at the end of this year, I think that flatbed capacity could tighten even further as we look out into 2018 just love to get a reminder there..

Yes, based on the building material side, it's about 8% of our total business so we don't have tremendous exposure on that side..

Okay. And I think looking on the CapEx side, you said you are going to be replacing a lot of your trailers here in 2017, that's why we should expect depreciation to keep ramping up. I didn't catch the total CapEx budget for '17 I might have missed that..

Yeah, Jason on the trailers because of their curb initiative we've had replaced a lot of our trailers. The reason the depreciation is going to go up at the end of 2016 only 10% of our fleet was fully depreciated and normally runs in the 10% range.

So I expect deprecation on a quarterly basis to go from about $10 million to just under $11 million in the fourth quarter of 2017. So that will ramp up a little bit. We only expect to replace about 700 trailers this year so that impact will taper off in 2018 and '19, but we're going to have a peak year of depreciation in 2017..

Right. So it's more of a just the depreciations schedules and how they head versus the overall CapEx spend for '17..

And as far as the CapEx for the year, the cash CapEx we continue to believe about $8 million, $5 million to $8 million on an annual basis so the good number there. That does not include the capital leases for the trailers at about say, we do 700 trailers next year, vans run about $31,000..

Hello, Hello?.

One moment please it seems there is a technical difficulty..

Hi, we're back. We had a technical malfunction. Are people on - open up to a question..

Yes, guys can you hear me it's Jason..

Actually yes we can hear much better it was coming off....

Perfect. Well, listen guys I was just about to say I am glad your fourth quarter performance was better than that of your conference call providers. You guys kind of cut out when you were answering your capital leases and what you're planning to do and that's when I completely lost you..

Right. Jim through at about 700 trailers will no growth anticipated for next year. But we'll trade out about 700 vans at $31,000 or there about that would be what the capital lease adds would be for next year. The cash lease probably $5 million to $8 million that's what we average so..

Okay prefect well listen gentlemen thank you for your time as always..

Thank you. Our next question is from Jack Atkins of Stephens, Incorporated. Your line is open..

Hey Jack..

Hey guys good morning and congrats on a very nice quarter here. So I guess to start off with Jim, could you maybe comment a little bit about your cross-border business.

I know you all just completed a new service center in Laredo to service the U.S., Mexico cross-border business, but sort of curious how big of business that is for Landstar and sort of how do you see that developing in light of potential policy changes coming out of Washington?.

Hey Jack this is Joe Beacom I'll just for a second about the center. We've had a facility down there since the late 90s so we've been in the facility that we were in since '99. And we do about 120,000 loads north or south in a given year to approximately $300 million worth of business.

And we came pretty evident back in '14 that we were outgrowing the facility that we were in. We had to lease additional space to house our platform trailers, because they do a lot of platform business across the border as well as van business.

And so we started the process of looking how to expand the facility to be a little bit more attractive for our service providers, as well as bringing efficiencies to the operation. And we also identified opportunities to service customers better with an ability to transload shipments.

So that's really the essence of why we started the process to invest in a new service center there. And we think the center we've got now is state-of-the-art, it's a got a lot of space for growth into the future. At this point, there hasn't been any significant reduction in volume as a result of all the rhetoric that's going on.

If you think about, there is hundreds of billions dollars of trade I don't think that stops. I think our investment just positions us better to service a broader range of customers a little bit more efficiently, and to be a little bit more timely in our servicing of capacity providers who come in and out of the property on the 11 hour clock.

So we think it's a good investment and to this point it's a lot of talk about NAFTA and renegotiating NAFTA, but at this point I think it's pretty much premature to think that that will have any dramatic impact in the short-term..

Okay Joe, that's really helpful. Thanks for that that color. And then as my follow-up question, just sort of curious Kevin and Jim, when you think about the growing sort of net cash balance here at its highest level it's been in several years, I know the plan is to most likely continue to buy back stock over the course of this year.

But given the cash flows of the company given the where the balance sheet is situated which is very strong, any possibility of accelerating that or maybe doing something different with the dividend?.

Yeah, we actually had that conversation in every Board Meeting and at this point the $250 million or so we have in the balance sheet isn't cause to react if continues clearly we prefer the stock buyback program, we have always been that way we've buying stock back forever. Although with the recent run up, we don't chase run ups in stock, right.

