Good morning, and welcome to Landstar System Incorporation’s Year End 2019 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; Rob Brasher, Vice President and Chief Commercial Officer; Joe Beacom, Vice President and Chief Safety and Operations Officer. Now, I would like to turn the call over to Mr. Jim Gattoni. Sir, you may begin.

Thank you, Eunice. Good morning, and welcome to Landstar’s 2019 fourth quarter earnings conference call. 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 2018 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. Throughout 2019, both truckload volume and revenue per load on loads hauled via truck were impacted by softening conditions in the spot market. In particular, Landstar was impacted as we move deeper into 2019 by the slowing US manufacturing sector. During the first half of 2019, I believe we were in a relatively healthy freight environment. The first half of the year was by far less our second best January through June performance in the Company’s history, second only to the first half of 2018. Throughout the second half of 2019 however, weaker economic conditions, especially in the US manufacturing sector led the seasonal softness in Landstar’s truckload volumes. The softness began mostly in September and continued through the end of the 2019 fourth quarter. While first quarter 2019 truckload volumes exceeded the 2018 first…

Thanks, Jim. Jim has covered certain information on our 2019 fourth quarter. So I will cover various other fourth quarter financial information included in the press release. Gross profit defined as revenue less the cost of purchased transportation and commissions to agents decreased 12% to $148.7 million, and represented 14.9% of revenue in the 2019 fourth quarter compared to $168.9 million or 14.3% of revenue in 2018. The cost of purchased transportation was 76.6% of revenue in the 2019 quarter versus 77.1% in 2018. The decrease in purchased transportation as a percent of revenue was primarily due to an increase in the percentage of revenue contributed by BCO independent contractors and decreased purchased transportation rates paid to truck brokerage carriers. The rate paid to truck brokerage carriers in the 2019 fourth quarter was 44 basis points lower than the rate paid in the 2018 fourth quarter. Commissions to agents was 8.5% of revenue in the 2019 fourth quarter versus 8.6% in 2018. The decrease in commissions to agents as a percentage of revenue as compared to 2018 was due to reduced commission incentives on BCO revenue, partially offset by increased commission rates on revenue generated by truck brokerage carriers due to an increased net revenue margin, revenue less the cost of purchased transportation divided by revenue on loads hauled by truck brokerage carriers. Other operating costs were $8.7 million in the 2019 fourth quarter compared to $7.6 million in 2018. This increase was primarily due to an increased provision for contractor bad debt and increased trailing equipment costs. Insurance and claims costs were $25.1 million in the 2019 fourth quarter compared to $18 million in 2018. Total insurance and claims costs was 5.7% of BCO revenue in the 2019 period and 3.7% of BCO revenue in the 2018 period. The…

Thanks, Kevin. And with that Eunice, we will open to questions.

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

So, Jim, if I could maybe just start with just a little bit of additional commentary on the market and what you’re seeing in January, could you maybe comment on how the first call it, three weeks, four weeks of the month have gone relative to expectations? And then when you kind of think about the van side of the business relative to the unsided equipment and flatbed, are you seeing one side really performing better than the other, just trying to get a sense if you’re seeing any sort of tightening in the market. I know it’s January. So it’s hard to draw any conclusions but would just be curious on any commentary there.

Yes. But, if you want to talk vans and flatbeds. Flats are a little bit softer in January almost every year. So it’s, that’s a difficult comp just for this four week period that we’re sitting in. But I think when you look at our trends in the first three weeks to four weeks of January, what we’re seeing on load volumes plus rates, we’re comfortable with what we put out in our guidance because what we’re seeing is a consistent trend with stability in our pricing, you know, where you see the pricing kind of traveling sequentially from December to January consistent with what we’ve seen in the past. And actually it might be a slight -- I don’t want to say it’s a lot better, but that trend that we -- that we forecasted for the guidance on a rate is slightly better what you saw in average over the last four years. And then on the volume, it’s a similar situation. Our trend is a little bit better than what you’d see from a fourth quarter to first quarter trend on volumes. So, I think our, we believe that what we guided to is really coming off the January results, which we’re seeing some stability and volume instability in price right now. Well, it’s a sluggish environment.

