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Landstar System Inc (NASDAQ:LSTR)
Q3 2020 Earnings Call
Oct 22, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Landstar System Incorporated Third Quarter 2020 Earnings Release Conference Call. [Operator Instructions]

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 third 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 by nature is 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.

Landstar entered the 2020 third quarter facing one of the most unpredictable and challenging freight environments in the company's history. The dramatic swing in demand from the sudden significant decrease in mid-March to the bottoming out in April and May to the gradual sequential improvements we experienced through the summer months and continuing through the end of September was unlike any other period in the history of the company.

Although we all recognized the impact of the COVID-19 pandemic on the economy is far from over, the company's variable cost business model, highly diversified customer base and geographically dispersed network of independent agents and third-party truck capacity provided resiliency and flexibility to Landstar as we managed through this unprecedented time.

Landstar's third quarter financial results far exceeded the third quarter financial guidance that we first presented in our 2020 second quarter earnings release on July 22. Our initial guidance anticipated 2020 third quarter revenue to be in a range of $885 million to $935 million and diluted earnings per share to be in a range of $1.11 to $1.17. On September 9, we updated that guidance in a Form 8-K filed with the SEC. Our updated guidance anticipated revenue in a range of $1.20 billion to $1.60 billion and diluted earnings per share to be in a range of $1.40 to $1.46.

Revenue diluted earnings per share also exceeded our updated guidance, primarily due to further sequential improvements we experienced in the number of loads in revenue per load on loads hauled via truck from September 9 through the end of September. Actual revenue in the 2020 third quarter is $1.86 billion, and diluted earnings per share was $1.61.

Our initial third quarter guidance provided on July 22 was based on rate and volume trends of our truck services through the first few weeks of July, and expectations that industry fundamentals of soft demand and readily available capacity would continue through most of the quarter. This initial third quarter guidance reflected our expectation that both revenue per load and the number of loads hauled via truck would be below the 2019 third quarter in a mid-single-digit percentage range. As business continued to improve from July 22 through September 9, our updated guidance anticipated both revenue per load and the number of loads hauled via truck would have seen the 2019 third quarter in a low-single-digit percentage range.

July closed with truck revenue per load 2% below July 2019, and the number of loads hauled via truck only 1% below that of July 2019. In early August, truck rates and volumes turned positive compared to the corresponding prior year period. August and September revenue per load on loads hauled via truck increased 5% and 10% over August and September 2019 respectively. And the number of loads hauled via truck in August and September increased 2% and 7% respectively compared to the same months of 2019. Overall, revenue per load on loads hauled via truck in the 2020 third quarter exceeded the 2019 third quarter by 5%, and the number of loads hauled via truck exceeded 2019 third quarter by 3%.

Along with the huge overall swings in demand for truck services we experienced during the 2020 second and third quarters, Landstar experienced a tremendous overall increase in demand for services provided via van equipment during the 2020 third quarter. On the flip side, in the 2020 third quarter compared to the 2019 third quarter, demand for services provided by unsided equipment remained soft, although improving sequentially as we moved through the third quarter. As such, overall demand for transportation services provided via van equipment outpaced demand for services provided by unsided equipment during the 2020 third quarter. More specifically, the number of loads hauled via van equipment in July 2020 was about equal to July 2019, while August and September were 6% and 9% above August and September of 2019.

Revenue per load on loads hauled via van equipment in July, August and September increased 3%, 8% and 17% over July, August and September 2019 respectively. In contrast, the number of loads hauled via unsided equipment in July, August and September 2020 was 5%, 4% and 2% below July, August, and September of 2019 respectively. Revenue per load on loads hauled via unsided equipment in July 2020 was 9% below July 2019, while August and September exceeded prior year by 1% and 2% respectively.

In comparing the 2020 second quarter to the 2020 third quarter, demand for our services fluctuated significantly by industry sector. The growth in revenue was driven by strength in consumer durables, automotive parts, building products and substitute line haul services, which is how Landstar refers to truckload services provided to large parcel and small package transportation companies.

Demand for substitute line haul was driven by growth in e-commerce that increased the company's third quarter revenue from that sector, both sequentially and over prior year third quarter. The boom in home improvement and renovations saw growth in the building product sector, while new business awards outside the big three automotive manufacturers helped drive automotive parts performance. And growth in new and existing accounts result in increased revenue in the consumer durables sector.

In an environment during the 2020 third quarter where U.S. manufacturing production continue to be below prior year levels, the company's agent network executed well on obtaining new business and sourcing capacity for businesses that continue to experience volume surge and supply chain disruption. More specifically, revenue from the consumer durables sector increased 11% in the 2020 third quarter over the 2019 third quarter, recovering from a decrease of 22% in the 2020 second quarter compared to the 2019 second quarter.

Similar trends occurred in other sectors. Automotive parts were up 17% in the 2020 third quarter compared to down 53% in the 2020 second quarter. Building products were plus 15% in the 2020 third quarter compared to down 21% in the 2020 second quarter. And substitute line haul services, which contributed approximately 5% of total revenue in the 2020 third quarter, were plus 125% in the 2020 third quarter compared to plus 21% in the 2020 second quarter.

Machinery and metals, both of which are typically service using unsided equipment, continue to lag prior year, but at improved levels compared to what we experienced in the 2020 second quarter. Revenue from the machinery sector in the 2020 third quarter was 12% below the 2019 third quarter, significantly improved from the 30% decrease in the 2020 second quarter. Likewise, revenue from the metal sector was 12% below the 2019 third quarter compared to a decrease of 35% in the 2020 second quarter. While certain sectors of the U.S. economy appeared strong and others lagged, the efforts of our agents to expand their business with new and existing customers across a broad array of sectors was critical in driving the company's strong third quarter performance.

