James B. 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.

Seldon Clarke - Deutsche Bank Scott Group - Wolfe Research Jack Atkins - Stephens, Incorporated Todd Fowler - KeyBanc Capital Markets, Inc. Matthew Frankel - Cowen & Company.

Good afternoon, and welcome to Landstar System Incorporated's First Quarter 2017 Earnings Release Conference Call. All lines will be on 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. And now I would like to turn the call over to Mr. Jim Gattoni. Sir, you may begin..

Thank you, Rita. Good morning, and welcome to Landstar's 2017 first 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 statement 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 the uncertainties and risks, including, but not limited to, the operational, financial and legal risks detailed in Landstar's Form 10-K for the 2016 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.

Our 2017 first quarter performance exceeded our expectations. First quarter revenue, gross profit, operating income, and diluted earnings per share were all first quarter records.

During our February 2nd year-end 2016 earnings conference call, we provided 2017 first quarter revenue guidance to be in a range of $725 million to $775 million and diluted earnings per share to be in a range of $0.70 to $0.75.

Revenue in the 2017 first quarter was $781 million and diluted earnings per share was $0.77, both above the high end of the guidance. Revenue exceeded our expectations due to increased loads and revenue per load on loads hauled via truck.

Loads hauled via truck in the 2017 first quarter increased 10% over the 2016 first quarter, ahead of our mid-to-high single-digit growth expectation. In comparing 2017 first quarter truck loadings to the 2016 first quarter, the fact that January 1, 2017, fell on a Sunday and January 1, 2016, fell on a Friday favorably impacted our productivity.

We estimate that the occurrence of New Year's Day on a Sunday in 2017 versus a weekday in 2016 favorably impacted the number of loads hauled during the 2017 first quarter by approximately 2%.

Excluding the favorable impact in January of the timing of New Year's Day, we saw consistent growth in truck volumes in each month of the quarter, with truck loadings increasing over the prior year month by 9%, 7%, and 9% in January, February, and March respectively. The increase was broad based amongst many customers and industries.

Our customer base is highly diverse. Revenue in the 2017 first quarter from our top 100 customers based on 2016 revenue was slightly lower than 2016, while revenue from all other customers increased 18% in the 2017 first quarter over the 2016 first quarter.

As it relates to revenue per load, we expected revenue per load on loads hauled via truck to be equal to or slightly below the 2016 first quarter. Revenue per load on loads hauled via truck in the 2017 first quarter was 1% higher than the 2016 first quarter.

The trend in revenue per load on loads hauled via truck improved each month of the 2017 first quarter as revenue per load was 2% lower in January 2017 as compared to January 2016, up slightly in February over prior February and plus 3% in March over prior year March.

The favorable trend in the growth rate and revenue per load on loads hauled via truck was partly due to easier March over prior year March comparisons and with favorable gains in unsided/platform revenue per load in the 2017 first quarter.

In March 2017, we experienced a more normal seasonal uptick in revenue per load as compared to February, whereas in March 2016, revenue per load was lower than February. Historically, revenue per load in March is typically slightly higher than February.

The number of loads hauled via rail, air and ocean carriers was slightly lower than the 2016 first quarter, and a softness in rail intermodal loadings was mostly offset by increased air and ocean loads. Revenue per load on loads hauled by each of these modes in the 2017 first quarter was below the prior year.

Revenue per load on loads hauled via van equipment was 1% below prior year's first quarter. The percent decrease was relatively consistent each month of the quarter. Revenue per load on loads hauled via unsided/platform capacity increased 5% over the 2016 first quarter. The percentage change improved each month as we moved through the quarter.

The improvement was somewhat due to easier comparison to prior year's month-to-month trend. The 5% quarter over prior year quarter increase was also partly attributable to a 2% increase in the average length of haul. Overall, we have experienced a normal seasonal uptick in revenue per load from December until the end of the first quarter.

The number of loads hauled via van equipment during the 2017 first quarter was 11% above the 2016 first quarter, while unsided/platform loadings increased 8%.

Overall, volume increases were strong throughout each month of the quarter for both van and unsided/platform equipment, but even more so in January as a result of the timing of New Year's Day in 2017 versus 2016, as previously mentioned.

