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Landstar System Inc (NASDAQ:LSTR)
Q4 2019 Earnings Call
Jan 30, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Landstar System, Incorporation's Year End 2019 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; 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.

Jim B. Gattoni -- President and Chief Executive Officer

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 quarter by 2%, truck volumes over the next three quarters in 2019 decreased by 1%, 5%, and 7% compared to the 2018 second, third and fourth quarters, respectively. In spite of these challenging market conditions and very difficult year-over-year comparisons due to Landstar's exceptional 2019 financial results, the Landstar variable cost business model performed relatively well in 2019.

Full year 2019 revenue, gross profit, operating income and diluted earnings per share were each and second best financial performance in Landstar history behind only 2018. Also in 2019, free cash flow was $288 million, an annual record. During 2019, Landstar purchased over $88 million of its common stock and declared dividends totaling $104 million, $79 million of which was paid in January 2020.

Cash and investments grew $113 million during 2019 to over $352 million at fiscal year in 2019. Focusing on the 2019 fourth quarter, as part of our 2019 third quarter earnings conference call, we provided revenue guidance of $970 million to $1.20 billion, or 14% to 18% below the 2018 fourth quarter. 2019 fourth quarter revenue was $995 million or 16% below the 2018 fourth quarter at the midpoint of our previously issued revenue guidance.

Our revenue guidance anticipated a number of loads hauled via truck to be below the 2018 fourth quarter in a high single-digit percentage range. The actual number of loads hauled via truck in the 2019 fourth quarter was 7% below the 2018 fourth quarter. This 7% decrease in load volume compared to the 2018 fourth quarter was due to a 9% decrease in truck loads hauled via van equipment and a 4% decrease in truck loads hauled via unsided/platform equipment, partially offset by a 3% increase in less than truckload volume.

From a sequential viewpoint, while historically we have experienced truckload volumes relatively flat to slightly increasing from the third quarter to the fourth quarter over the past five years, truckload volume in the 2019 fourth quarter was almost 3% below the 2019 third quarter. We believe this sequential weakness can be traced back to the weakness in the US manufacturing sector during the 2019 fourth quarter.

Our guidance also anticipated revenue per load to be below the 2018 fourth quarter in a high single-digit percentage range. Revenue per load on loads hauled via truck in the 2019 fourth quarter was 9% below the 2018 fourth quarter consistent with our expectations and better than the 13% decrease when comparing the 2019 third quarter to the 2018 third quarter. On a monthly basis, revenue per load on loads hauled via truck was 8%, 10%, and 9% lower in October, November and December of 2019 compared to each corresponding month of 2018.

We also provided diluted earnings per share guidance of $1.40 to $1.46, or 13% to 17% below the 2018 fourth quarter. 2019 fourth quarter diluted earnings per share was $1.27 or 24% below the 2018 fourth quarter. Our diluted earnings per share guidance assume that insurance and claim costs in the 2019 fourth quarter would approximate 3.6% of BCO revenue, based on the average of insurance and claims costs as a percent of BCO revenue over the preceding five years.

Insurance and claims cost was 5.7% of BCO revenue in the 2018 fourth quarter, well above our 3.6% assumption. Insurance and claims in 2019 fourth quarter included $7.2 million or $0.14 per diluted share of unfavorable development of prior year's claims.

We believe Landstar is one of the safe operators in the industry based on our low frequency of accidents. In recent periods, even though our frequency has remained relatively consistent, we've been experiencing an elevated insurance and claims costs. The volatility in the cost of claims was driven by the Company's high self-insured retention and the unpredictable nature of occurrences and estimating the cost of each occurrence. In recent years a news in our industry has been filled with stories of unusually large verdicts and the related challenges faced by motor carriers and their insurers in settling claims. The magnitude of the cost of a single accident will continue to plague not only Landstar but the entire industry.

As of the 2020 first quarter, we have begun to use a three year annual average of insurance and claims costs as a percent of BCO revenue rather than a five year average to estimate quarterly insurance and claims costs for purpose of our quarterly guidance. We believe a shorter look back period is more appropriate in the current environment. As we look ahead, we believe the first quarter will be the most difficult quarter over prior year quarter comparison of fiscal year 2020. Seasonally, the 2019 first quarter was the strongest quarter of the year. The 2019 first quarter delivered record first quarter gross profit operating income and diluted earnings per share.

Subsequent to the 2019 first quarter, the effects of softening demand and more readily available capacity that started in late 2018 began to slow Landstar's revenue and earnings growth. In subsequent quarters, revenue, gross profit and diluted earnings per share decreased sequentially from the second quarter to the third quarter and again decreased in the fourth quarter of 2019. Based on recent January trends, we expect truck loadings in the 2020 first quarter to be lower than the 2019 first quarter in a mid single-digit percentage range.

