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spk01: Good morning and welcome to Landstar System Incorporated's second quarter 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, Jim Todd, 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. You may begin.
spk03: Thank you, Missy. Good morning and welcome to Landstar's 2022 Second 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, included but not limited to the operational, financial, and legal risks detailed in Landstar's Form 10-K for the 2021 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 that differ materially from historical results for 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. Our 2022 second quarter financial performance was the best ever second quarter financial performance in Landstar's history. Although revenue and earnings per share came in below our second quarter guidance provided on April 20th, second quarter revenue and earnings per share exceeded the 2021 second quarter by 26% and 27% respectively. Truck revenue is 21% over the 2021 second quarter, on 10% increases in both volume and truck revenue per load. Revenue hauled via other modes of transportation increased 93% over the 2021 second quarter, mostly attributable to higher ocean and air revenue per load. Earnings per share fell short of the low end of our April 20th guidance by 17 cents or 5%. Insurance and claims costs exceeded guidance by approximately 10 cents, And variable contribution was below the low end of the variable contribution included in the guidance by approximately 7 cents. The shortfall in variable contribution was due to revenue that was slightly below the low end of the guidance and a lower variable contribution margin as compared to guidance mostly due to mix as BCO revenue, which has a higher variable contribution margin than most other forms of Landstar revenue, came in lower than expected. As it relates to price on loads hauled via truck, revenue per load can be influenced by many factors, including length of haul, delivery time, equipment requirements, and fuel costs. Also, Landstar's revenue per load on loads hauled via BCO capacity excludes fuel surcharges billed to customers, which are passed 100% to the BCO hauling the load. During the 2022 second quarter, fuel surcharges excluded from both revenue and the cost of purchased transportation were $127 million. One of many metrics we follow is revenue per mile on loads hauled via BCOs. Given the recent spike in diesel fuel costs, this metric may provide a better gauge of market conditions as compared to revenue per load, which is influenced by many other factors mentioned previously. During the 2022 second quarter, revenue per mile on van equipment hauled by BCO capacity in April, May, and June was 23%, 13%, and 7% over April, May, and June of 2021, respectively. Revenue per mile on van equipment hauled by BCOs sequentially decreased 6% from March to April, and another 6% from April to May, yet held steady from May to June. By the end of the quarter, revenue per mile on van equipment hauled by BCOs was 13% below the peak reached in February of 2022. As it relates to revenue per mile on loads hauled by BCOs via unsighted equipment, This metric is partly influenced by mix as heavy oversized loads tend to have a higher revenue per mile. Heavy haul loads were 13% and 11% of unsighted platform loadings in the 2021 and 2022 second quarters respectively. Overall revenue per mile on loads hauled by BCOs via unsighted equipment in April, May, and June increased 22%, 14%, and 11% over April, May, and June 2021 respectively. And unlike revenue per mile on van equipment, Revenue per mile on on-site equipment hauled VPO sequentially increased from the end of the first quarter to the end of the second quarter and achieved an all-time last-hour high in June of 2022. We attribute this to steadily increasing demand from a strengthening manufacturer sector, as the sector's recovery from the impact of COVID has significantly lagged the recovery and expansion of consumer-based demand that has driven strength in the van market since the fall of 2020. Total second quarter truck load volume increased what would be considered a strong 10% over the 2021 second quarter had it not been for the growth rates Landstar experienced over the past six quarters. The rate of load volume growth slowed in the 2022 second quarter as compared to the last six quarters, mostly due to more difficult year-over-year comparisons, along with pockets of slowing demand for our service in certain industries we serve. During the 2022 second quarter, the number of loads hauled via van equipment in April, May, and June increased 11%, 12%, and 4% compared to April, May, and June of 2021. Month-over-prior-month growth in the number of loads sold via unsighted platform equipment was more consistent in the 2022 second quarter, with April, May, and June increasing 11%, 9%, and 10% compared to April, May, and June 2021. Consumer doorables, building products, automotive parts, hazardous materials, machinery, metals, and substitute line haul generally combined to be over 70% of our loadings. As compared to the 2022 first quarter, where load volume grew 20% over the 2021 first quarter, the rate of growth and load count for consumer goods, building products, hazardous materials, machinery, and metals were all relatively strong in the second quarter, but below the first quarter growth rates. The rate of growth in automotive products is about equal to the 2022 first quarter growth rate, while substitute line haul volume decreased 19% compared to the 2021 second quarter. I attribute the decrease in substitute line haul loadings to softer consumer demand, and the large parcel carriers better optimizing their restabilized networks. We continue to track qualified agent candidates to the model. Revenue from new agents was over $22 million in the second quarter. We ended the quarter with 11,887 trucks provided by business capacity owners, 23 trucks above our year-end 2021 count. The number of BCO trucks at the end of the 2022 second quarter was 48 trucks below the end of the 2022 first quarter. As typical in an environment with increasing fuel costs and a lower revenue per mile month to month, it's not unusual to experience an increase in BCO turnover. Lows hauled via BCOs in the 2022 second quarter were relatively equal to the 2021 second quarter on higher truck count, almost entirely offset by lower utilization. BCO utilization devises loads defined as loads per BCO per quarter, decreased 4% in the 2022 second quarter compared to the 2021 second quarter. We ended the second quarter with a record number of approved third-party carriers in our network. The number of third-party carriers hauling freight in the 2022 second quarter increased 31% over the 2021 second quarter. Our network is strong and continues to attract third-party truck capacity. I'll now pass it to Jim for his comments on a few specific line items within the company's second quarter financials.
