Q3 2020 Landstar System Inc Earnings Call

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Good morning, and welcome to Landstar system incorporated third quarter 2020 earnings release Conference call all lines will be in a listen only mode until the formal question and answer session. Today's call is being recorded if you have any objections you may disconnect at this time.

Joining us today from Landstar are Jim Gattoni, President and CEO, Kevin Stout, Vice President and CFO, Rob Brasher, Vice President and Chief Commercial Officer, Joe Beacom, Vice President and Chief Safety and operations Officer, now I would like to turn the call over to Mr. Jim Gattoni.

Sir you may begin.

She.

Good morning, and welcome to Lessors, 2023rd quarter earnings Conference call before we begin let me read the following statement.

Following the Safe Harbor statement under the private Securities Litigation Reform Act of 1995 statements made during this conference call that are not based on historical facts are forward looking statements.

During this conference call. We may make statements that contain forward looking information that relates to lessors business objectives plans strategies and expectations.

Such information by nature subject to uncertainties and risks include but not limited to the operational financial and legal risks detailed in Landstars form 10-K.

The 2019 fiscal year described in the section risk factors and other SSD filings from time to time.

These risks and uncertainties cause could cause actual results or events to differ materially from historical results or those anticipated invest.

Investors should not place undue reliance on such forward looking information and lesser undertakes no obligation to publicly update or revise any forward looking information.

Landstar entered the 2023rd quarter vision, one of the most unpredictable and challenging freight environment in the company's history.

The dramatic swing in demand from the sudden significant decrease in mid March to the bottoming out in April and May So the gradual sequential improvements we experienced through the summer months and continuing through the end of September was unlike any other period in the history of the company.

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

Last our third quarter financial results far exceeded the third quarter financial guidance that we first presented in our 2022nd quarter earnings release on July 22nd our niche.

Our initial guidance anticipated 2023rd quarter revenue to be in a range of $885 million to $935 million and diluted earnings per share to be in a range of $1.11 to $1.17.

On September 9th we updated that guidance in a form 8-K filed with the SEC or update and guidance anticipated revenue in a range of $1.020 billion to $1.060 billion and diluted earnings per share to be in a range $1.40 to $1.46.

Revenue diluted earnings per share also exceeded our updated guidance primarily due to further sequential improvements we experienced in the number of loads and revenue per load on loads hauled via truck from September nine through.

Through the end of September actual revenue of 2023rd quarter is $1 billion $86 million and diluted earnings per share was $1.61.

Our initial third quarter guidance provided on July 22nd was based on rate and volume trends of our trust services through the first few weeks of July and expectations that industry fundamentals of soft demand and readily available capacity and with continued through most of the quarter.

This initial third quarter guidance reflected our expectation that both revenue per load and the number of loads hauled via truck would be below the 2019 third quarter in a mid single digit percentage range.

As business continued to improve from July 22nd through September 9th our updated guidance anticipated both revenue per load and the number of loads hauled via truck would exceed the 2019 third quarter in a low single digit percentage range.

July close with truck revenue per load, 2% below July 2019, and the number.

And the number of loads hauled via truck only 1% block below that of July 2019 in early.

In early August truck rates and volume turned positive compared to the corresponding prior year period.

Yes, the September revenue per load on loads hauled via truck increased 5% and 10% over August September 2019, respectively.

And the number of loads hauled via truck in August and September increased 2%, 7%, respectively compared the same month of 2019 overall revenue per load on loads hauled via truck in the 2023rd quarter 2019 third quarter by 5% and the number of loads hauled via truck exceeded 2019 third quarter by 3%.

Along with the huge overall swings in demand for trucks services, we experienced during the 2022nd and third quarters lesser experienced a tremendous overall increase demand for services provided via van equipment during the 2023rd quarter on the flip.

On the flip side and the two.

In the 2023rd quarter compared to 2019 third quarter demand for services provided by Unsided equipment remains soft, although improving sequentially as we move through the third quarter.

As such overall demand for transportation services provided via van equipment outpaced demand for services provided unsided equipment during the 2023rd quarter.

More specifically the number of loads hauled via van equipment. The two in July 2020 was about equal to July 2019, while August and September were 6% and 9% above Aucs in September of 2019.

Revenue per load on loads hauled via van equipment in July August and September increased 3%, 8% and 17% over July August and September 2019, respectively.

In contrast, the number of loads hauled via Unsided equipment in July August September 2020 was 5%.

4% and 2% below July August September of 2019, respectively Red.

Revenue per load on loads hauled via on site equipment. In July 2020 was 9% below July 2019, while August September exceeded prior year by 1% and 2% respectively.

In comparing the 2022nd quarter to 2023rd quarter demand for our services fluctuated significantly by industry sector. The.

The growth in revenue was driven by strength in consumer durables automotive parts building products and substitute line haul services, which is how landstar refers to truckload services provided to large parcel and small package transportation companies did.

Demand for subs to line haul was driven by growth in E. Commerce that increased the company's third quarter revenue from that sector, both sequentially and over prior year third quarter.

