Q2 2020 Landstar System Inc Earnings Call
[music].
[laughter].
Good morning, and welcome to Landstar system incorporated second quarter 2020, <unk> earnings release Conference call.
All lines will be Anna 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 arch and get Tony President and CEO, Kevin Stout, Vice President and CFO, Rob Brasher.
Yes, it didn't and Chief commercial Officer, Joe Beacom, Vice President and Chief Safety in operations Officer, now I would like to turn the call over to Mr. Good Tony Sir you may begin.
Thank you much.
Before we begin let me read the falling statement.
The ball is a safe Harbor statement under the private Securities Litigation Reform Act of 1995 seven made during this conference call that are not based on historical facts for forward looking statements.
During this conference call. We may make statements contain forward looking information that relates to lessors business objectives plans strategies and expectations.
Such information is by nature subject to uncertainties and risks, including but not limited to the operational financial and legal risks detailed in Landstars form 10-K for the 2000, making fiscal year described on the section risk factors and other FC filing from time to time.
These risks and uncertainties could cause actual results or does it differ materially from historical results for those anticipated.
Investors should not place undue reliance on such forward looking information and lift or undertakes no obligation to publicly update or revise any forward looking information.
[laughter].
Through the end of last year's first quarter. The Kogan 19 pandemic began to have a significant adverse impact on the U.S. economy.
The rapid decline in industrial output that began in mid March accelerated into April and carry through most of the second quarter.
Although conditions in the industrial markets last our served improved somewhat in June the 2022nd quarter experienced the most significant and rapid reduction of U.S. industrial output in decades.
The company's truckload volume began to experience the adverse economic impact caused by the pandemic in late March when state and local governments began to issue shelter in place mandates and manufacturing facility you started to close.
Several weeks later as truck capacity began to loosen due to severe reduction in demand revenue per load on loads hauled via truck began to rapidly deteriorating.
These conditions persisted through April and most of May fall by relative volume and pricing improvement in June that has continued into the first few weeks of July.
At the beginning of the crisis. The response to the pandemic generate a high demand for perishable consumer goods and much needed medical supplies, while the U.S. manufacturing sector began closing facilities and Furloughing workers.
The speed at which the freight environment deteriorated at the end of the first quarter was like nothing experience in the history of the company.
And the second week of April Landstars ditch, but this past truckload volume reached a peak decrease of almost 27% below the same week of 2019, you'd only four weeks prior was actually 1% above the comparable prior year week.
A few weeks later the downturn in revenue per load on loads hauled via truck peaked at almost 13% below the same week of 2019.
The peak decrease in volume in the second week of April reflected the extensive closure of automotive plants and suppliers throughout the throughout the United States.
To provide some additional context automotive sector loadings, which typically contribute approximately 8% of total landstar revenue experienced a decrease in dispatched volume over 83% in the second week of April compared to same week of the prior year.
For the large declines and load volume during that week were seen in our other top commodity sectors with building products machinery metals, and consumer durables down, 20%, 36%, 40% and 20% respectively.
Those five commodity groups in general contributed 56% of loadings in the 2020 weak compared to 63% of the company's loadings in the 2019 week.
Since the peak decrease in truckload volume in the second week of April both a number of loads and revenue per load on loads hauled via truck have showed significant improvement.
In June the number of almost all via truck was 9% below June 2019, and revenue per load unloads hauled via truck was 6% below prior year June.
Thankfully landstars, rather costs business model is highly resilient to rapid expansion and contractions in man for freight transportation services.
In the 2021st quarter earnings release, we described the impact on earnings under scenario, where revenue was assumed to do decreased from 20%, a 30% compared to the 2019 said quarter.
Under that hypothetical scenario, we said, we would anticipate diluted earnings per share to be in a range of 70 to 85 cents.
That diluted earnings per share estimate did not reflect several expenses that took place in the second quarter.
First and foremost we implemented implemented a pandemic relief incentive program for Landstar BCS and agents.
As we discussed during our first quarter earnings Conference call on April 20, Threerd 2020 under this program for every load delivered by a Bcf in April last or would pay $50 to the bcl hauling load and $50 to the agent dispatching load.
The program was implemented an effort to reduce the financial burden imposed by the impact of the pandemic on our Bcf and agents and a supplement what we expected to be an increase in empty miles for Bcf goes as they look to drive further to access freight opportunities.
As the impact of the pandemic on freight marks became increasingly difficult in April.
We received tremendous positive feedback on the importance of this program and fortifying our network and ultimately extended this relief effort through the month of May.
Overall the cost of this program was $12.6 million were 25 cents per diluted share in the 2022nd quarter.
Second the scenario that we described does not account for asset impairment charges related to the company's Mexico operation of $2.6 million or five cents per diluted share.
This impairment charge, primarily related to intangible assets associated with our interim Mexico business.
That were acquired as part of a small acquisition, we did in Mexico several years ago.
Third we did not anticipate insurance premiums would increase beginning in may at a rate of approximately $1.1 million per month or five cents per diluted share into 2022nd quarter. As you may be aware recent annual premium increases to ensure commercial auto liability for trucking companies have exceeded 200% in some cases.
Last our and news its insurance policies each year on May one.
For the policy period May one 2022 April 30 2021.
Last our aggregate premium expense payable to third party insurance companies for commercial auto liability coverage increased over 175% compared to the premiums we paid for the May want to 2019 to April 32020 policy period.
