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spk00: Good morning and welcome to Landstar System Incorporated's third 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. Sir, you may begin.
spk04: Thank you, Eunice. Good morning and welcome to Landstar's 2022 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 Lancer'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 risk detailed in Lancer'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 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. Our 2022 third quarter financial performance was the best ever third quarter financial performance in Landstar's history. Revenue was approximately 5% above the 2021 third quarter on a difficult year-over-year comparison, and within the range of our third quarter guidance provided on July 20th. Earnings per diluted share was 7% above the 2021 third quarter, towards the low end of our third quarter guidance. Truck revenue was 1% over the 2021 third quarter, mostly due to a 1% increase in truckload volume. Revenue hauled via other modes of transportation increased 49% over the 2021 third quarter, mostly attributed to higher ocean and air revenue per load. Overall, truck revenue per load in the 2022 third quarter was essentially equal to truck revenue per load in the 2021 third quarter, with revenue per load up 1% on truckloads hauled via unsighted platform equipment, down 2% on truckloads hauled via van equipment, and down 1% on truckloads hauled by other truck transportation services. Landstar's flat revenue per truckload results for the 2022 third quarter versus the 2021 third quarter may seem at odds with the various industry sources that have reported significant decreases since early 2022 in year-over-year truckload spot market pricing when excluding the impact of fuel costs. Historically, Landstar spot market pricing trends month over prior year month often are less pronounced than the industry trends during both growth and contraction cycles. We believe that has to do with the specialized non-routine nature of much of the freight we haul, along with our drop and hook business that tends to act somewhat more like contracted rated freight as we commit trailing capacity as part of that service. One of many metrics we follow is revenue per mile on loads called by BCOs. This metric is much less influenced by changes in fuel costs, as fuel surcharges billed to customers on loads hauled by BCOs are past 100% of the BCO hauling the load and excluded from Landstar revenue. Accordingly, given the increase in diesel fuel costs in the 2022 third quarter compared to the 2021 third quarter, I believe this metric provides a better gauge of current market conditions as compared to Landstar's overall revenue per truckload, which is influenced by many factors including length of haul, delivery time, equipment requirements, and fuel costs. While we have seen revenue per mile on van equipment hauled via BCOs decrease sequentially since it peaked in February 2022, Lensar's year-over-year change in rates has not been near the magnitude reported in various industry reports. During the 2022 third quarter, revenue per mile on van equipment hauled via BCO capacity in July was 2% over July 2021, and in August was one penny below August 2021. In fact, August 2022, was a first month since June 2020, where year-over-year revenue per mile on van equipment hauled by BCOs was below the corresponding month in the prior year. In September 2022, revenue per mile on van equipment hauled via BCO capacity was only 4% below September 2021, even though on a sequential basis, revenue per mile on van equipment hauled by BCOs as of the end of the 2022 third quarter was 17% below the all-time high reached in February. As it relates to revenue per mile on loads hauled via BCOs, hauled by BCOs via unsighted equipment, this metric is somewhat influenced by the amount of heavy oversized loads hauled by BCOs as heavy oversized loads tend to have a higher revenue per mile. Overall revenue per mile on loads hauled by BCOs via unsighted equipment in July, August, and September increased approximately 9%, 6%, and 2% over July, August, and September 2021 respectively. And unlike revenue per mile on van equipment, Revenue per mile on onsite equipment hauled via BCOs was at a record high in the 2022 third quarter, 5% higher than the 2021 third quarter. We attribute the strength in flatbed pricing to stable demand at an elevated level from the manufacturing sector, as that sector's recovery from the impact of COVID significantly lagged the recovery and expansion of consumer-based demand that took place in the van market beginning in late summer of 2020. As to load count, Total truckload volume in July was 5% over prior year July. August was approximately equal to prior year August. And September 2022 was 1% below September 2021. The decelering growth rate in truckload volume was primarily due to slowing of the strong consumer-driven freight environment we experienced since late summer 2020. Consumer doorables, building products, automotive parts, hazardous materials, machinery and metals, and substitute line haul combined to represent approximately 75% of our loadings. The rate of growth and load count for each of these industry verticals, other than hazmat shipments, slowed in the 2022 third quarter over the 2021 third quarter as compared to the 2022 second quarter over the 2021 second quarter. In particular, substitute line haul volume continued its downward trend from the 2022 second quarter and decreased 27% compared to the 2021 third quarter. I attribute the decrease in substitute line haul loadings to softer consumer demand throughout the economy in general and restabilization in the networks of large parcel and LTL carriers. We continue to track qualified agent candidates for the model. Revenue from new agents was over $38 million in the 2022 third quarter. We ended the quarter with 11,644 trucks provided by business capacity owners, 220 trucks lower than our year-end 2021 count. The number of BCO trucks at the end of the 2023 quarter was 242. three trucks below the end of the 2022 second quarter. As typical in an environment with a lower revenue per mile month to month, it's not unusual to experience an increase in BCO turnover. Loads hauled via BCOs in the 2022 third quarter were approximately 5% below the 2021 third quarter on lower utilization, partly offset by slightly higher average truck count. BCO utilization divides loads per BCO per quarter decreased 6% in the 2022 third quarter compared to the 2021 third quarter. We ended the quarter with a record number of approved third-party carriers on our network. The number of third-party carriers hauling freight in the 2022 third quarter increased 21% over the 2021 third quarter. I'll now pass to Jim for his comments on a few specific line items within the company's third quarter financial statements.