The boom in home improvement renovations help growth in the building product sector, while new business awards outside the big three automotive manufacturers helped drive automotive parts performance and growth in new and existing accounts resulted in increased revenue in the consumer durables sector.

In an environment during the 2023rd quarter, where you us manufacturing production continue to be below prior year levels. The company's agent network executed extremely well on obtaining new business and sourcing capacity for businesses to continue experienced volume surge and supply chain disruption.

More specifically revenue from the consumer durables sector increased 11% in the 2023rd quarter over the 2019 third quarter Rycroft recovering from a decrease of 22% in the 2022nd quarter compared to the 2019 second quarter.

Similar trends occurred and other sectors automotive parts were up 17% in the 2023rd quarter compared to down 53% in the 2022nd quarter building products were plus 15% to 2023rd quarter compared to down 21% in the 2022nd quarter and substitute line haul services, which contributed approximately 5% of total revenue in the 2012.

The third quarter were plus 125% in the 2023rd quarter compared to plus 21% in the 2022nd quarter.

Machinery and metals, both of which are typically service using unsided equipment continue to lag prior year, but it improved levels compared to what we experienced in the 2022nd quarter.

Revenue from the machinery sector in the 2023rd quarter was 12% below the 2019 third quarter significantly improved from the 30% decrease in the 2022nd quarter.

Likewise revenue from the metal sector was 12% below the 2019 third quarter compared to a decrease of 35% in the 2022nd quarter.

While certain sectors of the US economy appeared strong and others lagged the efforts of our agents to expand their business with new and existing customers across a broad array of sectors was was critical in driving the company's strong third quarter performance.

As to truck capacity, we continue to attract qualified owner operators to the model. We ended the third quarter with 10571 trucks 272 more than at the end of the 2022nd quarter. Please.

Your truck count continued to growth for the first few weeks of October and now sits at an all time record number of trucks provided by Vcs.

DCIO utilization or.

Or loads per Bcf per week.

Was it a 10 year low in April and May increase but remained below historical levels in June and improved significantly in July August and September.

As a result is relative as a result of the improvement that began in July bcl utilization to the 22023rd quarter increased approximately 6% compared to the 2000 1930 per quarter.

Record Vizio truck out and the increased PCL utilization led to a record number of quarterly loadings hauled by Bcl capacity in the 2023rd quarter.

Also as demand increased we saw an increased number of third party carriers haul loads for Landstar active truck broker count defined as carriers, who have followed the load a last our load in the past 180 days increase from 37620, 22nd quarter to an all time record of over 41000 in 2023rd quarter approved an active third carrier.

Count.

Is continuing at an all time high.

As it relates to third party carriers the inflection in demand that began in August results in the sudden tightening truck capacity that drove an increase in the rate of purchased transportation paid to third party truck carriers in the 2023rd quarter revenue per load increased 7%, but gross profit per load decreased 2% on truckloads Hall by third party carriers.

As compared to the 2019 third quarter.

The strong rate and volume trends in our truck services had continued in the first several weeks of October we expect that demand level of demand for our service to continue through the fourth quarter, assuming that level demand continues we expect 2024th quarter revenue to look similar to and potentially exceed our record 2018 fourth quarter revenue.

We expect we expect truck revenue per loan per load in the 2024th quarter to be similar to the record fourth quarter revenue per load we reported in the 2018 fourth quarter we.

We also currently expect the number of loads hauled via truck in the 2024th quarter to be equal to or slightly exceed the record fourth quarter truckload volume reported in the 2018 fourth quarter as such I expect fourth quarter revenue to be in the range with $1.150 billion to $1.200 billion.

As it relates to the 2024th quarter earnings estimates the company recently announced an initiative to further enhance its owner operator recruiting and retention efforts via its regional operation centers located in the United States and Canada in support of its Spiezio network.

In connection with this initiative to further enhance our bcl recruiting and retention efforts the company anticipates a buyout of certain legacy incentive commission arrangements that paid a commission to several agents for their bcr recruiting and retention services payments.

Payments under those agreements reported as age commissions in the company's annual statement of our color annual run rate of approximately $10 million.

Included in the 2024th quarter estimate is a onetime pretax charge of $15 million or 29 cents per diluted share for anticipated for the anticipated bias of these agent incentive arrangements.

Including this onetime charge 2024th quarter diluted earnings per share guidance is about 32 to $1.42.

Excluding the impact of this onetime charge diluted earnings per share guidance would be in a range of $1.61 to $1.71. The high end.

Of the range being above the record fourth quarter diluted earnings per share of $1.68 reported in 2018 fourth quarter.

West our business model with access to a substantial number of truck capacity providers, including both our bcl owner operators and third party carriers combined with the expertise and experience of the agent family and the geographic distribution of our over 1200 agents throughout the us and Canada drives exceptional performance in most environments. The 22.

The third quarter was no different.

Given the ongoing impact of cobot, 19, pandemic and the softness and softness in us manufacturing the speed and strength of the recovery of domestic spot market was highly unusual with the current strengthened demand capacity tightness any additional improvement in us manufacturing the quarter would further tightened capacity within the transportation and logistics.

Next marketplace.