The number of loads hauled via vans or controlled trailing equipment was mostly van equipment hauled by BCOs and drop-and-hook operations with 34% of truck loadings in the 2017 first quarter, an increase of 11% over the prior year quarter. Here's Kevin with his review of other first quarter financial information..

Thanks, Jim. Jim has covered certain information on our 2017 first quarter, so I will cover various other financial information included in the press release.

Gross profit, defined as revenue less the cost of purchased transportation and commissions to agents, increased 8% to $121.6 million and represented 15.6% of revenue in the 2017 first quarter compared to $112.2 million or 15.8% of revenue in 2016. The cost of purchased transportation was 76.3% of revenue in the 2017 quarter versus 75.9% in 2016.

The rate paid to truck brokerage carriers in the 2017 first quarter was 55 basis points higher than the rate paid in the 2016 first quarter.

Commissions to agents as a percentage of revenue were 13 basis points lower in the 2017 quarter as compared to 2016, due to a decreased net revenue margin, revenue less the cost of purchased transportation on loads hauled by truck brokerage carriers. Other operating costs were $6.9 million in the 2017 first quarter compared to $7.4 million in 2016.

This decrease was primarily due to decreased trailing equipment maintenance costs as the age of the fleet has decreased over the past few years.

The company currently has 11,223 trailers in its company-controlled fleet, 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. The insurance and claims costs were $14.5 million in the 2017 first quarter compared to $14.2 million in 2016.

Total insurance and claims cost for the 2017 quarter were 4.0% of BCO revenue compared to 4.3% in 2016. The increase in insurance and claims compared to the 2016 period was due to increased severity of accidents in the 2017 first quarter as compared to the 2016 first quarter.

Selling, general and administrative costs were $38.3 million in the 2017 first quarter compared to $34.6 million in 2016. The increase in SG&A costs was mostly attributable to an increase in the provision for bonuses under the company's incentive comp plans.

The provision for incentive comp was $2.9 million in the 2017 first quarter compared to $200,000 in the 2016 first quarter. As a result, SG&A expense as a percent of gross profit increased from 30.8% in the prior year to 31.5% in 2017. Depreciation and amortization was $9.9 million in the 2017 first quarter compared to $8.4 million in 2016.

This increase was due to the increase in the number of company-owned trailers. Operating income was $52.3 million or 43% of gross profit in the 2017 quarter versus $47.9 million or 42.7% of gross profit in 2016. Operating income increased 9% year-over-year. The effective income tax rate was 36.8% in the 2017 first quarter compared to 38% in 2016.

The effective income tax rate, which has historically approximated 38.2%, was impacted in both periods by tax benefits resulting from disqualifying dispositions of the company's common stock and in 2017 by implementation of Accounting Standards Update 2016-09.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $278 million. Cash flow from operations for the 2017 period were $62 million, and cash CAPEX was $5 million. There are currently 1 million shares available for purchase under the company's stock purchase program. Back to you, Jim..

Thank you, Kevin. We continue to attract qualified agent candidates to the model. Revenue from new agents was $17.2 million in the 2017 first quarter. Although below our target for new agent revenue, the agent pipeline remains full, and I expect to see improvement in new agent revenue in the upcoming quarters.

We ended the quarter with 9,370 trucks provided by business capacity owners, 69 trucks below our year-end 2016 count. However, BCO utilization increased in the 2017 first quarter, resulting in a 10% increase in the number of loads hauled by BCO truck capacity.

During the 2017 first quarter, we recruited more BCOs than we have in recent years’ first quarters. However, we also experienced a slightly elevated BCO turnover rate. We typically experience a net decrease in the number of trucks provided by BCOs during the first quarter of any year.

Overall, the net decrease in the number of BCO trucks in the 2017 first quarter was consistent with the typical decrease we've experienced during the first quarter over the past 10 years. We expect continued strength in recruiting in 2017. We had a record number of third-party broker carriers haul freight on our behalf during the 2017 first quarter.

Our network is strong and continues to attract third-party truck capacity. During the 2017 first quarter, we continued to have a challenging insurance and claim cost experience.