Sure. No, but that’s encouraging that you’re seeing that stability show up. So I guess kind of thinking through the bridge to the earnings guidance for a moment, when I look at the revenue numbers that you provided for your guidance range is there relative to the earnings outlook, it certainly feels like maybe there are some additional costs that are present in the first quarter. Could you, Kevin, could you maybe kind of talk about some of those different cost items? Are you seeing some pressure on the G&A side, maybe incentive comp is coming back. Could you just kind of walk us through that for a moment?

Sure, Jack. This is Kevin. Annually, let’s just talk annually first. We do expect an increase in the SG&A line, let’s say, in the range of $19 million to $20 million annually. That is -- I split that into two pieces. The first being incentive comp and stock comp and that’s about half of the $19 million to $20 million. Okay. Everybody knows about that. The remaining $9 million to $10 million I’d say split also evenly between, A, wage increases and inflationary increases, that’s about half of the remainder. And the rest, let’s say, $4 million to $5 million increase in tech spend. So, if you’re looking at on a quarterly basis, my SG&A let’s say run rate $43 million to $44 million. Obviously, depreciation’s up a little bit. I think we are like $11.4 million in Q4. Your best number there is probably $11.5 million to $12 million for the rest of 2020.

Okay. That’s great. Thank you for that. Just one quick follow-up on the IT spend, the tech spend. Could you maybe just comment on sort of what sort of projects that’s going toward, I mean do you feel like -- it’s almost like an arms race on the tech side within logistics. Do you feel like that you’re investing enough to sort of keep up with what’s happening on the competitive front there?

Absolutely. Next question. No, if we break down what we’re spending on, we were you know, up until about five years ago, we are sitting on IBM, iSeries from the ‘80s, right. So there is a little bit of built in efficiencies into the organization when we, remember about two years or, maybe three years or four years ago, we announced we’re going to rollout a new TMS, we’re in the middle of doing that. So there is a significant spending on rolling that out from converting off our legacy systems into a more agile, flexible, better functioning TMS. On top of that is all of the pieces that phase out to the customers and the shippers and the carriers where you have your apps, right, where in the app world where we’re moving into the cloud, and all the stuff is linked into our iSeries to Middleware, right. So we got spending just to create that infrastructure to create that plug and play atmosphere, the plug and play environment where we, you can take any app you want and plug it into our systems and -- feed the data to any source you want. So there is some spending on there in building up that Middleware, so that we can create the plug and play atmosphere and that is actually in place as of last year and that gives us the capability of the link in our pricing tool, which was just released over the last year and a half, our new Available Loads mobile app that’s in the hands of our carriers today and our new Maximizer. So, it’s across the board. But when you think of our model, it’s, we were, we’ve been sharing information between agents capacity and customers since this inception. And we’ve always used the latest technology. So when you talk about what we do, we weren’t that far behind the curve on a lot of what we had to do. You know, pricing was one thing, we didn’t really have a good pricing tool. We have one now. So we can push pricing directly out, it’s things like that. So we’re more although technology is not cheap. So we are, we’re more tweaking all our applications and creating this environment that’s more flexible and agile where we can plug and play the best tools into our system in the future as opposed to having to worry about a legacy iSeries.

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

So, I understand sort of it feels normal to start the year. There is this view from the TLs the market is going to tighten maybe in the second quarter. Do you agree with that?

I look at certain things, and I don’t see any, as we call green shoots or catalysts that is going to jump in the second quarter. And I’ll tell you why. This is probably, we are sitting in the -- probably the -- in the last 30 years, we’re sitting in a manufacturing environment where they’re shrinking manufacturing. And when you look at the three or four times it happened, it took anywhere from six to seven quarters to reverse itself. I don’t know when this one started, April was negative manufacturing in the US, but really started consistently in July, you were negative, all the way to now. So if you’re counting quarters, I’m somewhere, if it’s six quarters, we are toward the end of 2020. So that’s one side of what I’m saying, right. So, you’re looking at that and I’m looking at what’s going to happen in the manufacturing environment because we’re really impacted by US manufacturing and it’s been shrinking since July on a year-over-year. On the other side, you’ve got the trucks, right. So what’s going to happen with trucks and their direction may be coming from the fact that you’re going to see, you had lower truck orders last year, so that should help reduce the number of trucks in the system and our thing here is, how is insurance is going to impact the trucking industry with what’s going on and some of these large verdicts we’re dealing with. And it’s not even the large verdicts, it’s the -- it’s some of the even the smaller verdicts where settlements, where you look like you thought you had a fender bender, and next you know it cost a couple of million dollars. What’s that going to do to capacity over the next six months, 12 months in renewals in the insurance area, and then, when do these small guys have to renew. So it’s -- does that happen sooner than I see the economy turning? I think it does. But let’s, I am on a wait and see.