Our capacity in the drive and spot markets already tight heading into the traditional period of peak seasonal demand for dry van services during the fourth quarter. Nevertheless, long term outlook for us economic environment remains highly unpredictable.

Regardless of the economic environment, However, lessors network of small and large business owners provide the expertise to satisfy shipper debt demand in almost every sector. In every geographic region in North America sourcing capacity of varying equipment types, while EPS or provides the tools and financial support to empower their success our technique.

Our technology and it initiatives continue as we roll out new and improved tools.

Tools.

Most recently, we launched Landstar clarity, a new and improved freight visibility tool available to all left our agents to support their customers with our.

With our ongoing efforts to invest in and empower our network of small large business owners, along with our healthy balance sheet. We are confident in our position within the highly competitive technology, driven transportation and logistics marketplace.

With that I'll pass to Kevin for his commentary on the 2023rd quarter financials Kevin.

Thanks, Jim.

Jim has covered certain information on our 2023rd quarter. So I will cover various other third quarter financial information included in the press release.

Gross profit defined as revenue less the cost of purchased transportation and commissions to agents was $160.9 million and represented 14.8% of revenue in the 2023rd quarter compared to $152.6 million or 15.1% of revenue in 2019.

The cost of purchased transportation was 77.3% of revenue in the 2023rd quarter versus 76.6% in 2019.

The increase in the PT rate was primarily due to an increased rate of purchased transportation on truck brokerage carrier revenue, which was 187 basis points higher than the rate paid in the 2019 third quarter.

Commissions to agents as a percentage of revenue were 7.9% in the 2023rd quarter compared to 8.4% in 2019 third core.

The decrease in commissions to agents as a percentage of revenue as compared to 2019 was due to a decreased net revenue margin revenue less the cost of purchased transportation divided by revenue.

On loads hauled by truck brokerage carriers.

Other operating costs were $7.4 million in the 2023rd quarter compared to 10.4 million in 2019.

This decrease was primarily due to decreased trailing equipment rental costs decreased contractor bad debt decreased costs related to the annual BCP V. C. O event canceled due to to to the cobot pandemic and increased gains on sales of trailing equipment.

Insurance and claims costs were $21.9 million in the 2023rd quarter compared to 24 million in 2019.

Total insurance and claims costs for the 2020 quarter were 4.4% of Bcl revenue compared to 5.1% and 2019.

The decrease in insurance and claims expense compared to the prior year was primarily due to decreased net unfavorable development of prior years claims and.

And decreased severity of current year claims in the 2020 period.

Partially offset by increased insurance premiums incurred in 2024 commercial trucking liability coverage. Following the company's may one 2020 insurance renewal.

The impact of the May one insurance renewal will add approximately $3.4 million to the fixed portion of insurance expense in the company's fourth quarter.

Selling general and administrative costs were $38.9 million in the 2023rd quarter compared to 38.2 million and 2019.

The increase in selling general and administrative costs compared to prior year was attributable to an increased provision for incentive compensation.

Increased costs related to the Companys technology initiatives and increased stock based compensation expense, partially offset by a decreased provision for customer bad debt and decreased travel and entertainment expense related to the impact of the cobot pandemic.

Stock compensation expense was $1.5 million and $1.1 million in the 2020 and 2019 third quarters respectively.

The provision for incentive compensation was an expense of $2.1 million in the 2023rd quarter compared to a benefit of two $323000 in the 2019 third quarter.

Quarterly EPS DNA expense as a percent of gross profit decreased from 25% in the prior year to 24.1% and 2020.

Depreciation and amortization was $11.2 million in the 2023rd quarter compared to $10.7 million in 2019.

This increase was entirely due to increased IP related depreciation.

Operating income was $82.4 million or 51.2% of gross profit in the 2023rd quarter versus $70.6 million or 46.3% of gross profit in the 2019 third quarter.

Operating income increased 17% year over year.

During the 2023rd quarter, 140% of the increase in gross profit from the 2019 third quarter was passed through to operating income.

The effective income tax rate was 23.9% in the 2023rd quarter compared to 23.8% in 2019.

The effective income tax rate was impacted by excess tax benefits related to stock based compensation arrangements with employees in both periods.

Looking at our balance sheet, we ended the quarter with cash and short term investments of $258 million.

Year to date cash flow from operations for the 2023rd quarter was $186 million and cash capital expenditures were $25 million.

There are currently 1.821 million shares available for purchase under the company's stock purchase program.

Back to you Jim.

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

Certainly Sir we will now begin the question and answer session. If you would like to ask a question. Please press star followed by the number one on your Touchtone phone. Once again that is star one to ask a question to cancel your request. Please press star followed by the number two.

We do have several questions on queue and the first one is from Jack Atkins of Stephens. Your line is now open.

Hey, guys good morning, and congratulations on a great quarter. Thanks, Jack So Jim Let me, let me start first and I guess, if you could maybe larger economic Crystal ball I know, it's still tough to.

Yes kind of think about to triangulate sort of where we're going from here given all the uncertainty out there with the election in the pandemic and everything else, but you know when I think about the different.

Items that are really impacting your business over the next 12 months.

