Landstar System Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 13 speakers on the call.

Operator

Good morning, and welcome to Landstar Systems Inc. 2nd 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.

Operator

Joining us today from Landstar are Jim Gattoni, President and CEO Jim Todd, Vice President and CFO Joe Beacom, Vice President and Chief Safety and Operations Officer. Now I would like to turn the call over to Mr. Jim Gazzoni. Sir, you may begin.

Speaker 1

Thank you. Good morning, and welcome to Labstar's 2023 2nd Q1 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. Questions made during this conference call that are not based on historical facts are forward looking statements.

Speaker 1

During this conference call, we may make statements that contain forward looking information that relates to Landstar's questions. Such information is by nature subject to uncertainties and risks, including but not limited to the operational, financial and legal risks detailed in LifeStar's Form 10 ks for the 2022 fiscal year described in the section Risk Factors and other SEC filings from time to time. These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward looking information unless quarter. Before beginning my discussion of our 2023 second quarter financial performance, I want to briefly discuss 2 big picture items, freight cycles and seasonal trends that provide context to this year's results.

Speaker 1

Lessar's revenue performance through the freight cycles that occurred over the past 3 years ultimately set the stage for where we are today. Generally, in the ordinary course of our business, we experienced spot market down cycles that drive revenue from peak to trough as well as up cycles that drive revenue from trough to peak. In both cases, the typical spot market freight cycle from peak to trough or trough to peak occurs over a period of 6 to 8 quarters. And these cycles are typically driven by 3 main factors: The level of industry demand for freight services, the level of a belt truck capacity industry in the industry and the differential comes from the line of the line of the line of sight. Looking back over the last 3 years, Landstar's trough quarterly revenue occurred in the 20 22nd quarter at the beginning of the pandemic.

Speaker 1

Landstar's peak quarterly revenue occurred 8 quarters later in the 2022 Q2. From 20 22nd quarter revenue Q2. Landstar has experienced a down cycle during which quarterly revenue has thus far decreased each quarter over the past 4 quarters. Current conditions make it difficult to predict exactly when the current down cycle will end and revenue will again begin to cycle upwards. Question comes from the line of David.

Speaker 1

Two of the three key factors that drive this fight cycles are trending normally given the period of the cycle we are in. 1, as the truck availability, truck orders have recently slowed And 2, contract freight rates remain well above spot freight rates. However, the 3rd key factor driving cycles demand continues to be soft, For purposes of my remarks today, normal seasonal patterns refers to revenue load count and or pricing trends from 2015 to 2019 and excludes 2020, 2021 2022 due to the highly unusual dynamics reflected in those quarterly metrics during the pandemic driven freight cycle. Now to the 20 Q2. Included on our April 26, 1st quarter earnings release, we provided revenue guidance of $1,400,000,000 to $1,450,000,000 We updated the 2nd quarter guidance via an 8 ks filed with the SEC on May 23 in anticipation of an upcoming investor conference.

Speaker 1

In that 8 ks, we load revenue and earnings guidance due mostly to both revenue per truckload and the number of loads hauled via truck through mid May, trending below the estimates question comes from the line of our financial guidance. That update reduced the revenue guidance to $1,325,000,000 to $1,375,000,000 Our initial 2nd quarter earnings per share guidance was $1.90 to $2 Our updated earnings per share guidance based on the lower revenue guidance was As we enter 2023, it was clear we were facing very difficult year over year financial comparisons coming off back to back record years in 2021 2022, driven by the strong consumer demand and tight truck capacity. In fact, beginning in the 2022 Q2 and through the 2022 Q1, Both truckload volume and revenue per load consistently outperformed sequential quarter to quarter normal seasonal patterns. This outperformance came to an end in the 2022 Q2. From the 2022 Q3 through the 2023 Q2, Truckload volumes and revenue per truckload underperformed normal seasonal trends.

Speaker 1

Overall, total truck revenue was $1,247,000,000 in the 2023 quarter, 29% below the 2022 Q2 on a 16% decrease in load volume and a 15% decrease in revenue per load. Rail, Air and Ocean Services in the 2023 Q2 were 50% or $102,000,000 below the 2022 Q2. The question. The significant decrease in non truck transportation revenue was in line with our expectations of lower volumes across all non truck modes and the expectation of a significant decrease in Ocean revenue per shipment. Although revenue in the 2023 first half was below the 2022 first half by 20 9%.