This increase in our premiums will continue to be an additional headwind to us throughout the rest of the year.
Overall after taking account these three items 2022nd quarter earnings aligned with what we anticipated on their scenario that involved the 20% to 30% reduction in revenue.
The on its financial impact the Cobot 19 pandemic has had tremendous operational impact on our business.
The health and wellbeing of our men the members of our network. The company's over 12, our employees 10000, Pcls 1200 agents and their staff and over 25000 customers and 54000 or the third party capacity prices have always been part of our safety first culture and will remain a priority during these complex times.
During much became clear the last R&D to address potentially unprecedent operational challenge that could result from the pandemic.
The central business, we took actions to ensure freight continue to be delivered safely on time, while we maintain appropriate measures and protocols consist with uplift applicable guidelines provided by health authorities and various government agencies as well as customers.
As it relates to the health and safety, our employees and business continuity. We successfully transitioned almost 1000 of are more than 1200 poised to work at home we continue to operate.
With over 80% of our employees working remotely.
The transition and remote work was and continues to be highly successful even though remote work was the new to almost the entire last our employee base.
As it pertains to the company's transportation network, we expected that the sudden decrease in demand in late March caused by industry closures and sheltered home orders would result in the disruption in the daily routines of many of our company's Pcls and agents.
We implemented a pandemic relief incentive program I already spoke about to help RBC ratios and agents.
We also emphasized opened at ongoing communication with our Bcf and agents to keep everyone informed and working together throughout the downturn, we believe our support efforts through the crisis greatly contributed to the maintaining the health of the Lance our network.
In the midst of the pandemic Bcl utilization in April and May where loads per Bcf per week, we're at the lowest April and may utilization rates and over 10 years.
Even during that challenging operating environment PCR turnover during April and May was slightly better than historical trends in June continue into July bcl utilization significant significantly improved but remains somewhat below historical levels.
Nevertheless, Bcl truck count grew by 187 trucks during the second quarter from 10112 at the end of March 210000 to 99 at the end of June.
On the agent front the majority of the agents within our network also operate variable cost business models that help protect them from the sudden significant shifts and market conditions agent turnover with on our existing agent base continues to be very low.
Recruiting of production productive agents, however has become increasingly difficult in this environment due to the inability to personally interact with prospects and the sharp down and freight demand.
During the 2022nd quarter, we did not purchased any shares of the company's common stock consists of what I said during our 2021st quarter earnings Conference call. We believe it is prudent to conserve cash on the until the duration and depth of the crisis becomes clear.
Although the level industrial has stabilized in the back half of June and the first weeks of July any adverse government our industry action to the increase spread occur underwriters could disrupt the recent market improvements until we have sustained stability and freight demand and economic performance. We will continue to be prudent in our uses of cash.
You will note, though that we announced in our earnings release that our border increased landstars regularly quarterly dividend by <unk> 0.0 to five cents per share or 13.5% over the amount of the company's regular quarterly dividend declared following each of the prior four quarters.
There's no question, we remain in a highly uncertain environment due to the Corona Vice president and the possibility that economic conditions could again rapidly deteriorate due to the spike in number of cases government actions and business closures and bankruptcies.
Nevertheless, based on the current trends, our 2023rd quarter revenue guidance assume that the industrial output will remain stable and truck capacity tightening on a sequential basis, but more readily available throughout the quarter as compared to the prior year quarter.
Consistent with recent trends and truck rate than volume, we expect a number of low install and revenue per load on loads hauled via truck to each be below the 2019 third quarter in a mid single digit percentage range.
We expect revenue into 2023rd quarter to be in a range of $885 million to $935 million.
Earnings guidance also assumes third quarter gross profit margin will be in a range of 15.2% to 15.4% similar to the gross profit margin of the 2022nd quarter prior to giving effect to the 12.6 million pandemic incentive we paid in the aggregate in April and May.
Our third quarter guidance reflects as well insurance claim costs at 4.8% of estimated bcl revenue for the quarter.
Over the past several quarters, we have seen the cost of insurance and claims increase as a percent of bcr revenue due to the increased cost of settling individual claims.
As I previously discussed lesser experienced an increase of over 175% and its annual commercial auto liability premiums beginning in may.
This increase to the fixed cost component of our insurance and claims cost on an annual basis.
Approximately 80 basis points to the 4% historical average we previously used to estimate ensuring the claim costs as a percent of easier revenue.
Based on these assumptions our estimate of 2023rd quarter diluted earnings per share it'd be in a range of $1.11 to $1.17.
When we take a longer term view of the possible impact of last on the economic downturn associated with associated with Covance 19 pandemic.
We believe the resilience of our light asset based product costs business model, we continue to generate outstanding returns over time relative the overall environment.
The significant percentage of our cost tied directly to revenue somewhat insulated landstar business model from significant downturns in freight and typically generates positive cash flow throughout most business cycles. We continue to believe landstar is well positioned with a strong balance sheet and expect positive cash flow generation throughout this cycle.
In the past 20 years last our model is generated positive free cash flow every year, but one and positive earnings in every year in the first half of 2020 last are generated $170 million of free cash flow, including 84.6 million of which was generated in the 2022nd quarter. Although 2020 has become a challenging year, we remain calm and.
Our model not only to endorse through tough times.
Like these but also to come charging back as business conditions improves.
And here's Kevin to provide additional commentary on the 2022nd quarter financials.
