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Landstar System Inc (NASDAQ:LSTR)
Q1 2020 Earnings Call
Apr 23, 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 First Quarter 2020 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.

Jim B. Gattoni -- President and Chief Executive Officer

Thank you, Missy. Good morning and welcome to Landstar's 2020 first 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 2019 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.

Through the first 12 weeks of the 13-week, 2020 first quarter, Landstar's results were in line with our expectations. During that period, the freight environment was somewhat more balanced than during the back half of 2019 with truck rates and volume trends follow normal seasonal patterns. In late March, however, impact from the COVID-19 pandemic resulted in accelerated softening of truckload demand throughout the United States. This deterioration, late in the quarter, did not have a significant adverse impact on the first quarter overall, but will negatively impact volume in April and likely the remainder of the second quarter.

Thankfully, Landstar's variable cost business model is highly resilient to rapid expansion and contractions in demand for freight transportation services. Demand for Landstar services is mostly correlated to the output of the North American manufacturing sector.

As a response to the pandemic generated high demand for perishable consumer goods and much needed medical supplies in March, the U.S. industrial manufacturing sector began closing facilities and furloughing workers. The speed with which the freight environment deteriorated into the beginning of the second quarter was like nothing experienced in the history of the company.

The actions taken by government authorities and private industry to slow the speed of the coronavirus, significantly impacted Landstar's loading opportunities at the end of March. It is safe to say that nobody knows the depth of the impact the pandemic will have on the freight transportation industry or how long this current crisis will last.

Over the past 20 years, including 9/11 and the great recession of 2008-2009, Landstar model has endured during periods of tremendous challenge. We expect no different in 2020.

Getting back to the first quarter, Landstar's 2020 first quarter revenue and earnings were in the range of the first quarter guidance provided as part of our year-end 2018 earnings release distributed on January 29, 2020. In that earnings release, we provided first quarter 2020 revenue guidance in a range of $915 million to $965 million. Actual 2020 first quarter revenue was $928 million.

We also provided diluted earnings per share guidance of $1.10 to $1.20. The range of earnings per share guidance did not include an estimate for the financial impact on insurance and claims costs of a known severe vehicular accident that took place in January of 2020. At the time of the release of earnings per share guidance, the financial impact of the severe accident on insurance and claims costs in the quarter was not estimable as the company continued to gather facts regarding the accident. Actual diluted earnings per share for the 2020 first quarter would have been at the upper end of the earnings per share guidance before getting effect of the financial impact of the severe accident on first quarter insurance and claims costs. Inclusive of the estimated financial impact of the severe accident, actual earnings per share were $1.04 in the 2020 first quarter.

Our first quarter revenue guidance anticipated that the number of loads and revenue per load on loads hauled via truck would both be lower than the 2019 first quarter in the mid-single-digit percentage range. First quarter 2020 loads hauled via truck were 6% below prior year's record first quarter truckload volume. Revenue per load on loads hauled via truck in the 2020 first quarter was 5% below the 2019 first quarter.

Load volume and revenue per load on loads hauled via truck trend is fairly consistent with the normal seasonal patterns on a month-to-month basis through the quarter.

First quarter insurance and claims costs were estimated at 4% of BCO revenue in the first quarter guidance. This estimate did not include any financial impact from the severe accident I previously referred to. Actual insurance and claims costs in the 2020 first quarter were 5.8% of BCO revenue.

During March, it became clear that Landstar needed to address potential unprecedent operational challenge that could result from the pandemic. As a safety-first company, Landstar has always placed safety at the forefront of all we do. The health and well-being of the members of our network, the Company's 1,200 employees, 10,000 BCOs, 1,200 agents and their staffs, and over 25,000 customers and 59,000 of third-party capacity providers has always been a part of our safety-first culture.

As essential business, we have taken actions to ensure the freight is delivered safely while maintaining all of the social distancing recommendations and other guidelines provided by U.S. health authorities and various government agencies.

As the pandemic grew, Landstar took major steps to prioritize the health and well-being of all our employees and their families and limit the risk of community spread of the virus within our main offices, while we also sought to limit possible business disruption that could be caused by the potential impact of reduced staff in the event of an outbreak within our offices or from a government mandated shutdown.

As it relates to business continuity, our focus was to ensure trucks and agents would be paid timely, customers would be billed, collections of receivables would continue to flow, the IT systems powering our network would continue to function, and BCOs agents would continue to have the uninterrupted access to trailing equipment and customer service.

Over the course of several weeks in mid-March, the company transitioned over 800 of its 1,200 U.S.-based employees from its two main corporate facilities to work at home. The transition helped to secure business continuity and maintain a healthy work environment for Landstar's employees. We now have over 1,000 Landstar employees working remotely.

From an administration and operation standpoint, the transition of so much of our employee base to work at home has been a great success, and currently it is business as usual at Landstar.

From a freight standpoint, however, it is far from business as usual. We expect a very difficult freight environment during the second quarter with idle manufacturing plants and shrinking industrial and consumer demand. The speed of change in demand for freight transportation services caused by the pandemic has resulted in significant inconsistencies in the level of demand among various sectors.

Beginning in early to mid-March, industry demand for transportation of consumer goods and medical supply skyrocketed, while demand for transportation in the industrial manufacturing and oil and gas sectors experienced severe decreases. These industry trends became clear in Landstar's truck loadings toward the back half of March.

During the first 12 weeks of the 13-week first quarter, Landstar's dispatched truckload volume was 5% below the comparable weeks of 2019. In the last week of fiscal March, dispatched load volume was 14% below the number of truckloads dispatched during the same week of March 2019. This was one of the swiftest and most dramatic reductions in week-to-week load volumes in the history of the company. The drastic slowdown in loadings experienced in the last week of March was a result of state's beginning to implement stay-at-home orders, shutting nonessential businesses, along with a wide number of auto plants announcing temporary closures.