spk10: Jim? Thanks, Jim. Jim G. has covered certain information on our 2022 second quarter, so I will cover various other second quarter financial information included in the press release. In the 2022 second quarter, gross profit was $208.1 million, an increase of 19% compared to gross profit of $174.8 million in the 2021 second quarter. Gross profit margin was 10.5% of revenue in the 2022 second quarter, as compared to gross profit margin of 11.1% in the corresponding period of 2021. In the 2022 second quarter, variable contribution increased 21% to $267.5 million, compared to $220.8 million in the 2021 second quarter, driven by strong revenue growth. Variable contribution margin was 13.5% of revenue in the 2022 second quarter, compared to 14.1% in the same period last year. The decrease in variable contribution margin compared to the 2021 second quarter was primarily attributable to mix. as an increased percentage of revenue was generated in the 2022 period by, one, truck brokerage carriers, which typically has a higher rate of purchase transportation than revenue generated by BCO independent contractors, and two, multimode capacity providers, which typically has a higher rate of purchase transportation than revenue generated by third-party truck capacity providers. The unfavorable mixed impact was partially offset by an increased variable contribution margin on revenue generated by truck brokerage carriers. as the rate paid to truck brokerage carriers in the 2022 second quarter was 183 basis points lower than the rate paid in the 2021 second quarter. Other operating costs were $10.4 million in the 2022 second quarter compared to $8.9 million in 2021. This increase was primarily due to increased trailing equipment maintenance costs and an increased provision for contractor bad debt, partially offset by increased gains on disposal of operating property. Insurance and claims costs were $34.1 million in the 2022 second quarter compared to $24.1 million in 2021. Total insurance and claims costs were 4.9% of BCO revenue in the 2022 period and 3.7% of BCO revenue in the 2021 period. The increase in insurance and claims costs as compared to 2021 was primarily attributable to increased severity of current year claims during the 2022 period, primarily due to the impact of two tragic vehicular accidents that occurred during the 2022 period. Selling general and administrative costs were $59 million in the 2022 second quarter, compared to $54.1 million in 2021. The increase in selling general and administrative costs was primarily attributable to increased wages and benefits, an increased provision for customer bad debt, and approximately $2 million related to the return of the company's annual agent convention held in April of 2022, partially offset by a decreased provision for incentive and equity compensation under our variable compensation programs. In the 2022 second quarter, the provision for compensation under variable programs was $8.3 million compared to $15.2 million in the 2021 second quarter. Depreciation and amortization was $14.3 million in the 2022 second quarter compared to $12.1 million in 2021. This increase was primarily due to increased depreciation on technology tools resulting from continued investment in new and upgraded applications for use by agents in capacity with approximately $400,000 of the increase attributable to increased trailing equipment depreciation. The effective income tax rate was 24.6% in the 2022 second quarter, compared to 23.9% in 2021. The effective income tax rate during the 2021 period was favorably impacted by excess tax benefits resulting from equity compensation arrangements, whereas the 2022 period had an insignificant amount of shortfalls from equity compensation arrangements unfavorably impacting the effective income tax rate. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $120 million. Cash flow from operations for the first six months of 2022 was $210 million, and cash capital expenditures were $7 million. There are currently 1,603,000 shares available for purchase under the company's stock purchase programs. Back to you, Jim.