spk07: Thanks, Jim. Jim G. has covered certain information on our 2022 third quarter, so I will cover various other third quarter financial information included in the press release. In the 2022 third quarter, gross profit was $185.7 million compared to gross profit of $189.2 million in the 2021 third quarter. Gross profit margin was 10.2% of revenue in the 2022 third quarter as compared to gross profit margin of 10.9% in the corresponding period of 2021. In the 2022 third quarter, variable contribution increased 1% to $245.7 million compared to $242.3 million in the 2021 third quarter. Variable contribution margin was 13.5% of revenue in the 2022 third quarter compared to 14% in the same period last year. The decrease in variable contribution margin compared to the 2021 third 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, multi-mode 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 third quarter was 224 basis points lower than the rate paid in the 2021 third quarter. Other operating costs were $13.4 million in the 2022 third quarter, compared to 10.6 million in 2021. This increase was primarily due to increased trailing equipment maintenance costs, the impact of the resumption of a large in-person event for the company's BCO-independent contractors, and decreased gains on disposal of operating property, partially offset by decreased provision for contractor bad debt. Insurance and claims costs were $31.4 million in the 2022 third quarter, compared to 29.6 million in 2021. Total insurance and claims costs were 5% of VCO revenue in the 2022 period and 4.3% of VCO 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, as well as increased premiums for commercial auto and excess liability coverage, partially offset by decreased net unfavorable development of prior year claim estimates. During the 2022 and 2021 third quarters, Insurance and claims costs included $2.1 million and $3.5 million, respectively, of net unfavorable adjustments to prior year claim estimates. Selling, general, and administrative costs were $53.5 million in the 2022 third quarter compared to $59.2 million in 2021. The decrease in selling, general, and administrative costs was primarily attributable to a decreased provision for incentive and equity compensation under our variable compensation programs and decreased employee benefit costs partially offset by increased wages and increased information technology professional fees and subscription costs from continued investment in new and upgraded applications for use by agents in capacity. In the 2022 third quarter, the provision for compensation under variable programs was $8.1 million compared to $16.6 million in the 2021 third quarter. Depreciation and amortization was $14.6 million in the 2022 third quarter compared to $12.3 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 $800,000 of the increase attributable to increased trailing equipment depreciation. The effective income tax rate of 24.3% in the 2022 third quarter was essentially equal to the effective income tax rate in the 2021 third quarter. The effective income tax rate during the 2022 period was approximately 20 basis points below the 24.5% estimated annual effective income tax rate for fiscal year 2022 due to higher than anticipated state income tax refunds and excess tax benefits realized on stock-based compensation arrangements. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $228 million. Cash flow from operations for the first nine months of 2022 was $436 million, and cash capital expenditures were $21 million. The operating cash flow generation of $436 million during the first nine months of fiscal year 2022 exceeds any full fiscal year operating cash flow in the company's history. Back to you, Jim.
