Q3 2022 Landstar System Inc Earnings Call

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

Jim got Tony President and CEO , Jim Todd, Vice President and CFO , Rob Brasher, Vice President and Chief Commercial Officer, Joe Beacom, Vice President and Chief Safety and operations Officer, now I would like to turn the call over to Mr. Jim Good Tony Sir you may be.

<unk>.

Good morning, and welcome to Landstar is 2022 third quarter earnings Conference call before we begin let me read the following statement. The following is a safe Harbor statement under the private Securities Litigation Reform Act of 995 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 containing forward looking information that relates to <unk> business objectives plans strategies and expectations, such information by nature subject to uncertainties and risks, including but not limited to the operational financial and legal risks risks detailed in last year's Form 10-K for the 2021 fiscal year described in the section risk factors and other SEC filings from time to time these risks.

These uncertainties could cause actual results or events to differ materially from historical results or those anticipated investors should not place.

Undue reliance on such forward looking information unless our undertakes no obligation to publicly update or revise any forward looking information.

Our 2022 third quarter financial performance was the best ever third quarter financial performance in Landstar history revenue was approximately 5% above the 2021 third quarter on a difficult year over year comparison and within the range of our third quarter guidance provided on July 30th 20.

Earnings per diluted share was 7% above the 2021 third quarter towards the low end of our third quarter guidance.

Revenue was 1% over the 2021 third quarter, mostly due to a 1% increase in truckload volume revenue hauled via other modes of transportation increased 49% over the 2021 third quarter, most mostly attributed to higher ocean and air revenue per load.

Overall truck revenue per load in the 2022 third quarter was essentially equal to truck revenue per load in the 2021 third quarter with revenue per load up 1% on truck loads hauled via <unk> platform equipment down 2% on truckloads hauled via van equipment and down 1% on truckloads hauled by other truck transportation services.

<unk> was flat.

Revenue per truckload results for the 2022 third quarter versus the 2021 third quarter may seem at odds with the various industry sources that have reported significant decreases since early 2022 and year over year truckload spot market pricing when excluding the impact of fuel costs.

Historically landstar spot market pricing trends month over prior year month, often are less pronounced than the industry trends during both growth and contraction cycles. We believe that has to do with the specialized non routine nature of much of the freight we haul along with our drop and hook business. It tends to act somewhat more like contracted rated freight as we commit trailing capacity as part of that serve.

Yes.

One of many metrics, we follow as revenue per mile on loads hauled by <unk>. This metric is much less influenced by changes in fuel cost as fuel surcharges billed to customers on loads hauled by BCS Our first 100% of the Bcl hauling the load and excluded from last our revenue.

Accordingly, given the increase in diesel fuel cost in the 2022 third quarter compared to the 2021 third quarter. I believe this metric provides a better gauge of current market conditions as compared to Landstar is overall revenue per truckload, which is influenced by many factors, including length of haul delivery time equipment requirements and fuel costs.

While we have seen revenue per mile on van equipment hauled via <unk> decreased sequentially. Since it peaked in February 2022, <unk> year over year change in rates has not been near the magnitude reported in various industry reports.

During the 2022 third quarter.

Revenue per mile on Dan equipment hauled via <unk> capacity in July was 2% over July 2021, and then August was one Penny below August 2021. In fact August 2022 was the first month since June 2020, where year over year revenue per mile on van equipment hauled by <unk> was below the corresponding month in the prior year.

In September 2022 revenue per mile on van equipment hauled via <unk> capacity was only 4% below September 2021.

Even though on a sequential basis revenue per mile on van equipment hauled by <unk> as of the end of the 2022 third quarter was 17% below the all time high reach in February .

As it relates to revenue per mile on loads hauled via <unk>.

<unk> via onside equipment. This metric is somewhat influenced by the amount of heavy oversized loads hauled by vcs as heavy oversized loads.

We will have a higher revenue per mile overall revenue per mile on loads hauled by Bcl as via onside equipment in July August and September increased approximately 9%, 6% and 2% over July August and September 2021, respectively.