Thanks, Jim.
Jim is covered certain information on our 2022nd quarter. So I will cover various other second quarter financial information included in the press release.
Gross profit defined as revenue less the cost of purchase station and commissions to agents with a $113.1 million and represented 13.7% of revenue in the 2022nd quarter compared to 158 million or 15.1% of revenue in 2019.
Included in the 2022nd quarter is the impact of approximately $12.6 million paid to viscose in agents in April and May under the company's previously disclosed pandemic relief incentive program.
Excluding the effect of these payments gross profit in the 2022nd quarter was approximately $125.7 million or 15.3% of revenue.
The cost of purchase transportation was 77.1% of revenue in the 2022nd quarter versus 76.5% in 2019.
Excluding the cost of these payments under the fan different pandemic relief incentive program to be Ceos.
The cost of purchase transportation was 76.4% of revenue in the 2020 quarter.
The PT rate.
Paid to truck brokerage carriers, and the 2022nd quarter was 37 basis points lower than the rate paid in the 2019 second quarter.
Commissions to agents as a percentage of revenue were 9.1% in the 2022nd quarter compared to 8.4% in the 2019 second quarter.
Excluding the cost of payments under the pandemic relief incentive program to agent commissions to agents as a percentage of revenue was also 8.4% in the 2022nd quarter.
Other operating costs were $7.4 million into 2022nd quarter compared to 9.9 million in 2019.
This decrease was primarily due to decreased trailing equipment rental costs decreased visco recruiting costs decreased contractor bad debt and increased gains on sales of trailing equipment.
Insurance and claims costs were $19.8 million in the 2022nd quarter compared to 16.3 million in 2019.
Total insurance and claims costs for the 2020 quarter were 5.2% of Bcr revenue compared to 3.4% in 2019.
The increase in insurance and claims expense compared to the prior year was primarily due to increased insurance premiums incurred in 2024 commercial trucking liability coverage. Following the Companys may one 2020 insurance renewal.
Increased net unfavorable development of prior years claimed and increased severity of current year claims in the 2020 period, partially offset by reduced frequency and bcl miles in the 2020 period.
The impact of the May one insurance renewal will add approximately $3.4 million to the fixed portion of insurance expense in both the Companys third and fourth quarters.
Selling general and administrative costs were $40.6 million in the 2022nd quarter compared to 41.3 million in 2019.
The decrease in selling general and administrative costs compared to prior year was attributable to decreased agent convention costs and decreased stock based compensation expense.
Partially offset by an increased provision for incentive compensation and increased provision for customer bad debt and increased costs related to the company's technology initiatives.
Stock compensation expense was $570000 and $1.4 million and the 2020 and 2019 second quarters respectively.
The provision for incentive compensation was $2 million into 2022nd quarter compared to $873000 in the 2019 second quarter.
Quarterly as DNA expense as a percent of gross profit increased from 26.1% in the prior year to 35.9% in 2020.
Depreciation and amortization was $11.5 million into 2022nd quarter compared to 11 million in 2019.
This increase was primarily due to increased IP related depreciation.
The impairment of intangible and other assets charge of $2.582 million. During the 2020 period was due to the impact of negative macroeconomic trends in Mexico on customer related intangible assets acquired in September 2017, resulting in current financial projections.
Relating to these intangible assets to be substantially below those originally and anticipated at the acquisition date.
Operating income was $32.2 million or 28.4% of gross profit in the 2020 quarter versus 2000 versus 80.9 million or 51.2% of gross profit in 2019.
Operating income decreased 60% year over year.
Excluding the impact of the pandemic relief incentive payments to be Ceos and agents operating income was $44.8 million approximately 45% below the 2019 second quarter operating income.
The effective income tax rate was 22.3% into 2022nd quarter.
Compared to 23.8% in 2019.
The effective income tax rate was impacted by excess tax benefits relating to vesting of equity awards to employees in both periods and by higher than anticipated state tax refunds in the 2020 period.
Looking at our balance sheet, we ended the quarter with cash and short term investments of $282 million.
Year to date cash flow from operations for the 2022nd quarter was $198 million and cash capital expenditures were $20 million.
There are currently 1.821 million shares available for purchase under the company's stock purchase program.
Thank you Jim.
Thanks, Kevin with that non Missy, we will open to questions.
Thank you so much at this time, we will begin the question and answer session. If you would like to ask a question. Please press star followed by the number one on your Touchtone phone. Once again that is one star one to ask questions to cancel your request. Please press star to one moment. Please for the first question.
Our first question is from Scott Group of Wolfe Research. Your line is now open.
Hey, Thanks morning, guys want to so Jim I wanted to ask about some of the yield trends. So we're seeing obviously spot rates of return nicely positive and even some of the T cells are talking about their their yields turning positive in the third quarter why do you think youre still down mid single digits.
Do you think that you have visibility to that getting better as the quarter plays out or where maybe.
Looking out into next quarter, just from just some perspective there.
Sequentially as Scott if you look at historical trends when you move through April May and June and into July.
Sequentially, we are improving better if you looked over the last five years, so pricing is getting better from a trend standpoint, we move when you move month to month, so the pressure or prior years I think as as you know our agents tend to be a little bit slower in reacting to market conditions as opposed to what happens in a different type of.
Somebody who run more company store operations and have the centralized power to move rates within that organization, where our agents kind of out there.
