James B. Gattoni - Landstar System, Inc. L. Kevin Stout - Landstar System, Inc. Patrick J. O'Malley - Landstar System, Inc. Joseph J. Beacom - Landstar System, Inc..

Amit Mehrotra - Deutsche Bank Securities, Inc. Jack Atkins - Stephens, Inc. Todd C. Fowler - KeyBanc Capital Markets, Inc. Jason Seidl - Cowen & Co. LLC Scott H. Group - Wolfe Research LLC Bascome Majors - Susquehanna Financial Group LLLP.

Good morning and welcome to Landstar System, Incorporated Second Quarter 2017 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, Carrie. Good morning and welcome to Landstar's 2017 second quarter earnings conference call. This conference call will be limited to one hour. When we open the line for questions, I ask that each participant have a two-question limit. Time permitting, we can circle back for additional questions.

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

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

Such information is, by nature, subject to uncertainties and risks, including, but not limited to, the operational, financial and legal risks detailed in Landstar's Form 10-K for the 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 take undertakes no obligation to publicly update or revise any forward-looking information.

Our 2017 second quarter performance was at the high end of our expectations. Second quarter revenue and gross profit were both second quarter records.

During our April 27 first quarter earnings conference call, we provided 2017 second quarter revenue guidance to be in the range of $820 million to $870 million and diluted earnings per share to be in the range of $0.84 to $0.89.

Revenue in the 2017 second quarter was $870 million and diluted earnings per share was $0.89, both at the high end of our guidance. Loads hauled via truck in the 2017 second quarter increased 10% over the 2016 second quarter, slightly ahead of our mid to high single-digit growth expectation.

Revenue per load on loads hauled via truck increased 3% over the 2016 second quarter at the high end of our guidance. During the 2017 second quarter, we experienced consistent growth in truck loadings in each month with truck loadings increasing over the prior year month by 9%, 12% and 10% in April, May and June, respectively.

The increase in revenue was broad-based amongst many customers and industries. Our customer base is highly diverse. Our largest customer accounted for less than 3% of second quarter revenue. Our top 100 customers based on 2016 revenue contributed 37% of revenue in the 2017 second quarter and exceeded prior year second quarter by 3%.

Revenue from all other customers increased 18% in the 2017 second quarter over the 2016 second quarter. As it relates to revenue per load, we expected revenue per load on loads hauled via truck to increase over the 2016 second quarter in a low-single-digit percentage range.

Revenue per load on loads hauled via truck in the 2017 second quarter was 3% higher than the 2016 second quarter.

The growth in revenue per load on loads hauled via truck held relatively steady each month of the 2017 second quarter as revenue per load was 3% higher in April and May 2017 as compared to April and May 2016 and 4% in June over prior year June. Revenue per load on loads hauled via van equipment was 1% above prior year second quarter.

Revenue per load on loans hauled via van equipment was impacted by a 3% decrease in the average length of haul in the 2017 second quarter compared to the 2016 second quarter. The increase in revenue per load on loads hauled via van equipment was the first meaningful quarter over prior year quarter increase since the 2015 first quarter.

Revenue per load on loads hauled via unsided/platform equipment increased 9% over the 2016 second quarter. The 9% quarter over prior year quarter increase was partly due to a 3% increase in the average length of haul.

After considering the impact of the change in length of haul in the 2007 (sic) [2017] second quarter compared to the 2016 second quarter, the growth in revenue per load in loads hauled via unsided/platform equipment was slightly stronger than the growth in revenue per load on loads hauled via van equipment.

Overall, we experienced normal seasonal uptick in revenue per load on loads hauled via truck from 2017 first quarter to the second quarter. The number of loads hauled via van equipment during the 2017 second quarter was 10% above the 2016 second 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. 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 2017 second quarter, an increase of 10% over the prior year.

The number of loads hauled via rail, air and ocean carriers was slightly lower than the 2016 second quarter as 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 second quarter was below prior year.

Gross profit increased almost 10% compared to the 2016 second quarter. Gross profit margin decreased from 15.6% in the 2016 second quarter to 15.2% in the 2017 second quarter, as industry demand and availability of truck capacity became more balanced. Here's Kevin with his review of other second quarter financial information..