Although accident frequency was slightly below our historical frequency experience in the 2017 first quarter, increased severity of accidents drove insurance and claim costs to 4% of BCO revenue compared to 4.3% in the 2016 first quarter, both periods well above our historical run rate of insurance and claims as a percent of BCO revenue.

I continue to believe that insurance and claim costs will approximate 3.3% of BCO revenue over the long term. However, accidents in the trucking industry can be severe, and occurrences are unpredictable. Overall, I'm very pleased with the 2017 first quarter results.

2017 first quarter revenue increased approximately 10% compared to the 2016 first quarter on a 10% increase in the number of loads hauled. Considering the continued soft U.S. economic environment, especially the soft U.S.

manufacturing sector, the Landstar model continued to demonstrate how well we perform even in a soft economic environment as we generated record first quarter revenue, gross profit, and diluted earnings per share.

As it relates to our 2017 second quarter expectations, I anticipate that truck capacity will continue to be readily available in the 2017 second quarter. Therefore, I expect gross profit margin to be in a range of 15.3% to 15.6% in the second quarter, assuming fuel prices remain stable and truck capacity remains readily available.

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 quarter, we experienced a normal seasonal increase in revenue per load on loads hauled via truck. In early April, we have been experiencing a continuation of the seasonal trend.

I expect those normal seasonal trends to continue into 2017 second quarter and therefore, expect revenue per load on loads hauled via truck to be higher than the 2016 second quarter in a range of 1% to 3%.

I also anticipate the normal seasonal increase in number of loads hauled via truck from the first quarter to the second quarter after taking into account the favorable impact of the timing of New Year's Day in the first quarter.

Therefore, I expect the number of loads hauled via truck in the 2017 second quarter to increase over the prior year second quarter in a mid-to-high single-digit percentage range. Based on the continuation of recent revenue trends, I currently anticipate 2017 second quarter revenue to be in a range of $820 million to $870 million.

Based on that range of revenue and assuming insurance and claim costs are approximately 3.3% of BCO revenue, I anticipate 2017 second quarter diluted earnings per share to be in a range of $0.84 to $0.89. Our 2017 first quarter results were above expectations even with a soft operating environment and low economic growth in the U.S.

Even with the soft pricing, 2017 first quarter diluted earnings per share were the highest first quarter diluted earnings per share in the company's history. We continue to focus on profitable load volume growth and increasing our available capacity to hold those loads.

With continued load volume growth, we are well positioned for when the pricing environment improves. And with that, Rita, we are ready for questions..

[Operator Instructions]. And the first question on queue comes from Amit Mehrotra from Deutsche Bank. Your line is now open. .

Hey guys, this is Seldon Clarke on for Amit. .

Hey, good morning..

Good morning. So I know you talked about the Landstar model and its ability to attract agents and stuff like that.

But can you give me a little more color on what's driving this load growth? And is it more shippers kind of heading to the spot market, is it winning share, can you just give me a little more color there?.

This is Pat O'Malley. I would say it's all those things. Clearly, it's bringing on new agents, that's automatic market share.

I think if you harken back to Jim's opening comments when he talks about being broad-based and across many industries and customers, I think that demonstrates the power of the model and the natural diversification that comes from using agents to generate revenue. So to answer your question, it is -- it's all of those..

Okay. And so is the current, just like looseness helping you guys take share? Kind of like just wondering if things tighten up and like you have a little bit tighter of -- I mean, the advantage of contract versus spots shrinks a little bit, does that reduce your ability to take share, like....

I don't think historically whether it's in a tight market or a loose market, we see the impact on our load volumes. So I don't think it's a market condition other than our agents are executing well in the environment they're playing in right now..

Okay, alright, that's helpful.

And then can you just talk about -- a little bit about the supply-demand dynamic in dry van versus flatbed and how kind of that has trended recently?.

Well, I think on the van side we're pretty consistent over the last even back into 2016. I think we're still seeing that consistency of more readily available capacity. But I'd say we're consistent about where we were on the van side compared to first quarter of last year.

I think we're seeing a little bit of tightening on the flatbed side because we saw rates climbing as we move through the quarter. So a little bit is coming regionalized. You're looking at Texas region is coming off of what I would consider a pretty low point in the 2015, 2016 periods.