Okay. So, you feel better about supply than demand. I get it. The BCO count that was down a bunch sequentially, what are you seeing so far to start 2020?

Yes. Scott, this is Joe. What we see is that interest and demand in trucks coming in the door still remains pretty strong. But in, in January, we were off about 20 trucks. We declined about 20, which is not unusual. Excuse me, yes, in January. Not unusual, in the first quarter, seven of the last 10 years we’ve been negative in the first quarter, I wouldn’t expect that to change. But hopefully and not too much more. And I just think the environment is such that we had, we lost 356 trucks in 2019. And that’s a pretty big number, but I think one way to look at it is we retained 70% of the adds that we created in ‘17 and ‘18. We grew 1,160 trucks in ‘17 and ‘18, and we were able to retain 70% of them in an environment that really switched pretty quickly. And I just think you have small businesses, some that are able to adapt to change quickly and others less so. And those that didn’t adapt and couldn’t hang in there are either doing something different or doing it somewhere else. But I think that comes back, but I’ll dovetail what Jim said, I don’t think it comes back in the first quarter or second quarter of this year. I think it’s going to be further out than that before the supply demand dynamic changes and capacity begins to net grow again.

Okay. And then last one, so net operating margin guidance for the first quarter is in that, what 42% to 44% range. Any thoughts on how to think about the rest of the year and if we think that revenue inflects positive in the third quarter, can you see earnings inflect positive too or because of some of the cost things do you think that the earnings inflection takes longer?

Yes. Scott, this is Kevin. Obviously, the first quarters are toughest number when it comes to that margin number. And yes, what you gave is about where we’re looking at. Obviously, if demand comes back in Q2, Q3, that will help that number. But again, we do have some other cost pressures out there, like I laid out on the SG&A lines, but it’s all about demand and increase in the gross profit number.

Thank you. The next question is from the line of Jason Seidl of Cowen and Company. Your line is now open.

I wanted to drill down a little bit on your comments on expected capacity. When I look at your truck brokerage business, your approved and active guys dropped sequentially at 4 -- just over 450 and I think year-over-year, you’re down over 1,500. Is this the reflection of the capacity that you’re seeing coming out of the marketplace? Have you heard, why is this all higher insurance cost? And do you expect that trend to continue?

Yes. Jason, this is Joe. While -- you’re correct, we dropped about 1,572 carriers year-over-year or through the year. I don’t see that necessarily as a reduction of capacity in the marketplace. What I attribute that to largely is the fact that because of the demand environment, we’re putting fewer opportunities out on public load boards and there is fewer reasons for those carriers to remain qualified and keep their insurance up with us in order to haul freight, because there’s just not as many loads being transported by a broader base of carriers. So, I don’t see it as necessarily an exodus yet, but I do see it as, as our volume declines and the number of carriers that are going to be there to haul, our volume is going to decline. If you look at our active count, it’s really was down far less, about 1%. And so I think where we have good relationships and where we have business reliant on certain carriers, I think that’s pretty much intact. I think it’s the other stuff that maybe that overflow or those additional volume that we had a year ago that we don’t have today is affecting the other carriers who may be didn’t haul much for us. There is no need for them to reup their insurance and provide it to us and go through that exercise. I think that’s kind of what, how I would interpret it at this point.

Okay. When I look at some of your end markets, obviously, automotive was down a ton, I’m assuming that’s all the GM strike. Just wanted to know sort of how that looks now post the strike and into 1Q?

Yes. So, this is Rob, Jason. Automotive, you kind of take a look at from 2018 to 2019, rates came down tremendously. The automotive manufacturers put their pricing out to bid, and quite frankly we -- our agents, we didn’t chase -- we didn’t chase the price. We didn’t chase -- we didn’t chase it downward, we focus more on freight that we could move at profitable levels, and that’s kind of where we saw our automotive go. The strike did have an impact in the fourth quarter, but again I think it was the bid in the rebid of more of the contracted rates moving through the, through the year. Go ahead.

And do you guys have any -- do you guys have a financial impact for that strike or no?

Only as it relates to negative revenue. We can’t really quantify the direct impact of what the drop-off in revenue was related to the strike, which has dropped off.