Unlike revenue per mile on van equipment revenue per mile on onside equipment hauled via BCS was at a record high in the 2022 third quarter, 5% higher than the 2021 third quarter, we attribute this strength and flatbed pricing to stable demand at an elevated level from the manufacturing sector.

That sector recovery from the impact of Covid significantly lagged the recovery and expansion of consumer based demand that took place in the van market beginning in late summer of 2020.

As the load count total truckload volume in July was 5% over prior year July August was approximately equal to prior year August and September 'twenty two.

2022 was 1% below September 21 2021 the.

The decelerating growth rate in truckload volume was primarily due to slowing of the strong consumer driven freight environment. We experienced since late summer 2020, consumer durables building products automotive parts hazardous materials machinery, and metals and substitute line haul combined to represent approximately 75% of our loadings the rate of growth in load count for <unk>.

Each of these industry verticals other than hazmat shipments slowed in the 2022 third quarter over the 2021 third quarter as compared to the 2022 second quarter over the 2021 second quarter in particular substitute line haul volume continued its downward trend from the 2022 second quarter and decreased 27% compared to the 2021 third quarter.

I attribute the decrease in substitute line haul loadings to softer consumer demand throughout the economy in general and re stabilization and the networks of large parcel in LPL carriers. We continue to attract qualified agent candidates to the model revenue from new agents was over $38 million in the 2022 third quarter.

We ended the quarter with 11644 trucks provided by business capacity owners 220 trucks lower than our year end 2021 cap.

The number of <unk> trucks, the demand of 2023rd quarter was 243 trucks below the end of the 2022 second quarter as typical in an environment with a lower revenue per mile month to month, it's not unusual to experience an increase in bcl turnover.

Loads hauled via <unk> in the 2022 third quarter were approximately 5% below the 2021 third quarter.

On lower utilization, partly offset by slightly higher average truck count.

<unk> utilization devices loads per bcf per quarter decreased 6% in the 2022 third quarter compared to the 2021 third quarter. We ended the quarter with a record number of approved third party carriers in our network. The number of third party carriers hauling freight in the 2023rd quarter increased 21% over the 2021 third quarter.

I will now pass to Jim for his comments on a few specific line items within the Companys third quarter financial statements. Thanks, Jim <unk> covered certain information on our 2022 third quarter. So I will cover various other third quarter financial information included in the press release and in <unk>.

22 third quarter gross profit was $185 7 million compared to gross profit of $189 2 million in 2021 third quarter gross profit margin was 10, 2% of revenue in the 2022 third quarter as compared to gross profit margin of 10, 9% in the corresponding period of 2021, and the 2022 third quarter variable contribution increased 1%.

$245 7 million compared to $242 3 million in 2021 third quarter.

Variable contribution margin was 13, 5% of revenue into 2022 third quarter compared to 14% in the same period last year. The decrease in variable contribution margin compared to the 2021 third quarter was primarily attributable to mix as an increased percentage of revenue was generated in the 2022 period by one truck brokerage carriers, which typically has a higher rate.

<unk> of purchased transportation than revenue generated by <unk> independent contractors and to multimode capacity providers, which typically has a higher rate of purchased transportation than revenue generated by third party truck capacity providers. The unfavorable mix impact was partially offset by an increase variable contribution margin on revenue generated by truck brokerage carriers as the rate paid to truck brokerage.

Into 2022 third quarter was 224 basis points lower than the rate paid in 2021 third quarter.

Other operating costs were $13 4 million in the 2022 third quarter compared to $10 6 million. In 2021. This increase was primarily due to increased trailing equipment maintenance costs. The impact of the resumption of a large in person events with companies <unk> and kind of contractors and decreased gains on disposal of operating property, partially offset by.

Decreased provision for contractor bad debt.

Insurance and claims costs were $31 $4 million in the 222 third quarter compared to $29 6 million in 2021 total insurance and claims costs were 5% of <unk> revenue in the 2022 period and four 3% of <unk> revenue in the 2021 period.

The increase in insurance and claims costs as compared to 2021 was primarily attributable to increased severity of current year claims during the 2022 period as well as increased premiums for commercial auto and excess liability coverage, partially offset by decreased net unfavorable development of prior year claim estimates during the 2022 and 2021 third quarters.