Industrial economy feels like it's improving from here construction activity looking strong next year.

Automakers can't produce enough cars I know energy remains a challenge.

Can you maybe kind of help us think through how you're looking at your end markets as we head into 2021, because it certainly feels like if you think about maybe additional stimulus or an infrastructure bill there are a lot more positive than negative when we kind of think about where we're trending into the next next calendar year.

As you know, we always speak to how we're pretty tied to the industrial sector and when you have.

Industrial production or manufacturing production users, which is negative still still little bit shy of where it was last year you'd expect our model did not produce the kind of performance that it just came out of but I think you know some of my emphasis in my points within the my prepared remarks, it really to speak to the agent family and how they penetrate into new markers are they penetrate.

In to existing customers, who may experience, a surge or some kind of supply chain disruption. So I think what we're looking at now is just the ability of the network to expand in an environment, where where industrial production is still remains soft and that to me really just provides a positive into the future because I don't think anybody anticipates a industry production is going to stay negative throughout.

The rest of the 12 hour you read the forward looking 12 to 18 months and any strength. There is just going to add to what we've already done.

For the ages of penetrated into some consumer durables as you know it was it was a great quarter for us subs to line haul with the E commerce demand coming through those parcel carriers.

I would say that if you were to ask me my expectation is were going into next year I think that substitute line haul would probably be the one area I'd watched it would soften but I. So I see no reason why any of the other stuff would soften even landstar here, we're talking about.

What percent of our employee base can remain at home indefinitely right. Even after cobot clears out which means you have got saving money on.

Saving money on travel and stuff like that and continue to spend at the economy. So you've got the consumer durables and all that stuff I see a lot of that continuing so.

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

On the environment, Okay that that's that's very very encouraging maybe for my follow up question, just kind of going to the insurance point for a moment if I go back to the second quarter call you guys talked about the potential actions on the insurance front that.

I think the idea was to maybe improve your cost recovery there so I guess either.

So I guess either for Kevin on for Jim could you maybe talk about maybe.

Maybe I guess, if you could add some more details around some steps you could take there to maybe impact your net insurance expense as we go into 2021, because I would imagine the insurance markets aren't going to.

I'm going to turn into a tailwind next year no.

No I would expect you are right there I don't see that.

Our premium.

The amount we pay in premiums for insurance coverage specially in the commercial trucking line I don't see that pulling back over the next six or eight months as you know we renew every year on may one [laughter] and RF.

Our anticipation right now is that the premiums will stay elevated through that renewal period, but hopefully not their actions. We can take we have a significant amount of coverage probably highest at what a higher coverage in the industry. When you talk about those layers and how high up the coverages. We could look at think about maybe reduced that a little bit without exposing the organization.

And on a per occurrence basis, you might get a little savings there.

We're looking at other programs.

On the EPS short side, where we might be able to reduce some of the.

Potential equipment, maybe we could influence our bcl to maybe put the truck to help influence maybe some of the specific accidents, we have which is on measurable you don't know its you can put equipment in the truck. They don't if an exit doesn't have you don't know it. So it's a lot of things, we're looking into and and and clearly a move we just made to improve our recruiting efforts and.

Attention efforts to eliminate the.

Agent incentive commissions was a big offset and that's a that's a tailwind going into next year right. So you've already picked up as I said in the in the in the opening remarks there is.

About not that it was intended to offset the insurance, but it was a it was a decision was made to improve our recruiting efforts internally and to improve our us our field locations in recruiting and retaining.

Be sales, but it turns out that we have about a 10 million dollar spend every year within the commission.

Commissions line that will will go forward. So it was it was a $14 million increase of premiums year over year.

So weve you know, we think we'll cover that with various programs by the time, we jump into January one or sometime through the year. Okay. That's great. Thanks again for the time.

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

Hi, great. Thanks, and good morning, I guess.

I guess I wanted to start with it looks like you had some continuing success in attracting both BC goes and then also third party carriers to the network.

Jim or maybe Joe can you talk a little bit I mean, we've heard a lot about the challenges and the driver market right now it seems like you're doing a good job in moving the DCIO count up on can you talk a little bit about why you think maybe you're having some success in doing that and the ability to continue to do that as you move into into 21.

Yeah sure Todd This Joe I think yet to the extent that the the demand environment changed and that the pricing environment could change too and moved in a positive direction. Those are two excellent a catalyst that drives a bcf growth historically.

And so to the extent that you know we continue to be solid on both of those fronts. I think are a bcf account hopefully can remain.

Growth through the balance of this year and that I would anticipate a you're not really having a crystal ball into next year, but if it remains pretty solid hopefully, we'll be able to maintain our account and growth I'm a little bit more in 2021, but I think you know just the model itself you know how we compensate on percentage pay versus mileage ended.

And the tools that we have that allow people to come in and take advantage of this strong demand environment and make.

Good decisions for their business I think it's I think thats really the foundation behind it I think if you're if you're in the company driver market I think it's a little bit more difficult because you're you're trying to get people to come back to a position that maybe they just loss were within the owner operator small carrier environment. This is there.