Okay. Well, that makes sense. I guess lastly, it looks like the industry got a stay from that California law that’s out there. Any thoughts from you guys going forward about that and about that potentially catching on in other states?

Yes. Actually what happened out there was a positive for us. I mean it was, it was kind of negative for a while, but the fact that they jumped on the Federal rules to basically put an injunction and to make sure that the California wasn’t over ruling -- over ruling what the Federal rules are about Interstate Commerce. That was actually, although the legislation coming out of California was negative the resulting decision coming out of there in January was positive for us with the injunction. And injunction specifically on the Federal side saying you can’t put rules in place that kind of overrule what the Federal says about Interstate Commerce. And I think that kind of makes the other states although they may roll things out to limit independent contractor work for various other industries within states, they really have to take a close look at the truck transportation industry and how they’re going to handle that from an Interstate Commerce and not -- and comply with the Federal regs.

So, this is pretty much can provide a blanket cover at least for now with Federal regulations. So it doesn’t really matter that much what the other states put out?

Right. The other states should be watching and make sure that that they’re not going to conflict with what the Federal regs are and that’s kind of -- where we expect the California is probably going to appeal, we haven’t heard anything yet. So we’ll see how this plays out over the next couple of years.

Thank you. The next question is from the line of Todd Fowler of KeyBanc. Your line is now open.

So, I wanted to ask on the gross profit margins in the quarter, the $14.9 million was up from the $14.3 million in the fourth quarter of ‘18, but specifically, can you talk about what you’re seeing on gross margins with respect to brokerage loads. And obviously, the question is related to again some of the pure transactional brokers are seeing some more pressure there. I’m curious kind of what your experience is and what you’re seeing and kind of any impacts in the marketplace from a competition standpoint?

Hey, Todd. This is Kevin. Yes. The buy-rate on the brokerage, as we move throughout the year in 2019. They are 177 basis points better in Q1, 168 basis points better in Q2, 116 basis points better in Q3. And then in Q4, it’s only 44 basis points. So I don’t know if I would characterize that as tightening. But we’re definitely paying the broker carrier more. My best guess right now for Q1 and this -- it obviously depends a lot on mix and how much is BCO and how much brokerage comes back. But I would use $14.9 million to $15.2 million as your gross profit margin range for Q1. Does that answer your question?

Yes. And I guess, Kevin, just a follow-up. I mean so with what you’re seeing just on the brokerage piece, it sounds like that you’re still within the range of what you’ve experienced historically. You’re not seeing anything that’s unusual from a brokerage margin standpoint.

No, no.

And I think Kevin that it’s true that the reason it was decelerating that the basis point pickup in the fourth quarter is because the deceleration started and it got a little bit tougher. Right?

That’s correct.

Not necessary because it’s, we are not tightening. We’re just seeing that comp got a little tougher, not a tightening in the fourth quarter.

That is correct.

Okay, good. That helps. And then just on the insurance piece and I understand shifting to that three year versus the five year, and it looks like there’s going to be some impact from that. As you think about that rolling forward into 2021 or beyond if insurance costs are going up, it feels like that that’s going to be an incremental cost pressure for the business. Is there anything that you can do to mitigate that cost? Is it something that you can work with either you know how you’re approving and qualifying BCOs? Is it something, I don’t know on the rate side. But how do you think about kind of mitigating that the incremental insurance cost that you could have, just based on the trends going forward.

Well one thing that’s difficult for an organization like ours when you’re running independent contractors is you can’t enforce certain safety rules or safety equipment that would otherwise benefit them and the organization, right. So we rely on them to buy the safe equipment. We make sure that they get their equipment inspected, we do believe we have the best safety programs in the industry right now and our qualification standards are really high already. So from that perspective, we believe we do everything we can right now to remain safe and I’m not sure it’s necessary, it’s how do we reduce the accident, the frequency of accidents, which are, like I said already pretty low from an industry standpoint. It’s those one or two accidents that’s just going to pop on you, that it’s hard to determine when that’s going to happen and which truck it’s going to happen. It could be a guy with 40 years experience, it could be a guy with two years experience. So trying to get our hands around how to limit the exposure to what’s going on in the insurance market, I’ll admit there has been a little bit of a challenge over the last couple of years. And we got our eyes on it. We’re trying to figure out what we can do to the equipment without stepping over the independent contractor line and there’s more to come on that. As you know, or if you didn’t know, we used to be able to insure our losses over our $5 million self-insured or $5 million to $10 million layer. That is to be a per occurrence covered. So, every time there was an accident we covered for everyone within the policy period. The insurance companies took that away last year, so that’s why we’re seeing a little bit of an uptick as it relates to cost from the $5 million to $10 million layer. So I think that’s where you’re seeing some of the pressure coming from. And the industry and the -- when you’re turning fender benders into million dollar accidents, it’s hard to figure out how we’re going to, how that gets controlled other than by trucks are going to shrink. I mean, the market we’re sitting and eventually trucks are not -- capacity is going to shrink, and they will drive rates up and maybe you get it through the, maybe you get it through the revenue line.