Overall, in the last week of fiscal March, we experienced increased dispatched truckload volume in foodstuffs and packaged commodities. Those increases were more than offset by significant decrease in output of automotive parts and supplies of building products and machinery.

Due to the unpredictable nature of the current environment and the necessary role the federal, state and local governments in lifting stay-at-home orders and taking other measures that will be needed to help the economy transition back to a more normal operating condition, we will not be providing earnings guidance for the 2020 second quarter.

In the long-term, growth in earnings is highly important to Landstar. Currently though, our near-term approach is focused on alleviating some of the business disruption and financial challenges caused by the pandemic that are facing the small and large business owners who have helped make Landstar one of the most successful freight transportation companies in the country.

We are fortunate that the Landstar model provides the flexibility and resiliency to provide financial relief to agents, BCOs in these unprecedented times. Part of Landstar's pandemic relief effort provide an initial $100 per load, $50 to the agent dispatching the BCO, and $50 to the BCO delivering load, for all loads delivered by BCO from April 1 to April 30. Based on our anticipated BCO load volume, we forecast that portion of our pandemic relief effort will pay out between $6 million and $7 million in the second quarter.

We also are providing $1,000 per week for two-week period to any BCO who contracts COVID-19 or has been mandatorily quarantined by a public health authority.

As we move through the quarter, we may add to or expand our pandemic relief efforts and commit additional funds to support our network.

During the 2020 first quarter, Landstar purchased over 1.2 million shares of stock at a total cost of approximately $116 million. We ended the first quarter with approximately $211 million in cash and short-term investments and $366 million available for borrowing on the Landstar's revolving credit facility.

Although we do not envision any liquidity concerns over the next few months or in the long term, we believe it's prudent to conserve cash until the duration and depth of the crisis becomes clear. Until then, we will be prudent in our approach to share purchases.

Although we're not providing guidance for the 2020 second quarter for the sake of providing an example of how our model may respond under certain adverse business assumptions, if one were to assume a revenue decrease in the 2020 second quarter of 20% to 30% as compared to the 2019 second quarter, revenue would be in a range of $730 million to $835 million. Under that scenario, we believe the model would likely produce earnings per share in the range of $0.70 to $0.85, which would be net of an estimated $0.13 per share related to Landstar April pandemic relief effort currently in place, which as I stated above, could be expanded as we move through the quarter.

The resiliency of Landstar's light asset base variable cost business model will continue to generate outstanding returns over time, relative to the overall environment. For every $1 decrease in revenue, direct freight-related cost decrease by approximately $0.85. The significant percentage of cost tied directly to revenue somewhat insulates Landstar model from significant downturns in freight and typically generates positive free cash flow throughout most business cycles.

We continue to believe Landstar is well positioned with a strong balance sheet and expect positive cash flow generation throughout this down cycle.

In the past 20 years, Landstar's model has generated positive free cash flow every year but one, and positive earnings in every year. Although 2020 has become a challenging year, we remain confident in our model, not only to endure through times like these, but also to come charging back as business conditions improve.

And here's Kevin to provide additional commentary on the 2020 first quarter financials.

Kevin Stout -- Vice President and Chief Financial Officer

Thanks, Jim. Jim has covered certain information on our 2020 first quarter. So, I will cover various other first quarter financial information included in the press release. Gross profit defined as revenue less the cost of purchased transportation and commissions to agents was $142.9 million and represented 15.4% of revenue in the 2020 first quarter compared to $155.6 million or 15.1% of revenue in 2019. The cost of purchased transportation was 76.5% of revenue in the 2020 quarter versus 76.6% in 2019.

The rate paid to truck brokerage carriers in the 2020 first quarter was 39 basis points higher than the rate paid in the 2019 first quarter. Commissions to agents as a percentage of revenue were 16 basis points lower in the 2020 quarter as compared to 2019, due to a decrease in net revenue margin, revenue less the cost of purchased transportation on loads hauled by truck brokerage carriers.

Other operating costs were $8.3 million in the 2020 first quarter, compared to $8.2 million in 2019. This increase was primarily due to increased trailing equipment cost and increased contractor bad debt, partially offset by decreased trailer rental expense.

Insurance and claims costs were $25 million in the 2020 first quarter, compared to $15 million in 2019. Total insurance and claims costs for the 2020 quarter were 5.8% of BCO revenue compared to 3.3% in 2019. The increase in insurance and claims compared to 2019 was attributable to the impact of a single claim related to an accident in early January 2020, and increased unfavorable development of prior year claims.

Selling, general and administrative costs were $45.3 million in the 2020 first quarter compared to $41.3 million in 2019. The increase in SG&A cost was mostly attributable to increased customer bad debt, an increase in the provision for bonuses under the company's incentive compensation plans and increased employee wages and benefits, partially offset by a decrease in stock compensation expense.

In addition, the 2020 first quarter, SG&A costs include approximately $800,000 related to the cancellation of the company's annual convention. Customer bad debt expense was $2.9 million in the 2020 first quarter compared to $1.3 million in the 2019 first quarter.

Stock compensation expense was $631,000 and $1.9 million in the 2020 and 2019 first quarters respectively. Provision for incentive compensation was $2 million in the 2020 first quarter compared to $1 million in the 2019 first quarter.

Quarterly SG&A expense as a percent of gross profit increased from 26.5% in the prior year to 31.7% in 2020. Depreciation and amortization was $11.5 million in the 2020 first quarter, compared to $11.3 million in 2019. This increase was primarily due to increased IT-related depreciation.

Operating income was $54 million or 37.8% of gross profit in the 2020 quarter versus $80.9 million or 52% of gross profit in 2019. The decrease in operating margin was driven by an increased SG&A expense, increased insurance and claims costs and the effect of decreased gross profit. Operating income decreased 33% year-over-year.

The effective income tax rate was 22.9% in the 2020 first quarter, compared to 21% in 2019. The effective income tax rate was impacted in both periods by excess tax benefits related to vesting of equity awards to employees.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $211 million. Cash flow from operations for the 2020 first quarter was $99 million and cash capital expenditures were $6 million.