To making their own decisions running their own business. So they tend to be a little slower. So I think thats, where you see where our when you look to our pricing drop off it was looked at lagged our pricing drop off and we are at the end of April talking about the first quarter in what we're seeing our pricing hasnt really been that affected yet and then a couple of weeks later start of the drop off and I think what you're doing a season on the similar side you will see.
Yes, climb a little bit slower and we Didnt, we didnt project any acceleration of growth into our into our forecast for the third quarter. We just kind of trended along the path that was taking through June and July which generally is a bit slower to react in the most than the other brokerage companies.
And then in July or are you seeing any difference in van versus.
Flat pricing.
Well, it's that's how are we don't have.
Over the last couple.
Weeks, it's hard for us to take one week carve out of information like that so it's really hard to talk about individual whether it's dan or flat better customer type of information, where it's really just general trends come combined Dan and flat.
Okay and then how are you thinking about net operating margins as as we go forward in the cycle. We haven't seen in this low in awhile and can we do you think it the if we get another cycle here that that those can get back towards those mid to high 40 levels yes.
Absolutely I think one clearly one headwind is going to be the 175% increase in our fixed costa in insurance.
We have some thoughts about you know lot in the short term, but probably sometime 2021, we're going to look at some things that we might be able to make a move on to offset some of that increased costs, but yes. If we get the growth back to where you had seven 2000 72018 I, Yes, I think we can get back to that high Fortys. Our goal is to get back to the high 40 to possibly 50%.
Operating margins clearly not this year and.
Depending on what happens with economic conditions, a 21, but in a longer term view you absolutely our goal is to get back there.
Okay, and then last one for me the Bcl count ticked up a little bit sequentially do you think that continues again in the third quarter.
Yes, Scott this is Joe I do think well see some some growth in the third quarter I think conditions are again, improving and I think our growth for this point has been very retention oriented so and we see a lot of things that working pretty well there. So yes. So I think some modest growth in the third quarter would be what we would expect.
Okay. Thank you for the time guys by gross.
Thank you so much. Our next question is from Ravi Shanker of Morgan Stanley. Your line is now open.
Hey, this is Christina Robbie Thanks for taking my question Sir.
Circling back to the earlier comment on end market I know you call about auto that sort of being a headwind into Q some of the other commodity.
Market, but how that trended as you guys have moved into July is autos pretty much entirely come back or how are those.
As we head into typically Q.
Vigorously in this is Rob Fortunately, the flatbed markets because we've had some.
Struggles I guess you'd say with government the headcount to stop order in March and wasn't lift until late may. So we look we come back on that we also know what's going on aerospace and automotive and automotive both direct automotive and indirect we serve a lot of industries that service the automotive the focus of serially go down as automotive steel I think.
But about a at an all time low since 2008 overseeing plant shutdowns in imports of those heavy equipment oil and gas machinery. So those first three government aerospace automotive steel we look for those to start coming back. So we look to start getting engaged and have already seen jade, especially at automotive in the third quarter.
Got it okay that makes sense.
Helpful and maybe switching gears to know that technology initiatives I believe last conference call.
You indicated that the rollout was maybe even better than expected given some of the productivity gains from working from whom so wondering if we could getting update concerning the Corinne Tech program in terms of rollout and then looking down the line.
They're out what sort of the next gen.
New technology initiatives for land sorry.
Yes, it when we talk about the when we talk about initiatives. It's really when you think about automation automation of the entire cycle for more to the cash. So there's components in there whether it's tracking visibility pricing tools simplifying our credit process trailer management, all those things pulled together as we talk about our our tranche our technology basically transformation.
We are working on for three to four years.
And when the productivity our IP guys is up based on what our projection was trying to have them do for the quarters compared to once they went home and what they've accomplished as far ahead of where where we thought it would be we have we have recently just rolled out.
Our we're beginning to roll out our new track and visibility tool, which is a lot more sophisticated and are all are older tool that start rolling out two weeks ago.
Pricing you know we're working on phase two with added a pricing tool that is.
Not that is used by the agents to be able to quick quotes in direct quotes into the.
Out into the to shippers. So it's a we're going to continue to spend that we Frank two or three years ago, We're planning to increased $8 million to $10 million annual we're still spending that run rate on new technologies and building out our modular system instead of being in the old legacy single platform. So when we talk about technology. It's all encompassing of everything we're doing so when you talked about.
Productivity, the productivity acceleration and visibility got it out we got out over the over the last few weeks. So it's the individual items that are coming in faster and rolling out quicker on the Tms side, which is the application. We started three to four years ago, we're running about 7% our volumes.
Through our agent network right now on the new Tms, what's rolling out.
Got it really helpful. I'll leave it there. Thank you for the okay.
Thank you so much. Our next question is from Bascome majors of Susquehanna. Your line is now open.
Yes. Thanks for taking my question I was hoping that you can help a little bit on some of the you asked you in a in other cost items, particularly with some of the noise around the are you can bridge into that we'd be in twoq or being cancelled this year any thoughts on your maybe where the annual report.
Accrual for incentive comp is right now all along with stock comp expense versus what would be in a more typical year in and thoughts on how the pacing of some of these operating costs items will grow in the second half. Thank you.
Yes, Bascome this is Kevin.
As far as the MCP accrual goes we're accruing to a onetime payout. So as you all know that the $8 million annually, so $2 million a quarter. So we're about halfway accrued for 2020.
The cdna going forward I would expect.