As to truck capacity, we continue to attract qualified owner operators to the model. We ended the third quarter with 10,571 trucks, 272 more than at the end of the 2020 second quarter. BCO truck count continue to grow through the first few weeks of October and now sits at an all time record number of trucks provided by BCOs. BCO utilization or loads per BCO per week was in a 10-year low in April and May, increased, but remained below historical levels in June and improved significantly in July, August and September. As a result of the improvement that began in July, BCO utilization in the 2020 third quarter increased approximately 6% compared to the 2019 third quarter. Record BCO truck count and the increased BCO utilization led to a record number of quarterly loadings hauled by BCO capacity in the 2020 third quarter.

Also, as demand increased, we saw an increased number of third-party carriers hauled loads for Landstar. Active truck broker count defined as carriers who have hauled the load, a Landstar load in the past 180 days increased from 37,600 in the 2020 second quarter to an all time record level of 41,000 in the 2020 third quarter. Approved and active third-party carrier count is continuing at an all time high.

As it relates to third-party carriers, the inflection in demand that began in August resulted in the sudden tightening truck capacity that drove an increase in the rate of purchased transportation paid to third-party truck carriers. In the 2020 third quarter, revenue per load increased 7%, but gross profit per load decreased 2% on truckloads hauled by third-party carriers as compared to the 2019 third quarter.

The strong rate and volume trends in our truck services had continued in the first several weeks of October. We expect that demand -- level of demand for our service to continue through the fourth quarter. Assuming that level of demand continues, we expect 2020 fourth quarter revenue to look similar to and potentially exceed our record 2018 fourth quarter revenue.

We expect truck revenue per load in the 2020 fourth quarter to be similar to the record fourth quarter revenue per load we reported in the 2019 fourth quarter. We also currently expect the number of loads hauled via truck in the 2020 fourth quarter to be equal to or slightly exceed the record fourth quarter truckload volume reported in 2019 fourth quarter. As such, I expect fourth quarter revenue to be in a range of $1.150 billion to $1.200 billion.

As it relates to the 2020 fourth quarter earnings estimates, the company recently announced an initiative to further enhance its owner operator recruiting and retention efforts via its regional operation centers located in the United States and Canada in support of its BCO network. In connection with this initiative to further enhance our BCO recruiting and retention efforts, the company anticipates a buyout of certain legacy incentive commission arrangements that pay their commission to several agents for their BCO recruiting and retention services. Payments under those arrangements reported as agent commissions in the company's annual statement have a current annual run rate of approximately $10 million.

Included in the 2020 fourth quarter estimate is a one-time pre-tax charge of $15 million or $0.29 per diluted share for anticipated -- for the anticipated buyouts of these agent incentive arrangements. Including this one-time charge, 2020 fourth quarter diluted earnings per share guidance is $1.32 to $1.42. Excluding the impact of this one-time charge, diluted earnings per share guidance would be in a range of $1.61 to $1.71, the high end of the range being above the record fourth quarter diluted earnings per share of $1.68 reported in 2018 fourth quarter.

Landstar business model with access to a substantial number of truck capacity providers, including both our BCO owner operators and third-party carriers, combined with the expertise and experience of the agent family and the geographic distribution of our over 1,200 agents throughout the U.S. and Canada drives exceptional performance in most environments. The 2020 third quarter was no different.

Given the ongoing impact of COVID-19 pandemic and the softness -- and softness in U.S. manufacturing, the speed and strength of the recovery of domestic spot market was highly unusual. With the current strength and demand and capacity tightness, any additional improvement in U.S. manufacturing in the quarter would further tighten capacity within the transportation and logistics marketplace.

Truck capacity in the dry van spot market is already tight heading into the traditional period of peak seasonal demand for dry van services during the fourth quarter. Nevertheless, long-term outlook of the U.S. economic environment remains highly unpredictable. Regardless of the economic environment, however, Landstar's network of small and large business owners provide the expertise to satisfy shipper demand in almost every sector and every geographic region in North America, sourcing capacity of varying equipment types, while Landstar provides the tools and financial support to empower their success.

Our technology initiatives continue as we rollout new and improved tools. Most recently, we launched Landstar Clarity, a new and improved freight visibility tool, available to Landstar agents to support their customers. With our ongoing efforts to invest in and empower our network of small and large business owners along with our healthy balance sheet, we are confident in our position within the highly competitive technology-driven transportation and logistics marketplace.

With that, I pass to Kevin for his commentary on the 2020 third quarter financials. Kevin?

Kevin Stout -- Vice President and Chief Financial Officer

Thanks, Jim. Jim has covered certain information on our 2020 third quarter, so I will cover various other third quarter financial information included in the press release. Gross profit defined as revenue less the cost of purchased transportation and commissions to agents was $160.9 million and represented 14.8% of revenue in the 2020 third quarter compared to $152.6 million or 15.1% of revenue in 2019. The cost of purchased transportation was 77.3% of revenue in the 2020 third quarter versus 76.6% in 2019.

The increase in the PT rate was primarily due to an increased rate of purchased transportation on truck brokerage carrier revenue, which was 187 basis points higher than the rate paid in the 2019 third quarter. Commissions to agents as a percentage of revenue were 7.9% in the 2020 third quarter compared to 8.4% in the 2019 third quarter. The decrease in commissions to agents as a percentage of revenue as compared to 2019 was due to a decreased net revenue margin, revenue less the cost of purchased transportation divided by revenue on loads hauled by truck brokerage carriers.