Okay. Yes. Jim, all that makes sense. I mean those are good thoughts and I’d have to think that you guys are better positioned in most, but it does definitely does feel like a pressure here in the interim until there’s kind of a solution to the cost side of the problem.

Right.

Thank you. We have five more questions in queue. And our next question is from the line of Bascome Majors of Susquehanna. Your line is now open.

Yes. Thanks for taking my questions here. Kevin, I don’t want to beat a dead horse on the cost. But even after the pretty detailed explanation you gave, it feels like there might be some more baked into the SG&A or other operating spend for the first quarter, just based on getting to the guidance from the bottoms up components. Can we do this may be walk forward item-by-item 4Q to 1Q or year-over-year. I just, I think it would be helpful to understand kind of a little more precisely how we’re getting from A to B?

Sure. Let’s just say at the midpoint for Q1, we will start with gross profit, probably given the range $14.9 million to $15.2 million, we’re looking at decline in revenue, you’re looking at probably $7 million to $8 million decline sequentially from Q4 to Q1. That flows down to the operating income line because once you get underneath that you’re going to have slightly higher other operating, let’s say, to the tune of about $1 million, but you’re going to have to pick up on the insurance of about $8 million. That’s assuming you know 4% of our BCO revenue in Q4 versus the $25 million that we had excuse me, in Q1 versus the $25 million we had in Q4. And then SG&A, let’s say, an increase of $45 million, and then depreciation that’s we’re probably looking at $11.5 million to $12 million on a quarterly basis going forward. So that’s going to be a slight decline as well. So those items underneath gross profit pretty much net to each other. And then you get the gross profit flow through the decline down to operating income.

Thanks for all that. I really appreciate that walk through. The one piece, just the SG&A sequential increase typically from 4Q to 1Q, that’s down $1 million, $2 million, $3 million, and that $4 million to $5 million increase is just kind of way out of line with history, even considering that incentive comp is -- needs to come back this year. I mean, on the text -- and maybe if you could just focus on that piece of it, because I think that’s what people are trying to get their arms around. The reasons, Jim, you gave for elevated tax spend weren’t that different than a lot of stuff you guys have been talking about for three years now. What does the incremental 2020 step-up look like on the ground? And is that some sort of temporal project-related spin or is that more of a structural increase? Thanks.

No. I think, from the tech spend coming from the fourth quarter to the first quarter, I mean the wages might be up slightly. I mean it’s not there. So it’s not the tech. I mean we are going from, if you look at the, here’s the thing about history. In bonus years and we have a good bonus year, we’re playing catch up in SG&A because the first quarter, we would love to have your bonuses paid equally booked throughout the year, right. At the end of the first quarter, we’re saying, we’re going to have $8 million bonus as you put up $2 million. In the second quarter, year is looking better, we’re going to have $12 million, then you put up -- and then by the time you get to the fourth quarter, a lot of, a lot of times when we have a big bonus here, there is a lot of bonuses in that fourth quarter and you see a more significant drop-off because of that. It’s the equity program and it’s a true up in the bonuses that happened in the fourth quarter that create that look like I went from fourth quarter of -- I had $48 million and now the first quarter it’s only $40 million. That trend always seems to make sense and a lot of it has to do with the equity comp and the incentive comp.

Okay. That helps quite a bit.

Yes. I think, what I’m saying is when you look at the historical trends it’s a little difficult due to the way the incentive comp piles up toward the year and we play catch-up a lot. As the year grows, we got to keep catching up to the, to the accrual. So you could have a pretty big number in the fourth quarter of ICP for the catch-up and then zero like some years, we’ve seen at the end of the first quarter, the year doesn’t look good, it goes to zero. And that could create a huge historical spread between Q4 and Q1. We’re now, we’re not necessarily looking at it because we didn’t really have bonuses in the fourth quarter of this year.

