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

Jack Atkins - Stephens Inc. Amit Mehrotra - Deutsche Bank Todd Fowler - KeyBanc Capital Markets Matthew Brooklier - Buckingham Research Group Bascome Majors - Susquehanna Jason Seidl - Cowen.

Good morning and welcome to Landstar System Incorporated Third Quarter 2017 Earnings Release Conference Call. [Operator Instructions]. Today’s call is being recorded. If you have any objections, you may disconnect at this time.

Joining us today from Landstar are Jim Gattoni, President and CEO; Kevin Stout, Vice President and CFO; Pat O’Malley, Vice President and Chief Commercial and Marketing Officer; Joe Beacom, Vice President and Chief Safety and Operations Officer. Now I’d like to turn the call over to Mr. Jim Gattoni. Sir, you may begin..

Good morning and welcome to Landstar’s 2017 Third 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. With 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 risk 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.

Overall, the 2017 third quarter operating environment was outstanding for Landstar. We saw significant increases in both the number of loads being hauled by truck and revenue per load. We’ve been experiencing a strong, broad-based demand for our services.

I expect this environment to continue to strengthen into the end of the fourth quarter, with industry-wide growth in ecommerce and the ELD mandate taking effect towards the back half of the fourth quarter.

Recognizing this strong backdrop, for the first time in the company’s history, we have issued quarterly revenue guidance that is over $1 billion at the upper end of the range.

Our 2017 third quarter results established numerous Landstar financial records, as the company set all-time quarterly records for revenue, gross profit, operating income and diluted earnings per share from continuing operations.

On top of a very strong performance by our core business, the financial results also reflect the transportation services provided in support of relief efforts for the storms that impacted Texas, the Southeastern United States and Puerto Rico, and a significant tax benefit from deductions and credits taken for prior year amended returns.

On the capacity side, we ended the third quarter with a Landstar all-time record number of trucks provided by BCOs, as we continue to work attract high quality BCO capacity to the network. Landstar also had a very positive quarter in terms of executing on its strategic priorities.

In the beginning of 2017, we opened our brand new transload facility in Laredo, Texas, enabling the company to significantly increase its cross border transportation opportunities. In September, we announced the opening of Landstar Metro, our new operation inside of Mexico.

And this new operation provides intra-Mexico truck transportation, and we intend to drive more cross border service through our 11 cross border crossings, especially through our new Laredo facility via both new and expanded relationships with carriers and customers in Mexico.

In addition on the technology side, we took a number of very positive steps with respect to several of the initiatives we have been working on over the past 18 months. We completed the integration of our new transportation management system to our legacy system and are moving forward with transitioning agents to the new tool.

We launched a new and improved dynamic pricing tool for our agents. We released a new mobile application to our entire BCO population to better enable them to access all of our available loads on smartphones, and we launched an analytics tool for our agents so they can better manage and monitor their businesses.

We’re very excited about the new technology based tools we delivered to agent BCOs during the quarter, and look forward to continuing to deliver our technology initiatives in the future.

Now in comparing our financial results from the 2017 third quarter to the guidance we previously provided on our July 27, 2017, second quarter earnings conference call. Revenue in the 2017 third quarter significantly exceeded our expectations.

During our second quarter earnings conference call, we indicated that we expected 2017 third quarter revenue to be similar to 2017 second quarter revenue of $870 million. Revenue in the 2017 third quarter was $943 million, leading to record quarterly gross profit of $140 million.

Revenue in the 2017 third quarter included $23 million for services in support of relief efforts relating to the hurricanes that impacted Texas, the Southeastern United States and Puerto Rico in late August and September.

During our second quarter earnings conference call, we provided diluted earnings per share guidance of $0.88 to $0.93, actual diluted earnings per share was at $1.01, during the third quarter, with several items that was unanticipated as of our second quarter earnings conference call that impacted diluted earnings per share in the quarter.

Our previously issued third quarter guidance did not include earnings from revenue generated in September for services in support of relief efforts, nor did it include the tax benefit in regards to the tax credits and deductions under Section 199 for prior year’s tax returns amended in the third quarter of 2017.