Other operating costs were $7.4 million in the 2020 third quarter compared to $10.4 million in 2019. This decrease was primarily due to decreased trailing equipment rental costs, decreased contractor bad debt, decreased costs related to the annual BCO event canceled due to the COVID pandemic and increased gains on sales of trailing equipment.

Insurance and claims costs were $21.9 million in the 2020 third quarter compared to $24 million in 2019. Total insurance and claims costs for the 2020 quarter were 4.4% of BCO revenue compared to 5.1% in 2019. The decrease in insurance and claims expense compared to the prior year was primarily due to decreased net unfavorable development of prior year's claims and decreased severity of current year claims in the 2020 period, partially offset by increased insurance premiums incurred in 2020 for commercial trucking liability coverage following the company's May 1, 2020 insurance renewal. The impact of the May one insurance renewal will add approximately $3.4 million to the fixed portion of insurance expense in the company's fourth quarter.

Selling, general and administrative costs were $38.9 million in the 2020 third quarter compared to $38.2 million in 2019. The increase in selling, general and administrative costs compared to prior year was attributable to an increased provision for incentive compensation, increased costs related to the company's technology initiatives and increased stock-based compensation expense, partially offset by a decreased provision for customer bad debt and decreased travel and entertainment expense related to the impact of the COVID pandemic.

Stock compensation expense was $1.5 million and $1.1 million in the 2020 and 2019 third quarters respectively. The provision for incentive compensation was an expense of $2.1 million in the 2020 third quarter compared to a benefit of $323,000 in the 2019 third quarter. Quarterly SG&A expense as a percent of gross profit decreased from 25% in the prior year to 24.1% in 2020.

Depreciation and amortization was $11.2 million in the 2020 third quarter compared to $10.7 million in 2019. This increase was entirely due to increased IT-related depreciation.

Operating income was $82.4 million or 51.2% of gross profit in the 2020 third quarter versus $70.6 million or 46.3% of gross profit in the 2019 third quarter. Operating income increased 17% year-over-year. During the 2020 third quarter, 140% of the increase in gross profit from the 2019 third quarter was passed through to operating income.

The effective income tax rate was 23.9% in the 2020 third quarter compared to 23.8% in 2019. The effective income tax rate was impacted by excess tax benefits related to stock-based compensation arrangements with employees in both periods.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $258 million, year-to-date cash flow from operations for the 2020 third quarter was $186 million, and cash capital expenditures were $25 million. There are currently 1,821,000 shares available for purchase under the company's stock repurchase program.

Back to you, Jim.

Jim B. Gattoni -- President and Chief Executive Officer

Thanks, Kevin. With that, Missy, we will open to questions.

Questions and Answers:

Operator

Certainly, sir. [Operator Instructions] We do have several questions on queue, and the first one is from Jack Atkins of Stephens. Your line is now open.

Jack Atkins -- Stephens Inc. -- Analyst

Hey guys. Good morning, and congratulations on a great quarter.

Jim B. Gattoni -- President and Chief Executive Officer

Thanks, Jack.

Jack Atkins -- Stephens Inc. -- Analyst

So Jim, let me start first, and if you could maybe pull out your economic crystal ball. I know it's so tough to kind of think about and triangulate sort of where we're going from here given all the uncertainty out there with the election and the pandemic and everything else. But when I think about the different items that are really impacting your business over the next 12 months, the industrial economy feels like it's improving from here, construction activity is looking strong next year, automakers can't produce enough cars, I know energy remains a challenge. Can you maybe kind of help us think through how you're looking at your end markets as we head into 2021? Because it certainly feels like if you think about maybe additional stimulus and an infrastructure bill, there are a lot more pluses than negatives when we kind of think about where we're trending into the next calendar year?

Jim B. Gattoni -- President and Chief Executive Officer

Yeah. As you know, we always speak to how we're pretty tied to the industrial sector. And when you have industrial production or manufacturing production, which is negative, still a little bit shy of where it was last year, you would expect our model to not produce the kind of performance that it just came out of. But I think some of my emphasis and my points within my prepared remarks was really to speak to the agent family and how they penetrate into new markets or they penetrate into existing customers who may experience a surge or some kind of supply chain disruption.

So I think what we're looking at now is just the ability of the network to expand in an environment where industrial production has still remained soft. And that to me, really just provides a positive into the future because I don't think anybody anticipates industrial production is going to stay negative throughout the rest of the 12 -- the forward-looking 12 to 18 months. And any strength there is just going to add to what we've already done where the agents have penetrated into some -- consumer durables, as you know, was a great quarter for us. Substitute line haul with the e-commerce demand come into those parcel carriers.

I would say that, if you were to ask me, my expectation is going into next year, I think that substitute line haul would probably the one area I'd watch that would soften. But I see no reason why any of the other stuff would soften, even at Landstar here, we're talking about what percent of our employee base can remain at home indefinitely, right, even after COVID clears out, which means you've got -- saving money on travel and stuff like that and continue to spend into the economy. So you've got the consumer durables and all that stuff. I see a lot of our continuing.

So if we can get the manufacturing start picking up and other than substitute line haul, like I said, which is probably kind of more of a surge right now and we're providing some surge capacity there probably for the next maybe three to six months then when I could see softening. But everything else, I see pretty strong throughout the next 12 to 18 months. I see no reason to pull back on the environment.