Okay. Last one, the buyback. How are you feeling about the stock here and what’s the thought after paying the special dividend is used to capital last year?

While I would, I would -- based on what I saw in the after-hours, I think people would know how we’re going to react on the purchases, the Board. Yes, I think we’re prepared, the Board was willing to up the available shares under the plans from, I think we’re sitting on a $1.2 million, we now have $33 million available. I don’t think our philosophy has changed and I think this is the cycle where you might see some activity on the buybacks.

Thank you. The next question is from the line of Scott Schneeberger of Oppenheimer. Your line is now open.

Good morning, it’s Daniel on for Scott. Could you guys elaborate a little bit on the visibility within the consumer durables vertical? What are you seeing presently and what we could expect there going forward?

That’s very difficult, because it’s, we don’t have any customers over 3% of our business and consumer durables is our largest category, but the top 25 customers only makes up about 30% of that category. So drilling it down on a mid-month basis is kind of tough for us. When you look at where we were in the, in the fourth quarter on that specific commodity or sector, it’s hard to draw conclusions, if you’re just looking at our charts where the numbers fell off of our consumer durables. I believe we said that in the quarter consumer durables is down 15%. And if I pull it apart a little further consumer durables, yes, everybody is talking about that the consumer market is a little bit stronger than the manufacturing sector. And yes, we believe that and we can see it in our numbers. I mean we tie that into the manufacturing sector. But, when you break down the consumer durables being 15% down in revenue quarter-over-quarter, 4Q ‘19 from 4Q ‘18, the mix there was actually, we are only down 4% volume and most of was rate. So it actually did a little better in the organization. So that’s how we can look at it, because it is such a diversified portfolio of customers within there and that’s what we got. And I would expect that’s probably continuing into the first couple of weeks in January.

Got it. That’s helpful. Thank you. Free cash flow in 2020. How do you guys think about that, please? Thank you.

I’ll put out an early conservative estimate of let’s say $175 million to $225 million, and obviously once we get to Q2, I have a better feel for that. But let’s just pinpoint $200 million as a midpoint.

Thank you. And the next question is from the line of Stephanie Benjamin of SunTrust Robinson Humphrey. Your line is now open.

I was hoping you could talk a little bit about the volumes related to your just drop and hook business, just kind of what you saw during the fourth quarter as it related to the prior year? And then how that business is really holding up to start 2020. Thanks.

Yes. Stephanie, this is Joe. We saw the drop and hook piece, about 34% of our business in the quarter was on company trailer that’s largely drop and hook. And that’s pretty consistent with full year and pretty consistent with prior year. So we see that continuing to be a vital part of the service offering and BCOs are a large part of that service offering in the drop and hook, and as that count goes, so does the number of trailers that we can place at customers. And it’s really like it is in other aspects that’s kind of a demand thing. So as demand grows, clearly if capacity grows and demand grows, we will put more trailers into those customers and into the fleet to grow that segment. But right now we’re, we’re kind of on a percentage of volume standpoint, it’s pretty consistent in the quarters for the year and the prior year.

Thank you. And the next question is from the line of Ben Hartford of Baird. Your line is now open.

Thanks for getting me in. Kevin, maybe just higher level perspective, you got some expenses here obviously from an insurance claim perspective, but also as it relates to tech. As you think about the model and that 50% EBIT margin as a percent of net revenue that’s been thrown out in the past, you did that early in 2019, and then it’s moved lower. What is it -- has anything fundamentally changed to the model here with the layering of cost to prevent that or is this simply a cycle, and overall net revenue issued and as that comes back then that kind of natural incremental margin comes back in the March to 50% and beyond should resume, can you talk a little bit about the profile of the model in aggregate and whether that’s changed here?

Yes. Ben, I don’t, I don’t see that that’s changed at all. This is from my perspective, it’s all about growth in the gross profit. There aren’t a lot of levers underneath gross profit that we can pull. We do have some increase in spend but that theoretically, that’s going to drive higher gross profit, right, down the road. So, no, I haven’t seen. I don’t see it as any change structurally 50%, when we put that out that was always about, we said that was net of the incremental temporary tech spend, right. And that’s the way we look at it, 50% that’s definitely where we should be but it’s all about gross profit growth.