There are currently 1,821,000 shares available for purchase under the company's stock purchase program.

The unpredictable nature of the current freight environment makes it very difficult to forecast revenue and resulting gross profit even in the near term. However, we are more comfortable with forecasting the indirect costs for the second quarter.

In yesterday's earnings release, we provided a revenue and earnings scenario to show how the model reacts under certain unfavorable assumptions. The assumptions we used was a reduction in revenue from the 2019 second quarter to the 2020 second quarter of 20% to 30%. Under that assumption, we said revenue in the 2020 second quarter would be in a range of $730 and $835 million, and earnings per share would range between $0.70 and $0.85.

Our calculation assumed that the combined total of the indirect costs consisting of other operating costs, selling, general and administrative costs, and depreciation, in the aggregate, to be similar to the $65 million reported in the company's 2020 first quarter. We estimated insurance and claims costs at 4% of a projection of BCO revenue for the quarter.

Back to you, Jim.

Jim B. Gattoni -- President and Chief Executive Officer

Thanks, Kevin. And with that Missy, we will take questions.

Questions and Answers:

Operator

Certainly, sir. [Operator Instructions] Our first question is from the line of Scott Group from 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

Hey, morning.

Scott Group -- Wolfe Research -- Analyst

So maybe if you can give us just some more color on exactly what you guys are seeing in April from a volume standpoint, maybe from a van versus flatbed perspective as well? And then, what you're seeing -- how you're seeing pricing trend so far in the month?

Jim B. Gattoni -- President and Chief Executive Officer

Yes, we base everything on a dispatched load, which isn't exactly tied back to our revenue, but it's pretty close. So, we look at daily load count and we get that report every day. And the report, as I said, at the end of March, show pretty significant declines. I think I had said that we were 14% load volume in our last week of March. We were running about 5% in the previous 12 weeks.

Going into April, for the last three weeks, we're ranging on a daily from 20% to 30% down on volume. It's kind of a little more down on flats and vans, but I would say it's about equally as weak. And from a pricing standpoint, what's surprising us slightly is that our pricing hasn't moved all that much. Seasonally, it's down a little bit from March to April, but it's not lined up with some of the industry stats you're seeing coming out of some of the companies that out the metrics.

So, from a pricing standpoint, it seems a little slightly less than normal seasonally. And from a from a volume standpoint, like I said, we're down probably 20% to 30% on a daily basis and anticipate that will continue at least through April and somewhat into May until some of the industry, the manufacturing industry starts to ramp back up.

Significant, if we talk about commodity areas, I would say that of that drop off, about 8% to 10% of our businesses in automotive, that we know are specifically related to automotive, that 8% to 10% went down about 2% of our business in the first three weeks of April, dropping off -- contributing about 30% to 40% of that 20% to 30% drop off. So, that's a big piece of it.

Building products is off, not quite as much as automotive, but it's off. Machinery and metals, all down, and even consumer durables is slightly down. Again, consumer durables for us isn't like consumer perishables, it's more the longer term. And between those five commodities, the dispatched loadings are probably -- that makes about 85% of the 20% to 30% drop off in loadings in the first three weeks of April.

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

And that's great color. Are you seeing that 20% to 30% sort of, is that been all month or is it getting worse as the month is going on? Any thought there?

Jim B. Gattoni -- President and Chief Executive Officer

At the beginning, it's -- I think it's leveled off now in the last week or two, but it was accelerating from the end of March into the first week of April and I think we're seeing it settled off between -- it's actually and probably more -- through the first three weeks, I'd say 20% or 30%, but we're trying to run in 25% to 30% right now. So, it's probably going to hover around there.

Scott Group -- Wolfe Research -- Analyst

Okay. The bonus that you guys are doing, how -- if it's on a per-load basis, how comfortable are you or confident that you can take that back in a couple of weeks?

Jim B. Gattoni -- President and Chief Executive Officer

It's clear that -- we're already getting questions from our constituents, whether it'd be the agents or BCOs or whether we're going to extend it. So, it's clear that we can either extend it or terminate it, once it expires on the 30th. We will make a decision over the next few days. We're watching volumes, we're watching BCO utilization, we're watching BCO turnover. And we're watching that right up to the point where we have to make a decision whether we extend that two weeks into May, for the entire month of May, or we see things starting to turn and volumes start coming back and we see some revenue rate per mile holding or rate per load holding.

Right now, rate per load seems to be holding in certain areas, but it's the volume that's kind of a little troubling. And the reason that -- part of the 52 is that when you disrupt the system as fast as this happened, our guys are driving a little bit more deadhead miles or a little bit running more empty to move from load to load, just to keep them a little bit more haul, if they are extending miles to go pick up loads. I think that's why the 50 was in there.

If we see load volumes where they stay, we may consider extending it either the two weeks or another four weeks into May. If we see the load volumes start to turn, we may not. So, it's a decision we'll make probably sometime next week. We have to make it next week as May 1 is next Friday.

Scott Group -- Wolfe Research -- Analyst

And then just last thing, when I look at the BCO count is down about 5% year-over-year most since 2010, what trends are you seeing as this issue is getting worse or has gotten worse in the second quarter, what trends are you seeing on the BCO count?

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

Scott, this is Joe. In April, we've actually seen a little bit of growth, it's small, 15%, 20% truck growth in the month of April. And so, we're encouraged by that. That could be a function of where the prices and holding, I think just to give you a sense. I think a lot of BCOs are active. Those that aren't active, I think are just waiting just like we're waiting to see if it does begin to turn and in which direction and when. They're trying to hold on. So, that's kind of what we're experiencing the last few weeks.

Scott Group -- Wolfe Research -- Analyst

Okay. Thank you for the time guys. Appreciate it.

Jim B. Gattoni -- President and Chief Executive Officer

Sure, Scott.

Operator

Thank you so much. Our next question is from Jason Seidl of Cowen. Your line is now open.