Speaker 1

One needs to put the impact of the pandemic driven growth in perspective. Even given the significant softness in demand compared to the fiscal 2022. 2023 first half revenue exceeded 2019 first half revenue by more than 35%. As it relates to truckload volume, Landstar's normal seasonal patterns exhibited average growth of approximately 8% From the Q1 to the Q2. Given the softness in freight demand, actual second quarter truckload volume was 1% below the 2023 1st quarter, in line with our updated guidance, but well below normal seasonal patterns.

Speaker 1

Even with the decrease we experienced in truckload volume from the Q1 to the 2nd quarter, Truckload volume in the 2023 Q2 was still Lancer's 3rd best all time second quarter truckload count behind only the consecutive quarter record set in 2021 2022. The inconsistency in pricing month to month has been very atypical from a seasonal Q2 guidance. As April came to an end, rates took a sharp downturn and settled almost 5% below March. Over the past 16 months since reaching its peak in February 2022, month to month sequential change in truck revenue per load have trended worse than normal seasonal patterns in all but Q4 months. Most recently, in a positive development, May to June revenue per truckload increased modestly.

Speaker 1

However, performance was still below normal seasonal patterns. After the breakdown of trucks' transportation revenue by equipment type, unsighted platform equipment held up better than revenue of the VAN equipment and other truck transportation services. The quarter over prior year quarter revenue comparisons for van are much more challenging than that for revenue hold on unsighted platform equipment, especially as it pertains to revenue per load. The The pandemic driven spike in consumer demand drove van revenue per load from its trough in May 2020 to its peak in February 2022, up 76%, While revenue per load on on-site equipment increased 54% from its low point in May 2020 to its peak in July 2022. I believe that rates in the spot market will stay relatively higher than pre pandemic levels, Given the significant amount of additional cost to operate a truck today.

Speaker 1

Based on industry data from ATRI, the cost to operate a truck Q1 of 2019, excluding

Speaker 2

fuel costs in fiscal year 2022

Speaker 1

was approximately 20% greater than in 2019, during which also experienced a relatively soft freight environment. Cost pressures, particularly on smaller carriers, there is relatively little room for further spot market rate decreases. Total loads in the 2023 Q2 was 17% below 2022 Q2. Truckload volume is somewhat influenced by Landstar's customer type. For example, Landstar provides truck capacity to other trucking companies, Revenue held on behalf of other truck transportation companies was 16% 20% of transportation revenue in the 2023 2022 2nd quarters respectively.

Speaker 1

During periods of tight truck capacity, other trucking companies, 3PLs and truck brokers Reach out to Landstar to provide truck capacity more often than during times of more readily available truck capacity. The freight hauled by Landstar on behalf of other truck transportation companies companies in the 2023 Q2 was 28% below the 2022 Q2, contributing significantly to the overall decrease in quarter over prior year quarter volume. During the quarter, BCO truck count decreased by 261 trucks, a relative improvement compared to the 4 72 truck decrease we experienced in the 20 Q1. Overall, BCO truck count has decreased approximately 11% since the end of the 2022 Q2. It is typical to incur increased turnover in BCO truck count when truck rates decrease.

Speaker 1

Over the past 12 months, truck rates have decreased at a rapid pace, 12 month rolling average turnover is currently about 37%, which is very similar to the 36% turnover rate Landstar experienced in Q1 of 2019 during the most recent relatively comparable soft freight environment. I will now pass to Jim Todd to comment on other additional P and L metrics

Speaker 3

the Thanks, Jim. Jim Gee has covered certain information on our 2023 Q2, so I will cover various other second quarter Q2. Gross profit margin was 10.2 percent of revenue in the 2023 Q2 as compared to gross profit margin of 10.5% the corresponding period of 2022. In 2023 second quarter, variable contribution was $198,200,000 compared to 200 quarter. Variable contribution margin was 14.4% of revenue in the 2023 second quarter Q1 compared to 13.5% in the same period last year.

Speaker 3

The increase in variable contribution margin compared to the 2022 Q2 was primarily attributable question comes from the line of John. 1, an increased variable contribution margin on revenue generated by truck brokerage carriers as the rate paid to truck brokerage carriers in the 2023 second quarter 13,500,000 in the 2023 Q2 compared to $10,400,000 in 2022. This increase was Q1 of 2019, primarily due to an increased provision for contractor bad debt and increased trailing equipment maintenance costs, partially offset by increased gains on sales of used trailing equipment. Insurance and claims costs were $29,800,000 in the 2023 Q2 compared to $34,100,000 in 2022. The decrease in insurance and claims costs as compared to 2022 was primarily attributable to a decreased severity of accidents during the 2023 period.