So I think there's a little bit of that fracking business or oil and gas kind of -- it's not picking up a lot, but it's starting to tighten up the flatbed side. So from a comparison standpoint to sum up, I'd say that the vans are pretty consistent on the available capacity throughout 2016 and where we sit today.

But it feels like a little bit of flatbed market’s tightening up a little bit. Not extreme, but I think that's where we're seeing some tightness..

And so you're kind of seeing people go back to that -- like I know you saw some capacity coming to your end market just because of the fracking and stuff like that.

So you're seeing some capacity, I guess, few of your end markets and head back to the energy?.

Well, clearly out in Texas, yes. I mean, clearly regionalized. I think that area for us grew about 18% in that region. I know a lot was driven by the flatbed business going in and out of Texas..

Okay, great. That's very helpful. That's it for me. .

And our next question comes from Mr. Scott Group from Wolfe Research..

Hey, Scott..

Hey, thanks. Good morning guys. So wanted to just follow-up on capacity, so Jim you said you expect it to be readily available in the second quarter. When you talk to the truckers, everyone seems to think it's going to get tighter in the second half of the year. I'm curious your thoughts on truckload capacity in the second half of the year.

And as you think back historically, does flatbed tend to tighten first, and that's usually a good sign that it's about to come and drive there?.

Yes. I would -- I don't know where those comments come on the tightening in the second half unless someone really thinks there's going to be an increase in demand. I mean, economically I can't speak to what I think is going to happen in the economy.

I would expect what's going on with the administration and some of the things they're trying to do sound all great. But when is that going to kick in on regulation, or tax or all the other stuff, I don't see manufacturing picking up over the next six months.

If they’re talking about the very back half in ELDs, yes, maybe there is a pickup there in tightening. There aren't a lot of trucks coming out of the system. Demand is relatively stable. I would say we're going to stay in this market at least through the second quarter and into the third. So I don't see that tightening of capacity in the short term.

And leading the flatbed, I guess, what's driving it is the consumer-heavy industry. Right now, it seems to be some of the industry, some of the oil and gas that's driving that flatbed market. If this infrastructure stuff kicks in or the wall kicks in, you'll see a tightening of flatbed before you see the van.

Right? And we've seen like for a while, the van’s been relatively chugging along flat. And to see the flatbed that I do think that's a positive on the economic trends..

Okay. And what is your latest kind of view on ELDs and your conversations with the truckers that you are dealing with on the brokerage side or your ability to keep finding truckers.

What are they telling you about ELDs and what's your expectation for the market impact?.

Scott, this is Joe. Right now there's a big wait-and-see mentality for most of the small carriers, right. I think a lot of them are still optimistic that maybe Trump will take this thing and put it on the back burner or that OOIDA might come through with some court challenge that makes a difference.

So I think there's a bit wait-and-see with some of the small guys. And, as you know, a pretty good percentage of our brokerage capacity comes from small carriers. But if you think about it, even our BCOs, not everybody is converted to an ELD as yet.

They're waiting to see and for a few reasons, but generally, it's an additional cost to them, right? So right now they're doing paper logs, they're getting along fine. If you go to an ELD, it's $30 a month in airtime and they're just trying to avoid the airtime.

I think the mentality from most capacity providers, small capacity providers, is that they're agreeable to the notion that they're going to have to get it done, but they're going to wait till the last minute. So I don't anticipate a huge exit of capacity from the overall marketplace or certainly, amongst our BCO community.

But I do think you'll have some, but it will be very late in the year, this year, and a big impact, probably a bigger impact, in 2018..

Okay. That's helpful and if I can ask just one last thing.

Can you just remind us some of the cost comps maybe by quarter on the IT rollout, and agent convention? And how those compare versus this year from a quarterly expectation?.

Yes, Scott. If you go back to our first quarter release, we highlighted a couple items there. We think the agent workflow IT projects going to be similar to slightly up this year as compared to last year. I think we gave a range of $6.9 million to $9.5 million for the year. Obviously, incentive comp is a headwind this year.

We're booking about $8 million to $9 million now on an annual basis. And as far as the convention goes, it was in the same period this year as compared to last year. It's a second quarter event in both. So you'll see that it's about $2 million that will hit in the second quarter..