Thanks, Jim. Jim has covered certain information on our 2017 second 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 10% to $132.6 million and represented 15.2% of revenue in the 2017 second quarter compared to $121 million or 15.6% of revenue in 2016. The cost of purchased transportation was 76.7% of revenue in the 2017 quarter versus 76% in 2016.

The rate paid to truck brokerage carriers in the 2017 second quarter was 127 basis points higher than the rate paid in the 2016 second quarter.

Commissions to agents as a percentage of revenue were 29 basis points lower in the 2017 quarter as compared to 2016 due to a decreased net revenue margin, revenue less the cost of transportation on loads hauled by truck brokerage carriers. Other operating costs were $7.5 million in the 2017 second quarter compared to $6.6 million in 2016.

This increase was primarily due to increased contractor bad debt and decreased gains on the sale of trailing equipment. Insurance and claims costs were $13.9 million in the 2017 second quarter compared to $16.1 million in 2016. Total insurance and claims costs for the 2017 quarter were 3.4% of BCO revenue compared to 4.3% in 2016.

The decrease in insurance and claims compared to 2016 was due to increased severity of claims in the 2016 period, mostly related to the impact of a single claim related to a severe accident. We continue to believe that insurance and claims 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. Selling, general and administrative costs were $40.9 million in the 2017 second quarter compared to $36.9 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 compensation plans. The provision for incentive compensation was $3.9 million in the 2017 second quarter compared to $300,000 in the 2016 second quarter.

As a result, SG&A expense as a percent of gross profit increased from 30.5% in the prior year to 30.8% in 2017. Depreciation and amortization was $9.9 million in the 2017 second quarter compared to $8.7 million in 2016.

This increase was due to the increase in the number of company-owned trailers and a lower average age of the fleet during the 2017 quarter.

The company currently has 11,339 trailers in its company-controlled fleet, a 3% increase over prior year, as the number of BCOs hauling Landstar trailing equipment has increased with the increased demand for drop and hook services.

Operating income was $61 million or 46% of gross profit in the 2017 quarter versus $53.1 million or 43.9% of gross profit in 2016. Operating income increased 15% year-over-year. The effective income tax rate was 37.7% in the 2017 second quarter compared to 38.1% 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 $273 million, slightly lower than the balance at the end of the 2017 first quarter. Cash flow from operations for the 2017 26-week period was $79.8 million and cash capital expenditures were $6.6 million.

There are currently 1 million shares available for purchase under the company's stock purchase program. Back to you, Jim..

Thanks, Kevin. We continue to attract qualified agent candidates to the model. Revenue from new agents was $22.7 million in the 2017 second quarter. We ended the quarter with 9,404 trucks provided by business capacity owners, 34 trucks above the end of the 2017 first quarter, but 58 trucks lower than the end of the 2016 second quarter.

BCO productivity increased in the 2017 second quarter over the 2016 second quarter, resulting in an 8.6% increase in the number of loads hauled by BCO truck capacity, more than offsetting the impact of slightly lower BCO truck count in the 2017 second quarter compared to the 2016 second quarter.

During the 2017 second quarter, we recruited the second highest number of BCOs of any second quarter in the past five years. However, we also experienced elevated BCO turnover. Net additions of BCO trucks in the second quarter has historically been somewhat inconsistent.

Overall, the net increase in the number of BCO trucks in the 2017 quarter falls within the range of net additions experienced over the past five years, however, at the lower end of the range. Assuming freight market continues to improve, we would expect to see an improvement in BCO turnover.

However, although we expect the implementation of the ELD mandate to take effect as scheduled and anticipate this implementation to have a little impact to our BCO count, we could experience a possible uptick in BCO turnover over the next 12 months due to this mandate.

We had a record number of third-party broker carriers hauled freight on our behalf during the 2017 second quarter. Our network is strong and continues to attract third-party truck capacity. Overall, I'm very pleased with the 2017 second quarter results.

2017 second quarter revenue increased approximately 12% compared to 2016 second quarter on a 9% increase in the number of loads hauled. As it relates to our 2017 third quarter, I anticipate the truck capacity will continue to be more balanced in the 2017 third quarter.