Speaker 3

Quarter was primarily attributable to increased cargo claim expense. Selling, general and administrative costs were $54,500,000 in the 2023 second quarter compared to $59,000,000 in 2022. The decrease in selling, general and administrative costs was primarily question comes from the line of David. Partially offset by increased information technology costs and increased wages. In the 2023 Q2, the provision for compensation under variable programs Looking at our balance sheet, we ended the quarter with cash and short term investments of $419,000,000 Cash flow from operations for the first half of twenty twenty three was $192,000,000 and cash capital expenditures were $13,000,000 Back to you, Jim.

Speaker 3

Thanks, Jim. 2022 Q2 makes for

Speaker 1

a very difficult year over year comparison to the 2023 Q2. Following the 2022 Q2, 2022 Q3 truckload pricing and truckload volume both experienced below normal seasonal average sequential growth rates. One would expect this to make 2023 Q3 2022 Q3 comparison slightly less challenging than what we have faced during the 2 most recent quarters. However, to date, through the 1st few weeks of the 2023 Q3, we have not seen significant consistency in truck revenue per load on a day to day basis. Quarter.

Speaker 1

Accordingly, volatility in revenue per load and to a lesser degree truckload volume make predicting near term performance very challenging. Yesterday's earnings release made note that early truck We expect 2023 3rd quarter truckload pricing to be 10% to 12% below the 2022 Q3. Given those estimates, the number of loads hauled via truck is expected to be approximately 6% below the 2023 second quarter We also expect revenue from our non truck modes to be similar to that of the 2023 Q2. Based on the assumptions mentioned, We expect revenue in the 2023 Q3 to be in a range of $1,275,000,000 to $1,325,000,000 Earnings per share to be in a range of $1.65 to $1.75 The 2023 Q3 guidance incorporates a variable contribution margin range of

Speaker 2

quarter is approximately 14.4 percent to

Speaker 1

14.6 percent and insurance and claim costs somewhat similar to 2023 first half as a percent of BCO revenue. We don't expect much change to overall freight economy in the 2023 Q3 compared to what we experienced in the 2023 first half. Overall though demand for freight transportation question comes from the line of John. Directionally, it is difficult to forecast truckload volume levels beyond the next few months as future economic conditions are very unpredictable. Regardless of the economic environment of Landstar's challenging year over year comparisons, the resiliency of Landstar's private cost business model continues to generate significant free cash flow.

Speaker 1

Question

Speaker 2

comes from the line

Speaker 4

of David. I discussed the significant unprecedented favorable

Speaker 1

impact the pandemic driven consumer demand and supply chain disruption had on the company's revenue in fiscal years 2021 2022. Although we are in a freight cycle that varies significantly from 2021 to 2022, where revenue increased over those 2 years by 80%. Assuming we achieve the revenue provided in the Q3 guidance plus a similar amount of revenue during the Q4, fiscal year 2023 revenue will exceed pre pandemic 2019 by 30% to 35%. And with that, Belle, we will open to questions.

Operator

We have the first question coming from the line of Jon Chappell from Evercore. Your line is now open.

Speaker 5

Good morning. Thank you. Jim, Thanks for all that detail. Between trying to I know you don't unpack by line item, but given the fact that Van is such a big mover And you mentioned that some of the more difficult, I think, comparisons are there. I'm just trying to figure out, is it bottoming from a Load perspective, it seems like maybe the Q3 may be the bottoming from the load perspective, whereas the revenue per load May have already had bottomed in the Q2.

Speaker 5

Is that the right way to think about that just from using the van and backing into your bigger picture guidance numbers for the quarter?

Speaker 1

I would like to be able to confirm that. But as we mentioned in my prepared, we actually are anticipating Continued seasonal softness on both the van and flats, if you break it down to that level of detail, because we've seen nothing to indicate that we're going to start Either the bottom, which we hope we are at the bottom or any acceleration of growth off of this where we are today. So I would say that both equipment types are Generally trending in the same direction and it's not a significant drop off. We're just where you might see rates typically go up 1% into the Q3, we're seeing maybe soften or be 0.5% or 1% down. It's not significant it's not like it was, but it's still trending seasonally question comes from the line of Peter.

Speaker 5

Okay. That's helpful. And then secondly, there's a lot of disruption in the market Right now, probably more so than at any time since spring of 2020. Have you seen any changes in the sentiment around from your customers? And again, this kind of relates We had companies potentially going out of business, potential strikes, I think, free flow shift from one side of the country to the other.

Speaker 5

Any kind of view from your customers that they're in a bit more of a rush for capacity than maybe over the last 12 months? And question comes from the line of Danfelter specifically from some of these moving chest pieces.