The amount in Q3 to be very similar to the amount in Q1, our Q2 sorry.
ER and obviously there is.
We're spending a little bit more on the technology initiatives.
That amount annually on an incremental basis is eight to 12 million probably closer to the higher end at that this year.
Alright.
I'll leave it at that thank you.
Thank you so much we have several questions on Q enter next question is from Jack Atkins Stephens. Your line is now open.
Okay, great. Good morning, everybody. Thanks for taking my questions have been.
So just going back to the capacity.
Side of things for a moment BC Bcl count picked up sequentially.
But youre third party brokered broker carrier count actually tick down. So just curious what you guys you're seeing out there from a capacity perspective, I mean do you feel like capacity has come out of the truckload market.
You know maybe a temporary maybe it's more permanent any sort of comments you could brady provide around that.
Yeah, Jack this Joe I think.
Couple of comments.
More specifically if you I think it's somewhat of a utilization.
Issue, so if you're VCR landstar and year utilization is down because your baby sit on the sidelines already or high risk DCIO, you don't necessarily come out of account because you're still active.
If you're a carrier and our loads that were put into the third party boards declines because demand is often the economy is a little slow.
And you're not in a position to haul road for us and your insurance expires you come out of account right. So it's just it's kind of how we how we do the accounting if you're not active as a carrier you can come out of account if youre not immediately active as the B C O U can stay in Macau.
Think thats just the different way in which we account for the two a capacity tight.
And I think more broadly.
And I kind of always look at Landstars Vito population as a good guide as to what's going on in the greater industry and I think as our results demonstrate we're growing the capacity count but utilization is off right for for obvious reasons I think the carriers out there are many of the small ones.
Our probably not as active maybe they've got a high risk drivers or what have you.
Outside of the already pretty obvious bankruptcies, and so forth I think it's really difficult to read whether they're leaving the market permanently.
I refer they've got the same insurance headwinds of a different type than we do but the same sentiment.
And it's really hard to say until things tighten up a little bit more but certainly no indication that we've seen any major declined in that 10 to 10 trucks and less population that we tend to deal with mostly.
Okay. Okay. That's helpful. Joe Thank you and I guess it back to the insurance comment Jim It lets you made earlier.
You know our there's some things that you guys can do to incentivize viscose to maybe install safety equipment that can help sort of lower your potential insurance.
Costs I'm just curious if maybe you can expand on that for a moment could we have seen.
So fairly steady inflation in that line over the last couple of years and and maybe if you could just expand on sort of some of the initiatives that maybe we'll be rolling out next year I think it'd be helpful for folks.
Yeah. Jack This is Joe I'll give you our thoughts on that on the technology because there has been a lot of conversation and generally about truck technology, and where it's going to you really have to look at the BC Oakley itself and most of the truck technology. That's out there the collision avoidance technology assisted brake technology.
It's really only applicable in trucks that are 2017, and newer and the majority of our DCF hopefully have trucks that are older than 2017, so really not a candidate for much of that technology. I think you hear about unlike some of the company iron large publicly traded companies who rotate their fleet every three years.
As or so so were most of our Bcl fleet model not a candidate for much of that but there are some other technologies whether it be.
Alerts and those kind of thing that we're looking at that can be more of an aftermarket application and so thats kind of where our we're headed in kind of focus to see what we can do to implement something like that.
And 21.
Okay. That's great. One last question, if I could just on peak season expectations.
It's been extremely volatile.
Market here over the last six months seven months, but you know what are your customers tell you about their expectations around peak season, I know in the past you guys that had a little more E commerce exposure and obviously E. Commerce has been growing very rapidly here over the last several quarters, but is there a thought that maybe you know.
The the increased adoption of E commerce combined with peak season could be a good guy for Landstar and up in the fourth quarter up how are you guys thinking about that and what are you going to your customers.
This is Rob yes, a lot of the customers that we deal with the handle ecommerce they're expecting big years.
Their businesses, obviously improved through this pandemic.
I agree or another and we're seeing direct effect to the that being said a lot of the customers. We talk through also they feel that as business comes back things are improving and things look good moving into future, but they don't know what the future. The pandemic as they don't know what the future their plant closures or openings are everybody's kind of in flux right now so.
The sentiment right. The second is things look good and improving into the third and fourth but theres still the auto nodes.
Hello sitting above.
Okay makes sense. Thank you you up at the time.
Thank you so much. Our next question is from Todd Fowler of Keybanc capital markets. Your line is now open.
Great Thanks, and good morning.
Jim on the gross profit margin expectations for Threeq to be pretty consistent with two Q. If you ex out the.
The agent and Bcl bonus.
I think with revenue per load going up a little bit that that would help gross profit.
Margins is the offset there that you're expecting a little bit more compression on the brokered loads or is there something else going on with gross profit percent is going to be relatively flat sequentially threeq versus twoq you.
I'd say, it's pretty much exactly what you described as I think we're going to see with little bit tighter capacity coming out of the weakness of April and May.
So you're going to get a little more compression on the broker side, but I think utilization of Bcl will go up so it'll be a you know improve bcl utilization and then.
Driving the gross profit margin up a little bit while we're getting pressure on the third party truck side, it's the net of the two.
Got it okay that makes sense and then to your comment about the challenges right now in recruiting agents.
Can you remind us I think that every year you new agent.