With respect to price beginning in the middle of the second quarter of 2019 and continuing through December, truck revenue per load fluctuated at rate somewhat consistent with historical month-to-month patterns. Although the current macro environment makes long-term trend somewhat unpredictable, in the near term, we expect to see relatively stable pricing trend to continue through the 2020 first quarter.

Accordingly, we expect revenue per load in the 2020 first quarter to be below the 2019 first quarter in a mid single-digit percentage range. This would represent an improvement from the 7% decrease we experienced from the 2018 fourth quarter to the 2019 fourth quarter. Based on those expectations of revenue per load, a number of loads hauled via truck first quarter 2020 revenue guidance calls for $915 million to $965 million compared to $1.33 billion of revenue in the 2019 first quarter.

Our diluted earnings per share guidance calls for diluted earnings per share in a range of $1.10 to $1.20 compared to $1.58 in the 2019 first quarter. The decrease in revenue and diluted earnings per share when comparing the 2019 first quarter to the 2020 first quarter guidance is due to Landstar's record 2019 first quarter results and a relatively soft macro environment that I expect will continue through the 2020 first quarter.

From a sequential perspective, our guidance anticipates a somewhat normal seasonal decrease in revenue and gross profit moving from the 2019 fourth quarter through the 2020 first quarter. Also keep in mind that typically other than in 2019, the first quarter of any year is seasonally softer than any other quarter of the year. With respect to insurance and claims and our guidance for diluted earnings per share, in early January our BCO was involved in a tragic accident involving a fatality. Although it is probable this accident will adversely impact the financial relative to the Company's 2020 first quarter, we are still in the process of investigating that accident determining a range of ultimate cost.

While our valuation is still preliminary and our investigation continues the Company's pre-tax loss exposure at the time of this accident included our $5 million self-insured retention and up to $3.5 million relating to aggregate losses above our self-insured retention during an annual policy period. As I discussed earlier, our first quarter guidance includes an estimate of insurance and claim cost of 4% of BCO revenue, which is higher than what we have been using in our guidance over the past few years.

Please note, however that our 2020 first quarter estimate does not include amounts specifically related to an estimate for this tragic accident, and it is highly likely that once all facts are determined, the estimated ultimate cost of this accident will reduce first quarter diluted earnings per share to amount below the low end of our first quarter guidance. As it relates to the full year, I expect the operating environment in the first half of 2020 to continue to be challenging with continued softness in US manufacturing and readily available truck capacity.

Although it is difficult to predict the economic environment in the back half of 2020, our year-over-year financial comparisons begin to ease starting with the second quarter. Additionally, with a hardening insurance market, combined with a -- combined with an ongoing soft macro environment that began in late 2018, I expect capacity could tighten later in the year as trucks leave the market. Landstar remains focused on profitable load volume growth and increasing capacity to haul those loads. With our ongoing efforts to invest in and empower our network of small business owners along with our healthy balance sheet, I believe the Company's line asset variable cost business model is performing relatively well in the current environment.

Landstar continues to be confident in our positioning within the transportation logistics marketplace. We're also well known for returning capital to our stockholders through a combination of stock buybacks and dividends. It is our intent to continue with our historic approach to buyback our stock on the open market, on an opportunistic basis.

And with that I will pass it to Kevin.

Kevin Stout -- Vice President and Chief Financial Officer

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 increase in insurance and claims as compared to 2018 was primarily due to increased unfavorable development of prior year claims.

Selling, general and administrative costs were $38.2 million in the 2019 fourth quarter compared to $47.3 million in 2018. The decrease in SG&A cost was mostly attributable to a decrease in the provision for bonuses under the Company's incentive compensation plans, and a decrease in stock compensation expense partially offset by increased wages.

Stock compensation expense and the provision for incentive compensation were both insignificant in the 2019 fourth quarter. In the 2018 fourth quarter, stock compensation expense was $5.3 million and the provision for incentive compensation was $4.6 million. Quarterly SG&A expense as a percent of gross profit decreased from 28% in the prior year to 25.7% in 2019.

Depreciation and amortization was $11.4 million in the 2019 fourth quarter compared to $11.1 million in 2018. This increase was entirely due to increased depreciation on technology tools resulting from the recent deployment of new and upgraded applications for use by agents and capacity.