spk03: Thanks, Jim T. As it relates to our 2022 third quarter expectations, I assume the stable freight environment that we experienced from May to June and into the first several weeks of July to continue through the 2022 third quarter. Given that assumption, I expect year-over-year growth in revenue to be at a desolated rate as compared to the previous eight quarters. In June, revenue per load for all our truckload revenue was approximately equal to that of May. Through the first several weeks of July, truck revenue per load has remained consistent with June. Given that start to July and assuming that truck revenue per load throughout the remainder of the third quarter trends consistent with normal seasonal patterns and fuel costs remain relatively steady throughout the remainder of the quarter, I would anticipate truck revenue per load to be about equal to the 2021 third quarter. The second quarter of 2022 was a record second quarter truckload count. Typically, a normal seasonal pattern results in third quarter truckload count to be slightly below the second quarter truckload count. I expect the 2022 third quarter truckload count to experience normal seasonal trends. Given that assumption, I expect truckload count to increase over the 2021 third quarter in a 3 to 5 percentage range. Based on these expectations of truck revenue per load and the number of loads hauled via truck, I currently anticipate 2022 third quarter revenue to be in a range of $1,800,000,000 to $1,850,000,000. Based on that range of revenue and assuming insurance and claim costs are approximately 4.2% of BCO revenue I anticipate 2022 third quarter diluterings per share to be in a range of $2.75 to $2.85. Overall, I am pleased with Landstar's performance in the first half of 2022. 2022 first half revenue was the highest first half revenue in the company's history and increased profit 38% compared to the 2021 record first half. Perhaps even more impressive than the top line growth was the fact that 2022 first half gross profit, variable contribution, operating income, net income, and diluterings per share increased with the highest ever achieved by Lesser in any first half in the company's history. In fact, earnings per share in the first half of 2022 exceeded the first half of 2021 by 45%. During the 2022 first half, we also purchased over $212 million of Landstar stock and paid dividends totaling $94 million. Since early 2022, industry data regarding spot market pricing has been showing a significant decrease in year-over-year spot market rates when excluding the impact of fuel costs. While we have seen revenue per mile on van equipment hold via BCOs decrease since it peaked in February 2022, Landstar's year-over-year change in rates hasn't been near the magnitude reported in various industry reports. In fact, as earlier mentioned, revenue per mile in June continued to be above June 2021 revenue per mile, although at a decelerated rate of growth as compared to the past 12 months. Landstar spot market pricing trends month over prior month tend to lag and often are below published industry trends both during growth and contraction cycles. We believe that has to do with the special non-routine nature of much of the freight we haul, along with our drop-and-hook business that tends to act somewhat more like contract-rated freight as we commit trailing capacity as part of that service. Looking forward, the current environment, with high inflation and slowing consumer demand, makes for an unpredictable freight environment. Regardless of the freight environment, Landstar's highly variable cost business model generates significant free cash flow. We intend to continue to return capital to shareholders. In our view, the current environment for Landstar continues to remain strong. We continue to focus on profitable load volume growth and increasing our available capacity to hold those loads. I'd like to end my prepared remarks by noting that we were proud to be recently announced as a member of the Fortune 500 for the first time. Although this achievement is based on our 2020 fiscal year revenue, it is also a testament to the company's unique entrepreneurial business model that has proven successful for decades. On behalf of Landstar's leadership team, we thank all of our independent agencies, owner approved third-party carriers, customers, and employees who helped us to accomplish this milestone in our history. With that, Missy, we will open up to questions.
spk01: Certainly. At this time, we will begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your touchtone phone. Once again, that is star one to ask a question. To cancel your request, please press star followed by the number two. We have several questions on queue, and the first one is from John Chappelle of Evercore ISI. Your line is now open.
spk07: Hey, John. Thank you, Missy. Good morning, Jim. Hey, Jim. Jim Gattoni, first question for you. I was going through my notes from April, and you had said you're seeing little signs of softness, seeing recovery in auto on EasyCom, CE Commerce volumes are strong. I mean, clearly this is still a great quarter by any historical context, but You were caught by surprise by a few things in May and June. Can you maybe just explain a little bit of where the surprises came from and where that may recur in the third quarter, maybe in the fourth quarter as you look out?