Recruitment contribute so I think it's a couple hundred basis points to topline growth can you talk a little bit about that indeed, what would your expectation be something that you know as long as we're in this environment, that's going to be a challenge or do you have things in place were maybe theres a pause right now and you could see the start to pick up and get back to more normalized level later this year.
Yes tied what we used to talk about if you go back a couple of years at that new agent revenue would crutcher about 3% of our revenue, but thats. When we were a $2 billion to $3 billion company. When we got the 4 billion a lot of the growth is coming from our existing agents in our focus really is to help those existing agents grow while we recruit new agents.
But our goal every year on new agent revenue and it has been for quite awhile is to add about $100 million a new agent revenue annually. This year based on what just recently going through the pandemic in our recruiting efforts. We don't anticipate that we're going to be near that 100 million, but Rob probably got.
Ross probably got some good commentary about recruiting in the effects of that.
The pandemic.
Yes on crude continues to run rate for front of what we do and I will tell you from a and actual AD and leads and interest standpoint, we're kind of running to the good news is running to the same rate that we ran a 29 team the not as good news is putting my team wasn't agree you're either I think.
I think the reason that is coming off the 2018 coming off the way the that year was able by a lot of people in the industry, making the transition.
We're comfortable that we're happy that a lot of money in their pocket right. So by the end of 2019 when that starts to run out they kind of looked at the industry and making the changes in almost on a pandemic. So while our numbers are they're transitioning those customers over trends in that business over taking a look as a whole.
We've got the numbers coming in the revenue just has has maybe it will it will start phone as things lose though and you call it gets better.
Okay that makes sense and I guess that just shows I go back a little bit too far on the on the percentage piece. So the last one Jim I wanted to ask is you know on the balance sheets, you know I understand you know the uncertainty in the environment right now, but obviously the cash balance has grown to you know I guess what.
Are you looking for as far as capital deployments and how do you think about.
No that the cash balance relative to the uncertainty and maybe you can just put a few parameters around some of the metrics that you're looking at before either considering buying back stock and I know you took up the dividend, but you have something along the lines of how you're thinking about the balance sheet in this environment. Thanks.
Yes, Tom if you go back to where we were sitting in mid March to through our first quarter release in April clearly I don't think anybody new where there's pent never was going to end up. So it was clearly prudent to sit and sit on the sidelines and just watch our cash balances watch our customer receivable that was kind of a concern there for yeah, we do in lot of small customers.
As a prime were higher risks and several larger customers. We deal with so quantifying are trying to determine what kind of risks we would have on our balance sheet from a receivable standpoint was a little bit.
A little bit on predictable that point in clearly today, you know if we remain with a stable output in industrial production, assuming that continues that weren't beyond any of those thoughts and we had in March and April so.
The level of prudency is probably dropped off a little bit, but I will say that yeah. We're only in about the fifth or six week of a more consistent pattern of freight flows in industrial production and with you know the talk of some governments are you talking about shut in things back down I don't anticipate manufacturing be shutdown, but you're still concerned about the consumer.
Confidence going on out there the unemployment levels in and how that can impact. The next three to six months out clearly not near where we were at the end April on concern about maintaining a cash balance, but we're still keeping an eye on the stability of the loadings. The other thing as you know we do internally here do forecasts and things like that and do pay attention to market condition.
And what we think is going on out there and that's another factor we look at so we basically look a confidence levels look businesses.
Business and consumer confidence, we watch our internal trends, what's going to happen with automotive or other consumer to come back and drive automotive purchases backup to the normal run rate of about 17 million. Those are the things we look at internally before we deploy cash and I think you're talking about our buyback program mostly.
So that's what we're watching it but we are clearly going to continue to be more prudent until we get further out of this.
Economic cycle that weren't.
Yeah, Okay all of that makes sense. Thanks for the time this morning.
Yep.
Thank you so much. Our next question is from Jason Seidl of Cowen and company. Your line is now open.
Hey, guys. This is Adam on for Jason I won't ask a little bit about capacity, but in light of the PPP loans I think they're kind of two schools of thought here. One is that you know these loans come up that.
<unk> carriers will be on particularly smaller carriers, we would see these loans, what kind of bridge financing trouble and may exit market, but I think the other school of thought is back on the government stimulus in general is maybe keeping people at home you, maybe a little bit left motivated to go out there in any kind of get back to work in someone's actually about your thoughts regards to the stimulus regards that PPP loans and how.
I mean, if that capacity in coming months in quarters.
Yes, Joe.
I don't really have a great deal of insight as to the.
Fields or small carriers and how much there.
Tapping into the BPP loans I do think it has been a in general for those that have participated I think it's been a nice way to bridge of very difficult time.
I think that you know as things improve hopefully it's been enough or they've had enough.
To draw from to sustain themselves, but I think thats one of the big questions. We just don't have a great deal of visibility either into our be feel population or the carrier population.
As to whether or not that occurred.
Hopefully the bounce back that we're starting to see continues and moves.
The point, where we won't need it going forward, but even that I think is uncertain.
Okay got that and then I also want to ask a little bit about symbion markets. I mean, we've talked about you know some end market, but really struggled during the pandemic like autos and once vazculep about some end markets actually saw more strength during the pandemic.
Your food consumer products types categories.
How long those levels for those categories turned good kind of students coming off the trough and what do you think we'll have something kind of in terms of those those categories in the coming months.