Speaker 1

Yes, I'd say 2 of the bigger disruptors that have been discussed recently are the A little more LTL parcel type businesses that don't directly affect us, other than the fact that if Something does occur with one of those and we need to move freight between DCs for a different carrier that could impact us, but I wouldn't say it's very significant. As the shift in geographic regions, I think those were as stuff was moving to the East Coast over the last few years of West Coast, so I don't think there's any impact there directly that hasn't already occurred for us. So I'm not seeing that. When you speak to there are some things happening. You talk about Carrier bankruptcies or carriers leaving the market or the number of available trucks out there.

Speaker 1

In very isolated areas right now, we are seeing trucks question comes from the line of Chris. We're going to push rates up a little bit, which we hadn't seen probably since the end of 2022, but it's not across the board. It's very specific Probably West Coast where they're dealing with some regulatory issues on how many trucks are out there and independent contractor status. Other than that, it's kind of Same as it's been for the last 6 or 8 months. So nothing special really driving us to have any considerations of an upward tick yet.

Speaker 5

Got it. That's very helpful. Thank you, Jim.

Speaker 2

Yes.

Operator

We will move to the next person coming from The Scott Group of Wolfe Research. Your line is now

Speaker 6

Hey, thanks. Good morning. Just want to clarify a couple of things first. So volumes starting July are underperforming seasonality. Jim, you're assuming that they continue to underperform seasonality in August September, is that right?

Speaker 1

Yes, that is absolutely right.

Speaker 6

And the thought process on that is?

Speaker 1

To be honest, we missed the Q2 when we released April. And what we projected when we put the Q2 guidance together was sequential improvement in normal seasonal patterns. And since we haven't seen that in next 6 or 7 months. We just we played a little conservative on trending seasonally. Kind of where it's been is missing the seasonal trends by 1% or 2%.

Speaker 1

So That was the logic. Do I see patterns? Can I guess August? No. There's nothing indicating other than trends to be honest with you,

Speaker 6

Okay, fair enough. And then on the yellow question, do you are you seeing any pickup in Your substitute line haul business, do you think you would start to see that as maybe some carriers that picking up share need some increased Line haul capacity?

Speaker 1

I would expect, yes, we would see that, but I would say it's clearly not going to be material to any the Q3 or Q4. It's not by the end of Q3, if we get something, it probably wouldn't even be something to hit our radar or even talk about. So not material.

Speaker 6

I know just big picture taking a step back, you've had good views, calls of where we are in the cycle. Do you Are we at the bottom? Are you comfortable enough to say that? Do you see that? What's your view?

Speaker 1

I would like I don't know if I can to be honest with you because as we just talked about as our seasonal trends continue to be below normal, which would indicate We're not there yet. Now I'd say that the seasonal more the abnormal below seasonal trends has slowed a little bit, but we're still tracking it slightly below seasonal trends. So I would not It's not just demand and the number of trucks in the system. It actually has to do with the contract and spot pricing, right? Spot pricing and contract are pretty far away right now.

Speaker 1

But we're still seeing a little more pressure on the contract side and the spot prices aren't coming up yet. But I think on that when I talk about the 6 to 8 quarter trends, I'm still a believer that puts us in sometime the end of 2023 beginning of 2024. And I'm still a believer that happens. But who knows what happens with demand. To me, the big question is, does demand continue to slip or is it going to actually going to start to Coming off this where we are right now.

Speaker 1

That's kind of where I hesitate on giving an answer on if we're at the bottom.

Speaker 6

So hopeful, but visibility is left. Okay.

Speaker 1

Yes.

Speaker 6

Thank you, Jim. Appreciate the time.

Operator

Yes. We will move now to the next question coming from the line of Jack Atkins of Stephens. Your line is now open.

Speaker 7

Hey, great. Good morning, guys. Thanks for taking my questions. So I guess maybe if we could kind of go back to the cycle thoughts for a moment, I'd love to kind of take a look at this from a capacity quarter end of the quarter. Joe, is there anything maybe you can kind of help us with in terms of thinking about the decrease that you're seeing both in terms of the On the BCO front and in the active brokers, 3rd party broker carriers, can you maybe talk about what do you think is driving that?

Speaker 7

Is that retirements maybe or is that the effect of capacity attrition?

Speaker 8

Yes, Jack. I think what's driving it is Kind of all of the above. I think what's primarily the driver is the demand environment and the rate environment. I think Jim said in his remarks that When rate declines, we tend to see more terminations. And I really think that's we react very, I think, quickly on the BCO front to question comes from the line of John.

Speaker 8

And I'm just going to go back here. I've got some just some quick numbers from back to 2017 as we saw the economy strengthened from 'seventeen into 'seventeen. So we added 257 trucks in 'seventeen, continued strength into 'eighteen. We added 903 that year. It softened a little bit in 2019.