And then, Jim, in the context of AB5 and understanding the injunction there, helped for the time being, but we’re seeing movement in New Jersey and we will see elsewhere whether other states go forward with it. But have you seen enough with California? I know you guys took some actions late in the year to protect yourself against that legislation particularly potentially coming on board. But regardless of that preliminary injunction in California, have you seen enough to be concerned about kind of the state of how independent contractors are going to be viewed broadly over the next several years to think about potentially changing the manner in which you guys conduct business.

Well, it’s always a conversation and it wasn’t just AB5, I mean if you look at our 10-K. We’ve had that risk factor in there, since we first issued our 10-K I think in 1993. So there is always a mindset around here of the things we can do to stay further and further from the line regardless whether it’s the Federal or the state level. So it’s kind of always on, it’s always on our radar to pay attention to it. And with AB5, did we sit back and look and are there ways to maybe just change this model? Not that rapidly when they came out with that. We didn’t have enough time to come up with any ideas or plans to get out. That was such a strict rule, it was almost impossible to get out of it. I mean we had attorneys and everybody looking at stuff and we had about three months or four months to react to it. And our best response was to have the guys either move out of California, don’t haul freight in California or haul on their own. And yes, that is not the best answer, but we are watching what’s going on in the rest of the country and are working up other ideas of, you know how you make slight shifts to the model to avoid any of these state regulations, if possible.

Are you doing anything similar in New Jersey at the moment?

No, we are not. We are not as exposed with the number of drivers we have there as we were in California. And we’re kind of just waiting back, sitting back and see what’s going to happen in Jersey. If -- I would think they’re paying attention to the California rule and they’re going to implement it. But that Prong B probably not -- might not be as strong as it was on California to allow for trucking companies to continue to operate in interstate commerce.

Yes, I agree. Okay. Kevin, did you provide a CapEx number for 2020?

That’s going to be, this year, we are cash cap spend was about $19 million. I’m guessing $15 million to $20 million, again this year.

Thank you. And our final question is from the line of Barry Haimes of Sage Asset Management. Your line is now open.

Good morning. Thank you. I had two questions. One, back on the insurance issue for a moment and appreciate going from five years to three year look-back. Makes sense. But is that enough or in other words is this, was the severity in ‘19 per incident, let’s say a lot higher than ‘ 17 and ‘18 such that the three year look back maybe even still be understating? So just curious how you think about that and then I have one other one afterwards, unrelated.

We looked at it various different ways. We looked at the cost per truck which is pretty, a pretty good indicator. And I would say that ‘19 was just a bad year, but I would say the conditions of the industry hasn’t really changed just in that one year, I think it started earlier than that. So I think that’s why the basis of the three years. And when you look at insurance cost per average truck for the year relatively consistent over the three year period. If you go back a little further was probably a little lighter on the cost per trucks. So that’s how we look at that. So I think the three years. That’s how we came up with three, I think using anything less than three is a little bit -- we could, we could still have a year that’s 2% I believe. You know, if we just be safe and we don’t have any of these big occurrences. But right now it looks like the trend is more that 3.5% to 4.5% range, we are going to stick with 4%.

Got it, thanks. Thanks for the color on that. And then I had a question related to end markets particularly within flatbed, if you look at the fourth quarter and through January, are you seeing any changes up or down? So if you look at steel versus machinery versus wellpatch or what have you. Just curious if you’re seeing any changes in the last three months, four months. Thanks.

Barry, this is Rob. It’s really hard to kind of predict that far out. I mean, what we do in the flatbed market. I mean, we tend to think of it as it’s a little harder entry space. So we feel pretty good about our position in it. We’ve got great partners in wind, ag, power generation, infrastructure to name a few. We feel flat coming to the first quarter rate wise, not a great deal of growth, but again it kind of depends on where we’re at capacity wise and manufacturing going forward.

My question is looking backwards, not forwards, and it was over the last three months or four months, have you seen any of those end markets either move materially up in terms of freight volume or materially down, just looking for the change. Thanks.

No. We’re seeing no big swings one way or the other looking back...

And January was a tough indicator, because it’s usually there is a soft -- January is -- flatbed is typically soft.

Thank you. At this point, we don’t have any more questions on queue.

Well, thank you, Eunice. And I honestly will tell you, I can’t wait to get through this first quarter. I think it will be our most challenging quarter of the year. And thank you. And I look forward to speaking with you again on our 2020 first quarter earnings conference currently scheduled for April 23rd. Have a good day.

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