Okay, thank you guys very much..

And our next question comes from Jack Atkins from Stephens. Your line is now open..

Hey Jack..

Hey guys, good morning. Thanks for the time. Just wanted to dig in again on the strong volume growth, just going back to the first questioner because I think when you try to compare your results versus other folks in the transactional market, you guys are clearly outperforming.

And just kind of want to, if you could kind of go back to that for a moment and just kind of think about sort of the end markets, there are no, you talked about strengths both in van and unsided.

But can you maybe kind of drill into that again in terms of, sort of, what you think really is sort of driving that volume growth which, I think, is in a market that's really in equilibrium otherwise?.

Well, I think there's a little bit of uniqueness of our model, right, Jack? Our guys, as we always said, we knew they would kill us, small business owners and our role here is to support them and give them the tools they need to succeed. And they're just hitting the market hard right now, and I think they're executing very well.

And like I said, there's a lot of demand for our trailing equipment on the drop-and-hook side. Flatbed is starting to lift a little bit compared to where we were. I think if you look at back 2015, 2016, heavy haul growth in load volume was negative every month for 2015 and 2016 except for maybe one or two months.

And we have just finally seen heavy haul start to lift a little bit. So I think there's a lot of niche markets and some of the special stuff we do is we're getting that penetration into the marketplace. We're expanding it to different in some of the retail stuff.

Not that we're moving retail, but some of the large retailers are looking at us for some of those more lane-driven moves when they need capacity. So I think we're expanding in and it's all about our agents bringing us into some new markets and along with the growth in the flatbed side and the demand on our drop-and-hook services.

So it's -- like we always say, it's very broad based and it continues to be that way. The reason it's hard to describe is when we -- as I've said before, our top 100 customers in this first quarter were actually flat to down to last year's first quarter. The growth came from every customer that's smaller than that.

And we just really expand our customer base in these types of environments. You know the customer is doing $0.5 million a year with us. It's those kind of customers currently driving it, we penetrate into the smaller markets..

Okay. Okay, Jim. Thanks for that additional color. And then just for my follow-up question.

I would like to ask sort of bigger picture question about automation, and we've been hearing from accounts, increasing concern with some folks that are tied to the brokerage industry around potential disintermediation from guys like an Amazon or an Uber, as customers look for more rate visibility, more capacity visibility.

I'm just sort of curious how you guys think that the industry is going to trend here over the next several years with regard to automation and more focus on technology, and how do you think Landstar plays into that going forward, because I know you guys are investing in technology as well?.

Yes, putting Amazon aside, let's just talk about those, we call them digital freight matching or the Ubers of transportation. They're replicating what we have. I mean, we already -- we send out 250,000 load alerts a week. We're automated, right. And our capacity can put in a subscription of where they want to go, at what price they want to go there.

All that technology that people are talking about exists today, and we're using it. So from a technology standpoint, it's really not a concern. I think what we're dealing with is guys who are trying to get into the brokerage industry and just play a price game. The bigger concern is it's hard to compete against companies that don't want to make money.

That's really what we look at. Amazon being a different story, they already have scale, and they already have a network. That competition is probably little more real than I think. I'm not saying that the digital freight matching companies aren't real and we're not paying attention to some of the stuff they're rolling out.

But the Amazon is a little bit different on how they're playing the game. But again, we have assets, we have trailers in the system. We specialize in heavy specialized, that type of stuff. We're not necessarily in e-commerce. So do they -- are they going to go into our niche markets, maybe. But, I think we can compete pretty well there.

I mean, we're well positioned. We're deep inside the customers. We're part of the strategic plans of a lot of our customer base. So I think we're well positioned to compete against any of these guys. Amazon being the -- that is the bigger picture to take a look and watch what they're doing..

Okay Jim, thanks very much for the insight. .

And our next question comes from Mr. Todd Fowler from KeyBanc Capital Markets. Your line is now open. .

Great, thanks, good morning everyone. Jim, just a question about when you see the increase in the unsided business come back given the higher revenue per load, I understand that the splits on that are relatively the same.