Our previous guidance also assumed insurance and claims costs at 3.3% of BCO revenue and a lower provision for incentive compensation.

While the tax benefit and services in support of relief efforts contributed $0.17 to diluted earnings per share in the third quarter, elevated insurance and claim costs and a higher provision for incentive compensation due to increased earnings reduced diluted earnings per share by $0.11 compared to the mid-point of our prior guidance.

Overall, therefore the net effect of these four items the third quarter diluted earnings per share guidance was a favorable $0.06. Our third quarter guidance called for loads to be slightly below the number of loads hauled in the 2017 second quarter.

The number of loads hauled via truck in the 2017 third quarter was 3% over the 2017 the second quarter and 13% over the prior year third quarter. Our expectation was that revenue per load on loads hauled via truck would be slightly ahead of the 2017 second quarter. Revenue per load on loads hauled via truck exceeded the 2017 second quarter by 4%.

During the 2017 third quarter, we experienced accelerated growth in truck loadings in each month, with truck loadings increasing over the prior year month by 6%, 12% and 20% in July, August and September, respectively. The increase in revenue was broad based amongst many customers and industries.

As it relates to revenue per load, revenue per load on loads hauled via truck in our 2017 third quarter was 6% higher than the 2016 third quarter. Revenue per load on loads hauled via truck in July and August were 3% and 4% higher than prior year July and August.

In July and August, we experienced a more balanced environment that set the stage for a strong pricing environment to end the quarter. The storms that impacted Texas and the Southeastern US in September clearly resulted in a rapid tightening in truck capacity. Revenue per load on loads hauled via truck in September grew 9% over prior year September.

Revenue per load on loads hauled via van equipment was 5% above the prior year’s third quarter, while revenue per load on loads hauled via unsided/platform equipment increased 8% compared to the 2016 third quarter.

Revenue per load on loads hauled via van equipment was slightly impacted by a 1% decrease in the average length of haul in the 2017 third quarter compared to the 2016 third quarter, while the increase in revenue per load on loads hauled via unsided/platform equipment was favorably impacted by a 2% increase in the average length of haul.

After considering the impact of the change in length of haul in the 2017 third quarter compared to the 2016 third quarter, the growth in revenue per load on loads hauled via unsided/platform equipment was similar to the growth in revenue per load on loads hauled via van equipment.

Overall, as I previously described, we experienced an above normal seasonal uptick in revenue per load on loads hauled via truck from the 2017 second quarter to the third quarter, attributable to a more balanced truck market throughout the earlier portion of the quarter, followed by the rapid tightening of the truck capacity in September.

The number of loads hauled via both van equipment and unsided/platform equipment during the 2017 third quarter increased 13% above the 2016 third quarter. Overall volume increases were strong throughout each month of the quarter for both the van and unsided/platform equipment, with September being the strongest month for each equipment type.

The number of loads hauled via Landstar controlled trailing equipment mostly van equipment hauled by BCOs and drop and hook operations, was 32% of truck loadings in the 2017 third quarter and increased 6% over the prior-year quarter.

The number of loads hauled via rail carriers was 7% lower than the 2016 third quarter, as the intermodal market has become more competitive, and we continue to experience softness in rail intermodal loadings at several customers. The number of loads hauled via air and ocean carriers increased 21% over the 2016 third quarter.

Overall revenue from air and ocean carriers increased 57% over the 2016 third quarter, driven mostly by services in support of relief efforts. Excluding approximately $9 million in air revenue, attributable to the storm related services in support of relief efforts. (Inaudible) and ocean revenue increased 12% over the 2016 third quarter.

Gross profit increased 15% compared to the 2016 third quarter. Gross profit margin decreased from 15.5% in the 2016 third quarter to 14.8% in the 2017 third quarter. And with that, I will pass it to Kevin for more on the financial results..