Jason Seidl -- Cowen & Company -- Analyst

Thanks, guys. Good morning, gentlemen. Sticking on the capacity side, what are you seeing from some of the smaller carriers in the brokerage operations? Has there been a steady sort of deterioration in the amount of variable company use or are they sticking in there better than we thought?

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

Jason, it's Joe again. Now, quarter-over-quarter, if you look at the first quarter, the percentage of volume on the smaller carriers, which make up 56% to 57% of our volume, has been pretty flat. You've seen the count go down and the approved count go down. That's really a function of us putting fewer and fewer loads out on the third-party boards for those carriers to find and to haul. Thus, they become inactive in our network.

So, it's hard to say about the health of them. It's just the fact that we're brokering less volume and those fewer carriers will stay approved in the network. That's just a function of how the process works.

Jason Seidl -- Cowen & Company -- Analyst

Got you. And I think you guys made the comment that the trends were relatively similar between flatbed and dry van here in April. How about if you looked at the trends on an end market basis in April, you did that -- that's on chart as you always do for the quarter. Have you seen any particular fall off in end markets in it?

Jim B. Gattoni -- President and Chief Executive Officer

I think the end market are the ones we do -- mostly it was -- the end market, meaning automotive? Automotive was the -- they're kind of leading it. Like I said, our automotive in the dispatched side for the first three weeks of April, it was running 8%. Prior to first three week our business, it's done a 2%. That's, like I said, I think that's 30% to 40% of our drop off in volume. Building products contributed about equally, and so did machinery, not automotive. But building products, machinery, and metals also contributed to the drop-off. Foodstuffs, one of the positives with foodstuffs, but it's such a small piece of our business. It wasn't near close to offsetting the drop-off in some of our heavy industry freight sectors.

Jason Seidl -- Cowen & Company -- Analyst

All right. I guess as we're hearing some states sort of explore coming back to, I guess, a more normal living and operating procedures here. Where do you think we're going to start seeing the freight recover, in what end markets for you guys? And I guess, how is Landstar going to handle that in terms of the disparate openings in the states?

Jim B. Gattoni -- President and Chief Executive Officer

Well, we're pretty tied into the automotive sector and I think that's the first one we got to keep our eyes on, because it has been the cause of the significant downturn. And I would expect no different -- I would expect that our -- we are so tied into them that as soon as they start opening it up, we'll start -- we'll be in their move and freight. I mean, clearly, this has disrupted their supply chains and our agents are in constant contact with them along with some our employees. We're kind of waiting them to pull the trigger and start moving freight, and that should turn back pretty quick.

From the Building Product side, it's really up to when they start manufacturing again. I mean, our relationship aren't broken. It's just the fact that the plants are down.

Jason Seidl -- Cowen & Company -- Analyst

Okay. I'll turn it over to somebody else. Yes, you guys, stay safe.

Jim B. Gattoni -- President and Chief Executive Officer

You too.

Operator

Thank you so much. We have six more questions on queue. And the next question is from Todd Fowler of KeyBanc Capital Market. Your line is now open.

Todd Fowler -- KeyBanc Capital Markets -- Analyst

Great. Thanks, and good morning.

Jim B. Gattoni -- President and Chief Executive Officer

Good morning.

Todd Fowler -- KeyBanc Capital Markets -- Analyst

Jim, just back to the comments on the pricing that you're seeing here in the second quarter. As you think about that, do you think that that's more a reflection of the loads that the BCOs are willing to take in this environment and so maybe not taking some of the lower price freight? And if you just have any thoughts in general about pricing within the market, do you think it bottoms out here in 2Q or kind of how you think the rate environment is going to evolve, obviously understanding the visibility is pretty limited, but just some thoughts there would be helpful?

Rob Brasher -- Vice President and Chief Commercial Officer

Hey, Todd, this is Rob Brasher. As we've said in past calls, our agents and the BCOs kind of lag or adjust to market conditions a little slower than the actual market itself. So, if you kind of take that in mind, we're seeing prices hold. Couple that with the fact that we've seen a decline or loss of volumes in automotive business that supports automotive, oil and gas, retail, kind of freight from the ports which is more of a short haul type business for us. So, that's kind of left our longer haul rates in place or revenue per load. So, it's kind of stayed at the higher level.

That being said, over the last couple of days, this week, we've started to see a small downtick in rates. And I'll let Kevin or Jim kind of address what they see on a long-term basis from that perspective. But again, in talking to our customers and kind of looking at what their plans are, as Jim kind of said, there's a lot of uncertainty. There are a lot of customers and lot of segments that are putting dates out to when they think they're coming back, but there's no real certainty to say that they're coming back at that point in time.

Jim B. Gattoni -- President and Chief Executive Officer

Yes, I would say, just to follow-up, we've always experienced a lag of reaction in our network when agents don't respond to a downturn in pricing. The speed of downturn, and this is something we've never seen before. And clearly, as they don't react, they're still move the freight that's -- I don't say highly priced but reasonably priced and haven't reacted yet to the downturn.

So our expectation is that we're going to start to see some more -- some deterioration in that pricing as we move through the quarter just because of that maybe 30 to 45-day lag and reaction from the network from our -- just the way our model is designed. I do anticipate we're going to see some coming back more to the industry rates or maybe not quite as low as they are saying, but I think we'd see some pullback in rates over the next 30 to 45 days.

Todd Fowler -- KeyBanc Capital Markets -- Analyst

Okay. That's helps and that was helpful on the mix issues too, Rob. So that was -- I appreciate that. Kevin, to your comments about the sensitivity where you talked about the indirect costs, the other SG&A, depreciation, assuming those staying at $65 million, consistent with 1Q. Is that -- I mean, is that what we should use right now for modeling purposes? Is there any reason why SG&A with incentive comp would come down sequentially in 2Q or 3Q or are you really saying that the $65 million is kind of the right run rate to think about for quarterly indirect expenses?