Jack Atkins -- Stephens Inc. -- Analyst

Okay. That's very encouraging. Maybe for my follow-up question, just kind of going to the insurance point for a moment. If I go back to the second quarter call, you guys talked about some potential actions on the insurance front that I think the idea was to maybe improve your cost recovery there. So I guess, either for Kevin on for Jim, could you maybe talk about maybe -- I guess if you could, some more details around some steps you could take there to may be impact your net insurance expense as we go into 2021 because I would imagine the insurance markets aren't going to turn into a tailwind next year?

Jim B. Gattoni -- President and Chief Executive Officer

No, I would expect -- you're right there. I don't see that our premium -- the amount we pay in premiums for insurance coverage, especially in the commercial trucking line, I don't see that pulling back over the next six or eight months. As you know, we renew every year on May 1. And our anticipation right now is that the premiums will stay elevated through that renewal period, but hopefully not. There are actions we can take.

We have significant amount of coverage, probably highest -- one of the higher coverage in the industry when you talk about the layers and how high up the coverage is. We could look and think about maybe reducing that a little bit without exposing the organization on a per occurrence basis. You might get a little savings there. We're looking at other programs on the insurance side where we might be able to reduce some of the potential equipment, maybe we could influence our BCOs, maybe put in a truck to help influence maybe some of the specific accidents we had, which is unmeasurable. You don't -- you could put equipment in the truck, but you don't -- if an accident doesn't happen, you don't know it.

So it's a lot of things we're looking into. And clearly, move we just made to improve our recruiting efforts and retention efforts to eliminate the agent incentive commissions was a big offset and that's a tailwind going into next year, right? So you've already picked up, as I said in the opening remarks, there is about -- not that it was intended to offset the insurance, but it was a decision that was made to improve our recruiting efforts internally and to improve our field locations in recruiting and retaining BCOs. But it turns out that we have about a $10 million spend every year within the commissions line that would go forward. So it was a $14 million increase of premiums year-over-year. So we've -- we think we'll cover that with various programs by the time we jump into January 1 or some through the year.

Jack Atkins -- Stephens Inc. -- Analyst

Okay, that's great. Thanks again for the time.

Operator

Thank you so much. Our next question is from Todd Fowler of KeyBanc. Your line is now open.

Todd C. Fowler -- KeyBanc Capital Markets -- Analyst

Great. Thanks, and good morning. I guess I wanted to start with, it looks like you had some continued success in attracting both BCOs and then also third-party carriers to the network. Jim or maybe Joe, can you talk a little bit -- I mean we've heard a lot about the challenges in the driver market right now. It seems like you're doing a good job in moving the BCO count up. Can you talk a little bit about why you think maybe you're having some success in doing that and then the ability to continue to do that as you move into '21?

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

Yeah, sure. Todd, this is Joe. I think to the extent that the demand environment changed and that the pricing environment changed to -- moved in a positive direction, those are two excellent catalysts that drive BCO growth historically. And so to the extent that we continue to be solid on both of those fronts, I think our BCO count hopefully can remain, grow through the balance of this year. And then I would anticipate not really having a crystal ball into next year, but if it remains pretty solid, hopefully we'll be able to maintain our count and grow it a little bit more in 2021. But I think just the model itself, how we compensate on percentage pay versus mileage and the tools that we have that allow people to come in and take advantage of this strong demand environment and make good decisions for their business, I think it's -- I think that's really the foundation behind it.

I think if you're in the company driver market, I think it's a little bit more difficult because you're trying to get people to come back to a position that maybe they just lost in the owner operator, small carrier environment. This is their career decision. They've made their decision. It's just a matter of where they want to align themselves. And I think we've got a very good platform from which to align themselves with us and be successful.

And as Jim pointed out, our centers that we're initiating in 2021, I mean that's just one more step that we'll take to try to improve recruiting and retention. Most of our growth, Todd, has been not so much on the recruiting side. We did recruit a little bit better quarter-over-prior-year quarter, but it's really been on the retention side where we saw about a 30% reduction in the number of termination.

So once we get them here, get them acclimated, get them in a position to make good money, make agent relationships, and our agents do a great job by taking care of capacity whether it's BCOs or carriers, we like our chances in a good freight environment.

Todd C. Fowler -- KeyBanc Capital Markets -- Analyst

Okay. No, that makes -- go ahead. Go ahead, Jim. Sorry.

Jim B. Gattoni -- President and Chief Executive Officer

Todd, the other thing there is, and I think Joe mentioned the tools, right. You know our business model. We've had an app out there forever to simplify it, to make it easy for the BCO to identify the opportunities. We have 8,000 to 10,000 loads on the board at any given point in time. So the network and the ability for us to just automate that whole process and some of the things we've done over the last two or three years to improve the app and being able to sort functions and stuff like that, and I think that helps improve and would attract more drivers into the system also as we make things easier on them and the communications become more automated.

Todd C. Fowler -- KeyBanc Capital Markets -- Analyst

Yeah. All of that makes sense. And to me, it sounds like maybe one of the big difference is that you're not as dependent on the new drivers and the driver schools than maybe some of the large company driver fleets might be, and then of course the strong freight market and the technology helps. So that helps kind of square that away.

Just for my follow-up. Kevin, can you share with us what you think based on your guidance where total incentive comp will be for all of 2020 as well as stock-based compensation, so kind of the full year number? And then what you would expect it to be into '21 just based on kind of the normal target or the normal run rate that you'd have going into next year?

Kevin Stout -- Vice President and Chief Financial Officer

Yeah, Todd, as far as incentive comp goes, we're pegging the number to a one-time payout for 2020, which would be about $8 million. So we're putting up $2 million a quarter.