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

Gross profit defined as revenue less the cost of purchase transportation and commissions to agents, increased 15% to $140 million and represented 14.8% of revenue in the 2017 third quarter, compared to 121.8 million or 15.5% of revenue in 2016. The cost of purchase transportation was 77% of revenue in the 2017 quarter versus 76.3% in 2016.

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

Commissions to agents as a percentage of revenue were 15 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 $8.1 million in the 2017 third quarter, compared to $7.5 million in 2016.

This increase was primarily due to decreased gains on the sale of trailing equipment, partially offset by decreased trailing equipment maintenance cost. Insurance and claims costs were $17.9 million in the 2017 third quarter, compared to 12.5 million in 2016.

Total insurance and claims costs for the 2017 quarter were 4.1% of BCO revenue, compared to 3.3% in 2016.

The increase in the insurance and claims compared to 2016 was due to increased severity of claims in the 2017 period, mostly related to the impact of a single claim related to a severe accident and net unfavorable development of prior year claims in the 2017 period.

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 $44 million in the 2017 third quarter compared to 34.7 million in 2016.

The increase in SG&A cost was mostly attributable to an increase in the provision for bonuses under the company’s incentive compensation plans, and an increase in the provision for customer bad debt. The provision for incentive compensation was $6.8 million in the 2017 third quarter, compared to $427,000 in the 2016 third quarter.

As a result, SG&A expense as a percent of gross profit increased from 28.5% in the prior year to 31.4% in 2017. Depreciation and amortization was $10.1 million in the 2017 third quarter, compared to 9 million in 2016. This increase was due to the increase in the number of company owned trailers during 2017.

The company currently has 11,442 trailers in its company controlled fleet, a 3% increase over prior year, as the number of BCOs hauling Landstar (inaudible) equipment has increased with the increased demand for drop and hook services.

Operating income was $60.6 million or 43.3% of gross profit in the 2017 quarter versus 58.5 million or 48% of gross profit in 2016. The decline in operating margin was driven by the increase in the provision for incentive compensation and increased insurance and claims costs, largely related to the single severe accident in the 2017 third quarter.

Operating income increased 4% year-over-year. The effective income tax rate was 29.2% in the 2017 third quarter, compared to 36.9% in 2016.

The effective income tax rate was significantly affected by tax benefits of approximately $5.2 million related to the Internal Revenue Code Section 199 domestic production activities deduction and research and development credits.

The effective income tax rate, which has historically approximated 38.2%, was also 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 $295 million. Cash flow from operations for the 2017 39-week period was $132.3 million, and cash capital expenditures were $8.8 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 track qualified agent candidates to the model. Revenue from new agents was $22.7 million in the 2017 third quarter.

As of Monday this week, there were fewer than 500 BCO trucks that had not installed an ELD or placed an order with us for an ELD, down from approximately 2,000 as stated on our second quarter earnings call on July 27.

We have been in recent contact with the vast majority of the BCOs without ELDs and continue to expect a minimal turnover resulting from the implementation of the ELD regulations. We ended the quarter with a record 9,548 trucks provided by business capacity owners, a 144 trucks above the end of 2017 second quarter.

BCO productivity increased in 2017 third quarter over the 2016 third quarter, resulting in an 8% increase in the number of loads hauled by BCO truck capacity. During the 2017 third quarter, we experienced the lowest truck turnover in eight quarters and had the highest net BCO truck addition since the 2015 second quarter.

Although, we expect the implementation of the ELD mandate to take effect as scheduled, and anticipate this implementation to have little impact to our BCO count, we could expense increased turnover in the near term compared to the low turnover experienced in the 2017 third quarter.

We had a record number of third-party broker carriers’ hauled freight on our behalf during the 2017 third quarter. Our network is strong and continues to attract third-party truck capacity. I am extremely pleased with the 2017 third quarter topline results.

2017 third quarter revenue increased approximately 20% compared to the 2016 third quarter on a 13% increase in the number of loads hauled. With that said, during the quarter, we had a very disappointing increase in the severity of accidents, mostly attributed to a single severe accident that occurred during the quarter.