So and it's run ups since the summer up to year end. So if it continues to run up and we see an opportunity we'll look at special dividends the way you have over the last four years. So those are the two options we typically look at. But we are not really committing to anything other than to continue our stock buyback program for now.

And then we'll make a decision over the next three to six months on whether we make any dividend decisions..

Okay, great. Thanks for giving the time guys..

Next question..

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

Good morning, Scott..

Hey, thanks, morning guys. So wanted to ask about the BCO count, Jim I think you said that you're seeing kind of a pickup in turnover at the BCO level.

So what do you think striving that is that just kind of the environment here? And can you just give us an update on what percent of your BCOs have ELDs and maybe the difference in productivity that you see from a BCO with an ELD and one without an ELD?.

Hey Scott, this is Joe Beacom. I will take that question. Yes, we did see a little bit of uptick in turnover in 2016, the recruiting year was very strong as Jim mentioned in his comments. But I do think that a lot of the BCOs coming into the system, it was a little bit of a tough year, if you think about it.

So we did see some turnover in the newer BCOs and the turnover we lost 60 trucks in December of those 60 that we lost in September almost half of those were just in the Christmas week and the New Year's week, it's kind of like they planned to shut down for some period of time.

We're unsure is to whether they came back that happens quite frequently where guys will terminate and then take care of some business or maybe fix their truck of whatever and then come back.

So that's not for sure, but the recruiting environment remains good in the first month of the year, interest is high, adds are strong, we clearly need to continue to focus on retention and produce some net growth there in 2017 that's our aim.

About 75% of our fleet is ELD compliant and we are in the process of starting here in a week or so to canvas the remaining 2,200 [ph] BCOs about what their plans are to implement ELDs.

These are the - if you remember how we approach the ELD mandate, if you are a BCO and you were violation free you didn't have to get an ELD you couldn't get an ELD you didn't have to and that's still the way we're operating. So we have got 2,000 guys who haven't had a log violation of any significance in the last couple of years.

We have programs to migrate them to ELDs and we are beginning those conversations now in order to make that occur..

And then just do you see a productivity difference between the 75% of guys with ELDs and the 25% without?.

Yes Scott we have looked at that a couple of different times over the last couple of years and we have not seen any degradation in productivity from the pool with ELDs against those without there isn't a difference..

Does that tell you that we shouldn't expect the big impact from ELDs or do you think there is something specific about your BCOs why they would be even ones without ELDs would be compliant and....

Scott I think it's more about our model and how our guys go about finding their loads. They're planning their future, they're planning their next load.

And I think they have earned a much better position to make load selections based on their available hours they're not trying to be placed into a fixed solution for a customer they're just I think better at managing their time and managing their way through the hours of service.

So I think that probably more consistent with how we operate, I would not attribute that to the rest of the industry. I think some of the productivity challenges that are cited by others in the company iron world are probably very real..

Okay. And then just last thing real quick. In terms of the first quarter volume outlook, so I know there is a favorable calendar versus a year ago.

How much you think that is helping volumes in the first quarter have you factored that into the guidance?.

It's probably worth 7,000 or 8,000 loads about first week of January because of the timing because the New Year's Day was on Sunday this year and last year I think it was on Tuesday. So we pretty much have that first week of January is pretty much a fully productive week. So I would say you probably add 7,000 or 8,000 loads for the first quarter..

Okay. Thank you, guys..

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

Great good morning everyone. Jim just on the growth that you saw with e-commerce particularly in December. I know that you've had some exposure there in the past, but it seems like it was pretty strong here this year.

Is there anything specific that drove that and is that something that is handled at the agent level or is more of a kind of a strategic initiative? And then can you also talk about as most of that done at the spot rate or is there other contracts in place for some of that pricing?.

Todd this is Pat you're correct. We have been performing in that market for one large provider for over 20 years. As we have expanded the number of accounts that we cover in that space it is largely driven by a corporate sales initiative and executed by the agent.

So we have corporate representative kind of driving that through those e-commerce companies and then of course in the model the agents execute. And I think that's a big difference maker in that business..

And Pat as most of that done at the spot rates and what's the margin profile in that compared to maybe more traditional non-e-commerce type business?.

The overwhelming majority of that is done at a set price..

Okay great.