Career decision they made their decision, it's just a matter of where they want to align themselves and I think we've got a very good job.

<unk> form from which their ability to align themselves with us and be successful and as Jim pointed out our centers that were initiating in 2021, maybe that's just one more step that will take to try to.

Improve recruiting and retention most of our growth Cabot has been not so much on the recruiting side, we did recruit a little bit better quarter over prior year quarter, but.

But it's really been on the retention side, where we saw about a 37% reduction in the number of termination. So once we get them here get them acclimated get them Anup.

Get them in a position to make good money make agent relationships and our agents do a great job of taking care of capacity, whether its pcls are carriers we.

We like our chances to in a good freight environment.

The update now let me go ahead go ahead, Jim So the other thing there's one I think Joe mentioned the tools right.

You know our business model, we've had an app out there forever to simplify it yes.

Make it easy for the Bcf to identify the opportunities. We have there was eight to 10000 loads on the board at any given point in time, so the network and the ability for us to just just automate that whole process in some of the things we've done over the last two or three years to improve that the app and be able or theres sort of function and stuff like that and there I think that helps them improving.

Will attract more drivers into the system also as as we make things easier on them and the communications become more automated.

Yeah, all of that makes sense and to me it sounds like maybe that's one of the big differences that you are not as dependent on the new drivers and the driver schools that maybe some of the large you know on company driver fleets might be on it and of course, the strong freight market in the technology help so that helps kind of square that away just for my follow up.

Kevin can you share with us what you think on based on your guidance, where total incentive comp will be for all of 2020 as well as stock based compensation. So kind of the full year number and then what you would expect it to be into 21, just based on your kind of the normal target or the normal run rate that you've kept going into next year.

Yes, Todd as far.

Ours incentive comp goes as it were.

Pegging the number two a onetime payout for 2020, which would be about $8 million. So we're putting up $2 million a quarter. Okay. So assuming we hit exactly on our target for 2021 it'd be the same number you about $8 million annually.

On stock comp were about between three and 4 million this year right at $4 million.

I would expect the same thing for next year.

Okay. Good that helps and I agree with Jack great quarter, and I know, it's been a quite a volatile environment. Some nice job. Thanks.

Thanks, Thank you.

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

Hey, Thanks morning, So I want to ask us about some of the guidance pieces for the fourth quarter have you seen the flatbed volume and price inflect positive, yet, but with banner or not yet and then I think I read that you're assuming the rates sort of stay flat from here is there a reason why you don't think they take another.

Further step up in at the end of the quarter as we typically see around peak season no.

No I think I Wouldnt, we I don't think we are anticipating that they remain flat I think seasonally sequentially, we're expecting them to be normal typically what you see from September to December as you do see some increase in rates and I think we've built that into the model we are expecting.

I think on average you see it from September by the time you close at December Europe may be 80 to $100 on a per load basis, and I think we did and we did we did that we did build that into the guidance as the flatbed you've seen the you've seen the improvement sequentially. In July August September I don't believe we've seen and inflect positive yet, but it's still.

You know, it's still soft as compared to where the van side is so so.

I don't think we expect that the pick up and stay relatively flat throughout the remainder of the year.

Okay. The back above 50% net operating margins do you guys think thats sustainable going forward as long as the trends remain positive or is there anything unusual from a cost standpoint.

That means that the margin should go back below 50, no I think Kevin explained some of the big variables. We got right with you know our bonus program is highly variable right, but I think what he had said that those should be consistent year over year into 2021, you talk about the incentive comp no pressure there right, that's not a tailwind or headwind those are relatively flat so you're not feeling pressure on the.

Margins their insurance clearly is a margin pressure with the 14 million more of premiums.

Premiums that only started may one of 2020. So you got some pressure there, but we feel like we've got enough ideas in our heads to kind of offset that maybe not on the insurance line, but in various other lines within the PML. So I think if we sell it if our gross profit stays elevated and stays we continue down the path that we are going with the growth.

Both and the performance we put through yes, I think that 50% margin is achievable I'm not not up maybe I don't want to talk about quarterly because the first quarter clearly as a softer quarter in the infrastructure costs might push that below 40%, 50% I'm, sorry, but on an annual basis over a longer period of time, yes, I think I think that 50% is.

Is achievable and realistic.

Okay and then just last question just on the sustainability of the cycle, you've been a straight shooter overtime and I get your points about maybe the.

Maybe the industrial demand hopefully getting better next year, what about on the supply side do you think that are you seeing signs of supply coming back as quickly as it's come in prior cycles are the reasons why it's going to come back faster. This time slower. This time, how do you think about the supply side of the equation.

As Scott This is Joe I think that as I think there's been supply that's been sitting on the sidelines, especially when you think about the owner operators and small carriers, which are the bulk of our capacity at this point I think they have been around I, just think they've been a little bit sidelined or dormant or waiting for things to change whether it's there.

Their ability to feel comfortable about operating in a in a cold environment or whether it's the feeling that the markets and the pricing and those kind of things have bounced back to the point that it's worth their while I think makes a lot of them look at it as a cost benefit type decision and as we've seen the demand improve and pricing improved pretty dramatically I think you've seen a.