Accidents in the trucking industry can be severe, and occurrences are unpredictable. Safety in the trucking industry is a responsibility that we take very seriously at Landstar, and we will continue to work to be an industry leader in this area.

As we head into the fourth quarter, we recognize we have some difficult comparisons to the prior year fourth quarter, based on the timing of the company’s fiscal calendar.

Because Landstar’s fiscal year ends on the last Saturday of the calendar year, the 2016 fourth quarter included 14 weeks of operations, while the 2017 fourth quarter will include 13 weeks. The 2016 fourth quarter also included Christmas falling on a Sunday, plus Christmas falling on a Monday in 2017.

We estimate this extra week of operations and a favorable timing of Christmas contributed an additional $52 million of revenue and 30,000 loads via truck to the 2016 fourth quarter. As it relates to our 2017 fourth quarter, I anticipate that truck capacity will continue to be tight for the remainder of the year.

I expect gross profit margin to be in a range of 14.4% to 14.6% in the 2017 fourth quarter, assuming fuel prices remain stable.

I expect that truck capacity will remain tight as we move through the fourth quarter, with even more tightening in the anticipation of the ELD mandate and industry-wide increase in ecommerce related freight late in the quarter. Seasonally, revenue per load on loads hauled via truck in the fourth quarter is typically slightly above the third quarter.

During the third quarter, we experienced a significant increase in revenue per load on loads hauled via truck in September. In early October, revenue per load on loads hauled via truck continues at the September level.

I expect revenue per load to remain elevated through the remainder of the fourth quarter at a low double-digit percent above prior year fourth quarter.

As two quarter over prior year quarter volume comparisons, as I described above, we estimate that the extra week and favorable time of Christmas in 2016 added approximately 30,000 loads hauled via truck to the 2016 fourth quarter.

When comparing quarter to previous quarters’ sequential trends, the 2017 third quarter included approximately 16,000 loads hauled via truck services in support of relief efforts. We have not assumed any such services in the 2017 fourth quarter, and expect such services, if any, to be insignificant to the fourth quarter.

Recent trends through the first few weeks of October show a continuation of the strong volumes experienced throughout 2017.

Assuming that current trends continue, I expect 2017 fourth quarter loads hauled via truck to be above the 2016 fourth quarter in a high single-digit to low double-digit range, when excluding the estimated 30,000 loads resulting from the extra week and favorable timing of Christmas in 2016.

I currently anticipate 2017 fourth quarter revenue to be $975 million to $1.25 billion. Based on that revenue expectation and assuming insurance and claim costs are approximately 3.3% of BCO revenue, I anticipate 2017 fourth quarter diluted earnings per share to be in a range of $0.98 to $1.03 on an operating margin of approximately 48%.

The operating environment experienced in the 2017 third quarter exceeded our expectations. The momentum in demand for our services that began in the fourth quarter of 2016 continued and strengthened through first three quarters of 2017.

The increase in demand, combined with a significant increase in rates late in the quarter, contributed to the very strong the third quarter revenue and gross profit, when we reported record third quarter gross profit in the 2017 third quarter, and the highest third quarter diluted earnings per share in the company’s history.

We continue to focus on profitable load volume growth, increasing the number of agents and capacity we can provide in our network and enhancing the tools available to our network of agents and capacity drivers to enable them to effectively haul more loads. And with that, Carey, we’ll open to questions..

[Operator Instructions] our first question is from the Jack Atkins of Stephens. Your line is now open. .

So Jim, I guess let’s just start with the revenue guide, which obviously I think is really encouraging. Pretty strong number there, obviously building on what you did in the third quarter, despite some pretty tough comps.

But when we sort of look at the EPS growth that’s implied by the guidance relative to the revenue growth, it’s sort of lagging a bit. I know you guys typically do a very good job sort of leveraging your net revenue and gross revenue to the operating income lines.