And just for my follow-up on the flatbed side given where your exposure is, what are some of the leading indicators that you're focused on that would really help driving either the volume improvement in those end markets as well as the rate side? I mean what are some of the things that you're paying attention to, to anticipate either an uptick on the flatbed or the unsided business?.

Oil and gas, infrastructure spend, commercial and residential building. That's the thing that absorbs the flatbed market. And not that we participate directly in those, but it would tend to tighten up capacity those are three we look at..

Yeah not some of the shorter cycle stuff but a little bit of longer cycle..

Yes..

Okay, all right. Nice quarter today guys. Thanks for the time..

Yes thanks..

Thank you. Our next question is from Amit Mehrotra of Deutsche Bank. Your line is open..

Great thanks for taking the question. Wanted to understand the company's ability to sort of retain and growth the BCO count in maybe a very tight truck load market or maybe a fast increasing rate environment. I mean do you continue to have high turnover, but it's just easier to recruit on a net basis sort of flat or even ahead.

Just trying to understand how that changes from a just a cyclical standpoint. Thanks..

Thanks, Amit this is Joe. Yes the BCO recruiting environment, BCO has come here for a lot of reasons and independence to capitalize on a strong environment when you mentioned the rate environment. As rates improve because BCOs get paid a percentage of revenue they see the rate increases instantaneously with each successive load.

So that is a large recruiting point for us and we do seem to see a lot of guys come on for that and stay for that. But really it's the fundamental of the opportunity, the freedom to make choices and to earn a good living here.

And I think that's really what drive that I think we have seen some turnover increase up to 35%, which is still by industry standards very good. But a little bit higher than our recent performance.

And that I think just was a function of a challenging rate environment and I think with capacity being more readily available it was just a little bit tougher to perhaps get the productivity that they were looking for. And you saw some turnover that we hadn't historically seen..

Yes just quickly follow-up on that.

So are you saying that does it become easier to grow the net BCO count in a very tight truck load market or is it not super, I mean I am just trying to understand does it get easier or does it get a little harder or is it neutral?.

It's never easy to net grow, because our standards are pretty high, right. So but I do think it's easier to retain BCOs in an increasing rate environment and you get an increasing rate environment when capacity is a little bit tighter. So that's kind of how I would look at that..

Got it okay thanks. And just one follow-up on just the BCO mix dipping below 50%, I mean is that just seasonal maybe exacerbated by the e-commerce surge in December.

Just trying to understand if that's more seasonal or structural and how that changing mix would impact the margin or the variability of the operating margin?.

I mean I think it demonstrates the flexibility of the model. So as e-commerce business and other business opportunities increased in the fourth quarter, we were able to source enough capacity to serve those customers. I think it's just a reflection of the model executing in an environment where there were many opportunities..

Right.

And then just one last one on the convention, can you just talk about the timing of the convention that can impact the cadence of the expense in a year?.

Second quarter..

Second quarter, great. Okay thanks guys congrats on a good quarter..

Thank you..

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

Hey good morning guys.

Kevin just I know you outlined in the release the potential bonus provision in 2017, but can you remind us how that engages I think looking at the proxy, you look back to 2015, I believe it looks like that you guys had achieved the target in 2015 and look like it assumed kind of a gross EPS growth number of about 13% and the net number being about 10.

I guess the question is when we think about the potential engagement of the bonus provision in 2017 the number that you had highlighted are those metrics that are in the most recent proxy? Are those numbers that - are those rough targets to think about for 2017 or do those change on a year-to-year basis?.

They change on a year-to-year basis. There is a lot of considerations when we put target together. What's the economic environment look like? What's capacity, you got to look at what you think pricing is going to do.

So you can't look at a proxy, you can't look like the five - last three or four years of pricing and say hey we typically have building a 10% growth rate because there's really a lot more.

We're trying to do a grounds up budget target process, so it doesn't work the way you'd look at it I don't think you could determine by looking at a prior year proxy and term what our targets are. We don't necessarily share our targets..

Hey Ben, the best way to look at that is if we hit our target for 2017 the ICP number will be about $8 million. So $2 million a quarter is the best way to look at that..

Okay, that's great, that's helpful.

In that vein for the '17 targets for the IT cost rising kind of trending in '16 at the top end of your initial projections, can you talk about why that market is rising, are you pulling forward any spend or are you finding that the project is running a little bit more expensive than previously saw some perspective there would be helpful..