Why that one of our more stable categories is hazmat because every one of our pcls are certified to haul hazmat. So it was down but not a significant and I think you're going to see youre seeing that trend similar to where we did throughout the quarter and never dropped off as big as the other commodity groupings and we're seeing some pretty level play on the hazmat side, the other ones foodstuff, which.
Isn't a big component of our overall.
Revenue base, but that was throughout April.
Early April as part of May It was actually flat to up it was probably probably the only commodity Irving that we had to flat to up and it's still trending relatively where it was where it's slightly up compared to where it was from prior year. Other not most of our commodities, where if we were up say 25, 23% of revenue in April Yelp.
The big the big ones that were hired not like we said what amount of machinery metals. They were above that 23% run rate, where consumer durables foodstuffs and I'm, a little bit energy, because we did a little bit of wind of were above that better than that 23% drop off. So if you bring about commodities most of our big ones, where you know.
Driving that 23%.
Drop off in revenue in loadings in the month April.
Got it thanks for the time really appreciate it.
Thank you so much. Our next question is from the line of Banhart forward of Baird. Your line is now open.
Hey, good morning, guys.
Wanted to just kind of come back to the be Seo concept and obviously the.
The program in April and May look like it was it was successful.
What we can't see from our standpoint, obviously the utilization of that they would be fios within that number. So as you made the decision to end the program in late May.
I'm interested in kind of how that utilization of the be Seo count within the network trended in in June and I think you've made the comment maybe it was Jim talked about being able to focus is going to be on on that utilization improving.
Anyway to incentivize that is there some some something you can do above and beyond just what you did in April and May obviously to make sure that takes place interested in kind of how that utilization trend may play out above and beyond the count that we can see.
Normally we track it on a you know a load loads per bcf per week right and on a normal trend you know attract between 1.7 loads per week 1.81, 0.6 April was 1.4 and it's the lowest April we've seen in.
Actually I went back 10 years and it was never that low before so if you start off in April well, if you think about RBC on our some of those guys do run routine right. They kind of build the routine they build relationship with agents or they could they they go through a weekly routine and when the our thought was when the revenue was when we sell loadings drop off in the 20% rage those guys.
You had routines the also they're going to have to go back to the.
Looking for spot business looking for business off our load boards in kind of more driving more empty miles. Joel also commented on the impact the utilization could be some guys who are at risk of maybe high risk coated and maybe part our truck for a couple of weeks.
Are you know there's other things will drive that utilization down now went from 1.4 in April and prove to about 1.5, I think we where we were in may of still way below historical levels and a jump back up to about 1.7 in June. So it's 1.7 load. So so we're seeing that attrition that that come back to normal trend was slightly below.
Low so I'm not sure theres anything to help.
I don't think a program to relaunch of programs such pandemic relief is was really the intent we intend to depend and it really program is to try and financially help them through a tough time keep him onboard with US and then you know we knew they were going to probably drive unless miles and longer empty miles just to help them out financially through the through the real significant downturn, but I think.
We're going to get utilization coming back there is more automotive like automotive was a big big impact a lot of RBC us participate in the automotive business without dropping off 85%, but clearly going to drive those those guys and you know do an automotive out into our spot market trying to find freight. So it's all those things combined automotives coming back we're seeing a lot of the industrial.
Well. These are back now for six weeks and Utilizations climbing we expected to continue to climb as we go through the quarter. So from an incentive standpoint, I think the fact that you're seeing rates come back and there's plenty loads out. There is is plenty incentive for the bcl to to come back up we'll still have some of the guys pricing on the sidelined what the risk of the Cove, it and being a little bit concerned about their health or the average age of our guys probably.
50, 350, 452, Joe says 52, so yeah. There are guys out there that sitting on the side why do we keep a big stay in our count, but not necessarily hall. So those are all things contributor. We expect we clearly have seen a better trend and utilization go coming into through June and into July even maybe the core.
Year over year by month percentage changes on that utilization would help April negative 18 may negative 16, and then June negative for.
Okay. Yeah that is helpful. Thanksgiving, what does that historical load level.
For a 10 year average as a point of reference.
I would say that you're looking at somewhere between 90 to 95 loads annually as what they hall.
That's great and then the sequential improvement in that count do you attribute that to through the program in April May obviously, it's a little bit counter to.
To what happens when we're in quote unquote recessionary periods with a cult following what what do you attribute that sequential improvement to I don't know if you touched on that earlier.
Yes, Ben this is Joe it's really been a retention driven growth.
Growth in the Vito count.
And I think I do attribute that part of it to the to the incentive and I think the gesture as much as the dollars and I think also the realization that.
They want to stay in the industry they want to run their own business.
But they want to have a home and somebody who takes.
Care of them in certain respects, that's why I'm, sorry, I think that's that's part of it I think youve got a owner operators either on their own authority, we see some significant challenges as a result of just the general environment, the coded and in insurance that might come our way and I think with the flow down you've seen owner operators, who where our.
Cash to other.
Company owned fleets as kind of.
Flex capacity and there they weren't seeing any business and so they see landstar as a as an environment, where they have an equal opportunity.
To run their business. So I think all three of those really help us than in any environment, but I think it helped us a particularly well in the in the second quarter.
Great Kevin what are you assuming protex Rebecca.
24, two is our best guess on that got it. Okay. I appreciate the time goes good work.
Thank you so much we have three more questions on Q and the next one is from Stephanie Benjamin of Suntrust. Your line is now open.
Hi, good morning, good morning.