spk03: Well, I think the – one was – I wouldn't call them a surprise. I would say that, you know, when we missed, we missed by a slight bit on the low end on both volume and rates. When I look at the rates, we talk about truck rates. Let's talk about the bigger picture is rates and volumes, right? Not specifically into the detail of customers and commodities, which I'll talk about in a second. But when we talk about rates, we were tracking about, when we were looking at our March revenue per load compared to where we were looking, tracking the first couple weeks of April we came out, it was flat to down like 1%. So we kind of went with a flat. And I think ultimately we closed out April. The revenue per load was about 2% decline sequentially. It was like 1.8%. So it was a little bit – that was, look, a slight bit higher. But then we moved into May, and I think we dropped down like 3% or 4%. And that was where we saw the decline. So it was a – you know, it moved into after the April, you know, call – We saw the decline, and then things balanced back out coming into June, as I said. May to June was kind of what we anticipated the whole quarter to be like. So it kind of happened in May is where most of the drop-off fell off, and it was in the revenue per load. When you talk about commodities and things like that, I was about 15 months early on my prediction that substitute line haul items would slow down. I thought they would optimize quicker and that the consumer demand would pull back. I think I recall of April of 2021, me talking about sub-line haul pulling back. And then I didn't take it out of our guidance in the second quarter, and that's when it hit us, right? So we had a substitute line hold decline a little bit bigger than I thought, and I think, you know, so those volumes declined. So from a commodity standpoint, that's where I saw softness coming in from the first quarter to the second quarter. When you look at that transition, foodstuffs was off a little bit more than we anticipated, too. It's not a large category for us, but we saw a little volume decline there. So there's little pockets of softness that really weren't anticipated there. Nothing big. Look, other than the substitute line haul, which was a bigger decline in volume than I thought, I think there wasn't any other category in there that really caught us that much by surprise. I think it was just, as I said, a May hit on rates and then gradually dropping off in sub-line haul through the quarter and a couple of other smaller commodities that we saw.
spk07: Okay. That helps. And just for a follow-up, I hate to ask a super big picture question, especially one where not many people may know the answer, but for Landstar specifically, we're getting a lot of questions about the impact or lack thereof of this AB5 in California. Can you just speak to us a little bit for how you prepared for that, how you think it may impact your business or not, and kind of how you see the implementation of that?
spk03: That's a real question. I think that's good for Joe to answer.
spk11: Hey, John, Joel Beacom. So, yeah, you know, we went through this preparation and a lot of planning around this back in 2019 when this was all being talked about then, and we've really kind of just picked up the same playbook. We've got about 360, 365 BCOs who are potentially affected, and what we're doing is just making them aware of the legislation and the fact that the Supreme Court didn't pick it up and and going through the options that they have to continue to either stay with Landstar, which would be to relocate out of California or not haul California originating loads, or they can move to their own authority and continue to haul Landstar loads. So it's a relatively small number of guys, 365 BCOs, and those are the options, and we're helping them work through that process, and we're having conversations as we speak to see what direction they want to take.
spk07: Okay. Thank you, Joe. Thanks, Jim. Yep.
spk01: Thank you so much. Our next question is from Todd Fowler of KeyBank Capital Markets. Your line is now open.
spk08: Hey, great. Thanks, and good morning. So, Jim Gattoni, I think you covered some of this at the end of your prepared comments, but, you know, I'm curious on your expectations for revenue per load to stabilize the you know, into the third quarter and maybe just some thoughts on why, you know, it dropped down in 2Q and then you're seeing the stabilization now is that you're kind of the gyrations between the shift from spot to contract and some of that balancing out. And then, you know, when I think about your model historically, I think you've talked about a little bit of a lag between, you know, the agents adjusting rates versus where the spot market is. And so, I'm curious, is that caught up and you think that, you know, kind of your revenue pool is more reflective of the market or is there the potential there could be some lag in what you're seeing with relative to broader industry trends?