spk04: Thanks, Jim. The 2022 fourth quarter provides for the most difficult quarter over prior year quarter revenue and earnings compresses of any quarter in 2022. As an example, fourth quarter 2021 truck revenue per load was a record quarterly truck revenue per load at the time was $390 over the 2021 first quarter. load count in the 2021 fourth quarter was an all-time last year quarterly record of 667,000 loads. As it relates to our 2022 fourth quarter expectations, based on the trends we have experienced through the first few weeks of fiscal October and our anticipation of a muted holiday shipping season this quarter, I've assumed that the sequential decrease in truck revenue per load and truck load volume we've experienced thus far in October will continue throughout the rest of the 2022 fourth quarter. On average, and taking into account the extra week in the In the 2016 fiscal fourth quarter, truckload count was approximately equal when comparing the fourth quarter to the third quarter in the five years preceding the pandemic. Note also that the 2022 fourth quarter includes one more week than the 2021 fourth quarter due to the timing of fiscal year-end. Even given the extra week in the 2022 fourth quarter, we expect the recent softening trend in truckload volume to continue and expect fourth quarter truckload volume to be below the 2021 fourth quarter in a range from 2% to 4%. Truck revenue per load historically has been harder to predict when comparing the sequential change from the third quarter to the fourth quarter in a given year. In the five years preceding the pandemic, truck revenue per load on average was approximately 1% higher in the fourth quarter compared to the third quarter. However, in 2017, truck revenue per load in the fourth quarter exceeded the third quarter by over 8%. Yet in 2018, truck revenue per load in the fourth quarter was 3% below the 2018 third quarter. Based on recent trends, I expect truck revenue per load in the 2020 to fourth quarter looked more like the 2018 fourth quarter, with truck revenue per load expected to be 2% to 4% below the 2022 third quarter. Given that assumption, truck revenue per load in the 2022 fourth quarter would be 5% to 7% below the 2021 fourth quarter. Based on these expectations of truck revenue per load and the number of loads hauled via truck, I currently anticipate 2022 fourth quarter revenue to be in a range of $1,775,000,000 to $1,825,000,000. Based on that range of revenue, assuming insurance and claim costs are approximately 4.5% of BCO revenue, I anticipate 2022 fourth quarter dilution earnings per share to be in a range of $2.60 to $2.70. Following our typical approach of providing financial guidance, and given the uncertainty of the U.S. economy, we do not expect to be providing financial guidance for periods beyond the upcoming quarter. However, as an example of the model's resiliency, if we were to experience a 20% decrease in revenue in 2023, from our 2022 full-year estimate. And assuming normalized insurance, we believe Landstar would still generate an operating margin of 50% or more. Given the scenario of a 20% decrease in revenue in 2023 from our 2020 full-year estimate, we anticipate free cash flow to exceed $300 million in fiscal 2023. The domestic freight, transportation logistics, and it relies heavily on U.S. consumer demand and domestic manufacturing. Well, Landstar business model, however, provides strong free cash flow in almost any environment. While we continue to invest in technology, facilities, and equipment that support the small and large business owners who comprise the Lancer network, we continue to return cash to shareholders. During the 2022 third quarter, we purchased 504,000 shares of stock at a total cost of $73 million. Year-to-date, the company purchased 1.9 million shares, over 5% of the year-end 2021 outstanding share count. Regardless of the point in the business cycle, Lancer returns a significant amount of free cash flow to shareholders via dividends and share purchases. Since 1997, when we first started our share purchase programs, Landstar has purchased approximately $2.2 billion in stock, the primary use of our excess cash flow. And with that, Eunice, we will open to questions.
spk00: Thank you very much, sir. At this time, we will begin the question and answer session. If you would like to ask a question, please press star 1 on your touchstone phone. Once again, that is star 1 to ask a question. And to cancel your request, please press star 2. Our first question came from the line of John Chapelle of Evercore ISI. Your line is now open.
spk02: Thank you. Good morning, Jim and Jen. Jim, kind of your time to shine here with the macro outlook, and I know you don't want to give any guidance towards 2023, but as you think about what you laid out for 4Q and a bridge to some of these bigger macro themes that you just can't help but getting hit over the head with every day, what are you hearing from customers, from consumers on inventories demand, and how do you feel about, let's just say, the first half of 23 relative to the second half of 22 from a bigger picture, you know, volume perspective?
spk04: Well, I would say that, you know, our second quarter commentary had a couple of our shippers that were more favorable to the peak season in the fourth quarter, and some were more relatively going to be, you know, flat the last year. I think that... That thought process has kind of disappeared a little bit. Now everybody's flat to a soft, muted peak season. So since our July call, I would say things have clearly softened up compared to the anticipation of a better peak season. So I think that's turned. Our first, and then if we talk about next year and demand there, you know, you've got to look at the consumer demand side and how it really drove for us the first quarter last, this year, I'm sorry. We had a record first quarter. The comparisons are going to be extremely difficult coming into the first quarter. We are already on a revenue per load that is, you know, like where are we, about 15%, 20% behind where we were in the first quarter. And typically you see a drop-off from December to January. You know, clearly the demand in the first quarter is not like it is in the fourth quarter. You see another 5% to 6% drop-off in rates. So I think it's going to be an extremely tough half next year based just on the comparisons and the direction of the economy. You know, we definitely feel it. We've seen the sequential low-volume trends decrease July through from July to – from June to July to August to September and anticipate kind of the peak season kind of being stable throughout the rest of the thing, but the comp going into the first quarter and the demand scenario we're looking at is going to be a very challenging first half next year.