Kevin Stout -- Vice President and Chief Financial Officer

Yes, Todd, this is Kevin. Yes, we expect the indirect costs to be similar in Q2. I don't see any reason why it wouldn't be similar in Q3 and Q4. In years past, we had the convention expense in Q2, that's no longer going to be there this year.

As far as like the run rates, I would say they're operating in the $8 million to $9 million range for the quarter, SG&A around $44 million and then depreciation at $11 million to $12 million, I think it was $11.5 million in Q1.

So, those are the round numbers. There aren't a lot of levers in our model to pull on those line items. So, I'm pretty confident on those. Obviously, insurance is a wildcard. I still think the 4% of BCO revenue, obviously that's going to be a lower number in Q2, but that's still our best guess on the insurance number.

Todd Fowler -- KeyBanc Capital Markets -- Analyst

Okay, great. That helps. And then just the last one from me. When I think about your model, you're kind of tied into the small business community, if it's the BCOs or if it's the agents. The BCO count, we talked about that a little bit earlier in the call, but can you speak to maybe the health just at the BCOs and how you'd expect them to fare in this environment? Is it something where they can withstand the sort of drop in volume for a couple of quarters or how do you kind of see the BCO community weathering this environment? Thanks.

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

Hey, Todd, this is Joe. I think from a financial viability standpoint, I think it probably varies considerably from BCO-to-BCO. Clearly, we've got -- because we've seen it kind of flatten out here so far in Q2, I think there is, those that have put aside a little bit of a cushion and they're using that to stay viable and they're using that to sustain their business. How long that can go will really depend, I think, business-to-business. And clearly, there is not a -- the large exit is now, I think what we've done with the $50 per agent and BCO per loading, I think that's been very well received. We've been communicating very consistently with large conference calls to the BCOs and agents to let them know where we are and what we think.

But as Robin, Jim, both outlined, there is a lack of clarity on when this thing really bounces back. But to this point, there aren't a lot of, really, influx of calls or anything like that that lead us to believe that there's a tremendous amount of desperation or that kind of thinking out there. But really, I think the uncertainty is the thing that's probably the most aggravating and the most difficult for them to deal with.

Todd Fowler -- KeyBanc Capital Markets -- Analyst

Yes, understood. Okay. I appreciate all the help this morning. Thanks.

Operator

Thank you so much. Our next question is from Bascome Majors of Susquehanna. Your line is now open.

Bascome Majors -- Susquehanna -- Analyst

Jim, can you remind us of situations in the past that have led you, for lack of a better term, rewriting or tweaking the way that the system shares revenue with BCOs and agents? And does this feel like a situation that that may create a shock to the system where you do need to think on ways to tweak that and keep the system intact beyond just temporary bonuses in a weak demand environment?

Jim B. Gattoni -- President and Chief Executive Officer

No, actually, historically, we have not adjusted the arrangements that we have with our BCOs and agents in any of the environments we've been through, whether it was the 9/11 quick drop-off in volumes or it was the 2008/2009 slow painful drop-off in volumes.

But we haven't really reacted. To tell you truth, I think this is the first time that -- I've been here since 1995 and I don't recall ever a time where we had a situation wherein when this happened so rapidly that the best decision to make was trying to support them with this $50 a load, just to make sure that they were covered at least through the month of April.

I don't anticipate or foresee, even in this environment or even if the environment stays that way, that the deals that we have with our BCOs and agents and the agreements we have would change from a financial standpoint. I think we're in -- we're kind of soft and down now and we're looking at volumes that are, where we were eight years ago, where we had the same agreement. So, I would say that there are no plans to make any changes to those programs.

Bascome Majors -- Susquehanna -- Analyst

Thank you for that. And can you also -- have you seen anything in casualty that could potentially be problematic as single incident so far in the last few months, while we have you? And that will be my last one. Thanks.

Jim B. Gattoni -- President and Chief Executive Officer

Only the one that we disclosed in January. I'm not aware of any significant. But in our world today, you could have a fender-bender that turns into something serious two years from now. But right now, no, we're not aware of any significant items out there that we haven't addressed in our release or in our numbers.

Bascome Majors -- Susquehanna -- Analyst

Thank you.

Operator

Thank you so much. We have four more questions on queue. And the next one is from Jack Atkins of Stephens. Your line is now open.

Jack Atkins -- Stephens, Inc. -- Analyst

Hey Jim, hey Kevin. Good morning. Thanks for taking my questions.

Jim B. Gattoni -- President and Chief Executive Officer

Jack, there's four questions left. So, if you use them all, I guess it's over.

Jack Atkins -- Stephens, Inc. -- Analyst

I guess it's over. Okay. Well, I owe you two, how about that? So, I guess just to start, if we can kind of maybe talk about the flatbed market, obviously there has been a significant disruption here in the energy complex over the course of the last couple of months. I know you guys don't have a lot of direct energy exposure per se, but the flatbed market broadly does. So I guess, how are you guys thinking about sort of the structure of the flatbed market as we look out over the course of the next -- whether it's several quarters, couple of years? I mean, do you think things could be sort of more challenged there for a while, just given what's happening within the energy sector?

Jim B. Gattoni -- President and Chief Executive Officer

Yes, I think Jack it's -- everything is a downturn for us, whether it's vans or flatbeds. And on the flatbed side, yes, the oil and gas about 2% or 3% of our business, and then we actually had a little tick up in energy because we did some, I think we did some towers, wind generation stuff in the first quarter. But it's like any other environment other than the sharp downturn.

I think there's trucks going to be parked along. They're going to be parked against the fence because the freights not there. People aren't going to -- they're not going to be drivers and trucks. I think there's going to be a truck reaction that we got to think about. But people are going to be idling trucks when this thing, and I think they are ready.

So there is a -- you're back to that balance of supply and demand. And I don't anticipate -- it's going to be soft, there is no question we're going to have a soft flatbed environment, but you got the infrastructure build that hopefully comes around to help us through and tighten that flatbed market up. And oil and gas probably be down for a while, that could be something that help supplement the demand on the flatbed side, but it's really hard to predict in where we sit today.