I am just sort of curious if you could maybe help us think through and Kevin, you may have given this, but sort of the incentive comp accruals, the increase in incentive comp accrual in the third quarter versus last year, and then sort of what are you expecting in terms of incentive comp accruals in the fourth quarter versus what you accrued last year?.

Well Jack most of it’s coming from - when we drive revenues through the organization at the speed where I think we’re driving it, a lot of it comes from the broker side. So most of that decline is really just greater revenue with a gross margin.

So when we said, I believe, we’re at 14.8% in the gross profit margin in the third quarter, we’re going to be 14.4 to 14.6; that’s where you’re getting most of that EPS pressure..

So you don’t have any sort of extra catch-up in terms of just a year maybe panning out a bit better than expected in the fourth quarter from an incentive comp accrual perspective?.

Jack, this is Kevin. In my prepared remarks, I said it was 6.8 million for the third quarter versus 427,000 last year. And the way the rules require us to book it is to have 3/4 of what we think the total year-end incentive comp’s going to be. So as of the end of September, we have 3/4 of it.

So there’s going to be an increase year-over-year on the incentive comp line for the fourth quarter compared to last year also..

Okay, Kevin. That makes sense. I’m sorry about -- sorry if I missed in that in your prepared comments. And then sort of looking forward here for my follow-up question, Jim, I’m pretty encouraged to hear that you just have 500 BCOs without an ELD at this point, seems like you made a lot of progress implementing that in the third quarter.

But you’re not seeing any sort of degradation it looks like, in terms of BCO utilization. So if you could sort of comment on sort of why do you think, there’s a lot of fear out there that as these owner-operators put ELDs on, that’s going to translate into lower levels of fleet utilization across the industry.

Would you say that your experience is sort of bucking that trend, or maybe there’s something different about your owner-operator fleet? Just kind of help us think through that, because I think that kind of goes against maybe a narrative that’s sort of out in the marketplace when we think about ELD implementation..

Yes, Jack, this is Joe. I think what you look at there is the fact that our BCOs have been running paper logs as has everybody else for a quite long time, and we’ve been pretty stringent in our auditing of those logs.

So their behavior probably changes less if they were skirting the rules somewhere else, and now they have an ELD, I think there’s a bigger impact.

But I also think, you look at the model and how our BCOs select the freight that they haul, and they’re selecting that, in many cases on a spot market basis, where they can put things together where a lot of fleets are really trying to utilize the equipment and get as many miles as they can, and the BCOs just don’t operate that way.

And if you look at the utilization total, the guys are hauling less than two loads a week. So it’s not like they’re [buffing] up against hours of service limitations in our system. So I think that’s why you have the disparity, because as you pointed out, utilization’s up 8% and ELDs are a great majority of the fleet today.

So for us, I think we’re a little bit different in how we operate. I think the BCOs clearly operate differently than a fleet driver..

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

So, just following up on the ELD question, I was just wondering if you could just offer color on the drivers of the accelerated adoption. I guess we are certainly, obviously, closer to the mandate, but we did also get some details in terms of how the mandate would be enforced from the state enforcement associations.

I just wanted to see if you can offer any maybe qualitative thoughts on driver mindsets and behavior on the back of maybe a little bit more color on how this ELD mandate is actually going to be enforced starting April 1 of next year..

So I think that the driver mindset is slow to come around, right. I still think there are many in the industry, who believe there’ll be some administrative relief, which we don’t believe is on the horizon.

I think if you look at the BCO in the Landstar System, as I’ve kind of mentioned to Jack, this has been something that we started on the slow implementation path at the end of 2012, and it’s kind of gotten us to where we are today. I think it’s widely accepted that this is the way that we’re going.

Our model allows them to operate and still maintain productivity and earnings and so forth.

What I think, from an industry perspective though, if you’re a prospective driver or if you’re a driver who gets paid by the mile, and you see the ELD mandate is something that’s going to curb the number of miles you’re able to get, I think you would draw some conclusion that your earnings are capped or that your earnings are going to go backwards, right? So I think that’s where you see a lot of perception around how this can be damaging.