spk03: Well, I'll start with the end there. There continues to be a lag if you look at how our percentage change year over year moves compared to some of the industry data. Directionally, we kind of move that way, but I'd say that's maybe a 30, maybe a little bit longer, 30-day, a little bit longer lag. So I would say there's still lag. I think maybe that actually showed up when we went down in May compared to everybody else going down in March, April, right? So that might be an indication. That is a clear indication that we do lag a little bit as it relates to our revenue per load and when you compare the industry trends. We're in a very unpredictable environment right now with what's going on with consumer demand, inflation. Manufacturing is pretty strong for us on the flatbed side. Really hard to predict what the next six months is going to look like. I think we're comfortable with the next two months. We're halfway through July. But again, if you look back at what happened to me in April, we lost 2% or 4% of revenue per load from April to May. We lost 4%, which was unanticipated. I think a move of up or I don't think we're going to go up 2%, but could I lose 2% where I did stable? Absolutely. But I think we're comfortable with the stability because it's been about six weeks where we've seen these revenue per load numbers kind of hold on. Nothing specific in there. It's not like driven by anything like automotive or any kind of special. It's just kind of a general feeling over the rates right now. And we're comfortable sitting here today. But, again, I think we're in a very unpredictable environment, just hoping to hold the rates where they are. And I think you talked to some of our field guys. You talked to Rob Brasher. You know, there's a lot of different opinions on what the next six months is going to look like coming from some of the shippers out there. Some are thinking that the peak is going to be a little softer. Some think it's going to be terrific. So the inconsistencies coming out of the field staff and Rob's team are and some of the shipper surveys they have done is indicating that it's unpredictable and that they don't know what direction it's going to move. But at the same time, they are concerned that if it does get strong, they want to have capacity locked up. So that's kind of where the kind of the conflicting messages get us to a stable environment for the next two months. How's that?
spk08: Yeah, no, Jim, I mean, all that's helpful. And we understand kind of the lack of visibility. So just it's helpful to kind of hear your thought process behind it and Yeah, we look at one of those industry reports, and we've seen a little bit of stabilization recently as well. So we won't comment on the quality of that data. But just to follow up, I'm kind of curious about your comments around the mix and what's happening with higher third-party brokerage revenue versus the BCOs. And so I guess can you just unpack that a little bit, and is there anything to read into why the mix is shifting more away from BCOs and to third parties right now?
spk03: That absolutely has to do with how many BCOs we have. We're doing a really good job of executing on load volumes, and that's kind of the game we've pitched here for years. We don't control price, so you go after volume, profitable load volume growth, as we say. So it's really just more the magnitude of the growth in volume than it is any deliberate move by us. The one thing that I talked about is one of the misses on the variable contribution margin was really because of BCO utilization was down. In this environment, we see the fuel costs. One of the things we have that happens is the fuel surcharges also lag. When you have that sudden spike in fuel coming into March, April, it takes us a couple of weeks to catch up and get that fuel surcharge passed to get the BCO recovery. That may be a little bit of the impact of why BCOs cut back a little bit. Also, the dropping rates. You know, a little bit they may be waiting for rates to pop, so you see that utilization come down. So the things that's really going on, it's a little bit twofold. One is the volume has to go to third-party trucks if we don't have the BCOs to haul it, and then there was a slight dip in the BCO utilization in the quarter, which really drove a little bit, you know, the percentage of revenue driven by third-party trucks as opposed to BCO.
spk08: Okay, got it. Thanks for the time, and Jim Todd, welcome to the call. Thanks so much.
spk01: Thank you so much. Our next question is from Allison Poliniak of Wells Fargo. Your line is now open.
spk00: Hi, good morning. I'm not sure if I missed this, but other truck revenue is sequentially declining. Could you give a little color of what's going on there? I know there's a couple pieces in that business as well.
spk03: Yeah, there's a part of a substitute line haul business there on power only, which is probably most of the drop-off in there. I mean, that's really – and like I said, I I believe that the load volume on that substitute line haul business was sequentially down about 18% or something.
spk00: Okay, so power only, though, was still fairly positive for you on that side?
spk03: Yeah, well, I would say stable. I wouldn't necessarily say, you know, high or low.
spk00: Got it. And then on, you know, the trends within the truck transportation and van versus the unsighted platform, that revenue per load, do those trends, I know you talked about overall stabilization, but the revenue per load on the unsighted platform, are you still seeing that trend continue on the upward curve or is it flattening out at this point?
spk05: Hey Allison, this is Rob Brasher. From a revenue per load, we're still seeing a high level. We're above 2021 levels. I don't know reports that say that rates are getting down into the 2019 levels, but that's not what we're seeing. We're starting to come more in line with the 2021 as we progress further into the year. But, again, we're starting to see some improvement in some manufacturing. We're starting to see some improvement in some projects, some building projects that are coming back. We're seeing a lot of steel, a lot of metals that have impacted that. So we'll call it a stabilization for now. Just don't know what the future looks like as far as how these projects and such come back as to how it's going to impact that.
spk01: Great. Thanks so much. Thank you so much, Allison. Our next question is from Bascom Majors of Susquehanna. Your line is now open.
spk12: Thanks for taking my questions. You talked a lot about the changes in incentive comp year over year in the quarter. Can you lay out where you're accrued for the full year with the new outlook here, both on incentive comp and in stock compensation for kind of a total variable cost?