Jack Atkins -- Stephens, Inc. -- Analyst

No, that's totally understandable and I appreciate that color. And I guess just for my follow-up question, Kevin, for you on free cash flow. And I thought yours and Jim's comments earlier in the prepared remarks were very helpful to understand the cash flow power of the Landstar model. But, with a significant level of exposure to automotive, we've been hearing anecdotes about automotive customers really pushing back on payment terms in particular. What are you seeing in terms of DSOs? And do you think that working capital could be a little bit of a drain here over the next quarter or two until things normalize? And just to tag on to that, bad debt expense, do you feel like you're accrued properly there?

Kevin Stout -- Vice President and Chief Financial Officer

Yes, Jack. I do suspect that over time we're going to see a deterioration on the receivables. Thus far, not too much. But again, we're three weeks into April. I suspect that it will drop off. To what extent? I don't know. But we are going to conserve cash. We're keeping an eye on that. Like Jim said, we're going to make sure that we don't get into any kind of situation where we're desperate for cash. We obviously have availability on the revolver.

We ended the quarter with $211 million of cash in short-term investments with the ability to access another $366 million off the revolver. So, liquidity, not so much of an issue just yet, but I am keeping an eye on the receivables. I'm getting a daily aging. And yes, it's starting to slip a little bit, but we'll see. Obviously, as the weeks roll by, we'll have a better answer for you next time.

Jack Atkins -- Stephens, Inc. -- Analyst

And just to quickly follow-up on that, I mean, how do we think about the interplay between the aging of those receivables and your agent base? I mean, is there any sort of true up there with agents if the receivables end up aging more than they should?

Kevin Stout -- Vice President and Chief Financial Officer

We do have agent risk, that is a part of our business. But we treat that just like any other receivable. I don't see that as an issue just yet.

Jim B. Gattoni -- President and Chief Executive Officer

If we, the way our business model works, if we give a $100,000 worth of credit to a customer, that agent has no risk once we do that as long as he doesn't bill over $100,000. So, all that risk sits on us.

Jack Atkins -- Stephens, Inc. -- Analyst

Okay, got you. Yes, that makes sense.

Kevin Stout -- Vice President and Chief Financial Officer

And yes, Jack, I'm happy with the AR reserve as of the end of the first quarter.

Jack Atkins -- Stephens, Inc. -- Analyst

Okay, thanks guys. Thanks for the time. Really appreciate it.

Operator

Thank you so much. Our next question is from Stephanie Benjamin of SunTrust. Your line is now open.

Stephanie Benjamin -- SunTrust Robinson Humphrey -- Analyst

Hi, good morning.

Jim B. Gattoni -- President and Chief Executive Officer

Good morning.

Stephanie Benjamin -- SunTrust Robinson Humphrey -- Analyst

I was just wondering if you could ask about -- just remind us what the general seasonality is for gross margins from 1Q to 2Q? Obviously, the environment is significantly different. But if you could just talk about what you're seeing either throughout the quarter and then generally what you see from 1Q to 2Q, that would be helpful.

Kevin Stout -- Vice President and Chief Financial Officer

Yes, Stephanie, this is Kevin. As far as gross profit margins go, it's going to move based on, more -- for Landstar, it's more going to be based on mix more than anything. Obviously, we've got some incentives out there to try to help our BCOs. So, I still think the range of the gross profit will be similar. We think the $100 per load has helped us stem the tide so far. But seasonality, whether it's first quarter or second quarter, it's really going to depend on the mix of BCO versus brokerage.

Stephanie Benjamin -- SunTrust Robinson Humphrey -- Analyst

Got it. Appreciate. And then I was just hoping that you could speak a little bit about what you're seeing in terms or what you saw throughout the quarter before the impact of COVID, just from manufacturing trends. I mean, did -- was it a situation where you started to see some improvement, just particularly with more favorable comps or maybe you have to pick up a little bit and then all of a sudden we kind of hit this massive Black Swan event. Maybe just anything, so we can kind of think through how it could progress as we start to rebound from the pandemic?

Jim B. Gattoni -- President and Chief Executive Officer

It was more of a very quick paced event. We were through, our dispatched loadings were actually, it was looking positive in week 11 of the quarter, which is probably the middle of March. Our dispatched loadings finally went 1% over prior year same day -- week, I'm sorry. So, we were seeing an elevation, we're seeing an increase in improvement in our trends from a dispatched loading basis on a week-to-week.

In week 12 of the quarter we dropped off. And then, I said, in the last week of the quarter, we dropped off to 14%. So, it was pretty rapid and then it just continued through there until now that 14% went to 20%, now we're sitting between a range of 25% to 30%. We've seen no positive signs for many industries yet opening up to get freight flowing. So, it was swift over a four-week period to watch the volumes go from positive 1% on one week to now looking at negative 25% to 30%. And until the manufacturers start to open up plants, we're probably -- I expect we're going to hover between that 25% to 30% for a little bit on a week-to-week -- week over prior year week on the dispatched volume.

Stephanie Benjamin -- SunTrust Robinson Humphrey -- Analyst

Great. Well, that's all I had. Thank you.

Operator

Thank you so much. Our next question is from Bruce Chan of Stifel. Your line is now open.

Bruce Chan -- Stifel -- Analyst

Thank you, operator, and good morning, gents. Just want to get your take on maybe overall market capacity. I know we talked about the BCO population a little bit. But we discussed expectations of supply led tightening on the last call, and obviously we're going to have a big glut here in 2Q. But as we shake out of the pandemic, what are your expectations of how market supply shakes out? Is it just going to be a much more significant tightening and are there any indications of any material changes right now?