Therefore, I expect gross profit margin to be in a range of 15% to 15.2% in the third quarter, assuming fuel prices remain stable and truck capacity remains balanced. Seasonally, revenue per load on loads hauled via truck in the third quarter is typically slightly higher than the second quarter.

During the second quarter, we experienced a normal seasonal increase in revenue per load on loads hauled via truck. In early July, we have been experiencing a continuation of the normal seasonal trend. I expect those trends to continue in the 2017 third quarter.

The number of loads hauled via truck in the third quarter is typically slightly lower than the number of loads hauled via truck in the second quarter. I anticipate the normal seasonal decrease in the number of loads hauled via truck from the second quarter to the third quarter.

Based on the continuation of recent revenue trends, I currently anticipate 2017 third quarter revenue to be similar to the 2017 second quarter. Based on that revenue expectation and assuming insurance and claim costs are approximately 3.3% of BCO revenue, I anticipate 2017 third quarter diluted earnings per share to be in a range of $0.88 to $0.93.

The 2017 second quarter results were at the high end of our expectations. The momentum in demand for our service that began in the fourth quarter of 2016 continued and strengthened through the first half of 2017. The strong demand, combined with the long-awaited increase in rates, contributed to the very strong second quarter results.

Truck availability and demand for services seem somewhat more balanced than in recent quarters with increased revenue per load and higher cost of purchased transportation paid to third-party truck brokerage carriers in the quarter.

Those market conditions drove our gross profit margin to 15.2% in the 2017 second quarter compared to the 15.6% in the 2016 second quarter. Regardless, we reported record second quarter gross profit in the 2017 second quarter and the second highest 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 haul those loads. And, with that, Carrie, we will open to questions..

Thank you very much, sir. At this time, we will begin the question-and-answer session. Our first question is about Amit Mehrotra of Deutsche Bank. Your line is now open..

Great. Thanks, guys. Good morning. Thanks for taking my questions..

Good morning..

The first one is maybe on the drivers of the volume growth in the second quarter. I'm just trying to get a sense of how much of the volume growth is attributable to maybe higher activity as it relates to growth in rig counts and completions, which were obviously quite strong in the second quarter.

And whether – just more sort of extrapolating that, whether maybe we should temper our volume growth assumptions in the second half, even after considering the harder comparisons, just given the fact that the growth in that sector of the industrial economy at least may not grow nearly at the same rate. Just your thoughts that would be appreciated..

Amit, this is Pat. Clearly, in the second quarter, a lot of the volume growth was on the heavy haul side, was driven by shipments inbound to Texas and related to the growth in energy in production down in Texas. We don't anticipate a slowdown in that productivity. And so we anticipate similar results in the third quarter on that heavy haul business..

Right. So just as a quick follow-up. I mean I guess that makes sense in terms of what it is in the third quarter. But if oil prices kind of stay at these levels, the productivity of the existing rigs, the wells, may deplete a little bit and you're definitely probably not going to get as much growth obviously and rig counts maybe even decline.

So if you look at sort of your business as a whole, how much of that do you think is exposed to that piece of the pie, so we can just get a sense of maybe the sensitivities around there?.

We had about 10 million of oil and natural gas revenue in the quarter. So it's not that significant to us. It just grew a lot because the prior year we had $3 million..

Okay. That's really helpful. Thanks. And then one follow-up for me is last quarter you mentioned that about a quarter of your BCO count did not have ELDs. I'm just wondering how that trended into the second quarter and if you're sensing or seeing any increased sense of urgency among the operators to maybe get on board with the ELD mandate..

Yeah. Amit, this is Joe. We had 75% at the end of the first quarter. We're currently around 80%. And there is a lot of discussion going on and a lot of conversation going on. We're trying to get the guys to move towards implementation of ELDs by the deadline in December. We currently believe it's going to – the deadline is going to hold.

We're confident that the BCOs will get them installed. But with some of the proposed legislation and the request from Congress to review – for FMCSA to review I think that's actually created a little hesitation on behalf of some of the BCOs. But we'll continue to work with them. We're confident that we'll get there by the deadline.

But I do think there's been some speculation as to whether or not the deadline will hold and I think there's been some indecision based on that..