Todd C. Fowler -- KeyBanc Capital Markets -- Analyst

Okay. Sure, Kevin.

Kevin Stout -- Vice President and Chief Financial Officer

Assuming we hit exactly on our target for 2021, it would be the same number, about $8 million annually. On stock comp, we're about between $3 million, $4 million this year, right at $4 million. I would expect the same thing for next year.

Todd C. Fowler -- KeyBanc Capital Markets -- Analyst

Okay, good. That helps. And I agree with, Jack. Great quarter. And I know it's been a quite a volatile environment, so nice job.

Kevin Stout -- Vice President and Chief Financial Officer

Thanks.

Jim B. Gattoni -- President and Chief Executive Officer

Thank you.

Operator

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

Scott H. Group -- Wolfe Research -- Analyst

Hey, thanks. Good morning. So I want to ask just about some of the guidance pieces for the fourth quarter. Have you seen the flatbed volume and price inflect positive with van or not yet? And then I think I read that you're assuming the rates sort of stay flat from here, is there a reason why you don't think they take another step-up at the end of the quarter as we typically see around peak season?

Jim B. Gattoni -- President and Chief Executive Officer

No, I think -- I wouldn't -- I don't think we're anticipating that they remain flat. I think seasonally sequentially we're expecting them to be normal. Typically what you see from September to December is you do see some increase in rates, and I think we've built that into the model. We are expecting, I think on average you see it from September. By the time you close at December, you're up maybe $80 to $100 on a per-load basis, and I think we did build that in our guidance.

As to flatbed, you've seen the improvement sequentially in July, August and September. I don't believe we've seen an inflect positive yet, but it's still soft as compared to where the van side is. So I don't think we expect that to pick up and stay relatively flat throughout the remainder of the year.

Scott H. Group -- Wolfe Research -- Analyst

Okay. The back about 50% net operating margins, do you guys think that's sustainable going forward as long as the trends remain positive or is there anything unusual from a cost standpoint that means that the margin should go back below 50%?

Jim B. Gattoni -- President and Chief Executive Officer

No. I think Kevin explained some of the big variables we got right. Our bonus program is highly variable, right? But I think what he had said that those should be consistent year-over-year into 2021. You talk about the incentive comp, no pressure there. That's not a tailwind or headwind, those are relatively flat. So you're not feeling pressure on the margins there. Insurance clearly is a margin pressure with the $14 million more of premiums. That only started May 1 of 2020, so you've got some pressure there. But we feel like we've got enough ideas in our heads to kind of offset that, maybe not on the insurance line, but on various other lines within the P&L.

So I think if we still -- if our gross profit stays elevated and stays, we continue down the path that we're going with the growth and the performance we put there. Yes, I think that 50% margin is achievable. Not up maybe, I don't want to talk about quarterly because the first quarter clearly is a softer quarter and the infrastructure costs might push that below 40% -- 50%, I'm sorry. But on an annual basis, over a longer period of time, yes. I think that 50% is achievable and realistic.

Scott H. Group -- Wolfe Research -- Analyst

Okay. And then just last question, just on the sustainability of the cycle. You've been a straight shooter over time, and I get your points about maybe in the industrial demand hopefully getting better next year. What about on the supply side. Do you think that -- are you seeing signs of supply coming back as quickly as it's come in prior cycles? Are there reasons why it's going to come back faster this time, slower this time? How do you think about the supply side of the equation?

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

Yeah. Scott, this is Joe. I think that as -- I think there has been supply that's been sitting on the sidelines, especially when you think about owner operators and small carriers, which are the bulk of our capacity at this point. I think they've been around. I just think they've been a little bit sidelined or dormant or waiting for things to change, whether that's their ability to feel comfortable about operating in a COVID environment or whether it's the feeling that the markets and the pricing and those kind of things have bounced back to the point that it's worth their while.

I think a lot of them look at it as a cost benefit type decision, and as we've seen the demand improve and pricing improve pretty dramatically, I think you've seen a lot of carriers or owner operators that were sidelined come back into the market. How much of that is left to go? It's hard for me to say that. It doesn't look at this point in time like there's going to be a lot of new truck production. From what little I've seen, it's going to be more about replacement levels in '21. So if that's the case, I think capacity remains tight to it, but it's not really clear as to how much is still out there that's not coming back and operating in this environment. I would think it's not that much.

Scott H. Group -- Wolfe Research -- Analyst

Okay. Thank you.

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

Yeah.

Operator

Thank you so much. Our next question is from Michael DiMattia of Wells Fargo. Your line is now open.

Michael DiMattia -- Wells Fargo Securities, LLC -- Analyst

Hi, yes. Good morning. You mentioned some of the declines in the industrial markets throughout the quarter, but it sounds like there is indeed a brighter picture shaping up for 2021. Could you sort of bucket the new growth opportunities and customer potential wins in terms of how to think about those businesses as we head into 2021?

Jim B. Gattoni -- President and Chief Executive Officer

Yeah. It's very difficult for us to get down to a customer level because we are highly diversified. If you think of our agent model, with 1,200 all around the country, they're in all different customers. When we look at things, we kind of look at more of a broad array of sectors. We look at the sector level. We don't look necessarily down at the customer level because clearly no customer is more than 3% of our revenue. I haven't looked recently, but generally, I know there's less than 5%. And so when we look at it, it's really a sector thing. So you talk about end markets more, we speak to more what's going on in manufacturing and especially on the machinery and metals side, steel production and stuff like that, that's how we look at. It's hard to drill in the customers.