Lot of carriers that or or owner operators that were sidelined come back into the market. How much of that is left to go.

It's hard for me to say that it doesn't look at this point in time like there's going to be a lot of new truck.

New truck production from what little I've seen it's going to be more about replacement levels. In 21. So if thats. The case I think capacity remains tight right, but I mean does it not really clear as to how much is still out there that's not coming back and operating in this environment I would think it's it's not that much.

Okay. Thank you.

Thank you so much. Our next question is from my Coty Matea of Wells Fargo. Your line is now open.

Hi, good morning.

The the declines in the industrial markets throughout the quarter.

Sounds like there is indeed, a brighter picture shaping up for 2021 could you sort of buckets, the nuclear new growth opportunities and customer control wins in terms of how to think about those businesses as we head into 2021.

Yes, it's very difficult for us to get down to a customer level because we're highly diversified if you think of our agent model with 1200 agents all around the country, there and all different customers. When we look at things, we kind of look at more of a.

Broad array of sectors, we look at the sector level, we dealt with all we don't look nets are down at the customer level, because it clearly no customers more than 3% of our revenue.

I did look regionally, but generally I know there is another 5% and.

So when we look at it it's really a sector thing. So you talk about end markets more we speak to more what's going on in manufacturing and especially on the machinery and metals side, you know steel production and stuff like that that's how we look at it it's hard to drill into customers.

Now on the substitute line haul that's really customer driven there is four or five heavy customers there and like I said to that sector is where we could experience some softness there if things ease up on E commerce.

Coming into next year, but it's really difficult for us to pull apart what our projections are at a customer level because one one single customer does not drive the business, it's really more industry side and sector side.

Okay. Thank you and just one follow up thinking about the supply side again.

I think your piece you can inflect positive by 1% for the first time in five quarters, which still seems moderate.

Sort of trajectory should we think about as we head into 2000 2021.

If the market continues to remain tight.

Yeah. This is Joe again, I think we anticipate a little bit of growth it's still in the in Q4.

In in October we're we're <unk>, our net growth is about a 100 trucks in October so far so I don't think we'll continue at that pace for the rest of the quarter I think it will slow down and then and next year I think the growth will be a little bit more modest.

Maybe in that net growth of 100 to 200 somewhere in that range would be a kind of where we sit now and what it looks like now that'd be more of a.

Achievable I think just given given that I think things are going to stabilize pricing is going to stabilize volumes.

We'll be what volumes will be once we understand how next year shakes up.

It sounds great. Thank you.

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

Yes. Thanks for taking my question today I wanted to follow up on some of the cost items can you share with us the EPS June a levels anticipated in the guidance and maybe on a go forward basis is there any SGN a your operating costs, you're taking on to do.

That is a partial offset to some of the commission savings from the buyout you're doing it for Q.

Yeah Bascome this is Kevin.

I think in fourth quarter, our SGN. They line is going to be somewhere between 40 and $42 million.

That should be a pretty consistent number if you look back over time, our Arden our numbers had been ranging probably 38 to 42 million overtime.

I don't anticipate any significant increases we might add head count here.

Here are there for the recruiting but nothing significant going forward.

Alright, so so so so just like history incentive comp will be the big variable to move that up on the <unk>.

On the beach to go up on the EPS DNA line, yes.

Okay.

Yes. It does a couple of small things, we got to think about as as as Joe starts to implement this plan over the.

Centers the operation centers, you know, there's probably a little I mean, we're talking low operating costs makes driving up 500 to a million dollars next year right. It's small stuff, though so you know the other thing that happened this year, if you're doing a comp year over year. If you look at 2020 compared to 2021, there's a there's some expenses we didn't incur this year that will maybe roll back next you're right we had.

An agent convention that we canceled a which is a couple of million dollars that we did have some penalties we had to pay there but you have that you also have we have a DCIO allstar event that you know it's $1 billion over the summer that we had to.

We cancel that will do it again, some penalties and we had to pay but there is another million dollar I will call a headwind there is some nickel and diming into the PNM will roll in next year travel clearly I don't think there's a company in the in the country that hasn't reduced their travel and entertainment expenses over the last since March so we're going to have a little headwind there and if you add.

Ill, let up in my head that theres going to be some costs coming back in and the extent of if I did it real quick in my head for $5 million. So.

So, but it's spread throughout each individual line item.

And.

We will try and manage to that we're not through our budget process and we'll figure out whether we can you know reduce.

Reduce that it's it's a.

It's a year over year thing, it's not a spending issue and we'll see if there is other spots, where we can kind of offset some of that but right now in my head there was that due to the pandemic theres some year over year comps that are a little bit different than you would get in a normal year.

But again on the other side you know, we did pay $12.6 million of.

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Bcl pandemic relief, where we pay the $50 to the age of the Pcls, We had that and then this year clearly in the fourth quarter will have another $15 million onetime charge for the buyouts of the commission incentive so we've got a little bit of noise coming into next year, but I think I bought it just kind of walk through what we know of as being the noise.