Yeah. Can you just give us some color on any productivity changes you saw in that incremental 5%? I know the volume was growing, so it might be hard to parse that out.

But any sense of what you're seeing in terms of changes in productivity? Is that 5% maybe moved from the non-ELDs to ELDs?.

Yeah. I don't have anything for you, Amit, on the 5%. I can say that we have looked at it a couple of times in the past over the last four years that we've been working to implement ELDs. And we've not seen any negative productivity trend.

And if you look just simply at the 80% of our BCOs that have them now and you see our productivity on the BCO side up nearly 9%, I think, that would tell you that we're not in our model – the way our model works, we're not seeing the productivity decline as others might be seeing..

We actually have seen – the BCO productivity this year has been better than it has been in the past two years, back to 2014 is the last time they were running the way they are running today..

Okay. That's helpful. Thanks, guys. Congrats on a good quarter. I appreciate it..

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

Hey, Jack..

Hey, guys. Good morning. Just a couple questions here from me. Jim, I guess, just back to your comments around seeing normal seasonal quarter-over-quarter trends thus far in July.

I think as we've been listening to second quarter earnings season and sort of the outlook from some of the other guys in the space over the course of the last couple weeks, it does sound like people are maybe anticipating – there's more of a cyclical change here happening, not just seeing seasonal improvements.

So just sort of curious if you could maybe comment on – are you seeing maybe the early signs that we could be nearing some sort of cyclical turn in the broader truckload market? And any indication in your business that maybe that's happening or maybe if you think that's not the case?.

Well, for us, to drop a 10% volume growth on truck in the quarter is pretty good. So I would say if there's a cyclical thing going on, it started for us earlier on. It's hard to sense in the spot market what drives it.

And, typically, what you'll see, if there's freight going out to the spot market, right, I mean there is freight out there that is looking for carriers that they can't find under contract, right. They're not contracted at this point.

So I think it's hard to tell if this early July or this – because we're running pretty consistent with where April, May and June was running. We're still running at 8% to 10% over in volumes. So if that's cyclical, okay. Just there's no – we're not seeing a significant uptick into July that's indicating there's any different kind of pattern..

Okay. Okay. That's helpful. And then just last question and I'll turn it over, but we saw spot pricing both in the van and in unsided equipment in the quarter up strongly, close to double-digits, in some cases, more of double-digits, sort of accelerating as we move through the quarter.

I'm just sort of curious when we look at your revenue per load and the length of haul, I think, was clearly a little bit of a headwind, especially on the unsided component. But I guess I'm just sort of curious why you guys didn't see a little bit more strength in revenue per load and if you could just sort of parse that out a little bit.

Maybe it's fuel which you guys wouldn't benefit from, just trying to think through that..

We don't correlate to – I look at the DAT rates that they put out on the spot market and their growth rates have always exceeded ours. And I've never been able to correlate it back. That's the industry data I look at. So I'm not – and there is other spot market indexes out there I could look at, I could probably speak to that.

But if you take the impact of the length of haul out of the equation, about 80% – we don't really talk about revenue per mile too much because we only account for the miles on about 80% of our freight. But in that 80%, van was up 4% on a revenue per mile and flatbed was up 5%.

So that 9% growth in flatbed was really 3% and was driven by extended length of haul. And the 1% growth on the van side – on the revenue per load was really about 4% because we had a shrinkage of mileage, about 3%. But to speak to an industry index or something like that, it's been hard to correlate to what's going on there.

Look, if the DAT is going up, so are we. If the DAT is going down, we're probably going down, but not to the extent that they move..

Got you. Okay. Well, Jim, Kevin, Pat, Joe, congrats on a great quarter and thanks again for the time..

All right. Thanks, Jack..

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

Hey, Todd..

Hey. Good morning, Jim. Thanks for taking the question. Just to start with the incentive compensation here in the quarter.

Did you have that factored in at the high end of the guidance or was that something that was greater than expected based on the results in the quarter? And then if you can give us some comments about how incentive compensation should work through the back half of the year based on your expectations either from a year-over-year standpoint or sequentially, that could be helpful..