Now on the substitute line haul, that's really customer-driven. There's four or five heavy customers there. And like I said, to that sector is where we could experience softness there if things ease up on the e-commerce coming into next year. But it's really difficult for us to pull apart what our projections are at a customer level because one single customer does not drive the business, it's really more industry side and sector side.

Michael DiMattia -- Wells Fargo Securities, LLC -- Analyst

Sure. Thank you. And just one follow-up thinking about the supply side again. I think your BCO count inflected positive by 1% for the first time in five quarters, which still seems moderate. What sort of trajectory should we think about as we head into 2021? Is the market continues to remain tight?

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

Yeah. This is Joe. Again, I think we anticipate a little bit of growth still in Q4 in October where our net growth is about 100 trucks in October so far. So I don't think it will continue at that pace for the rest of the quarter, I think it will slow down. And then in next year, I think the growth will be a little bit more modest maybe in that net growth 100 to 200, somewhere in that range would be kind of where we sit now and what it looks like now and that would be more of a achievable I think. Just given -- given that, I think things are going to stabilize, pricing is going to stabilize, volumes will be what volumes will be once we understand how next year shapes up.

Michael DiMattia -- Wells Fargo Securities, LLC -- Analyst

That sounds great. Thank you.

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

Yeah.

Operator

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

Bascome Majors -- Susquehanna Financial Group -- Analyst

Yeah. Thanks for taking my question today. I wanted to follow-up on some of the cost items. Can you share with us the SG&A levels anticipated in the guidance? And maybe on a go-forward basis, is there any SG&A or operating costs you're taking on to -- that is a partial offset to some of the commission savings from the buyout you're doing in 4Q?

Kevin Stout -- Vice President and Chief Financial Officer

Yeah, Bascome, this is Kevin. I think in four quarter our SG&A line is going to be somewhere between $40 million and $42 million. That should be a pretty consistent number. If you look back over time, our numbers have been ranging probably $38 million to $42 million over time. I don't anticipate any significant increases. We might add a headcount here or there for the recruiting, but nothing significant going forward.

Bascome Majors -- Susquehanna Financial Group -- Analyst

All right. So just like history, incentive comp will be the big variable to move that up if it needs to go up?

Kevin Stout -- Vice President and Chief Financial Officer

On the SG&A line, yes.

Jim B. Gattoni -- President and Chief Executive Officer

Hey, Bascome. There's a couple of small things we've got to think about is, as Joe starts to implement his plan over the centers, the operation centers, there's probably a little -- I mean, we're talking operating costs maybe driving up $500,000 to $1 million next year, it's small stuff. So the other thing that happened this year, if you're doing a comp year-over-year, if you're looking at 2020 compared to 2021, there are some expenses we didn't incur this year that will may be roll back next year. We had an agent convention that we canceled, which is a couple of million dollars that -- we did have some penalties we have to pay there, but you have that. You also have -- we have a BCO All-Star Event that is $1 million over the summer that we had. We canceled out on two, but again, but again some penalties there we had to pay, but there's another $1 million, I would call it headwind.

There is some nickel and diming into the P&L that will roll in next year. Travel, clearly, I don't think there's is a company in the country that hasn't reduced their travel and entertainment expenses over the last since March. So we're going to have a little headwind there. And if you add all that up in my head, there is going to be some costs coming back in, in the extent of -- if I did it real quick in my head, $4 million, $5 million.

So -- but it's spread throughout each individual line item. And we'll try and manage that. We're not doing our budget process, and we'll figure out whether we can reduce that. It's a year-over-year thing, it's not a spending issue, and we'll see if there is other spots where we can kind of offset some of that. But right now, in my head, there is a -- due to the pandemic, there is some year-over-year comps that are a little bit different than you would get in a normal year. But again, on the other side, we did pay $12.6 million of BCO pandemic relief where we paid the $50 to the agents of BCOs, we have that. And then this year, clearly in the fourth quarter, another $15 million one-time charge for the buyouts of the commission incentives. So we've got a little bit of noise coming into next year, but I think I might have just kind of walked through what we know of as being the noise.

Kevin Stout -- Vice President and Chief Financial Officer

I would add medical benefits to that too as people stopped going to the doctor.

Jim B. Gattoni -- President and Chief Executive Officer

Yeah, yeah. That was a -- it's incredible that medical benefits dropped off during a COVID pandemic. But we had a favorable experience on -- I guess people just basically -- if you just had a cold, you weren't going to the doctor, so we had that drop off. So there are some pieces in there. But I would still say it's maybe $4 million or $5 million of expense. And then we had about $30 million of one-time charge going the other away.

Bascome Majors -- Susquehanna Financial Group -- Analyst

Yeah. Thanks for walking through all that. That's helpful as we think about next year. Maybe moving up to the gross profit side of the P&L. I mean, on a per load basis, it looks like you past the $300 mark again this quarter, which is quite a pickup from where the first half was. And you haven't really been there other than a very good year, which was 2008 where I think you were above that in each quarter and got as high as $313, $315 in your best quarters. I mean, from the other commentary, it sounds like you've seen more market positives than negatives in next year. I just -- as we think about gross profit per load is a really key financial performance indicator for your business. Do you have any sense of where you think that can go and how high it needs to be before it feels like it's cyclically unsustainable?

Jim B. Gattoni -- President and Chief Executive Officer

Well, we know how high it can go because there is a cap. If you think about our business model, we're a mix of BCO and we're a mix of brokerage. And on a gross profit per load, the BCO gross profit per load is higher than the brokerage, and there is reasons for that. We have insurance costs, we have recruiting costs, we have a lot of things related to the BCO below the gross profit line that we don't have on the third-party truck side. There is pretty significant cost to maintain an independent contractor network within this organization.