Speaker 8

We lost 356. We all know what happened in 2020. We added 748 in the back Q3 of the year. We added 873 in 2021 because it was a good year. We lost 583 mostly in the back half quarter.

Speaker 8

Last year and we're down 733 in the 1st two quarters of this year. So we our BCOs just tend to be very reactionary to that rate and price. And so a lot of them some of them have retired for sure. Some took the opportunity to sell their equipment when it was at premium and decided to either retire or do something different or go drive for somebody else. We saw some of that.

Speaker 8

We saw repairs and the difficulty in the costs It was a pretty big impact for the last few quarters. That's lessening a little bit. It's really it's kind of an all of the above Kind of answer to the question, Jack. From a BCO perspective, on the carrier side, the net revocations are moving negative. I think the The number of carriers that people thought might be leaving the industry is maybe a little lighter than it than some were thinking.

Speaker 8

And I would agree with that. I just don't know if the data that we get is as accurate and timely as the BCO data that obviously that we have and that there's new still new carriers coming into the system at a rate that's Can't be an owner operator, you got to be on your own authority. There's some impact there, I think. But generally, I mean, if you look at like the trucking Conditions Index from FTR or anything of that sort. It's just a tough time.

Speaker 8

The ATRI data speaks to that. I mean, it's just a tough I think to be out there. And so I think that's what's leading to some of the turnover and the reluctance to come into the market as it question comes from the line of John.

Speaker 7

Okay. That's super helpful. Thank you for that. And then I guess maybe, Jim, for you, any sort of indication from your customers around peak season? I know it may be still early, but are you hearing anything around Commentary from them on what they might need from you, how to prepare for that, or is it just kind of still TBD?

Speaker 1

I think it's all TBD. I think from a customer standpoint, I think they're probably about as confident as we are coming into peak season. I will give you one little thing and don't this is not a big thing, but we hear that there's one thing that during peak season we get requests for trailing equipment Coming into the end of the year, and it's the request for trailing equipment has been way, way down over the last probably 2, 3 quarters. We did see a slight increase in request for trailers going into the Q4, but that's all I got. Other than that, it just seems like we're going to just grind through this through the end of the year.

Speaker 7

Okay. Okay. I really appreciate the commentary guys. Thank you.

Speaker 1

Yes.

Operator

We will move now to the next question comes from the line of Bascome Majors of Susquehanna. Your line is now open.

Speaker 9

Jim, you're a self described Cycle guy here. If I look at how you've operated through cycles historically, usually when you have down years, Landstar's top line and bottom line recover Pretty quickly in the year after, if we look at, say, 2014 or second half of twenty twenty or even some earlier periods. But There is one analog around the peak of the mid-two thousand cycle where things kind of flat lined for a few years I'm curious as you look at the cycle that we're coming out of today, is there any rhyme or reason to some of these question comes from the line

Speaker 2

of John.

Speaker 1

Well, very unusual down year this year, right, because the peak to It's bigger than it's ever been. So it's really hard to gauge where the next peak is. I mean, I think that's what we're trying to figure out and we try to figure that internally. You look at truck rates right now and where they are over the next 12 to 18 months, I could see them climbing back 10%, Which is pretty beneficial. The peak to trough over the last 6 probably years has been much more significant than it was prior to that.

Speaker 1

And I'm not sure if that's due to Access to pricing information coming from the DATs of the world stuff like that, because if I go back in 2010, 2011, We're getting bids from 12 shippers and we're putting our pricing in there using that. Now they can see all the pricing data and that may be driving this higher to lower. So my expectations, we're not going to see near the spike. The 2021 to 2022 peak spike when it grew when van pricing grew 76%. But I would expect you're going to see better than those flat years, just based on the performance here and the things we've done with whether it's technology And the driving agent sales and recruiting more agents into the system, other than that, it's really hard to project We really need demand to pick up from the consumer side.

Speaker 1

But I think we're well prepared the new tools we build up pricing tools. We're building efficiencies within the agent's office, so they can do more with the same number of people they have. That's really our goal is to make sure when this thing turns, we can attack volume better than we have in the past.

Speaker 9

Thank you for that. I don't know which Jim wants to answer this, but can whenever that return to maybe not quite as fast as 2021 recovery, but still but not a flat line. When that comes, can you walk us through question How you flex the model on the upside financially? What needs to come back from incentive comp or other costs that are kind of out of the system in the downturn? Just how do we think about the leverage you get when that revenue line starts pointing up again?

Speaker 9

Thank you.