That level of incentive comp in the second quarter was projected into our forecast. We have similar numbers projected for the third quarter and fourth quarter based on yearly projections..

Okay. Good.

And how much would incentive compensation be up year-over-year in 2017, if you hit those forecasts?.

Todd, this is Kevin. We're about – we've booked about half way of what we think the annual number will be. So you could double the year-to-date number. And then remember last year we had about $1 million related to sales incentive type compensation, but no management incentive comp.

So it's going to be in the ballpark of $13 million compared to $1 million year-over-year..

Okay. Good. That helps..

And the accounting rules make us try to book half of it. We're halfway through the year, so we need to estimate what the total number is and have half of it booked by now..

Okay. Got it. And then just for my follow-up, Jim, the comments on BCO productivity, excluding the ELDs – are the BCOs at a level where – I mean they're almost at like a full utilization or is there still – I'm looking at BCO revenue or revenue per BCO and it's at one of the highest levels where it's been over the past three years or four years.

Can the BCOs run more loads or at this level do you need to see additional growth within the BCO counts to handle essentially more volume to the network?.

Yeah. Todd, this is Joe. I'll take a swing at that question. I think that if BCOs chose to run more, they have the available hours to run more. They have the available time to run more. Historically, we're a little bit above where they've been since – as Jim stated, since 2014. So there's time available. It's whether or not they choose to do so.

And I don't expect that to change too much dramatically going forward. But it's our intent to try to improve retention and grow truck count. Going forward, we think the opportunity is there to continue to do that..

Okay. Good. That helps. I'll jump back in the queue. Thanks for the time this morning..

Right..

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

Thank you and good morning, guys. Thanks for the color on the pricing X length of haul. That was very helpful.

I'm just curious looking forward do you still expect the unsided/platform business to outperform the van business when you look at those metrics?.

Jason, this is Pat. We expect the platform business to continue to perform along the lines that it has in the first half of the year..

Okay. All right. That makes sense. And getting back to the ELD commentary, what is the feedback other than maybe this legislation that was introduced by a Texas senator, like at least causing some pause.

But are people – what are they most worried about? Is it just the productivity losses or is it just the newness of technology? Is it a little bit of upfront cost? What's the big sticking point with the 20% that hasn't done it?.

Yeah. Jason, this is Joe. So, I'll take you back. Just we started this as a voluntary program about four years ago for those that were currently leased on. And so those nearly 2,000 guys that don't have one today have been here for greater than four years. They've not had any log violations. Otherwise, we would have had them get one. They run compliantly.

They run with decent productivity and they just don't see the need to incur the additional airtime cost. And it just isn't something that they're afraid of. It's not a fear factor. It's not a productivity issue, I don't believe. It's just why incur the cost or the inconvenience before I have to. And so there's that deferring the decision.

It isn't something that they're not willing to do. It's just more a factor of seeing it as there's plenty of time and hope and maybe there's this slight chance that it gets deferred. So why go through the expense and the hassle if it does, in fact, get delayed two years? It's more of that kind of mindset that we're hearing..

And on the delay, I mean, we're having our own Washington Research Group. They have their opinions.

But I'd be curious do you think this delay's got much of a shot?.

My opinion would be – is that it probably doesn't. And I base that on the fact that it was Congress who asked them to implement it. So unless there's something that comes out as to trouble with enforcement or something along those lines, I would be hard pressed to think they would defer it further..

Okay. Perfect. Those are my questions. I'll get back in line. Gentlemen, appreciate the time as always..

Yeah..

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

Hey. Thanks. Good morning, guys..

Hey..

So, Jim, just wanted to go back on your kind of commentary on July and seasonally normal because, again, there's every other truckers telling it's better than seasonally normal. I know you said kind of flattish with the second quarter.

Is that not better than normal? I would have thought that July tends to soften a little bit, so maybe just a little bit more color..

I think when we talk about flat, we're talking about the entire third quarter not just the July and what's coming through. Look, we have three weeks of volumes coming through for July and it's hard to make an interpretation of what direction that's going to move after the first three weeks of July.

But all I can say is for the first three weeks of July that we're seeing the normal trend in volumes as it goes from June to July. There's nothing. It's pretty close to being right on target with when you look at the last five years of how that trends..