I wanted you touched a little bit on the revenue guidance that you gave you know maybe if you could just speak to what you would expect the in the market either from a capacity standpoint, or maybe some improvement on our list with some end markets to kind of reach the low or high end of that guidance. Just any color you can provide let's take the.
That would be helpful. Thank you.
Yeah, I, yeah, we touched on it a little bit as we expect the.
From up from a margin set not topline to us and gross profit. We will talk about we did expect the capacity to tighten a little bit as as industrial the industrial economy start picking up about a six for four or five six weeks ago. So from that standpoint, we expect the margin squeeze on a third party trucks, but we expect the trucks to drive more from the topline stands.
Point.
So we really just its we discussed whether we're going to put.
Guidance out at all based on what's going on at the little bit of uncertainty about you know the virus shoot back through the communities and whether they'll shutdown investor to be in the industrial come into which we don't believe is going to happen. We expect a stable economy, but what we did do as we just took the trends that we saw in July and did not elevate them for any pick.
Up in industrial production or or advancement, so when you're talking about when we use mid single digits. We really just took the last four or five weeks trend and use doesn't flow them through the quarter as they would trend in a normal year.
If indeed clearly at the industrial economy is better than it was you know if we see improvement in industrial economy coming out of the better no wasn't last four or five weeks, we will see a high end of that range.
If something turns and the government gets a little more strict on the you know the sheltered homeowners again or industrial economy starts to shut down again, we will will probably be more at the low end. So it's really more based on whether we are seeing in the car environment for the last six weeks trend it out.
Got it alright, well, that's all I had and I. Thank you for your time.
Thank you. So watch our next question is from Scott Schneeberger Oppenheimer. Your line is now open.
Oh, thanks, very much I'm just weren't as good back to the.
The the end markets in intact made to the bottom of the on this slide on in all there that's creeping up towards according the business slowly and I'm guessing, it's probably more by default.
But could you speak to a little bit about the puts and takes in there and then follow up on that is that you mentioned a wind farms in the second quarter, just curious what that can do in energy vertical in the second half. Thank.
Yeah, I think that that the other is primarily ethane K ran at freight all kinds, where the the agents just putting in a you know.
Catch all where its miscellaneous cradle kind to other theres not a specific category thats greater than like 3% of that category. So it's really general environment. There's lot of small customers a lot of different type of commodities within there. So that one is really driven by general economic mostly conditions and industrial and at the industrial.
Components could be imports exports, but it's it's a catch all of of various.
Commodity groupings.
Thanks, Jim in wind anything interesting the second half there Kevin has yes last year was our best year on the wind and there was about let's say 80 788 million.
Year to date this year, it's about 40 million. So we're we're close to our best year ever on the wind.
Okay, and then just curious known or unknown in camp that sizing in cadence over the balance of the year you talked earlier about you know the IP and this is coming along nicely just tool, so where you're spending will be there very good position with cash. So just I kind of curious what the with the next steps will be there. Thanks.
Yeah. The Capex year to date is 20 million, we've got a elevated IP spend in there are typically we run eight to 12 million our eight to 10 million annually on a cash capex, but again this year all the increases due to incur.
<unk> technology spend.
Right. Thanks much.
Thank you so much our last question on Q is from Bruce Chan of Stifel. Your line is now open.
Yes, good morning Jets I appreciate the time just a couple of left here on my list Kevin on the dividend, it's nice to see the increase there and obviously.
It seems like that rotation and shareholder return vehicles is a little bit more of a tactical decision, but is there anything more to read from that as far as the board's appetite for maybe climbing towards the certain you'll bogey.
No.
In July each year, we typically increase the dividend and it's usually in the 10% range I guess on average so slightly higher this year, we went from 18 and a half pennies to 21 pennies quarterly but no. There's nothing to read into that I would still I would say that we are still more on the you know we more favor the buyback program.
And then dividends and locking up to we like the flexibility of buybacks as opposed to being locked into a large dividend, but like Kevin said, we just you know if you go back to 2004 or five when we first started do it ever do and dividends.
Our first you know we've been increasing it you know in the in the third quarter every year. Since then and that the increase is actually a little bit larger from a from a dollar percentages and I think it was the largest we've ever made as two and a half sense, but it just consists of what we've done in the past and we still like to focus.
On the buyback program and the flexibility of that.
Okay, Great Fair enough and then just the last one here I'm certainly back in Mexico, I mean, I know that that's a pretty small portion of your revenue but.
We just we see given some of the changes going on.
If you have any visibility on on whether there has been increased capacity needs as a result in some of the near shoring efforts.
I think there hasn't Ivan we've been seen any really increasing capacity due to near shoring I think thats something that people are talking about as potential should that exist because of the trade talks and the climate with China, but I think you know whether that is something that I.
It's probably out in front of its little bit so really nothing that attributed business new business or otherwise, it's been specifically attributed to near shoring, but I think that cross border business had been impacted like everything else with the virus and but again starting to reopen back up and hopefully be strong going throughout the balance of the year.
Okay, great well, that's all for me appreciate it.
Okay great.
Thank you so much at this point, we did not have any more questions on Q you may continue.
Thank you as always for your attention. We wish you we wish for you in your families to stay healthy and safe and I look forward to speaking with you again on our 2023rd quarter Earnings Conference call currently scheduled for October 22nd.
Have a good day.
Thank you so much.
That concludes today's conference call have a good morning. Please disconnect your lines at this time.