Speaker 1

Well, one thing we've always talked about is incremental As we grow the variable contribution, which is I'm an old guy, so I'm not allowed to refer to it as gross profit, so I have to call variable contribution. We talked about the leverage we get off of growth and variable contribution and 2023 clearly hopefully going to be our trough year. We believe that we can push 70% of the growth in incremental growth in variable contributions through the bottom through the operating That's our goal. One thing you got to think about though is coming off a year like 2023 where our incentive compensation, Our variable programs are relatively low or almost 0 sometimes. We do have that headwind going into the 2024 year, But come into 2025, when you start booking that, things start to grow again.

Speaker 1

We do believe we can get back to that 70% pass through So there's a lot of leverage in the organization because the infrastructure is built. 70% or so of our SG and A headcount, but we don't really have to grow headcount too much as we put more volume on top of this business model. So I'd say we would not I wouldn't project for 20 2024 being a 70% push through because we do have that variable compensation programs that actually travel with our earnings. Well, in 2025, I think the goal is to go back to pushing 70% growth of variable contribution. And Jim can talk about the incentive comp and The variable compensation programs and what kind of headwind we're talking about.

Speaker 3

Yes, Bassam, so if you recall back in February, And then Q1, I updated that to $16,000,000 to $18,000,000 Well, now second quarter, I can say $20,000,000 is best case now on Tailwinds 23 versus 22. And as such, flipping to 24 to Jim's point, kind of a one time if we hit our numbers, I would anticipate About an $11,000,000 headwind on those programs 2024 versus 23.

Speaker 9

Thank you both. It's very helpful.

Speaker 1

That's the biggest variable for our cost. Well, that and the unpredictability of the insurance line. Everything else is pretty question comes

Speaker 2

from the line

Speaker 1

of Frank. Other than a little bit inflation, you got inflation on the maintenance on trailers. We had a little bit inflation on wages question Other than that, but typically the infrastructure is kind of set except for the unpredictability of the insurance line and the variable compensation program.

Speaker 9

Thank you both.

Operator

We will move to the next question coming from the line of Stephanie Moore of Jefferies. Your line is now open.

Speaker 10

Hi, good morning. Thank you. I appreciate all the cycle color that you've given so thus question comes from the line of Mark. And I think it'd be helpful. I think in the past, you definitely have talked about where Landstar can often maybe lag the market, maybe for various reasons that you called out, whether question comes from the line of John.

Speaker 10

No agents response times or dropping out trailers, things like that. So maybe can you talk a little bit about in the event we are seeing a turn in the cycle Broadly from an industry standpoint, when it would start to be a little bit more apparent for you guys, if that makes sense. Thank you.

Speaker 1

We watch a lot of the industry data that everybody else watches, right, whether it's coming off of DAT or the FTR data or things like that. We try and track. Now our when you look at our revenue slight lag. And if the lag is maybe 30 days, you'd see that maybe the pricing, even looking at the industry, is starting to climb a little bit, but we're still relatively flat. We tend to not react fast enough on both sides, on the downside or the upside.

Speaker 1

So if we start to see tick ups in that industry data, we probably lag that by a month or 2. But right now, we're not you're not seeing much. The only other positive sign we had actually, I think it was the first time in 15 months, BCO revenue per mile, which excludes fuel, actually ticked up from May to June, all right? So there's another small thing we saw that kind of Could imply that maybe we're seeing the end of the downturns, but we're not confident enough to say that because it was 1 month. So we see that and we think a little bit, hey, look, we've seen the positive Trends on the van revenue per mile on the BCO side, but it's 1 month that we're not confident yet that it's going to stick.

Speaker 1

So that's kind of stuff we watch. It's mostly on the rate The volume side is up to us to drive volume, right? And demand will drive our volumes a little bit, but we're out there trying to sell.

Speaker 10

Got it. No, I appreciate it. And then just, my follow-up. I wanted to touch a little bit on capital allocation and maybe quarter, which seems a little unlike you guys. So just maybe an updated thoughts on share repos and normal capital allocation.

Speaker 3

Hey, Stephanie. No change, same approach. When we are price sensitive and we don't chase run ups, we'll be patient and the cost of being patient is a lot less today than it was 12, 18, 24 months ago.

Operator

We will move now to the next person who is Amit Mehrotra of Deutsche Bank. Your line is now open.

Speaker 11

Hi, good morning. This is Ben Moore calling in for Amit. Wanted to ask a little further about your BCO count Down to the 9,700 handle. It looks like in 4Q 2019, it led down further at the time to 95 handle. And then 1Q 2020 COVID led down further to a 94 handle.

Speaker 11

What would you say the current 97 handle that's Signaling to you, what could it point to, with respect to where we are in the cycle? Could it leg down further? Do you sense that that might be the bottom?