<unk> and claims costs included $2 1 million and $3 $5 million, respectively of net unfavorable adjustments to prior year claim estimates.

Selling general and administrative costs were $53 $5 million in 2022 third quarter compared to $59 2 million in 2021, the decrease in selling general and administrative costs was primarily attributable to a decreased provision for incentive and equity compensation under our variable compensation programs and decreased employee benefit cost partially offset by increased wages.

And increased information technology professional fees and subscription costs from continued investment in new and upgraded applications for used by agents and capacity into 2022 third quarter. The provision for compensation on a variable programs was $8 1 million compared to $16 $6 million into 2021 third quarter.

Depreciation and amortization was $14 6 million in 2022 third quarter compared to $12 3 million. In 2021. This increase was primarily due to increased depreciation on technology tools, resulting from continued investment in new and upgraded applications for use by agents and capacity with approximately $800000 of the increase attributable to increased trailing equipment depreciation.

Jason.

The effective income tax rate of 24, 3% in the 2022 third quarter was essentially equal to the effective income tax rate in the 2021 third quarter.

The effective income tax rate during the 2022 period was approximately 20 basis points below 24, 5% estimated annual effective income tax rate for fiscal year 2022, due to higher than anticipated state income tax refunds and excess tax benefits realized on stock based compensation arrangements looking.

Looking at our balance sheet, we ended the quarter with cash and short term investments of $228 million cash.

Cash flow from operations for the first nine months of 2022 was $436 million in cash capital expenditures were $21 million.

The operating cash flow generation of $436 million during the first nine months of fiscal year 2022 exceeds any full fiscal year operating cash flow in the company's history. Thank you Jim Thanks, Jim The 2022 fourth quarter provides for the most difficult quarter over prior year quarter revenue and earnings compressors at any quarter in 2022 as an example.

<unk> fourth quarter 2021 truck revenue per load was a record quarterly truck revenue per load at the time was $390 over the 2021 first quarter. Additionally truck load count 2021 fourth quarter was an all time last our quarterly record of 667000 loads as it relates to our 2022 fourth quarter expectations based on the trends.

We have experienced in the first few weeks of physical October and our anticipation of a muted holiday shipping season. This quarter I have assumed that the sequential decrease in truck revenue per load and truckload volume we've experienced thus far in October will continue throughout the rest of the 2022 fourth quarter on average and taking into account the extra week.

In the 2016 fiscal fourth quarter truckload count was approximately equal when comparing the fourth quarter to the third quarter in the five years preceding the pandemic.

Note also that the 2022 fourth quarter includes one more weak than the 2021 fourth quarter due to the timing of fiscal year and even given the extra week in the 2022 fourth quarter. We expect the recent softening trend in truckload volume to continue and expect fourth quarter truckload Bob to be below the 2021 fourth quarter in a range from 2% to 4% truck revenue per lead.

<unk> historically has been harder to predict when comparing the sequential change from the third quarter to the fourth quarter in a given year and.

In the five years preceding the pandemic truck revenue per load on average was approximately 1% higher in the fourth quarter compared to the third quarter. However, in 2017 and truck revenue per load in the fourth quarter exceeded the third quarter by over 8%.

Yet in 2018 truck revenue per load in the fourth quarter was 3% below the 2018 third quarter based on recent trends I expect truck revenue per load in the 2022 fourth quarter look more like the 2018 fourth quarter with truck revenue per load expected to be 2% to 4% below the 2022 third quarter given that assumption truck revenue per load in the 2022.

But it would be 5% to 7% below the 2021 fourth quarter.

Based on these expectations that truck revenue per load the number of loads hauled via truck I. Currently anticipate 2022 fourth quarter revenue to be in a range of $1 $775 million to $1 billion $825 million based.

Based on that range of revenue, assuming insurance and claim costs are approximately four 5% of Dci revenue I anticipate 2022 fourth quarter diluted earnings per share to be in a range of $2 62.

$2 $62 78.

Following our typical approach of providing financial guidance and given the uncertainty of the U S economy, we do not expect to be providing financial guidance for periods beyond the upcoming quarter. However, as an example of the model's resiliency. If we were to experience a 20% decrease in revenue in 2023 from our 2022 full year estimate.