Okay. Okay..

Look, we're also coming up with stronger June than most people probably had. So I mean people who are talking about a grey where things are looking better over the summer didn't probably put up numbers that we put up..

Fair enough. Okay. In terms of – it looks like the number of like approved truck brokerage carriers fell a little bit in the second quarter.

Is that in your mind related to ELDs? And have you guys formulated any kind of policies and how you're going to treat the broker carriers with the ELDs?.

Hey, Scott. This is Joe. You saw a slight decline in the number of approved carriers and that was the result of us putting in some qualification criteria this year. And you saw a minor decline – a slight decline.

Although I would call your attention to the fact that it really was taking carriers that really weren't hauling for us anyway out of the mix because if you looked at the approved than active count that's up about 1,500 carriers or about 5%.

So the overall decline is a function of putting in some qualification criteria, but the brokerage carriers that are actively hauling our agents freight is actually up year-over-year which is obviously our intent, is to grow our relationships and get more carriers to be active.

And then on the reaching into the carriers and trying to understand what they're doing, we don't have a policy. There isn't really a policy that we could enforce upon them. It's the regulatory requirement, when and if that occurs in December.

But we're really relying a great deal on just the relationships we have with the carriers, the relationships that our agents have with those same carriers to try to understand and ensure that they're ready to go and give us the visibility that we need from them come December the 18..

Okay. And if I can just ask one more just kind of, Jim, bigger picture, a lot more talk in the market about competition and apps and all that.

What are you seeing from these new competitive entrants into the market? How have you heard they're doing in a tighter capacity environment? And big picture, how do you think this evolves and what does it mean for your business going forward?.

Well, honestly, we have seen – Pat's team talk to the agents all the time to see if there's any penetration being made into any of our customers and there has been none. So we read a lot about what they're doing and what they're working on. And everything we read is – it just reads as if they're replicating what we already have.

And some of these guys who are getting the funding recently they talk about building warehouses and turning into basically 3PLs and brokers, similar to a Robinson or a Landstar. So we have the capabilities of everything they're launching. So, if you think about – they talk about the apps where trucks can just go onto the app and pull up a load.

We've been doing that since 2004. You think about alert systems. Our BCOs and carriers can actually set up a subscription on a mobile app that says hey, notify me when there's a load leaving Jacksonville at $2 a mile and it's taking me up somewhere into the Northeast. And so when that load hits the board, boom, they get an alert.

We send out 250,000 alerts a week. So yeah, we understand they're coming out. We refer to them as like the non-traditional competition coming into the marketplace. But, right now, it hasn't seem affected or gone after any of our customer base or hit any of our agents. But I believe that they're building us, is really what they're doing.

But we already have the infrastructure and the scale and the technology. So we're clearly watching what's going on out there. The tools they're putting out are describing what we have. We just really don't publish it. We have pricing tools. We have load boards. We have mobile apps.

We have all the things you need to have a seamless interaction between customer and carrier..

Do you think your customer base or the nature of what you're doing for your customers is more or less at risk than maybe some of the others?.

I'd kind of break that down to there might be – I'd say there's probably a portion of our freight that might be subject to risk.

But I don't think the flatbed heavy haul – I don't think where we're putting vans in the equipment, where we have dedicated capacity being BCOs, it's a significant portion of our businesses, I don't think really is conducive to just a freight app.

And the fact that we have a freight app kind of keeps us in the game for those guys who don't need all the services we provide, whether it's trailing equipment or special handling on heavy haul loads or expedite business. I talk about it here internally.

I talk about hey, if you're shipping marbles from Jacksonville to Memphis, and you don't care what happens, that's great for the app and we probably have some of that freight. I just don't think it's a significant portion of our business..

Got you. Okay. Thanks a lot for the time..

Yeah..

Our next question is from Bascome Majors of Susquehanna. Your line is now open..

Good morning, guys. So with the buyback you guys have always historically been pretty disciplined at higher valuations and so far you've stuck by that approach in 2017. As we kind of think about the cash balance you've been growing pretty nicely here.

Is there anything besides a drop in the valuation of your stock that would get you back in the market for your own shares?.