But are there other costs through the business to support that or when you're getting that higher revenue per load and the additional revenue coming back is essentially the operating margin better on that business, is that a big contributor to the mix shift as we think back to the margins that you guys had in 2014 and 2015?.

It is not from a gross margin perspective, it is maybe slightly better, but it wouldn't be something you'd noticed. So I don't think from a margin perspective it's really about just, it's a higher revenue per load. But it's not driving bigger margin.

But when you -- the other piece you got to think about is on the flatbed side, most of those trailers are provided by the BCOs, whereas on the van side 60% of the -- it's like 60% of our van is on our trailers, but like 40% of the flat is on our trailers. So you have a higher PT rate, but lower operating costs. So there's a little mix in there.

But it moves so slow, you don't see it. That is not something you see transition within a 12-month period. It could be a long-term thing. But you wouldn't see the impact over the year..

Okay, that helps. But then like the SG&A side and like the other operating expenses, there's no additional cost or there's no unusually higher cost on the flatbed side, those are relatively consistent..

Right, yes..

Okay, got it and then, just a couple of quick ones on the second quarter guidance. Can you talk about the impact of the timing of the Easter holiday, we're obviously through that, so what sort of impact did that have for you on April and how has that factored into the second quarter of this year? And I know you gave some comments on insurance.

And I think longer term, you're expecting it to be back at that normalized levels of 3.3% of BCO.

But what are you expecting in the second quarter guidance?.

We're -- for insurance, we continue to expect the 3.3% be back to our normal historical trend, again, subject to the unpredictability of accidents. But on the effect of that Easter holiday, it was like a couple -- we didn't mention it because it's like a couple thousand.

Those might be 2,000 loads at most on the impact of the way the holiday fell this year compared to last year. So it's not material to the quarter. Yes. I mean, we talked about -- the reason I spoke to the effect of January 1st is because of sequential trend into the second quarter.

If you notice that we grew volumes 10% first quarter 2017 over first quarter 2016, and then we said mid-to-high single-digits for the second quarter and that's really just to point out the reason we grew 10% was partly due to the -- about 8,000 loads we got in the first quarter due to the comparison..

Okay.

So no big impact year-over-year, but when we think about the trend sequentially that's where we -- and it's more on the New Year's holiday versus the Easter holiday?.

Yes, much bigger impact on the New Year's holiday than the Easter holiday..

Okay, sounds good. Nice quarter guys, thanks for the time. .

Thanks Todd. .

[Operator Instructions]. And our next question on queue comes from Mr. Matthew Frankel from Cowen. Your line is now open.

Hi, good morning guys.

Just what percentage of your BCOs do not have an ELD in their tractor today?.

It's about -- right about 24%, Matt. This is Joe..

Okay, thanks. And I've always viewed you guys are really on the front lines of trucking because of the spot market, because it's primarily an independent operator business and it's diversified. We all know how OOIDA feels about ELDs and how independent operators feel, in general, about ELDs.

Is there any concern at Landstar that a significant percentage of that 24% just won't install the ELD and therefore, your capacity will tighten materially come this time next year?.

Yes, Matt, so we are in the process of talking. There's about 2,200 BCOs that don't have an ELD today. And the reason they don't have one today is because they don't really -- they have roadside violations for logbook, so that they are -- we've not required them to get one.

And we are talking to them as we speak, we've talked to about half of them to find out what their plan is to try to uncover the very questions that you just asked. And it's a very, very small percentage that are really contemplating doing anything but waiting until the last moment, right. So they understand they will have to get one. They accept that.

It's purely a big brother and a cost-related issue. But they don't intend to abandon the industry. They don't intend to leave Landstar in great numbers. They're just not anxious to absorb that $30 a month or whatever it might be in airtime charges unnecessarily when they're perfectly happy doing it on paper.

That's the sentiment from the BCOs that we've talked to thus far. And again that's, over 1,000 BCOs that we've talked to one-on-one to get that assessment.

So, and it relates to the sentiment towards ELDs in general, there was a surprising positive sentiment from a large percentage of our BCOs when we started to implement ELDs pretty rigorously in 2013. And that really hasn't changed. I think there is a fear and a more of a principled objection to ELDs.