And based on historical operating habits of the driver or of the fleet, there’s some truth to that. I think that’s where you get the productivity decline commentary from some of the carriers out there..

And then one for my follow up, just on the unsided loads. I mean, the number of loads is obviously pretty impressive in the quarter. I think it was the highest in the history of the company if you exclude kind of the auto contract in 2015.

I just wanted to understand a little bit better, the sustainability or how you think about the sustainability of that. You did say September was, I guess, the best month in the quarter for that business line, and we certainly got some good results earlier this week, I guess, from a big machinery company.

So I’m just trying to better understand, was it driven by broad strength across the board or maybe some specific pockets, regionally speaking or customer-related that, maybe, we should think about in a different way?.

Amit, this is Pat. It was broad-based. To kind of give you an idea, if you look at the different industries that we serve; if you look at the consumer durables segment, the machinery segment and the metals segment, that comprises approximately 40% of our revenue in the quarter.

And in the quarter, in those segments, 25% of the top customers in each one of those comprised almost 30% of the revenue. So you can see it’s broad-based, there’s an awful lot of different accounts in those particular service offerings.

And so I think that demonstrates just how broad based it was, and the demand for that platform side of the business continues to be fairly robust, and we anticipate that through the balance of the year..

And just a quick follow up to that, there are some people that expect some of these relief and rebuilding efforts to be sustained over a little bit of period of time.

I wasn’t sure of the bump you saw in the third quarter, do you expect that to maybe be sustained as some of, maybe, the rebuilding efforts continue? But I just wasn’t sure because it didn’t seem like it wasn’t that big of a storm, relatively speaking, to what we have in 2005.

So just wanted to hear some thoughts into the sustainability of that?.

Amit, I think absent any storms, I think the demand would have been equally as great. I don’t think it had that significant of impact on that segment of the industry..

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

It’s Rob on for Scott. Could you give us a little bit of context in terms on prior rebuilding efforts and kind of what sort of lag Landstar saw in terms of seeing some underlying demand for the recoveries that go on in those areas.

Like, how long after a hurricane we see the uptick in terms of flatbed demand in some of the regions for the actual rebuilding portion of it?.

Rob, this is Pat. I’ll just repeat what I mentioned in response to Amit’s question. We don’t see, and we did not see in the third quarter, a substantial amount of business related to the rebuilding efforts in those hurricane ravaged areas.

Now we’ve provided some relief services for FEMA, but as it relates to the rebuild, I can’t give you any idea of what it looked like back in ‘05, post Katrina, as it relates to today, post Irma and Harvey.

So again, what we’re seeing is a very broad based demand across all these industries, and it does not seem to be related to any of the relief efforts. If you look at the amount of inbound shipments into Texas and the outbound shipments into Texas, it really hasn’t changed much..

That context is really helpful. Your earlier comments about the utilization on the BCOs, I think you had mentioned they were up about 8%.

Could you give us a sense to if we saw any sort of underlying change, it didn’t sound like it from your earlier comments, with regard to the utilization of recently adopted BCOs with the ELD equipment?.

Rob, this is Joe. We’ve looked at that a couple of times in the past, and the utilization of those, with or without ELDs has really not been anything material.

And again, with the great majority of the fleet having them on board and operating with them to see that kind of an increase, I think it just tells you from a productivity standpoint, there hasn’t really been much impact and we don’t anticipate much impact going forward..

One of the benefits you’re seeing on utilization is over comparison of prior year they weren’t running as many loads. I think when you talk much utilization; utilization was up in the second quarter also, when you’re talking a third of load a week, but it adds up over time, more than they had hauled last year.

But it has nothing to do with the ELD implementations or any of that..

That’s helpful. The utilization dropped a little bit sequentially, 2Q to 3Q, but up nicely year-on-year.

In terms of overall BCO count, how did that trend during the quarter as the load growth accelerated? It was obviously up 1.4% from the second quarter, but is it fair for us to assume that, that strengthened as you were seeing more loads come across the Landstar network?.