There are some things that you're sitting waiting on, right. Well, you're waiting on Washington, D.C. to make some big decisions. A tax reform would be nice. Infrastructure build would be nice. That stuff – that could contribute to maybe a different decision as we're sitting here watching today.

Those are the things people are probably sitting around and – because a tax reform for us would be good. An infrastructure spend would be good and it would drive performance and drive the industry really. But we will continue to be opportunistic, though. There's no change in our philosophy. We haven't bought stock back in nine months.

There's no change in the philosophy, so..

Understood. As we look at that cash balance, I think, you're up to about $270 million, $275 million this quarter.

If you choose to try to distribute cash via special dividend instead, which you've talked about before and done in the past, what's the timeline and sizing should we have in mind? And maybe if that's too specific if you could talk about maybe just how much cash you'd like to hang onto the balance sheet too after any move that would be helpful.

Thank you..

Well, the size of the organization – I don't think we're sitting on excess cash right now. It's less than 10% of our revenue, but there'll be a number somewhere – creeping higher than that that we're going to have a discussion.

But we'll be talking special dividends with the board over the – toward the end of the year if we don't see a use of the cash we had on the balance sheet..

Thank you for the time..

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

Thanks for taking the follow-up. The primary question I was going to ask has already been just covered but since I've got the time, Jim, maybe if you can give an update on the IT rollout in the systems? Maybe a little bit of color on the progress that you're making versus your original expectations.

And if there's been any additional costs? Just kind of where you're at with the IT rollout would be helpful. Thanks..

Yeah. We first rolled this out – it started out as being the new tool for the agent office. Basically, what the agents use our systems for is order to delivery, to place the order, get the freight delivered, track the freight while it's moving for customers who require that, and all in one TMS. We're utilizing five today. So we're converting to one TMS.

It was put out as a three-year to five-year project. We're in year four and we will probably most likely start rolling agents on it into September, starting in September. We have two agents on it today. They love it. It's a great tool.

And the rollout – since we have 1,200 agents and every one of them does something a little different it will take us a couple years to roll it out. But the plan to start that TMS roll order delivery inside the agent's office should begin in September.

And basically pretty slow at the beginning to make sure it's doing what it's supposed to do and then probably a heavier rollout starting beginning middle of next year..

And just from a....

Go ahead..

I'm sorry. Go ahead, Jim..

Well, the costs are dragging out a little longer, but I'm going to say that we're probably going to run similar costs every year for a little while, like $6 million to $10 million, until we get it fully rolled out because there's a cost of training. It goes from cost of build out and implementation to the roll out.

Then there's training costs going forward that we have to train. So those are the costs kind of going forward along with some additional build out..

Okay. Good. So it sounds like that this is ongoing in the background. Sounds like that you're being methodical about it.

We shouldn't see any big changes and my guess is even in September it's going to be something that's going to be pretty gradual in seeing how it goes with the additional agents that you bring on versus any big kind of foot-to-switch type change in the third quarter?.

Yes. I believe it's going to be gradual. It's just going to be a gradual – a couple million a quarter. It's not all of a sudden you're going to see a spike and then a stop. We have to roll it out slowly and a lot of rollout is training.

Todd, we've got a lot of other stuff going on too in here that we're rolling out a brand-new Available Loads mobile app to our BCO, just got launched. Pricing tools – we just enhanced our pricing tools, starting to roll that out to the agent base. We're automating trailer request tools.

So we're building efficiencies into the building, just not outside of the agent's office, but we're also adding some value into the customers, the employee base here and along with the agents and carriers..

Okay. Sounds good. And then just the last one real quickly. The LTL volume growth – and I know it's a small piece of the business, but it was pretty strong here in the quarter.

Is there anything specific that was going on there that contributed to the growth? Is that a new agent or something along those lines or maybe if you could just speak to the success that you have with that business line?.

Todd, this is Pat. I think it's a couple things. It's a few significant accounts that we landed and then I think it's an overall adoption across the agent group of that product line..

Okay. Thanks, Pat. Thanks, everyone. Thanks again..

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, Carrie. And thank you and I look forward to speaking with you again on our 2017 third quarter earnings conference call currently scheduled for October 26. Have a good day..

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