spk02: Okay. That makes sense. And then just for a quick follow-up, I thought your commentary at the very end, 20% revenue decline, would still have a 50% plus operating margin. Can you just talk a little bit about the levers that you can pull to keep that margin pretty elevated in that type of difficult macro backdrop you just laid out?
spk04: Our fixed costs aren't a very, as a percent of our variable contribution, pushing 50% of your variable contribution through to operating income really shows that we don't have a lot of leverage in there. I mean, there's very few fixed costs. We have maybe 1,300 employees we've had 1,300 employees probably for 10 years now. There's not a lot of leverage there. If the volumes, if it's a revenue per load decline, we still need all the people, right? Whether it's the number of trucks we have in the system on the compliance side or the number of loads passing through the system, so there's not a leverage on wages and benefits because... which makes up about 70% of the SG&A. So, you know, we can tweak here and there. And if things turn down, you know, you just don't rehire. You know, you don't fill positions. But there's, like I've said in the past, there's not a lot of leverage. We can tweak $5 or $10 million of the cost structure. And the other piece is I would guess we maybe have, you know, in a downturn next year, we could have $15 to $20 million pickup on the variable compensation program. So you got that that we always have. But other than that, there's a lot of inflation in the system on other operating costs with labor and maintenance for our trailer repairs. You know, you've got elevated depreciation because we've been investing in technology over the last few years to, you know, to build efficiencies within the agent network. The insurance is still so unpredictable right now. It's still unfavorable. I mean, you've seen a couple of the other transports come out with some insurance hits that, you know, we live with that every day. So I think, again, on the trying to get leverage off of the fixed costs, again, we can tweak it a little bit, but there's not a lot to pull out other than the biggest piece is the variable compensation programs.
spk02: Okay. That makes sense. Thanks for the time, Jim.
spk00: Thank you. And our next question came from the line of BASCO majors of Susquehanna. Your line is now open.
spk06: Hey, Jim, to square that last comment, can you just give us an update, and apologies if we missed it, but on the variable comp, including stock comp, where you're accrued for this year, and if there's anything that has changed from the, quote, normal year that would make next year be maybe more of an 8 to 10.
spk07: Hey, Batson. Just as a follow-up, variable contribution margin, too, we should see some expansion in a downturn, 23 over 22. I think in 2019, we picked up about 60 bps of variable contribution margin expansion. With respect to the compensation under variable programs, up Current accrual for 23 is about $31 million, and then similar numbers as 2Q. Target would be approximately $20 million. Bear case, $8 to $10 million.
spk06: In the scenario you laid out where you would have a 20% revenue decline, would the incentive comp plan still pay out, or could that actually go lower than the count of 8 to 10?
spk04: We have not set our targets for 2023 yet. I don't know if we would anticipate setting a target at a 20% decline in revenue, but I'll have a better answer for you on that in January when we set our targets for 2023. There's a chance it could pay out to the $8 million. There's also a chance it might not. So I'll give you more update as we go through that process. We actually don't finalize our targets until January.
spk06: Thanks for the candor there. And one last one from me. You talked a lot about substitute line haul. I believe it was – down 35% or so in revenues. But if I look at that other truck transportation number, the volumes there are still close to 50% above the 2018 peak. So that number has still been a pretty good growth story for you over some time. Do you have a sense of how far some of the LTL and parcel customers are below what would have been a pre-pandemic, or sorry, still above what would have been a pre-pandemic kind of volume level and in any sense on what they're planning as we get into next year? Thank you.
spk04: It's a very good question. Look, our power only pre-pandemic wasn't near the size of it was as people start looking for just trailing capacity. That might not be, that's not just a pandemic-driven demand. I think that was kind of a move in the business as people talk about the drop and hook we do. It's almost like it's drop and hook with someone else's trailer. As for the volumes of where that was, unfortunately, I don't have that prior to 2019. We'll try and dig that up, maybe get that out. But I would say that that I could see being a little more – that's a little bit where the substitute line haul sits, so you're going to see that drop off a little quicker than our general business and commodities. But I apologize for not having the history back beyond last year. Thank you.
spk00: Thank you, and our next question is from the line of Jack at Cairns of Stevens.
spk12: Hey, guys.
spk00: Your line is now open.
spk12: Hey, guys. Good morning. Thanks for the questions. So, Jim Gattoni, let me kind of ask you about housing and sort of the impact you think maybe a slowdown in housing and sort of the related industries to that could have on five-bed demand as you sort of – or unsighted demand as you sort of think about 2023. I mean – What sort of sensitivity would you guys have to that, or what sort of sensitivity do you think the unsighted market would have to that?