Operating income was $66.5 million or 44.7% of gross profit in the 2019 -- 2019 quarter versus $86.1 million or 51% of gross profit in 2018. Operating income decreased 23% year-over-year. The effective income tax rate was 23.8% in the 2019 fourth quarter compared to 19.8% in 2018. The effective income tax rate was favorably impacted in both periods by resolution of certain tax items and tax benefits resulting from equity compensation arrangements.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $352 million, cash flow from operations for 2019 was $308 million and cash, capital expenditures were $19 million. There are currently 3 million shares available for purchase under the Company's stock purchase programs. Back to you, Jim.

Jim B. Gattoni -- President and Chief Executive Officer

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

Questions and Answers:

Operator

Thank you very much, sir. At this time, we'll begin the question-and-answer session. [Operator Instructions] Our first question is from the line of Jack Atkins of Stephens. Your line is now open.

Jack Atkins -- Stephens Inc. -- Analyst

Good morning. Thanks very much for taking my questions.

Jim B. Gattoni -- President and Chief Executive Officer

Sure, Jack.

Jack Atkins -- Stephens Inc. -- Analyst

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.

Jim B. Gattoni -- President and Chief Executive Officer

Yeah, but you know 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.

Jack Atkins -- Stephens Inc. -- Analyst

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?

Kevin Stout -- Vice President and Chief Financial Officer

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, OK. 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 is 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.

Jack Atkins -- Stephens Inc. -- Analyst

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?

Jim B. Gattoni -- President and Chief Executive Officer

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.

Jack Atkins -- Stephens Inc. -- Analyst

Okay, that's great to hear. Thanks very much for the time guys.

Jim B. Gattoni -- President and Chief Executive Officer

Sure.

Operator

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

Scott Group -- Wolfe Research -- Analyst

Hey, thanks, good morning guys.

Jim B. Gattoni -- President and Chief Executive Officer

Good morning.

Scott Group -- Wolfe Research -- Analyst

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?

Jim B. Gattoni -- President and Chief Executive Officer

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.

Scott Group -- Wolfe Research -- Analyst

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?

Joe Beacom -- Vice President and Chief Safety and Operations Officer

Yeah, 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, yeah, 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.

Scott Group -- Wolfe Research -- Analyst

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?

Kevin Stout -- Vice President and Chief Financial Officer

Yeah. 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.

Scott Group -- Wolfe Research -- Analyst

Okay, thank you guys.

Operator

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

Jason Seidl -- Cowen and Company -- Analyst

Thank you, operator. Good morning, guys. 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?

Joe Beacom -- Vice President and Chief Safety and Operations Officer

Yeah. 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's 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.

Jason Seidl -- Cowen and Company -- Analyst

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?

Rob Brasher -- Vice President and Chief Commercial Officer

Yeah. 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.

Jason Seidl -- Cowen and Company -- Analyst

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

Jim B. Gattoni -- President and Chief Executive Officer

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.

Jason Seidl -- Cowen and Company -- Analyst

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?

Jim B. Gattoni -- President and Chief Executive Officer

Yeah, 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.

Jason Seidl -- Cowen and Company -- Analyst

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?

Jim B. Gattoni -- President and Chief Executive Officer

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.

Jason Seidl -- Cowen and Company -- Analyst

Sounds fair. Appreciate the time as always, guys.

Operator

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

Todd Fowler -- KeyBanc Capital Markets -- Analyst

Great, thanks, good morning.

Jim B. Gattoni -- President and Chief Executive Officer

Good morning.

Todd Fowler -- KeyBanc Capital Markets -- Analyst

Hey, Jim. 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?

Kevin Stout -- Vice President and Chief Financial Officer

Hey, Todd, this is Kevin. Yeah, 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?

Todd Fowler -- KeyBanc Capital Markets -- Analyst

Yeah. 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.

Kevin Stout -- Vice President and Chief Financial Officer

No, no.

Jim B. Gattoni -- President and Chief Executive Officer

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 in the [Speech Overlap] got a little bit tougher, right.

Kevin Stout -- Vice President and Chief Financial Officer

That's correct.

Jim B. Gattoni -- President and Chief Executive Officer

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.

Kevin Stout -- Vice President and Chief Financial Officer

That is correct.

Todd Fowler -- KeyBanc Capital Markets -- Analyst

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.

Jim B. Gattoni -- President and Chief Executive Officer

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.

Todd Fowler -- KeyBanc Capital Markets -- Analyst

Okay. Yeah, 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.

Jim B. Gattoni -- President and Chief Executive Officer

Right.

Todd Fowler -- KeyBanc Capital Markets -- Analyst

Okay, thanks for the time this morning.

Jim B. Gattoni -- President and Chief Executive Officer

Yeah.