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

Hey, Bruce, this is Joe. I would think that -- and we've seen the more and more bankruptcies even in Q1 and prior. So, I would think you'd see some of that materializing as the longer this slowdown persists. So, I do think there over time would be a tightening. I think you'll see it probably more in some equipment type, perhaps a little bit more on the flatbed market due to the energy impact initially. But again, it's hard to say. I mean, if things bounce back a little bit sooner, I think the tightness will be less. If it lasts a little bit longer, I think it could be pretty material.

Jim B. Gattoni -- President and Chief Executive Officer

Yes, and you still had -- we came into this watching insurance rates for these small carriers go through the roof, right, and actually starting to take some of these -- every -- a lot of the companies, the small carriers I saw going bankrupt are going out of business. mentioned insurance as one of their things. That's just another -- this pandemic just creates a more havoc to those small business owners.

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

Yes. And in addition to that, you know, the question prior was to Kevin about DSO, some of these small carriers, when payment terms get strung out so far, I think it gets increasingly difficult. So, I think there's just a multitude of factors they're trying to juggle, and it's just a matter of how long and how liquid were they before this all started to turn down.

Bruce Chan -- Stifel -- Analyst

Okay, that's good, I appreciate that. And maybe just a follow-up on Todd's earlier question, but more on the agent side. Can you give us some flavor on the resilience of that agent population? And then just conceptually, what tends to happen to that part of the Landstar model during down cycles? Do you see an influx of maybe small independents looking for support from the Landstar model? Do you anticipate or expect maybe some consolidation around $1 million agents, how does that usually play out?

Kevin Stout -- Vice President and Chief Financial Officer

No, I think you know, our -- we'll just start with the existing agent base that we have. They're so diversified. We have guys doing -- we have 200 some guys that do $1 million or $2 million. And then we have other guys doing $50 million to $100 million, right? So, you kind of -- you got to look at diversification within the agent base.

The smaller guys could be at risk if they didn't diversify within their own little businesses, right? If I'm a $1.5 million agent, I got one customer and that customer has shut his plant, well, he is not going to have business for a month.

So, they will probably get through it if they don't have staff or something like that. It's an individual business owner, he is a one-man team, he can make through a month and a half. When that plant back opens up, he'll probably be hauling freight again.

From an existing standpoint, you've got the larger guys who run staff of upwards maybe 100 people. They're managing their business the way a small business owner would manage. They're trying to keep the employees engaged, or in some cases they do have to furlough them and let them go.

So within our existing network, they're handling it as small businesses would handle it with a little help from us. They call us and we'll have discussions with them on how we can assist sometimes with them and getting through this month or two of severe downturn.

From a new agent prospect, they see us as an opportunity and we tend to get a few more calls coming in from agents. Whether we land them or not is another thing. But there does seem to be to be more activity on phone calls. The problem is, when you're in isolation, it's really tough to have meetings with people and to get to know somebody and try and recruit them into the business.

So, although there may be more calls coming in, the interactions don't really, they don't really stick until we can get maybe get out of our homes and start getting out and doing some more sales and recruiting efforts.

Bruce Chan -- Stifel -- Analyst

Okay, great. Well, I appreciate that color. Thanks, gents.

Operator

Thank you so much. Speakers, we have last two questions on queue. And our next question is from Barry Haimes of Sage Asset Management. Your line is now open.

Barry Haimes -- Sage Asset Management -- Analyst

Good morning. Thanks for taking my question. Had a couple maybe. First is, when you think about that sort of down 20% to 30% range that you guys saw late March into April so far, is there any way to ballpark how much of that is from companies actually shutting down versus how much of it is from shippers that are still open and just their same-store sales, if you will, are down? So that's the first question. I was wondering if we can get some feel for that.

Jim B. Gattoni -- President and Chief Executive Officer

That's a very difficult question for us because we have 25,000 customers that we bill and there's not one. We could talk from an industry sector standpoint. Clearly, I think the automotive piece is probably a combination of both, mostly plant shutdowns but also some other slightly operational. Building products, it's probably operational but way down. Steel, metals, that stuff, slightly like -- I think I read that steel was running about 50% capacity when they typically run at 80%. So, they're operational, it's just less freight coming. But from an industry sector that's what we know. But from an individual customer standpoint, we have so many customers out there, no one being more than 3% of our business. That's difficult for us to answer.

Barry Haimes -- Sage Asset Management -- Analyst

Got it. Thanks. And then just a quick follow-up on a couple of end-markets. Within building products, any feel for how much of that relates to new construction versus remodel? And then within consumer durables, are there any product types that are relatively more important to you or is it pretty broad based? Thanks.

Jim B. Gattoni -- President and Chief Executive Officer

They're both actually broad based. The consumer durables, it's the top -- that is highly diversified even within that category, I think, like, the top 25 customers only make up about 25% or 30%. So, there is no single durable in there, consumer durable in there that we could point it be driving that went down. Although, it's actually down less than the overall loadings from a percentage standpoint.

And in the building product side, yes, we don't -- we can't get into the detail of that to determine what is new construction versus rentals or something like that. I think that's difficult for us to pull apart.

We often don't know what the end market is. We could be hauling product to staging areas, it goes to another staging area that ends in an end product. So, it's just makes it difficult to get where the building products that are being built are headed.

Barry Haimes -- Sage Asset Management -- Analyst

Got it. Thanks a lot. Appreciate it. Good luck.

Operator

Thank you so much. Speakers, we have our last question and it's from Ben Hartford of Baird. Your line is now open.

Ben Hartford -- Robert W. Baird & Co. -- Analyst

Hey, good morning guys.

Jim B. Gattoni -- President and Chief Executive Officer

Good morning.

Ben Hartford -- Robert W. Baird & Co. -- Analyst

Jim, just I guess interested in your perspective. I know we've been focused on some of the supply dynamics with regard to trucks. But in terms of the competitive landscape within brokerage, I know it's early since everything inflected mid-March. But can you talk about extending of receivables across the industry? You talked about supply attrition on the truck side as we move through the year. Interested in how you think it might play out from a brokerage competition standpoint? Have you seen any change here in April, and what are some of your agent saying? Or how are you kind of thinking about this new environment from a brokerage competition perspective as we finish out 2Q and this year?