spk04: Well, I think generally the unsighted market would be negatively impacted. I mean, building products was a pretty strong producer for us over the last year and a half, right, as the housing market was relatively strong. So I would say that building products makes up about 8% of our revenue. Again, we're highly diversified. So to me, it would act almost like everything else. Consumer doorables is where the appliances sit and all the other stuff that we hauled. So I would say you're going to see that decline similar to see the rest of the market decline on consumer demand. Now, not near the substitute line haul. I mean, that was very specific to excess freight coming through the parcel carriers. But You know, we talked about appliances stuff and the stuff piling up at warehouses in June, right? And, you know, you've clearly seen a slowdown there. But overall dynamic, the economy and everything else, I think you take the building products, consumer doorables, it's even affecting your machinery and metals a little bit coming across on the flatbed side. So you think about the flatbed dynamic there. General softness in any one of those categories where it's machinery or housing or stuff like that will flow into our business even though we're not directly that tied into housing. So we'll wrap up that lousy answer there, Jack.
spk12: No, it was a good answer, Jim. I didn't land the plane. And then I guess maybe following up, when I sort of looked through the different lines of business, one area that kind of surprised me to the upside was the strength in, it's a smaller bucket, but the strength in air and ocean. Is that due to new agent additions that specialize there? Do you think that's just sort of lagging a slowdown that we're seeing kind of in the international markets? Any kind of commentary there? That's been a nice tailwind for you guys over the last couple years.
spk04: Yeah, look at that, Jack. It's mostly rate, right? I think, you know, our volumes there I think only look like they're about 10%. We did 11,500 loads there in Ocean this year in the quarter compared to only 10,000 last year. So it's really a rate-driven thing. I mean, rates are still elevated to about 50% of where they were compared to last year. And yes, the other thing is we did add a few agents into the ocean air category, which drove a little bit of that volume increase, but it's mostly on the rates. As you know, at one point, I think the ocean rates were four or five times where they were a year ago, and now it's pulled back a little bit, but that's what's driving it.
spk12: Okay. I'll turn it over. Thanks again for the time, guys. Yeah.
spk00: Thank you. And our next question is from the line of Todd Fowler of KeyBank Capital Markets. Your line is now open.
spk03: Hey, great. Thanks, and good morning. So, Jim, I know that we've talked about this quite a bit in the past, and you had some comments about this in your prepared remarks, but I just wanted to spend a little bit more time on your commentary around how your revenue payload is trending versus some of the spot rate data that's out there. You know, when I look at 21, van revenue payload was up, you know, 30%, and that seems to track a little bit more in line with spot rates and And now it kind of seems like it's a little bit more correlated with contract. And so, you know, can you just spend a little bit more time? I mean, is that much more on, you know, the shift of power only and some of the mixed things? Or are you expecting that there's more, you know, that we'll see van revenue per load start to decline more as we move into 23? Just wanted to spend a little bit more time on kind of, you know, what you're seeing with that decoupling between revenue per load and spot rates. Thanks.
spk04: Like I said, a significant part of it is that when you put trailers in the system in our drop-in hook, that does work a little bit more. It's a little more steady, a little more stable than true spot market pricing. They tend to not kick you out as fast if you're providing trailers, and so you kind of can lock in a little longer on those rates and hold them a little more steady. You'll get pressure there. There's no question. It just takes a little while longer. The other thing is when you think about our BCOs, they tend to look for premium, you know, the mother load, right? So they're trying to You're trying to find the load that pays them the most. And, you know, their utilization is a little bit down because, like we talk about, you saw rates slide a little bit. So they're still sitting out there. They're not hauling as many loads because they're looking for the mud load. So there's a little bit of that to keep the rates up, you know, where they'll only haul. You know, they're not going to walk away, you know, in six months. They're not going to drive as much if rates are down 20%. They're going to still look for the mud load. So there's a whole bunch of things, the non-routine, the flatbed. Like part of the – if you look at total revenue per load, combined flatbed stabilizes it because we actually have flatbed up a little bit. So that's driving the overall thing. So you're seeing a little softness in the van side and with supporting from the flatbed side. It's just we haven't correlated since February. You know, when we first started seeing freight waves and them coming out with this, we're 20% below, not us, but the spot market's 20% below last year. And to be honest with you, Todd, I just... I'm struggling with figuring out why we're so far off from where the industry is. Now, a lot of the stuff we read on the data is ex-fuel, and I've done some back of the envelope, and even when you pull fuel out, we're like 10% behind. So not 40% or 30% that you're reading in the industry. The other thing I mentioned was I believe truck stop data is the paid-to-truck value, not necessarily what's billing to the shipper. You know, we talk about actual build to the shipper numbers as opposed to what's going on and what trucks are getting paid. And if it's a posted rate, it doesn't actually mean that the freight moved. And then the other piece that kind of stabilizes, we don't put fuel in for the BCO. There's another stabilizing factor. So you don't have the volatility from the fuel piece on the BCO side because the fuel surcharges are removed. I forget what the number was, but I think the BCO fuel surcharge is upwards of over $106 70 million or 120 million? I forget. Jim may have the number. So that's not in the number. So that takes a little volatility out too. So we don't have the effect of fuel spikes and declines for that 40% of our revenue.