I would add medical benefits to that too yeah as people start going to the Doctor Yeah. Yeah. There was a it's incredible of medical [laughter] dropped off during a covert pandemic, but yeah. We had a favorable experience on I guess people just the basically if you just had a cold you want to go to the Doctor. So we had that drop off. So there is some pieces in there, but I would still say, it's maybe four or $5 million of expense.

Yes.

And then we had about $30 million onetime charge going the other way.

Yeah. Thanks for walking through all that Thats helpful. As we think about next year.

Maybe moving up to the gross profit side, the PML I mean on a per load basis it looks like.

You passed the 300 dollar Mark again, this quarter, which is quite a bit.

Quite a pick up from where the first half was and you haven't really been there other than a very good year, which was 2008 were I think you above that in each quarter and got as high as you know.

313 through 15, and your best quarters, I mean, you from your other commentary it sounds like you see more market positives negatives in next year I just as we think about gross profit per load is a really key financial performance indicator for your business. You know do you have any sense of.

Where do you think that can go and how high it needs to be before it feels like it's typically unsustainable.

Well, we know how high can go because there is a cat. If you think about our business model right were a mix of DCIO and or a mix of brokerage and on a gross profit per low the bcf. So gross profit per load is higher than the brokerage and there's reasons for that right. We have insurance costs. We have recruiting costs, we have a lot of things related to the bcl below the gross.

That line that we don't have on the third party truck side. There is you know pretty significant cost to maintain a an independent contractor network within this organization.

So one of its mix right. So if you have more bcl than you have broker youre going to have that consolidated.

Gross profit per load going to elevate.

If theres more Bcl then there is brokerage so that so that's a piece of it historically so if you went back that if when we were 60% Bcl and 40%.

Broken out what does pricing in a higher.

Gross profit per load given let's just make believe thats all equal every year.

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So what drives it since the Bcl gross profit per load from a dollar perspective is really based on rate you have to at a certain rate right of its $2000 alone we're going to be up relative to to 220 $300 per load ought to be sales.

It's gonna help lift that gross profit per load, but at the same time rates coming up we're feeling pressure on the on the broker side and that gross profit furloughs by shrinking right a little bit so and I think it's what we saw this quarter. We did we did see it we saw gross profit per load shrink on the broker side, Yeah, we sought to expand on the Bcl side. So it's a combination of those two things I wouldn't say we're at.

Where does very good number right now I don't claim it's the top there's clearly a.

I mean, if you go to if you going to come over to $5000 below again, we're going to we're going to exceed the 300 by by a lot.

I wouldn't say, there's a peak I would say that we are pretty healthy right now and that number will and into the fourth quarter, we could maintain or grow it a little bit, but let's just go with its healthy now and.

I don't know how high it could go or how high it will go it's hard to project that out.

Right. So it sounds like the volume might be a bigger variable going forward than necessarily the unit gross profit really.

Yes, because it I'm not like I said, the Bcl gross profit per load really varies with the not the revenue per load and then the brokerage really as the either the expanded a compression of margins.

Thank you very much.

Thank you so much. Our next question is from Stephanie Benjamin its truest. Your line is now open.

Hi, good morning.

Good morning.

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

Hey, Stephanie it's Kevin Oh, My my range is 14.5 to 14.8 were showing a little bit more I'm going back to what Jim just talked about on the mix a little bit more brokerage obviously, some tightening on a in that capacity. So there's going to be a higher brokerage PT rate in Q4, but the best range.

I came up with this 14 five to 14 eight for Q4.

Got it. Thank you so much and then maybe just taking that into expectations for peak season, I think any any complete E commerce expecting a pretty big year, but can you maybe talk little bit about what other customers are saying you know what as they looked at fourth quarter and then I'll say they continue into the first quarter just.

And expectations from a demand standpoint thanks.

Stephanie This is Rob Crow from the E Commerce and from the peak side of things things continue to.

From a customer standpoint, they continue to be strong through the fourth quarter I'm consumer spending continues to be high consumer based spending continues to be I don't feel that the official peak has even started yet that we're kind of running at peak levels right now and then they fully expect to start early into.

Continue on through the season as it goes into the first part of the year.

The customers that we deal with fuel is going to be strong but again.

It kind of depends on what.

What happens within our economy come the workforce if people go back to work things of that nature, So that there's kind of some.

Unknowns going into the first of the year, but but still continue to believe it's going to be strong.

Yes.

Great. Thank you so much.

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

Oh. Thanks, Good morning, everyone I'm just curious on on on free cash flow what type of Ah expectation you talked a lot about the PML. This year going into next year curious what you're looking at as we as we move towards next year and some considerations for capex need for Investor.

So perhaps technology investments thanks.

Yeah. Scott. This is Kevin last 2019 free cash flow was 288 this year our operating cash.

As in the 186 year to date, so I'm expecting that to be just north of 200 million. This year as far as next year I would say 200 to 250 would be a good guess as to operating cash flow for next for 2021.

Thanks appreciate that and then and then I'm just.

Curious it's been been touched upon in the last few quarters, but you had a write down for cross border Mexico in the second quarter in and I'm. Just curious if there if you're seeing any pickup there and then longer term with the consideration of near shoring going forward what might we see.