So one of it is mix, right? So if you have more BCO than you have broker, you're going to have that consolidated gross profit per load going to elevate if there is more BCO than there is brokerage. So that's a piece of it historically. So if you went back to when we were 60% BCO and 40% broker, you would have probably seen a higher gross profit per load. Given, and let's just believe that's all equal every year, so what drives it since the BCO gross profit per load from a dollar perspective is really based on rate, you have to hit a certain rate. If it's $2,000 a load, we're going to be up relative to $2,000 to $2,300 per load on a BCO side. That's going to help lift that gross profit per load. But at the same time rates coming up, we're feeling pressure on the broker side and that gross profit per load is probably shrinking a little bit.

So -- and I think it's what we saw this quarter. We did see it. We saw gross profit per load shrink on the broker side, yet we saw it expand on the BCO side. So it's a combination of those two things. I wouldn't say we're at a -- we're in a very good number right now, I don't want to claim it's the top. There is clearly a -- I mean if you're going to tell me we did $5,000 a load, yeah, we're going to exceed the $300 by a lot. I wouldn't say there is a -- I would say that we're pretty healthy right now on that number, and into the fourth quarter we could maintain and grow it a little bit. But let's just go with it's healthy now and I don't know how high it could go or how high it will go. It's hard to project that out.

Bascome Majors -- Susquehanna Financial Group -- Analyst

So it sounds like the volume might be a bigger variable going forward than necessarily the unit gross profitability?

Jim B. Gattoni -- President and Chief Executive Officer

Yeah, because it -- like I said, the BCO gross profit per load really varies with the revenue per load. And then the brokerage really is either the expansion or compression of margins.

Bascome Majors -- Susquehanna Financial Group -- Analyst

Thank you very much.

Operator

Thanks so much. Our next question is from Stephanie Benjamin of Truist. Your line is now open.

Stephanie Benjamin -- Truist Financial -- Analyst

Hi, good morning.

Jim B. Gattoni -- President and Chief Executive Officer

Good morning.

Stephanie Benjamin -- Truist Financial -- Analyst

I apologize if I missed this, but did you provide your gross margin expectations for the fourth quarter and what's embedded in the guidance given the current environment?

Kevin Stout -- Vice President and Chief Financial Officer

Hey, Stephanie, it's Kevin. My range is 14.5 to 14.8. We're showing a little bit more, going back to what Jim just talked about on the mix, a little bit more brokerage, obviously, some tightening on in the capacity. So there is going to be a higher brokerage PT rate in Q4. But the best range I came up with is 14.5 to 14.8 for Q4.

Stephanie Benjamin -- Truist Financial -- Analyst

Got it. Thank you so much. And then just switching kind of to expectations for peak season, I think any company tied to e-commerce is expecting a pretty big year. But can you maybe tell us a little bit about what other customers are saying as they look at fourth quarter? And then also as say they continue into the first quarter, just kind of expectations from a demand standpoint? Thanks.

Rob Brasher -- Vice President and Chief Commercial Officer

Sure, Stephanie. This is Rob. From the e-commerce and from the peak side of things, things continue to -- from a customer standpoint, they continue to be strong through the fourth quarter. Consumer spending continues to be high, consumer-based spending continues to be high. They don't feel that the seasonal peak has even started yet. We're kind of running at peak levels right now. And then they fully expect peak to start early and to continue on through the season.

As it goes into the first part of the year, the customers that we deal with feel it's going to be strong. But again, it kind of depends on what happens within our economy, come the workforce, can people go back to work and things of that nature. So there's kind of some unknowns going into the first of the year, but still continue to believe it's going to be strong.

Stephanie Benjamin -- Truist Financial -- Analyst

Great. Thank you so much.

Operator

Thank you so much. Our last question on queue is from Scott Schneeberger of Oppenheimer. Your line is now open.

Scott Schneeberger -- Oppenheimer & Co. Inc. -- Analyst

Thanks, and good morning, everyone. Just curious, on free cash flow, what type of expectation, you've talked a lot about the P&L this year going in the next year. Curious what you're looking at as we move toward next year, Jim, some considerations for capex, need for investments or perhaps technology investments? Thanks.

Kevin Stout -- Vice President and Chief Financial Officer

Yeah. Scott, this is Kevin. Last 2019, free cash flow was $288 million. This year our operating cash is in the $186 million year-to-date. So I'm expecting that to be just north of $200 million this year. As far as next year, I would say $200 million to $250 million would be good guess as to operating cash flow for next -- for 2021.

Scott Schneeberger -- Oppenheimer & Co. Inc. -- Analyst

Thanks. I appreciate that. And then just curious, it's been touched upon on the last few quarters, but you had a writedown for cross-border Mexico in the second quarter, and just curious if you're seeing any pick-up there? And then longer term with the consideration of near-shoring going forward, what might we think about for that business down there? Thanks.

Jim B. Gattoni -- President and Chief Executive Officer

Yeah. It wasn't -- the writedown wasn't cross-border. Actually, the cross-border Mexico, we have a Laredo facility in six or seven cross-border locations along the North-South border of U.S. to Mexico. The writedown was actually for our Mexico entity. That is really just interim Mexico. It's a small business, does about $20 million, $15 million to $20 million of revenue. And so there was an impairment there. And it really had to do it interim Mexico business at that Mexican entity.