spk03: Yeah, that's helpful. And I know we spoke about it and I know you've done some work on it. And so it's just helpful as we continue to try and think about the correlations and everything and what we're seeing. So I appreciate the thoughts there. Just for a follow-up, Jim Todd, you know, on the variable contribution margin, it's been relatively consistent, you know, for the last, you know, four quarters or so. I know that the mix is changing. You know, can you maybe share with us, you know, thoughts on fourth quarter variable contribution margin? And then just, you know, if the freight market does weaken and we see some ships away from, you know, kind of the elevated, you know, brokerage loads and the ship back to BCO, you know, how would that trend as we move into 23? Thanks.
spk07: Sure, Todd. I think if you look back the last two years, walking variable contribution margin 3Q to 4Q, we've dipped about 50 to 70 bps. We don't We don't see that as exaggerated this year, 3Q to 4Q, because if you think about the starting point, the BCO utilization started to soften up a little bit, 2Q, more than we thought. We expected it to be soft in 3Q, which it was. So we've got a little bit of compression, 3Q to 4Q, but not as much as recent years. And same with international, expected to be a little bit of a smaller share in 4Q than the last couple quarters.
spk04: And Jim made a comment early on about when things slow down, we'll get some margin expansion. How many bits?
spk07: Yeah. Yeah, the brokerage, you guys know, the brokerage freight typically falls off faster in a downturn, right? So in a hypothetical 20% decrease, I use 19 as a guidepost. We picked up about 60 bits on VCM. Yeah, okay, good. I did catch that, and I bet that's helpful.
spk03: Thanks for the time this morning. Yep.
spk00: Thank you. And our next question is from the line of Scott Group of Wolf Research. Your line is now open, Scott.
spk09: Hey, thanks. Good morning. I was wondering, is there any hurricane or FEMA benefit in the fourth quarter guide? And then, Jim, as you sort of maybe contemplate potentially revenue down 20% next year, how would you think about the mix between volume and price?
spk04: As to the first part of the question, we do not anticipate in our guidance any hurricane, and it wasn't material in the end of the third quarter either, so there's nothing material in there that's disaster relief related. When I think about the volatility, it's always, not always, always is such a bad word, but it's more often than not price volatility with us. Our volumes tend to not impact the model as much as the spot market pricing does. If you look at the history, you know, over the last 10 or 15 years, our volumes year over year have only dropped off three or four of those years. It's always been the volatility in price. So going into next year, I would think the same thing. I think we're going to – the biggest question mark is on pricing. It's the hardest part to predict. And I would say we probably will see – we had record volumes like just crazy this year. I expect a decline in volumes next year. But I think the bigger impact is going to be on the revenue per load.
spk09: Okay. And then the BCOs count inflected lower year over year. Just curious what you're seeing from that. Do you think that continues? And then just more bigger picture, what do you make of this AB5 thing and how big of a risk to the model is that if that becomes a national issue?
spk05: Yeah, Scott, this is Joe. So, yeah, the BCO count, I would say, you know, we saw the peak in revenue per load in February. We saw utilization start to decline in the second and into the third quarter, and with that, truck count declined. I think that there's a couple of pieces to that. One is the number of additions is off from where we typically see it, and that's a lot of times a function of the ability or inability to get used trucks, and we're also seeing... terminations up because of either the decline in price or reduced demand, but also the inability to get their trucks repaired in a timely fashion. So that's kind of factoring into BCO count, and as some of those things normalize, I think the BCO count will kind of hit bottom and increase, much like it did in 2019 where we saw kind of a similar scenario. I would expect us to see it drop a little bit further in the fourth quarter of this year and then hopefully bottom out going into next year. And on the AB5 front, we have, as we mentioned last quarter, around 360 BCOs who were affected by AB5. We've been in contact with all of them or all but a few of them, and they've made their decisions as to whether to relocate from California, stay in California and not haul outbound California freight, or go get their own authority. the great majority of those are going to either stay and not haul California loads or have started the relocation process. So we don't see a significant impact for our ability to service California or end the BCO count going forward.
spk09: Sorry, I was talking about the Biden proposal to sort of make that more of a national issue. Maybe I asked it wrong when I said AB5.