Think about for for that business down there. Thanks.

Yeah. It wasn't the right down wasn't cross border actually the cross border Cross border, Mexico, We have a laredo facility in six or seven cross border locations, along the north South border of use to Mexico. The write down was actually for our Mexico entity that is really just intra Mexico. It's a small business that does about 20 million.

$15 million to $20 million revenue and so there was an impairment there and it really had to do it.

Intra Mexico business at that Mexican entity as it relates to the cross border business I think what we're experiencing is that south on freight was kind of soften northbound freight was picking up.

Joe might be able to provide a little more depth into that but you know its and that continues there is a little bit the imbalance.

With capacity as as you know if southbound is softer north bound is is picking up you just get truck and balance and Joe's team works through that so Joe might have been a commentary Scott it absolutely true went to a gym state is theres an imbalance. There was also quite a bit of congestion at the border in the early.

These stages of Cobra in through probably through June a we've started to build because Mexico I think was a little bit hit a little bit harder in certain areas and has been a little bit slower to recover. So you had a lot of congestion of trailers of the border customers or vendors not open to that kind of thing a lot of that is starting to come.

Come apart and we're getting things delivered and getting back a little bit more normalized and then we've seen the volume's down there when you look at northbound and southbound combined continue to get better from a flattened July 6% in August and 8% in September growth, So I'm, starting to loosen up and improve.

As you would expect and as things continue to get it.

Get a little bit more parity with what's going on in Mexico from an operational perspective relative to the cobot I think you'll see even more normalized.

Great. Thanks appreciate all the color guys.

Yep. Thank you so much and we have one more question from Jack Atkins of Stephens. Your line is now open okay. Great. Thanks for the next one follow up guys. Just took just a couple of additional.

Additional questions here I, you know I guess, when we think about capital allocation from here, Jim I mean, I'd just be curious to get your sense for how you you know you and the board are thinking about.

Buybacks versus dividends I mean, there's still potential tax policy changes that could be on the horizon, depending on how the election shakes out.

You guys are you know in a great position within with a net cash balance how are you sort of weighing all that I know you did a special dividend that was paid in January any thought to maybe doing in another special dividend. This year or is it just too hard to tell at this point.

Yeah, those discussions actually happened December you know, we'll have those discussions with the board I would I would anticipate we're not going to change our philosophy of where we stand I do think even even.

Even even though or come out of very strong environment right now and we anticipate that strong environment to continue let's be serious that that the environment has been is three months old right. Now so I think there's still little unpredictability. So.

We prefer the share buyback program clearly, but you know if we end up at the end of the year with excess cash on the balance sheet you were going to do we've done historically you look it is a dividends or buybacks and so that's what we will have our discussion about in December and you know and we'll look at market conditions, and where the where we think 2021.

Atlanta, and we'll consider that any tax implications also I think if you look back when.

When there was going to be a proposed increase in the.

Taxes on dividends back I think it was on the 2012, we actually got a pretty big dividend check so we'll be watching the election in what we think is going to happen with tax rates also look at what our cash flow looks like for next year and what market conditions look like okay.

Okay. Okay. That's great and then I guess, maybe a last question also others as a capital allocation bend to it but im just curious how you guys are thinking about your your trailer pool, you know I think given the freight backdrop. You know we continue to hear about just a pretty significant shortage on the trailer fraud do you feel like your trailer pool gives you a pretty strong.

Pretty strong competitive advantage relative to other asset my players and is there any thought to maybe investing incremental capital. There just just given the demand outlook, perhaps over the next six to 12 months.

Jack This is this is Joe yeah. So isn't it we saw in the third quarter just to kind of make your point a little bit about 35% of our total truck volume was on the Landstar trailer and about 70% of our Bcl revenues on a landstar trailer. So clearly an important part of the model. We think we are in very good shape as it relates to the number of trailers.

We need to support our business and we've continued to operate on the philosophy that for every B C. O that that is pulling a company trailer that enters the fleet. We provide two trailers right and I think that's the philosophy that will continue to to utilize our trailers are very new they show very well, we've got a great track.

In technology, and and it helps us keep our maintenance in line so.

I think thats, the we feel pretty comfortable as we see the Bcl fleet grow we've been pretty effective at getting new.

New equipment built and delivered in time for four peak.

And and those kind of things so I think we.

I think we'll continue to operate on that basis, Okay. That's great. Thanks again.

Jack just just and the other thing too as we rollout, where we kind of roll out our travels every seven to seven years. So it's a replacement cycle. The two things we look at it as too.

Spending on on trailers is we try and anticipate.

We try to anticipate what RBC accounts going look like three months out and add our air travelers based on that and the and then you know replacement cycles about seven years okay.

Okay, great. Thanks, Jim Yep.

Thank you so much at this time I show no further questions I would like to turn the call back over to you Sir for closing remarks, yes. Thank you and I look forward to speaking with you again on our 2020 year end earnings Conference call. Currently scheduled for January 20, Eightth have a good day.

Thank you so much for joining the conference call today have a good morning. Please disconnect your lines at this time.

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