And assuming normalized insurance, we believe landstar would still generate an operating margin of 50% or more given the scenario of a 20% decrease in revenue and a 2023 from our 2020 full year estimate we anticipate free cash flow to exceed $300 million in fiscal 2023.

The domestic freight transportation logistics any relies heavily on U S consumer demand domestic manufacturing well, that's our business model. However provides strong free cash flow in almost any environment, while we continue to invest in technology facilities and equipment that support the small and large business owners, who comprise the left our network. We continue to return cash to shareholders during the 2022.

Third quarter, we purchased 504000 shares of stock at a total cost of $73 million.

Year to date the company purchased one nine.

9 million shares over 5% in the year end 2021 outstanding share count.

According to the point in the business cycle Landstar returned significant amount of free cash flow to shareholders via dividends and share purchases. Since 1997. When we first started our share purchase programs Landstar as purchase approximately $2 2 billion in stock the primary use of our excess cash flow.

And with that units will open to questions.

Thank you very much Sir at this time, we will begin the question and answer session.

I would like to ask a question. Please press star one on your Touchtone selling once again that is star one to ask a question and to cancel your request. Please press star two.

Our first question came from the line of Jon Chapell of Evercore ISI. Your line is now open.

Thank you good morning, Jim.

Sure.

Jim.

Your time to shine here with the macro outlook and I know you don't want to give any guidance towards 2023, but as you think about what you've laid out for <unk> and a bridge to some of these bigger macro themes that you just can't help but getting hit over the head winds everyday.

What are you hearing from customers from consumers on inventory and demand and how do you feel about let's just say the first half of 'twenty three relative to the second half of 'twenty two.

Bigger picture volume perspective.

I would say that our second quarter commentary you had a couple of our shippers that were more favorable to the peak season in the fourth quarter and some are more relatively going to be flat to last year I think that that.

That thought process has kind of disappeared a little bit now everybody is flat to a soft muted peak season. So the.

Since our July call I would say things have clearly softened up compared to the anticipation of a better peak season, So I think thats turned.

Our first and then if we talk about next year and demand. There you got to look at the consumer demand side and how it really drove for US the first quarter last this year I'm, sorry, we had a record first quarter.

Parison theyre going to be extremely difficult coming into the first quarter. We are already on a revenue per load that as.

Where are we about 15%, 20% behind where we were in the first quarter and typically you see a drop off from December to January .

The demand in the first quarter is not like it is in the fourth quarter, you see another 5% to 6% drop off in rates. So I think it's going to be extremely firsthand.

Half next year based on just on the comparisons and the direction of the economy.

We definitely feel that we have seen the sequential load volume trends decrease July from July to.

June or July to August to September and anticipate kind of the peak season that kind of being stable throughout the rest of the thing, but the comp going into the first quarter and the demand scenario. We're looking at is going to be very challenging first half next year.

Okay that makes sense and then just very quick follow up I thought your commentary at the very end, 20% revenue decline would still have a 50% plus operating margin.

Talk a little bit about the levers you can pull to keep that.

Margin pretty elevated and that type of a difficult macro backdrop, you just laid out.

As our fixed costs are in the very as a percent of our variable contribution 50% of pushing 50% of your.

We will contribute through two through to operating income really shows that we don't have a lot of leverage in there I mean, there's very few fixed costs, we have maybe 300 employees.

We've had 3800 employees probably for 10 years now there's not a lot of leverage there if the volumes if it's a if it's a revenue per load decline, we still need all the people.

Whether it's the number of trucks, we have in our system on the compliance side or the number of loads passenger the system. So there is not a leverage on on wages and benefits because.

Which makes up about 70% of the SG&A. So we can tweak here and there and if things.

Turned down you just don't rehire, you don't fill positions, but there is.

Like I've said in the past Theres not a lot of leverage we can tweak five or $10 million or the cost structure and the other pieces I would guess we maybe.

In a downturn next year, we could have $15 million to $20 million pick up on the variable compensation program. So you've got that that we always have but other than that theres a lot of inflation in the system on other operating costs with labor and maintenance for our trailer repairs, you've got elevated depreciation because we've been investing in technology over the last few years to build efficiencies within the agent network.