spk05: The Department of Labor proposal? Yeah, that just came out. Okay, yeah, so on that one, Scott, so it's a little bit different, or quite a bit different, actually. This is as it relates to the Fair Labor Standards, you know, the governance of minimum wage and overtime. And right now, truck drivers are exempt from overtime, so there'd have to be a congressional action to actually change that for truck drivers. And unlike AB5, as you recall, there's three prongs to that. If you fail any one of the three, you're an employee driver. With the DOL proposal, it's more of a holistic look at the relationship that you would have with your owner-operator, and there are a number of different factors inside what they call an economic reality test. And as we look at that current proposal, as we understand it, again, it just came out, but something we're going to watch. However, we don't really interpret that at this point as anything that we feel is you know, uncomfortable about. But again, we're going to watch it and, you know, get more detail as more details come up. But right now it's something that we remain comfortable with our relationship satisfying that expectation.
spk09: Very helpful. Thank you, guys.
spk00: Thank you. And the next question is from the line of Elliot Alper of Cowan. Your line is now open.
spk10: Great. Thank you. So you discussed the free cash flow you've generated through the first nine months of the year. Would be curious to hear any thoughts on M&A given the freight environment that's pressuring carriers. Are there any attractive opportunities coming across the desk within your portfolio? And kind of where do you think the best place would be for inorganic growth?
spk04: Yeah, the model doesn't really... support just wide-open acquisitions because anything we look at generally conflicts with the small business owners that we support. If we were to look at buying a trucking company or even a broker here in the U.S. moving truckload freight, it would compete against those agents. So when you talk about domestic ground transportation, there aren't a lot of opportunities for us there that wouldn't create a conflict within the model. So we always lean on what's out there that wouldn't really conflict with the model, and there are very few options for us. So our M&A, we see stuff all the time, but we don't pull triggers on it. We're not a big M&A organization. We focus on the core, support the agents, support the business capacity owners. So we're generally the plan. We have no long-term, I mean, a short-term plan to do any M&A, and we just take our cash flow and do what we've done before and return it to shareholders via dividends or share buybacks. We do keep our eyes open. I don't think there's any question. I'm not going to sit there and say it's not a never thing. It's just what's the opportunity we would have that wouldn't compete? Could it be freight forwarding? Could it be international? Could it be some kind of tech play? But nothing's popped as of yet. We're always looking, but there's nothing on the horizon for us.
spk10: Okay, great. Thanks. I guess one other one just on the visibility within the network. So peak season has come in kind of below expectations compared to a few months ago. I guess what has changed since then as we move through peak season? What are the largest uncertainties? that are still kind of unvisible within the rest of Q4?
spk04: Well, with us, the volumes are pretty good. I mean, I think our volume estimates were pretty good. I think it's the unpredictability of the pricing and what's going to happen on the demand side. We did anticipate a little bit of slowdown in rates coming into the fourth quarter compared to the third quarter, which is pretty unusual for us to be negative. I think the most unpredictable thing is not necessarily the The demand coming across, I think clearly it's going to be soft. Everybody thinks it's going to be soft. I think what happens to pricing as we move through the quarter. We do anticipate our substitute line haul to continue to be down compared to where it was, you know, over the last year. You know, even Jack talked about building products and where that goes with a slowdown in housing. Automotive is still relatively strong, which is, you know, that's the one thing keeping, you know, keeping the volumes up a little bit. So keep an eye on And the other piece would be the demand from 3PLs. One of the things we're very good at is finding truck capacity, and a lot of the 3PLs or the other carriers look to us when they can't find a truck in a very tight market. And as that loosens up, we see that drop off a little faster. So that's another thing we're keeping our eye on. It dropped off. It was that 3PL business where we haul for another carrier, another broker, or a 3PL when they're just looking for truck capacity, or they use us permanently like we're part of their network. That drops off a little quicker. It was 23% of revenue last year, and it dropped down about 18% of revenue now, so we're keeping an eye on that too as the demand coming in. As tender rejection rates go from 80% up to 95%, when you're accepting 95%, that business slows down a little quicker than most as seen in the substitute line haul line.
spk10: All right. Thank you. Appreciate it.
spk00: Thank you. And our next question is from the line of Scott Schneeberger of Oppenheimer. Your line is now open.
spk01: Thanks very much. Good morning. Jimmy and Tony, in the building products category, are you predominantly building residential or is there a large non-res component? And can you give us an idea for where that shakes out? And then I'll have a follow-up similar. Thanks.