As it relates to the cross-border business, I think what we are experiencing is that the southbound freight was kind of soft and northbound freight was picking up. Joe might be able to provide a little more depth into that, but it's -- and that continues. There is a little bit of imbalance with capacity, as you know. If southbound is soft and northbound is picking up, you just get truck imbalance. And Joe's team works through that, so Joe might have better commentary.

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

Yeah, Scott. It's absolutely true what Jim stated. There is an imbalance. There was also quite a bit of congestion at the border in the early stages of COVID through, probably through June. We've started to -- because Mexico I think was a little bit -- hit a little bit harder in certain areas and it's been a little bit slower to recover. So you had a lot of congestion of trailers at the border, customers or vendors not open and that kind of thing. A lot of that is starting to come apart and we're getting things delivered and getting back to a little bit more normalized, and then we've seen the volumes down there. When you look at northbound and southbound combined, continue to get better from flat in July, 6% in August and 8% in September grow. So it's starting to loosen up and improve, as you would expect. And as things continue to get a little bit more parity with what's going on in Mexico from an operational perspective relative to the COVID, I think you'll see it gets even more normalized.

Scott Schneeberger -- Oppenheimer & Co. Inc. -- Analyst

Great, thanks. I appreciate all the color, guys.

Jim B. Gattoni -- President and Chief Executive Officer

Yeah.

Operator

Thank you so much. And we have one more question from Jack Atkins of Stephens. Your line is now open.

Jack Atkins -- Stephens Inc. -- Analyst

Okay, great. Thanks for the follow-up, guys. Just a couple of additional questions here. I guess, when we think about capital allocation from here, Jim, I mean, I'd just be curious to get your sense for how you and the board are thinking about buybacks versus dividends. I mean, there is some potential tax policy changes that could be on the horizon depending on how the election shakes out. You guys are in a great position with the net cash balance. How are you sort of weighing all that? I know you did a special dividend that was paid in January. Any thought maybe doing another special dividend this year or it's just too hard to tell at this point?

Jim B. Gattoni -- President and Chief Executive Officer

Yeah. Jack, those discussions actually happen in December. We'll have those discussions with the board. I would anticipate we're not going to change our philosophy of where we stand. I do think even though we're coming out of very strong environment right now and we anticipate that strong environment to continue, let's be serious, but the environment has been -- is three months old right now. So I think there is still little unpredictability. So we prefer the share buyback program clearly, but if we end up at the end of the year with excess cash on the balance sheet, we're going to do what we've done historically, look at is it dividends or buybacks. And so that's what we will have our discussion about in December. And we'll look at market conditions and where we think 2021 is playing out and we'll consider any tax implications also.

I think if you look back when there was going to be a proposed increase in the taxes on dividends back -- I think it was around the 2012, we actually got a pretty big dividend check. So we'll be watching the election and what we think is going to happen with tax rates. Also look at what our cash flow looks like for next year and what market conditions look like.

Jack Atkins -- Stephens Inc. -- Analyst

Okay. Okay, that's great. And then I guess maybe a last question. Also, there's a capital allocation to it, but I'm just curious how you guys are thinking about your trailer pool? I think given the freight backdrop, we continue to hear about just a pretty significant shortage on the trailer fronts. Do you feel like you're trailer pool gives you a pretty strong competitive advantage relative to other asset-light players? And is there any thought to maybe investing incremental capital there just given the demand outlook perhaps over the next six to 12 months?

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

Yeah. Jack, this is Joe. Yeah, so we saw in the third quarter, just to kind of make your point a little bit, about 35% of our total truck volume was on the Landstar trailer and about 70% of our BCO revenue is on the Landstar trailers. So clearly, an important part of the model. We think we are in very good shape as it relates to the number of trailers that we need to support our business. And we've continue to operate on the philosophy that for every BCO that is pulling on a company trailer that enters the fleet, we provide two trailers, right? And I think that's the philosophy that we'll continue to utilize. Our trailers are very new. They show very well. We've got great tracking technology and it helps us keep our maintenance in line. So I think that's -- we feel pretty comfortable as we see the BCO fleet grow. We've been pretty effective at getting new equipment builds and delivered in time for peak and those kind of things. So I think we'll continue to operate on that basis.

Jack Atkins -- Stephens Inc. -- Analyst

Okay, that's great. Thanks again.

Jim B. Gattoni -- President and Chief Executive Officer

And Jack, just -- and the other thing is, we rollout -- we kind of rollout our trailers every seven years, so it's a replacement cycle. The two things we look at as to spending on trailers is we're trying to anticipate what our BCO count is going to look like three months out and add trailers based on that, and then replacement cycle is about seven years.

Jack Atkins -- Stephens Inc. -- Analyst

Okay, great. Thanks, Jim.

Jim B. Gattoni -- President and Chief Executive Officer

Yeah.

Operator

Thank you so much. At this time, I show no further questions. I would like to turn the call back over to you sir for your closing remarks.

Jim B. Gattoni -- President and Chief Executive Officer

Yes. Thank you. And I look forward to speaking with you again on our 2020 year end earnings conference call currently scheduled for January 28. 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 & Operations Officer

Rob Brasher -- Vice President and Chief Commercial Officer

Jack Atkins -- Stephens Inc. -- Analyst

Todd C. Fowler -- KeyBanc Capital Markets -- Analyst

Scott H. Group -- Wolfe Research -- Analyst

Michael DiMattia -- Wells Fargo Securities, LLC -- Analyst

Bascome Majors -- Susquehanna Financial Group -- Analyst

Stephanie Benjamin -- Truist Financial -- Analyst

Scott Schneeberger -- Oppenheimer & Co. Inc. -- Analyst

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