Yes, BCO count in the quarter Rob was up 54 in July, 40 in August, and 50 in September. So yes, I think it, again, just continued to grow. And again, you don’t always see a - from a timing standpoint sometimes there can be a little bit of a lag.

Again it just depends kind of on the quarter and on the timing of guys trying to get qualified and all sorts of other things. But it was pretty evenly split really across the quarter..

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

Jim just on the commentary on the gross profit margin guidance into the fourth quarter, can you talk a little bit about what your expectation would be? My guess is that most of that’s coming on the brokerage side.

When should brokerage gross margins start to normalize? It feels like that we’ve been in a period of higher spot rates for maybe significantly higher spot rates for 6 to 8 weeks. It feels like they’ve maybe come down a little bit from where we peaked.

Shouldn’t the gross margins be kind of trending up a little bit, or what’s the lag, and when you’d expect to see gross profit margins start to move up again?.

Well, I’ll be honest with you. We expect the capacity crunch coming into the end of the year between the drive of ecommerce that starts at about mid-November and ELD mandate. I would think that this crunch is going to continue at least into the first quarter. So I don’t see margin expansion for us from the brokerage side in the fourth quarter.

It usually dips down a little bit in January, February, when capacity loosens up. But it’s going to continue through at least the next three months..

Okay.

So when the (inaudible) stuff rolls off, the seasonal stuff picks up and then that’s what’s driving that sequential compressions, is that what you’re saying?.

Yes..

Okay, got it. And then just very strong volume performance here in the quarter, and it’s probably difficult to tease this out.

But when you think about the strength that you saw in September, is that what your expectation would have been with the dislocation in the market? I mean that, that’s the way model should perform when you see that tightness that your business picks up a lot of that dislocated freight? And I know Pat had some very good comments about the broad based strength on the flatbed, on an unsided commentary.

But the real strength that you saw just on the volume perspective, did the model perform, and was that just the opportunity that you see in a market like this, given how you’re positioned?.

I actually think it performed more than that. Basically what you’re saying that if we know storms are coming in September, would I have projected differently? Yes, we would have probably projected a tightening of capacity. But I think it was more than I would have projected.

It just feels like there’s an overall demand, some storm related, but it just seems like we are heading into September with a more balanced environment and things felt like they were getting to tightening up, and then we had the storms that made it even more tight. So I’d contribute part of it to the storms.

But I just think the demand’s out there right now, and with the storms combined, I think we accelerated faster than we would have expected had you told me storms were coming. I just think the market feels better..

That helps. I think you gave us a number, but it was 16,000 truck loads that was weather related here in the quarter.

Was that the right number on the truck side?.

Yes..

And then it was $9 million of storm related for air and ocean, and so the balance of that 14 million would have been the piece that was storm related on the truck side?.

Yes, 20 yes. That would have been truck..

Our next question is from Matthew Brooklier of Buckingham Research Group. Your line is now open. .

Can you talk to or do you have the truck volume growth number thus far in October? I think that you talked about them on for 3Q. (Inaudible) to hear where October’s trending..

Well, it’s looking about low single, but it is low double-digits, about 10% to 11%, through the first three weeks of October..

Okay. But I think you mentioned that any relief effort freight that’s happening in October is pretty minimal, and you are not anticipating --..

Right, yes, and this wouldn’t be in that 10% number that I just gave. Yes, it’s insignificant..

Okay, and then wanted to talk about cash flow. I know that increasing your trailer fleet has been a focus with the drop and hook business. I’m just trying to get a sense for if you have any inclination as to what CapEx could look like for ‘18, and maybe if you could talk about your plans for the trailer fleet..

I’m not sure we’re prepared for the trailer fleet conversation. .

We generally and on a quarterly basis will spend $2 million to $3 million of cash CapEx. Obviously, all of our trailers will be on lease, so it won’t be in the cash flow. But your best number for most years is 8 million to 10 million on the cash CapEx. Obviously our trailer fleet is newer than it’s been, but we are adding BCOs.