I think it's running as what we expected. As we're ramping up there was more we hit the high-end of our range in 2016 there was probably a little bit more software development than we thought we needed in the system. We expect to have a similar level of that this year. And then there is some launch cost in there that's why it's a little bit higher.

But these are very specific costs very - we watch them closely and it's mostly helping us build out the product when we're done building out the product it turns into training and launch cost. So we expect that this will continue on for the next two to three years at probably the similar rate of cost..

Okay.

The bottom line is the scope of the project hasn't changed and the timeline of implementation has not changed you still feel like it's as you had talked about, about a year ago?.

No I will say - I will tell you that we're a year behind the original plan..

Okay, that's helpful. Thank you..

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

Hey thanks good morning.

Can you talk to what percentage e-commerce represented of your revenue this quarter versus last quarter? I'm just trying to get a sense for how much it contributed to the upside here?.

Yes we refer to e-commerce we're dealing with certain companies that are impacted by e-commerce. So we refer to that as e-commerce. Some of that stuff that we're hauling for those companies may not be e-commerce.

So the way we describe it was of those companies who highly impacted by e-commerce, which is a lot of their business that we haul for them it was 8% of our revenue in the fourth quarter, it ran 4% for the first three quarters. So I would assume that that 4% increase for those customers was mostly the e-commerce surge..

Okay.

Do you have that number for fourth quarter of '15?.

Kevin may..

I can follow-up if you don't have it right here..

We're shuffling papers..

Okay, I'll ask my follow up question while you look..

I will get that by the end of the call..

Okay, fair enough. And then were there any other big customer wins age in additions in the quarter your volume was very strong in fourth quarter. I wouldn't describe that the trucking environment as robust from a volume perspective in general during fourth quarter.

So I'm just trying to get a feel for if there are any other factors that added to the volume upside in the fourth quarter and what's kind of sustainable going forward..

Matt this is Pat I think that in Jim's opening remarks he mentioned that it was broad based across many industries, agents and customers. And that held through in the fourth quarter as well. So there wasn't any specific large win with the customer with significant aging addition it was just again that broad based nature of the business..

Okay. So it sounds like it was just good growth with your existing customer base..

That is correct..

Okay appreciate the time..

Hey Matt on the e-commerce question, e-commerce related customers in fourth quarter of 2015 represented about 6% of our total revenue..

Okay, thank you..

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

Good morning this is Daniel in for Scott. Can you just walk us through the end markets driving your first quarter '17 volume guide? And if you can discuss if you anticipate any significant project work in '17. Thank you..

This is Pat again we'll go back to Jim's comments about being broad based it continues to be broad based across the number of industries, agents and customers.

And at this point we don't anticipate any project work and project work is by nature somewhat of a surprise because the customer has the disruption in their supply chain and they come to Landstar for the solution.

So at this point we don't have any projects planned and again it remains very broad based across a number of industries, agents and customer..

Okay thanks.

And the follow up on the alternative energy side with wind power, anything in that pipeline for 2017?.

Line of sight into that business remains consistent year-over-year. We anticipate similar to what we did in 2015..

Thanks guys..

Thank you. [Operator Instructions] our next question is from Matt Young of Morningstar. Your line is open..

Good morning how are you? I had a quick follow-up on the trailer purchases.

I think you mentioned 700 range for 2017, would that be the typically maintenance or refresh run rate longer term outside of any major growth initiatives?.

We try and turn our trailers about every eight years. We have say 10,000 van trailers right now. So we'd probably replace a little bit of over 1000 each year. Because if we stayed into that routine we were up at about 1400, 1500 for a while that get in compliance with CARB..

Okay, that make sense.

And then just a follow-up on the IT spend, I think you mentioned the cost will continue for a few more years would that imply that we should expect the $6.5 million to $9.5 million run rate each year does that taper down?.

Well of course we hope it tapers down. But I think it's going to run at $6.5 million to $9.5 million, it's really hard for me to say right now because as you move from deployment to launch it's a pretty big estimate on what the training is going to cost us. But the estimates I have would be in the range we're talking about.

So that would continue until we get everybody implemented..

Fair, enough. 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. And thank you and I look forward to speaking with you again on our 2017 first quarter earnings conference call currently scheduled for April 27th. Have a nice day..

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