Speaker 8

Yes. Ben, I think in July, we're seeing a little bit further decline. But I would In Q2 overall, I think we saw a slower net decline. I would like to think we'll see something similar in Q3. And then really again depending on demand and price maybe we hope to flatten out in Q4.

Speaker 8

But right now Q2 is a slowing net decline. Our adds are improving sequentially, additions of new equipment, both sequentially and year over year. Our terminations Are improving sequentially, but still well behind the prior year. And our utilization is improving. So BC utilization is improving.

Speaker 8

It was minus 5% in Q1, it's minus 3% in Q2. And in the month of June, it was actually flat to prior year. So hopefully, that's a good trend line that quarter continues based on the macro environment and what happens with demand. But I think we could be coming close to the bottom by year end.

Speaker 11

Great, thanks. And kind of piggybacking on a question earlier on the rest of the industry, Just focusing on the yellow situation. Would you say it might be benefiting you in terms of out And if so, what would you expect the cadence of this freight in terms of finding new carriers? Could it be a few months to settle?

Speaker 1

We don't anticipate any significant volume coming to us from any kind of yellow bankruptcy or anything like that. There might be something, but like I said, I can't imagine something we'd be talking about moving the needle in the Q3

Operator

We will move now to the next person who is Bruce Chan of Stifel. Your line is now open.

Speaker 12

Everyone, thanks for the question. Jim, maybe getting away from the cycle a little bit. We're, call it, 5 years and a couple of cycles past the hullabaloo of digital brokerage and we're seeing maybe a new kind of tech disruption du jour in AI. So I wanted to ask you, I guess, number 1, Do you see much potential for disruption from AI in either your business or in the brokerage industry? And are there any early investments or exploratory investments that You can make here on behalf of your agents.

Speaker 1

Yes. I would say that you get paid to move freight from point A to point B, Right. And it's how efficiently and effectively you communicate the data back and forth between the truck and the shipper and pricing. So the AI technology to me is more about Improving communications and efficiency and how you communicate between the carrier and the customer and satisfy their needs. But remember what we get paid to do is pick up question comes from the line of Chris.

Speaker 1

We're working on improving our efficiencies within whether it's call volumes or pricing tools or how quickly we can get credit out to the carriers and how we communicate with customers. Absolutely, We are on it. Do I think it's anything different than Uber or those guys coming in and saying they're going to disrupt the industry and Just intermediate brokers, I don't think that's there. I think what you got to do is just keep up with the latest technologies. And I think everybody is doing the same thing.

Speaker 1

If you recall block question comes from the line of the question. And everybody got on that bandwagon for a while. AI has probably got more it has definitely got more usefulness than what blockchain had, We're on it, but I don't think there's one thing we talk a lot about here is that the accurate spot market pricing predictions, right? And you use all these historical stuff, you throw algorithms on top of it. And for someone to tell you that they can tell you what spot pricing is in 6 months, you're using data that changes daily.

Speaker 1

No one and I think I remember about 6 or 7 years ago, we had someone competing us and they could give you spot market pricing in 6 months. I think kind of the same thing about AI, right? It's taking historical data and turning it into something they're trying to project in a very volatile spot market industry. And the other thing like I said, It's going to be very useful in communications with chats and stuff like that and communicating and getting quotes out quicker to the customers and getting information quicker to the customer. To me that's what AI is all about and improved algorithms on optimizing your freight lanes and stuff.

Speaker 12

Okay. That's great. Thanks for the insight.

Speaker 1

Yes.

Operator

We have our last person to ask the question coming from the line of Scott Schneeberger of Oppenheimer. Your line is now open.

Speaker 4

Thanks very much. Good morning, all. I wanted to focus a little bit on the industrial end markets. It looks like Machinery, building products, I'd say doing a little bit better than consumer and other categories. Jim Ji, could you speak to the kind of the trends that you're seeing?

Speaker 4

I think in one of the first questions you mentioned, you didn't want to call a bottom on volume How has it trended this year? Do you see a lot of opportunity for the back half? Is that just conservatism or maybe some green shoots and more opportunities to come?

Speaker 1

Yes, I mentioned the only green shoots I have, which was we saw BCO van revenue go up in from May to June and maybe Carriers are looking for a little more money in certain regions, but that isn't really all over the place. It's very limited. But When I look at what's going on with machinery and building products from a growth perspective, from a volume perspective, the They're down west because they weren't up as much as consumer durables, right? So I think you're looking at year over year comparisons, a quarter over comparisons more than seeing Flatbed doing much better than Van at this point, right? I think the anticipation was that flatbed was going to turn the corner with manufacturing and probably 6 months ago.