So as the demand for drop and hook goes up, we’re going to be adding trailers as well. We don’t have a number yet to put to that. But if the BCO count continues to climb you’ll see more trailers in the system, but obviously, that will be capital lease..

Well, we (inaudible) out about, (inaudible) of the trailers every year. We hold our trailers 8 years, so there’s always replacement coming through. I just don’t think we’ve projected out. We haven’t finalized a projection of how many BCOs we’re going to have (inaudible) them. So we don’t have the incremental growth in that number right now..

I guess my question being, if you don’t have - are unsure of the CapEx number at this point in time, do you still anticipate to buy a greater number of trailers on a go-forward basis? Do you anticipate they’re going to continue to grow the drop and hook part of your business during 2018?.

Well to the extent we can add BCOs to haul them, yes..

[Operator Instructions] Our next question is from Bascome Majors of Susquehanna. Your line is now open. .

You generated a lot of cash consistently through the cycle in your business model, but the (inaudible) payout’s just about 10% of earnings I believe as a recurring dividend.

In the valuation your stock has earned over the last few quarters seems to be persistently limiting how much capital you’re able to return via your historic avenue of repurchases.

And taking that into account in the considerable growth in your net cash this year, is the Board considering moving to a quarterly dividend that’s materially higher as a way to consistently reward your longer term shareholders?.

The Board considers all options. What we prefer though is the small dividend with a - we really prefer the stock buyback program more than we prefer a dividend. But those discussions are ahead. I don’t think we’re sitting on too much cash right now.

But if we continue to grow, we’ll be talking about similar to what we did in 2014, had a run up in the stock, we piled up cash, we did a special dividend at the end of the year. So all options are on the table, the buybacks, the special dividend.

But the least likely would be increase the quarterly dividend because we like the flexibility in the buyback program and the chance to do a special..

I appreciate that. So I guess we should increasingly think if the valuation remains high, which it seems like it will that the special dividend is going to come up as a higher possibility as time moves on.

What should we think about time line or maybe with respect to magnitude, how much cash you’d like to kind of keep on the balance sheet when that’s done as we think about that as kind of a range of outcomes over the next few quarters?.

Well, we’re comfortable with the cash we have on there now, so I don’t think we’re - we don’t have a target cash. Again like I said, the cash balance is much larger than what we have here, than we’d talking about pulling it back down. But if you look at history, we have done specials (inaudible) times and all at the end of the year.

I must saying we are going to do, but that’s kind of how we’ve been rolled out over the last six years or five years, we’ve done (inaudible)..

[Operator Instructions] Our next question is from Jason Seidl of Cowen. Your line is now open. .

Wanted to concentrate on brokerage for a minute, we’ve heard from some of the smaller brokers and then even a larger one last night, talk a little bit about going back to the customers and looking for some rate increases on anything that’s contractual.

I know you guys are almost all transactional in nature, but on any contracts you might have, I don’t know if you could address that..

Jason, I think if you think about the nimble nature of our business and the agent relationship with the customer, they’re constantly going back and identifying where they are challenged to meet the customer’s needs.

And what we see from a pricing perspective is, we don’t see a lot of enterprise bids coming in, we see more lane fulfillment bids coming in, which really tells us from the customer’s perspective that the person that owned that freight previously is no longer able to service it at that rate, and they’re putting the bid out to kind of either; A, identifying that the rates have increased; or B, move the freight to another carrier.

So I think the shipping community is very aware of the current status and the current tight capacity market that we’re operating in, and they’re more inclined to even initiate the discussion as opposed to holding those capacity providers to a certain rate.

Because ultimately with the demand that’s out there, if you’re going to fulfill your promises to your customers, you’re going to have to get the capacity and move the freight at the market’s rates that are currently in place..

Yes, I don’t think this market is surprising any shippers at this stage, so okay. Well, that’s good to hear. I appreciate the color. That was my (inaudible)..

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, Carey. And thank you and I look forward to speaking with you again on our 2017 fourth quarter earnings conference call currently scheduled for February 1, 2018. Have a nice weekend..

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