spk10: Yeah, so for total variable cost, some of the comp plans, full year 2021, we had $57 million. In total for 2022, I'm anticipating right now about $32 million on a full year basis, so down about $25 million.
spk12: Okay, and if we roll to 2023 and you had an earnings decline of anywhere close to the 20-ish percent the street is modeling, what would that number look like in 2023?
spk10: Bear case from total variable, I would say probably somewhere in between 8 to 10 in total.
spk12: Okay. Thank you for that. And last piece, there was a lot of noise in the second quarter in the G&A line with the aging convention coming back and the incentive comp pieces and some of the bad debt you talked about. But can you help us with what the underlying inflation rate you're seeing?
spk10: that number is a rough proxy of it sure specific to the G&A line in total or just all the indirect I mean yeah all of the above would be fine thank you yes so the way I think about it years ago that the inflationary pressures really were isolated to you know the insurance and claim line and the tech line and and if you look at the indirect costs today I mean you trailing equipment costs inflation trailer maintenance inflation wage inflation benefits inflation We finance all our trailers by capital lease. Our weighted average borrowing cost was 240 bps, I think, at first quarter. That's up 4.4%, 4.5% now. So it's kind of all over. SG&A 1Q to 2Q, 1Q was favorably impacted by about $2 million on the equity line for forfeitures related to former executives. And then also sequentially, you've got the $2 million agent convention in 2Q. So that's $4 million of the number there. And then we did see a little pressure on the customer bad debt line in 2Q22. One small bankruptcy that was about a penny bad guy, and then just the rest was general aging buckets. And then we did see a little PEPM pressure on the benefits line for mid-climbs.
spk03: From an inflationary standpoint... Jim is right on. The trailing equipment, you're talking about maintenance and labor costs on getting the trailers repaired. Quantifying that might be a little difficult, but it's out there. It's driving our other operating costs higher. We have 1,300 or 1,400 employees who support this network. We clearly have had to increase wages just to keep the salaries in line and the pay in line with what's going on with inflation. There's inflation there, too. Benefits cost is up. So it's hard to quantify exactly how much inflation is within these numbers, but clearly costs are going up due to the current conditions going on in the U.S. economy and the inflationary conditions we're dealing with.
spk12: Thank you for the time.
spk01: Thank you so much. Our next question is from Jack Atkins of Stevens. Your line is now open.
spk09: Hey, Greg. Good morning, everybody. And Jim Todd, congratulations on your promotion to CFO. Thanks so much, Jack. So I guess maybe if we could just drill down for a moment from our first question into the substitute line haul. Can you maybe help us a little bit? Is that largely parcel or is there also some like LTL carrier capacity in there as well? Just what type of customers are you kind of servicing with that business line?
spk03: A lot of it is that hauling full truckloads between the DCs of the large parcel carriers.
spk05: Okay.
spk03: And there is some little bit of LTL scattered around there, but the bigger pieces are just that.
spk05: Yeah, there is some line haul. Jack, this is Rob. There is some line haul substitution for LTL carriers. But when Jim talks about the decline in some of that, that's mostly from the, I would say, the majority from the partial carriers.
spk09: Okay. All right. I just wanted to make sure that was understood. And then I guess maybe kind of going back to the AB5 question for a moment. John asked. I thought that was a great question. We've been getting questions on that as well. But, you know, I guess, Joe, as you sort of think about, you know, the potential for AB5-like legislation to spread to other states, you know, there's been talk about it in New Jersey and Michigan and maybe other places. I guess, how do you think about, you know, kind of getting in front of that? Are there some changes that maybe need to take place with the model to maybe account for for that type of legislation in other parts of the country. And I'm thinking in particular about how you leverage your trailer pools, which if I understand right now is principally tied to BCOs, or maybe it's BCO only, can utilize your trailer pools.
spk11: Sure. Yeah, Jack, all good questions and all things that we've been thinking about for quite a while. And if it does migrate to other states, clearly we think we've got a good process to mitigate that from what I just already described. But to your point about if you look into the network, and each state is different, but if you look into the network, we've got tremendous growth in brokerage capacity. We don't think we're going to have a capacity-related issue with meeting customer demand. It would fall around some of that trailer-related, if it's a trailer-related account or something like that. And we're prepared to work through that. And I think made mention on other calls that we have instances where we'll put Landstar trailers in the hands of carriers on certain business, and certainly we need to look at that a little bit more closely if that were to come to be, and we would.