spk04: It's a mix of both. It's not generally, I mean, you know, you could be doing, you know, lumber into commercial. So, you know, it's not, and it's not We're not doing a lot of the home stuff. We are doing shingles and stuff like that for some of the new buildings. But, you know, I don't think we split it out between whether the demand's coming in from residential or it's coming in from the commercial side. We generally may not even know what it is, right? We may be moving stuff to yards and stuff where we're not necessarily bringing it to final destination.
spk01: Yeah, understandable. And probably tricky to answer this next one, too. It's along the same ilk. But just given limited visibility in the business model. But Infrastructure, Bill, things coming up for next year, are you catching any wind just through shippers of, you know, and not just limited to that, but maybe chip plants, large energy, alternative energy projects? Are you catching wind of anything like that that can be very beneficial or contributing next year or just not have the visibility there?
spk04: Well, there's nothing right now that would move the needle that we're aware of in any of the sectors where people are talking about some spike in business coming off from some of the things you mentioned. Not right now.
spk01: Okay. Fair enough. Last real quick one from me. Any thoughts on investment spending as you kind of touched upon it earlier in the call, but thoughts about any changes, acceleration or deceleration, with investment spending in the business going forward?
spk04: Well, I think you've got the two things where we spend, right, is trailing equipment and then technology. The technology spend is probably going to be consistent year over year, so what's happening on that side, it's the cash spend is probably going to be about the same, but the depreciation as we roll out these new tools is depreciation is starting to grow because you're starting to capitalize stuff that was sitting in prepaids as we launch. So you're going to see an increase in the depreciation on the technology going forward. Maybe not the cash spend, but the technology. And then as it relates to trailing equipment, still I think the industry is struggling with building out enough trailers for the demand. As I said, I think at the end of the second quarter, we're getting quotes on new trailers in the $50,000 range when we were paying $35,000. We have been unable to restock. We keep our trailers about seven years, and we've been unable to replace them on a seven-year cycle. And so when we start replacing them, clearly the depreciation is going to be higher, the cash spend is going to be higher because no one can predict what a trailer is going to cost us as we start trying to get new ones back in the system next year. Mostly replacement. We're not growing the fleet. We're just trying to replace, but the cost of a trailer is significantly higher today than it was just a year ago. So that's really where we spend, right? It's the two biggest points of investment is our trailing equipment, our technology. And the technology for us is a little more predictable. The trailers, we'll see what happens when we can get our orders in for next year and see what those trailers are going to cost.
spk01: Thanks very much.
spk00: Thank you. If you would like to ask a question, please press star 1 on your touchtone phone. Once again, that is star 1 to ask a question. Our next question is from the line of Bruce Chan of Stifel. Your line is now open.
spk11: Hey, good morning, gents. Appreciate all the color here on end market demand. But if I look at things from a geographic standpoint, wondering if there's anything to maybe call out here. Is there more maybe east to west, and do you think that's having any impact on your revenue per load?
spk04: I don't think there's any mixed issues in the revenue per load. We're pretty spread out geographically. Like, we don't have any, I mean, clearly the concentrate's coming out of California and Texas and Florida and all those major hubs. But, you know, I don't think there's been a shift in geographic that would drive that change in our revenue per load. That's not moving the needle much at all.
spk11: Okay, got it. No, that's clear. And then maybe just one quick one here on intermodal. I know it's small, but You know, volume drop-off is continuing to kind of get steeper there. Is that just rail fluidity or cheaper truck spread, anything else happening there?
spk08: Yeah, Bruce, this is Rob. I mean, it's a couple different things for us. It is very small, and really for us it constitutes kind of it goes with the consumer spending, right? It's two main customers, two of our agents. One is electronics and one is food-based, and that's kind of been our decline there.
spk11: Okay, has that kind of leveled off, or do you expect that to kind of continue to sink a little further?
spk08: I think it's leveled off for now. The electronics piece of it, the food, it kind of ebbs and flows for how we work in that market. But I don't anticipate anything different than those two accounts at present.
spk11: Okay, perfect. Appreciate the time.
spk08: Sure.
spk00: At this time, I show no further questions. I would like to turn the call back over to you, sir, for closing remarks.
spk04: Thank you. Looking forward, the current economic environment with high inflation and slowing consumer demand makes for what we anticipate will be a more challenging freight environment during the 2022 fourth quarter than we experienced during the first three quarters of this year. Nevertheless, our 2022 performance thus far has been exceptional. Going forward, we expect that even with inflation driving higher costs tied to labor, equipment, and insurance, the resiliency of Landstar's variable cost business model will continue to generate significant free cash flow and financial returns. Thank you, and I look forward to speaking with you again on our 2022 fourth quarter and year-end conference call, currently scheduled for Thursday, February 2nd. Have a good day.
spk00: Thank you for joining the conference call today. Have a good morning. Please disconnect your lines at this time.
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