Jim B. Gattoni -- President and Chief Executive Officer

It's through April. We're not hearing a lot of people swapping brokers right now. It's breakdown for us because the freight is down. It's not necessary people -- we're not picking up freight from other brokers, may be somewhat -- nothing abnormal that we're seeing as shippers swapping out brokers.

And I think, in our world, since we're heavy spot market, are you going to come back? They talk about the economics, right? Is it going to be a slow gradual come back, is it going to be a U-shaped or a V-shaped? And I think each one of those scenarios will have a different reaction from the broker community, right? If it's a long drawn out recovery, I think that gives more time for brokers to compete on pricing and get in there and we'll be battling for customers. If it's a quick V, we're the guy to be there, right? And then, we'll be there for six months and then they put their bids out again.

I think you have to look at what kind of recovery you think you're going to have and how it's going to react. And I think each scenario would have a different reaction within the industry from a broker standpoint. Because if it came back real fast, that we play best, right? Business disrupts and all of a sudden volume comes back. We can get trucks anytime anywhere, right, on a quick one.

On a slow pace one, it comes into a bidding process. So, brokerage -- we'll be bidding against other brokers. And I think that's how you see it playing out depending on how the -- how you see the recovery coming.

Ben Hartford -- Robert W. Baird & Co. -- Analyst

Okay, that's good. I understand what you've done on the cash preservation side and you have the line in here about funding technology initiatives. Can you give us an update in terms of where you sit on that front? And, has there been any change year-to-date? Do you expect any changes in terms of the pace of the rollout, either because of this or any other factors?

Jim B. Gattoni -- President and Chief Executive Officer

Yes, as a matter of fact, I think pace of the rollout of some of our tolls are going to be faster because we apparently are more productive not being in the office. It's the most incredible thing. But yes, we're in the middle of rolling out. People have been talking about Book-it-Now tools, right, where it's automated, because a lot of our stuff is phone call. The truck has to call the agent and there's a lot of that going on. So, we're working on Book-it-Now. We're working on our tracking and visibility tools, revamping load boards, and all these pieces of the TMS that our modular that we're working on separately. They continue to -- we run a beta Book-it-Now with one of our agents and it was working.

I think, right now, with the drop-off in loadings and stuff -- it's not producing the technology might just be the capability of us to put it in play right now. I don't think we're not doing anything to disrupt anything. But we are continuing to push out all those products. We had them, we're improving them and we're going to continue to spend on.

Kevin, I think the spend on this stuff was like $8 million to $10 million?

Kevin Stout -- Vice President and Chief Financial Officer

Yes.

Jim B. Gattoni -- President and Chief Executive Officer

It's actually no longer incremental spend, and we're probably -- we've been consistently spending that for this stuff for about the last three years. So, we're just going to be consistently pushing on the path. We have the TMS that we're trying to roll out. Let's say, it's about 8% to 10% of our truck volumes now in the new TMS. That's a slow process over a longer period of time.

So, that's -- our pricing tool has been out for two or three years. There's not a lot of spending going into that. But a lot of it is focused on the front end, customer facing, track and visibility, Book-it-Now, ease of use, that type of stuff as well, we're working on and try to advance. And that has not stopped. But the IT coders can sit at home and do this and I think that's why we're getting a little more productive. No more meetings.

Ben Hartford -- Robert W. Baird & Co. -- Analyst

What's the timeline on when you expect kind of the totality of these initiatives that you've had undergoing for several years now to be kind of done-done?

Jim B. Gattoni -- President and Chief Executive Officer

I would tell you truth, I'm not sure we're ever done. But on some of the stuff, the track and visibility was supposed to be out sometime this year. So that one -- I look at them from a modular standpoint, because we can -- we build these modules, they plug right into the system. TMS might not be completely rolled out, but we could have the track and visibility rolled out. We can have the Book-it-Now rolled out. We can have these components rolled out. So they rollout when they're ready. We beta test them and then we roll them out. So it's kind of a continuous process. And as we finish one, we find something else that we like and we put out.

Ben Hartford -- Robert W. Baird & Co. -- Analyst

And I guess last one since no more questions here. Can you remind us the nature of your relationship with the FAA, FEMA? I know it's different than 15 years ago.

Jim B. Gattoni -- President and Chief Executive Officer

Yes, we are now just -- we are just now another broker bidding when they put request for quota. We had that FAA contract that expired in 2008 when we were the sole provider for disaster relief. Yes, that was over in '08, and now we bid in certain states when they have disaster relief efforts.

Ben Hartford -- Robert W. Baird & Co. -- Analyst

That's good. I appreciate the time guys. Stay safe.

Jim B. Gattoni -- President and Chief Executive Officer

Yes, you too.

Operator

Speakers, at this point, we do not have any more questions on queue. I would like to turn the call back to you, Mr. Gattoni, for your closing remarks.

Jim B. Gattoni -- President and Chief Executive Officer

Thank you. And thank you, as always, for your participation in today's call. We wish for you and your family stay healthy and safe. And I look forward to speaking with you again on our 2020 second quarter earnings conference call scheduled for July 23. Have a good day.

Operator

[Operator Closing Remarks]

Duration: 90 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 & Operations Officer

Rob Brasher -- Vice President and Chief Commercial Officer

Scott Group -- Wolfe Research -- Analyst

Jason Seidl -- Cowen & Company -- Analyst

Todd Fowler -- KeyBanc Capital Markets -- Analyst

Bascome Majors -- Susquehanna -- Analyst

Jack Atkins -- Stephens, Inc. -- Analyst

Stephanie Benjamin -- SunTrust Robinson Humphrey -- Analyst

Bruce Chan -- Stifel -- Analyst

Barry Haimes -- Sage Asset Management -- Analyst

Ben Hartford -- Robert W. Baird & Co. -- Analyst

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