spk09: Okay, makes sense. Maybe one last question. I guess Jim Gattoni or Rob, you know, would love to get your thoughts on peak season. You know, Jim, I heard you a moment ago talking about it being kind of volatile in terms of what the shippers are telling you. What's your gut telling you about peak season this year? Just would love to get your thoughts there.
spk05: Hey, Jack, I'm glad you asked that question because my gut is upside down because no one can tell me what's going to happen. We base our peak really off of two parcel carriers and one big box retailer. And I will tell you, those three are about as far apart on what's going to happen when you talk to them. One of them absolutely says that peak is going to fall in line with last year. One of them says that they're inventories are a little bit, we'll say at a high level now, but they are gearing us up for August, and they think it's going to be consistent, but they're unsure, and one of them says that they're absolutely going to have a tremendous peak, and it's going to be bigger than last year. So I guess to answer your question, no one knows, and it's kind of like Jim alluded to earlier. They're keeping us real close because they don't want to get into a situation where there's they don't have capacity going into the third and fourth quarters. So I know I didn't answer your question, but I haven't been able to get a straight answer out of them either. There's just uncertainty around what peak looks like. Glad we could help Jack.
spk09: Well, if you can't get an answer, I can't get an answer.
spk03: Okay. It's just, it's very difficult to get a read from the business community right now. Like Rob said, there, there, some think it's going to be life. Some think it's going to be, gangbusters, some things can be the same as last year. It's really tough to get your hands around, but like Rob said, they are talking to us to make sure if it does get, you know, if capacity gets tight, we're there to help them.
spk09: Okay. All right. Well, thank you for the time. Really appreciate it.
spk01: Thank you so much. Our next question is from Scott Group of Wolf Research. Your line is now open.
spk02: Hey, thanks. Morning, guys. I don't know if you gave this already, so I apologize if I miss it, but can you just share the monthly trend in REV per load on a year-over-year basis throughout Q2 and then July?
spk03: I don't necessarily have July. I get a daily report that shows me one number, and that's what tells me it's stable. So July is a little bit rough, but Scott, I'll give you the – and Jim Todd will verify that I'm giving you the right numbers – Is that truck pricing year over year? I got you. This is a question. Hold on. I got you year over year. You got it? Yeah, I got it. You read it and I'll verify it.
spk10: Plus 15, plus 8, and plus 7, Scott. April, May, June compared to prior period.
spk02: Okay. Helpful. And then you don't have a final number for July, but how is July relative to your guidance of flat? Is it? Better than that flat or are we already flat? How is July directionally?
spk03: It is, July is typically growth from June on the revenue per load. That growth is slightly less than what you'd see seasonally. And then what we baked in is typically you see a little drop off back into August. So we kind of took that little bit of growth from June to July and then trended it seasonally into August and September. and came out with kind of a consistent quarter number as compared to June.
spk02: Okay, okay. And then just want to get your thoughts on just broader capacity, right? BCO count came down a little bit. Do you think that trend continues just in the softer market? Are you seeing any signs of the third-party carriers exit the market? Any signs of capacity pressure?
spk11: Yeah, Scott, to your point, and Jim mentioned some of it earlier, I think when you see the rates coming down and costs going up, the challenge is there. I think what you're also seeing, when utilization drops, then you also tend to see truck count decline. And we're seeing that as well. And part of that is the inability to get their trucks fixed. Our BCOs typically operate used equipment that's several years old. and the inability to get parts and get them timely, sometimes that affects turnover as well. All those things, I think, factor into that. I also think from the addition side, we've been challenged pretty much all year with the fact that it's very difficult to get used trucks if you can get them. The ads coming into the system are lighter. than typically what we see, and so that's impacting it as well. So I would think that there's some potential for some downward trajectory on the VCO count based on that. And I've seen some recent data where the net authority revocations are climbing. So I think in the big picture overall carrier capacity front, they're seeing the same increase in costs, whether it's their operating costs or their insurance costs and so forth. So I do think if the pricing stabilizes or continues to go down, I think you'll see some capacity come out of a larger network as well, just based on those factors.
spk02: Okay. Thank you, guys.
spk11: Thank you.
spk01: Thank you so much. Our next question is from Scott Schneeberger of Oppenheimer. Your line is now open.
spk04: Thanks very much. Appreciate it. Could we speak in the press release, the average length of haul was brought up, noted, Jim Gattoni. Could you please touch on what you think we should see for third quarter, second half, and how that may be impactful offensively?