Operator

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

Bascome Majors -- Susquehanna International Group -- Analyst

Yeah, 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?

Kevin Stout -- Vice President and Chief Financial Officer

Sure, 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.

Bascome Majors -- Susquehanna International Group -- Analyst

Thanks. Thanks for all that, I really appreciate that walk through. The, the one piece, I mean, just the SG&A sequential increase typically from 4Q to 1Q, that's down $1 million, $2 million, $3 million, and that $45 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, what does the incremental 2020 step off look like on the ground? And is that some sort of temporal project related spin or is that more of a structural increase? Thanks.

Jim B. Gattoni -- President and Chief Executive Officer

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.

Bascome Majors -- Susquehanna International Group -- Analyst

Okay. That helps quite a bit.

Jim B. Gattoni -- President and Chief Executive Officer

Yeah. 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.

Bascome Majors -- Susquehanna International Group -- Analyst

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?

Jim B. Gattoni -- President and Chief Executive Officer

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. Yeah, 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.

Bascome Majors -- Susquehanna International Group -- Analyst

Thank you.

Operator

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

Daniel Hultberg -- Oppenheimer -- Analyst

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?

Jim B. Gattoni -- President and Chief Executive Officer

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, yeah, everybody is talking about that the consumer market is a little bit stronger than the manufacturing sector. And yeah, 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.

Daniel Hultberg -- Oppenheimer -- Analyst

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

Kevin Stout -- Vice President and Chief Financial Officer

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.

Daniel Hultberg -- Oppenheimer -- Analyst

Got it. Thank you. I'll turn it over. Thanks so much.

Operator

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

Stephanie Benjamin -- SunTrust Robinson Humphrey -- Analyst

Hi, good morning. Thank you for the question.

Jim B. Gattoni -- President and Chief Executive Officer

Sure.

Stephanie Benjamin -- SunTrust Robinson Humphrey -- Analyst

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.

Joe Beacom -- Vice President and Chief Safety and Operations Officer

Yeah, 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.

Stephanie Benjamin -- SunTrust Robinson Humphrey -- Analyst

Great, thanks so much.

Operator

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

Ben Hartford -- Robert W. Baird -- Analyst

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% [Phonetic] and beyond should resume, can you talk a little bit about the profile of the model in aggregate and whether that's changed here?

Kevin Stout -- Vice President and Chief Financial Officer

Yeah. 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.

Ben Hartford -- Robert W. Baird -- Analyst

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.

Jim B. Gattoni -- President and Chief Executive Officer

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.

Ben Hartford -- Robert W. Baird -- Analyst

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

Jim B. Gattoni -- President and Chief Executive Officer

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.

Ben Hartford -- Robert W. Baird -- Analyst

Yeah I agree. Okay. Kevin did you provide a capex number for 2020?

Kevin Stout -- Vice President and Chief Financial Officer

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.

Ben Hartford -- Robert W. Baird -- Analyst

Okay, great, thanks for the time guys.

Jim B. Gattoni -- President and Chief Executive Officer

Great.

Operator

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

Barry Haimes -- Sage Asset Management -- Analyst

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.

Jim B. Gattoni -- President and Chief Executive Officer

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%.

Barry Haimes -- Sage Asset Management -- Analyst

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.

Rob Brasher -- Vice President and Chief Commercial Officer

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.

Barry Haimes -- Sage Asset Management -- Analyst

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.

Jim B. Gattoni -- President and Chief Executive Officer

No we're seeing no big swings one way or the other looking back...

Kevin Stout -- Vice President and Chief Financial Officer

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

Barry Haimes -- Sage Asset Management -- Analyst

Okay, thanks a lot. Appreciate it.

Operator

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

Jim B. Gattoni -- President and Chief Executive Officer

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 23. Have a good day.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Jim B. Gattoni -- President and Chief Executive Officer

Kevin Stout -- Vice President and Chief Financial Officer

Joe Beacom -- Vice President and Chief Safety and Operations Officer

Rob Brasher -- Vice President and Chief Commercial Officer

Jack Atkins -- Stephens Inc. -- Analyst

Scott Group -- Wolfe Research -- Analyst

Jason Seidl -- Cowen and Company -- Analyst

Todd Fowler -- KeyBanc Capital Markets -- Analyst

Bascome Majors -- Susquehanna International Group -- Analyst

Daniel Hultberg -- Oppenheimer -- Analyst

Stephanie Benjamin -- SunTrust Robinson Humphrey -- Analyst

Ben Hartford -- Robert W. Baird -- Analyst

Barry Haimes -- Sage Asset Management -- Analyst

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