Speaker 1

And I don't see any as if people would call green shoots yet that would indicate we're going to see any change in that. Again, like I said, building products from a building products and machinery from the standpoint of year over year comparisons are doing better, but I think that's They weren't the drivers of the growth during the pandemic. It was a lot of consumer doorbells type things. So I would say that's what we're looking at. And I'll just stick with the we hope we're at a trough or a bottom, but I'm not the guy to call that yet.

Speaker 4

Thanks. Appreciate that color. And then kind of following up on Bruce's question about he was asking more kind of about AI competitive threats in the industry. Curious, I want to ask about what you're doing with your tech spend this year. It seems like you were shifting the pattern given environment given the shift in your spend a little bit this year.

Speaker 4

Just an update there and Any comments you may have on digital tools and how that progress is going in your system? Thanks.

Speaker 2

Yes.

Speaker 1

When I took over back in 2015, well I took over. When I got the role of CEO and President in 2015, I put on a big push to improve technology in the organization and create the digital tools as opposed to being on our IBM iMainframe, which is green screens, a little clunky. And we've accomplished a lot over the last 6 years, but we still will be tweaking everything. But the spend from 2014 to 2015, 2015 to 2016, 2016 to 2017 really climbed as we made investments. I would say right now our spend is pretty consistent year over year, which includes probably $25,000,000 to $30,000,000 Which is really building out more AI tools and digital as compared to probably 6 years ago.

Speaker 1

So the investments are still being made and we're still working on whether it's AI Digital Technologies. It's just now we're more consistent on how we do it. You only have so many subject matter experts within the building and the IT Resources and you can't do a 1,000 things at once with 2 people. That's kind of logic. So we try and we're picking our spots where we think is beneficial, one being AI.

Speaker 1

Well, you talk about digital tools. We've had digital tools. They weren't really called digital back then, but since 'ninety nine, we had Today, it's called Landstar 1, but it's the phone app, right? It's all 100% digital. The BCOs or the carriers can do anything they want on a phone.

Speaker 1

They can see their loads, they can look at pricing, they can identify where fuel stops are. So we're digital and we tend to stay on top of the next best thing and And like I said, we do have a team within the building that's been watching AI and coming up with And using actually some outside help to identify areas where we can improve as it relates to efficiencies built with AI. But I'd say that We're right on we're right up with everybody else or ahead of everybody. The one differentiator for us is the BCO side. Our digital tools are different than people who are question comes from the line of Frank, because they're very specific to the BCOs.

Speaker 1

So we've had experience providing digital tools to Basically dedicated capacity to us since the mid-90s. So we're kind of very good at knowing what the trucks want from And we kind of correlate that and push it out to the 3rd party carriers.

Speaker 4

Got you. Thanks very much. Yeah.

Operator

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

Speaker 1

Thank you. We knew headed into this year that 2023 would be likely be a very tough year coming off our record performance in 2021 to 2022. Nevertheless, absent the U. S. Recession, I expect the normal cyclical patterns common to the spot market freight industry to continue.

Speaker 1

As I said earlier, although it's difficult to say precisely when the current question comes. History suggests we could see an inflection point in late 'twenty three or early 'twenty four. And when that time comes, Landstar's network of agents, 3rd party capacity conference employees will be ready. Thank you, and I look forward to speaking with you again on our 2023 Third Quarter Earnings Conference Call currently scheduled for October 26.

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Key Takeaways

  • Freight cycle downtrend: Landstar’s revenue peaked in 2022 Q2 and has fallen for four straight quarters, driven by soft industry demand, slowing truck capacity growth and a wider gap between contract and spot rates.
  • Q2 2023 results: Total truck revenue was $1.247 billion (–29% YoY) on a 16% drop in load volume and a 15% fall in revenue per load, while rail, air and ocean revenues plunged 50% to $102 million.
  • BCO fleet contraction: Broker-owner-operator truck count fell 11% since 2022 Q2, with turnover near 37%—similar to the last soft cycle in 2019—as lower rates and higher operating costs drive attrition.
  • Margin and cost trends: Q2 2023 gross profit margin eased to 10.2% from 10.5%, but variable contribution margin rose to 14.4% from 13.5%; insurance, claims and SG&A costs also declined YoY.
  • Q3 guidance: Landstar forecasts revenue of $1.275 billion to $1.325 billion and EPS of $1.65 to $1.75, assuming truckload pricing 10–12% below 2022 Q3 and loads about 6% under 2023 Q2 levels.
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Earnings Conference Call
Landstar System Q2 2023
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