But once they're installed, the BCOs tend to adopt them, use them. We've done a pretty nice job of integrating them to provide some efficiencies in the way of fuel taxes as well as log submission. So again, I think it's not going to be a huge disruption at the end of 2017 for us on the BCO front..

Okay. I appreciate it. If I recall back in the 2014 time frame and the market was very hot. I remember the utilization of BCOs, they were running very often.

They were running more loads than typical because there was just so much freight available at attractive pricing, and then before the market really cooled off, they started to slow down and their utilization started to slow because they had such a profitable quarter or two that they didn't need to run as much, if I recall correctly.

What I was thinking or my concern is that, they're getting in as much as they can right now because you're clearly outperforming in the volume perspective, I mean, just generally speaking. My concern is that they're working as hard as they can now, because they know that things may change towards the rest of the year.

But it sounds like you guys are very comfortable with where things are. So that was the genesis of the question. So I appreciate where you're coming from on that..

My pleasure, Matt..

And our next question on queue comes from Mr. Todd Fowler from KeyBanc Capital Markets. Sir, your line is now open. .

Great, thanks for taking the follow-up. Jim or Kevin, I know you gave some comments on the cost side related to the IT rollout. But I think when we spoke at the Analyst Day a year or so ago that the thought process was going to be, it's a gradual rollout and see how the implementation goes.

I was just wondering if you can give an update at this point, how many agents are on the new platform and kind of what the feedback has been and a little bit more of an update on kind of the timing over the next couple of years and kind of how the progress has been going?.

Well, we're still kind in a prototype atmosphere, where we have two agents utilizing the system. I will say we are a little bit behind. We hope to catch up over the summer this year, where we start a rollout to a limited number of agents is kind of where we stand. Nothing that's unexpected.

I mean, it's an IT rollout and I think we're pretty happy with where we are on it. And we just have a lot going on. We have a big weekend coming up, doing some testing again. But it's -- the two agents that are on it love the system and all the agents we rolled it, we demonstrated at the convention two weeks ago and are very excited to be getting it.

And we're just kind of more of a wait-and-see, and hopefully by the next call I'll tell you that we're starting to put more agents onto the system..

Okay. So it sounds like at this point still on track with what you initially had thought, but maybe just a little bit of a more gradual from a timing perspective.

And I guess, Jim, I'm asking a little bit, no big change on the cost standpoint and the timing at this point?.

No, no, no, no, big change. We said $6.5 million to $9.5 million this year on the project. We expect those numbers kind of to continue for the next couple of years as we roll it out. But there's no change in the plan and no change to our expectations of how this is going to roll out.

We're probably 6 to 12 months behind of our planned three to five year project..

Okay. Okay, that helps. And then just to clarify with the agent convention coming in the second quarter, SG&A in the first quarter was $38 million. The agent convention is typically $2 million to $3 million.

So is that what we should expect for the step up Kevin in the SG&A expense in the second quarter and then that comes down, again, in the third and fourth or how do we think about just the SG&A costs as we move through the rest of the year?.

Yes, that's right, Todd. The agent convention is $2 million to $2.5 million. All of that will be booked in the second quarter. So there will be no impact to the third or the fourth..

Okay. And then just the last one I had and I apologize if you gave this.

But was there any update on the CAPEX number and where you stand from investing in the trailer fleet at this point?.

Because of the CARB regulation we've turned over our fleet over the past five years. We're going to have dramatically less as far as CAPEX goes. We do the trailers by cap release anyway. So you won't see that in the CAPEX numbers on the cash flow. But we had $5 million CAPEX in the first quarter.

Part of that was the Laredo facility we opened in January but we still expect $8 million. That's our run rate on an annual basis if you exclude the Laredo on -- for each quarter probably $2 million CAPEX..

Okay, sounds good guys. Thanks for the follow-up..

At this time, I'm showing no further questions. Now I'd like to turn the call back over to you sir, for your closing remarks..

Thank you, Rita. And thank you, and I look forward to speaking with you again on our 2017 second quarter earnings conference call currently scheduled for July 27th. Have a nice day..

And thank you for joining the conference call today. Have a good afternoon and please disconnect your lines at this time..