spk03: Specifically to the length of haul? I think we've been consistently off. Maybe I think it was about off 6% year over year on a shorter – Short of length of haul, I think it was both in van and flatbed, Q2 or prior year Q2, pretty close to that. And I think you'd expect that to just be consistent. If you take our van and you take our van revenue per mile and you break it down into the categories, we do a bunch of loads that are 250 miles to 500 miles. We do a bunch of loads 500 to 700 miles. We do a bunch of loads over 750. And when you break that all down, Um, it ends up being averaging about 700 miles and that move 6%. So it's down 6%. It's really hard. It's more like of a mix than it is a specific, um, business. It's driving that, you know, we, we, we do like significant amount of van loads. So it's really hard to get my hands around what direction that's going to go. And we can pick up some accounts that are longer length of haul and just drive that mileage up. So it's more of a mix than it is a, It is a condition of what's going on in the industry. I don't think it's an industry trend where the longer hauls are going on rail. I don't think that's it. I think it's just our agents are hooking into more of the 250 to 500-mile loads than they were hooking into the over 100, 750. Again, unfortunately, I'd just say it's a little unpredictable and very diverse within that population of vanloads.
spk04: Thanks, appreciate that. A couple more if I could, a quick one here. Could you provide a status on the Ukraine operations, just production relative to prior year and how that's stabilizing things?
spk05: Yeah, the Ukraine operation, like you said, in the first quarter had a little bit of a blip for a couple of weeks. They have responded tremendously. We see the same production pretty much that we've seen out of them the past years, the past months. and that business will continue in the same manner that it has. So we see no issues there.
spk04: Excellent. Thanks. And then lastly, how should we think about the variable contribution margin trend in third quarter and beyond? What's the trajectory there? And any inflection points or thoughts on that front, Mexico?
spk03: Well, if mixed stays the same, which we anticipate it will stay pretty close to what it was in the second quarter, you're looking at that 13.4, 13.5 type margin. Remember with us, it's a lot of mix. It's how many loads, the percentage of loads produced by the BCOs, hauled by the BCOs versus the brokers. You think about that margin movement in the quarter, it was really mostly because we did more brokerage, and I think that's why you're asking the question. If our anticipated third quarter would be similar to the margin we had in the second quarter, third quarter, and then to the year end, if the mix stays the same, we expect to be within that 13.3 to 13.5 margin.
spk04: Great. Thanks, guys. I'll turn it over.
spk01: Thank you so much. Our next question is from Bruce Chan of Stifo. Your line is now open.
spk06: Hey, thanks, operator, and good morning, everyone. Just Jim and Jim want to get a little bit more color here on that decline in substitute line haul. You're really just wondering if that decline is stabilized at this point, or are you still expecting a little bit of a sequential deceleration there?
spk05: Hey, Bruce, this is Rob. So on the substitute line haul, it's stabilized, and again, we're starting to gear up for peak and what that's going to look like. So what we saw is, again, on the partial companies and things of that nature, They've geared up, they've added more, what they've tried to do is added more teams or added more capacity to their networks. One of the parcel companies offset and pushed a lot to the rail during this time trying to realize the cost savings. As far as from the LTL community that we do business with, that is still, the word coming out of that is that is still a hot market and that has definitely stabilized and actually on the rise. So to answer your question, I believe we've absolutely stabilized, and then depending upon peak will take us to where we're going moving forward.
spk06: Okay, got it. Now that's very clear and very helpful. And then maybe just one last follow-up here on Landstar Blue. I haven't heard a whole lot about it this quarter. Any updates there?
spk05: Absolutely. Landstar Blue, again, just to remind everybody, it's not a huge part of what we do. It's a very small company. We have – Doubled it in size. It is a contractually committed business. We continue to prove the concept of what we can do there. It continues to grow. It's doubled both in volumes, in revenue and volumes, and we'll continue to move forward with it. We're still working on the technology piece of it. So, again, but a very small piece of what we do.
spk06: Perfect. Super helpful, and I'll turn it over there.
spk01: Thank you so much. At this time, I show no further questions. I would like to turn the call back over to you, Mr. Gattoni, for closing remarks.
spk03: Yeah, sure. Thank you, Missy, and thank you, and I look forward to speaking with you again on our 2022 third quarter earnings conference call currently scheduled for October 20th. Enjoy the rest of your day.
spk01: Thank you so much, and that concludes today's conference. Thank you for joining the conference call today. Have a good morning. Please disconnect your lines at this time.
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