Insurance is still so unpredictable right now is still unfavorable I mean, <unk> seen a couple of the other transports come out with some insurance hits that we live with that every day. So I think again on the.

Trying to get leverage off of the fixed cost again, it can be we can tweak it a little bit, but there's not a lot to pull out other than the biggest pieces of variable.

Compensation programs.

That makes sense, thanks for the time Jim.

Thank you and our next question came from the line of Masco majors such Susquehanna. Your line is now open.

Hey, Jim to square that last comment can you just give us an update and I apologize if we missed it but on.

The variable comp, including stock comp, where your group for this year and if there is anything that has changed from the quote normal year that would make next year being maybe a more of an eight to 10.

And just as a follow up the variable contribution margin to we should see some expansion in a downturn 23 over 'twenty two I think in 2019, we picked up about 60 bps.

<unk> contribution margin expansion with respect to the compensation under variable programs.

Current accrual for 'twenty three is about $31 million and then similar numbers as <unk> target would be approximately $20 million.

Their case $8 million to $10 million.

In the scenario you laid out where you would have a 20% revenue decline would be incentive comp plans still pay out or could that actually go lower than the kind of eight to 10.

We have not set our targets for 2023 yet.

I don't know if we would anticipate setting a target at a 20% decline in revenue, but we will all have a better answer for you on that in January when we set our targets for 2023.

There's a chance it could pay out to the $8 million is also a chance it might not so well.

I'll give you more update as we go through that process, we actually don't finalize our targets till January .

Thanks for the candor there in one last one from me you talked a lot about substitute line haul I believe it was down 35% or so in revenues, but.

But if I look at that other truck transportation number.

The volumes there are still close to 50% above the 2018 peak so that number has still.

<unk> been a pretty good growth story for the year with some time do you have a sense of.

How far some of the <unk> and parcel customers are below what would have been a pre <unk>.

Sorry, Im still above what we would've been a pre pandemic kind of volume level and any sense on what they are planning as we get into next year. Thank you.

That's a very good question look we our power only pre pandemic.

It wasn't near the size of it was as people start looking for just trailing capacity that might not be that's not just a pandemic driven demand I think that was kind of a move in the business as people talk about the drop and hook, we do it's almost like it's dropping hook with someone else's trailer.

So the volumes of where that was unfortunately I don't have that prior to 2019, we'll try and dig that up maybe maybe get that out.

But I would say that the.

I could see being a little more that's a little bit where the subsidy line haul sits so youre going to see that drop off a little quicker than the than our general business and commodities, but I apologize for not having the history back beyond last year.

Thank you.

Thank you and our next question is from the line of Jack Atkins of Stephens, Inc.

It is now open hey, guys. Good morning, Thanks for the questions.

So so Jim.

Let me kind of ask you about housing and sort of the impact you think maybe a slowdown.

Housing related industries, so that could have on flatbed demand as you sort of were inside of demand is just think about 2023, I mean, what sort of sensitivity would you guys happen to that or what sort of sensitivity do you think the outside of the market would have to that.

Well I think generally the onside of market would be negatively impacted I mean, it was building products was a pretty strong producer for us over the last year and a half right is the.

The housing market was relatively strong so I would say that.

Building products makes up about 8% of our revenue.

Again, we're highly diversified so to me it would act almost like everything else. We have consumer durables is where the appliance is set and all the other stuff that we hold so I would say youre going to see that decline similar to the rest of the market.

Decline on consumer demand not near the substitute line haul I mean that was very specific to excess freight coming through the <unk>.

The parcel carriers.

But.

We talked about appliances stuff and the stuff piling up at warehouses in June right and you've clearly seen a slowdown there.

But the overall dynamic of the economy and everything else I think you take that.

Building products consumer durables, it's even affecting the machinery and metals will be common across on the flatbed side. So you can think about the flatbed dynamic.

General softness in any one of those categories, where it is machinery or.

Housing or stuff like that will flow into our business, even though we're not directly that tied into housing.

So okay wrap about lousy answer there Jack.

Yeah.

It was a good answer and then I guess I.

I didn't land the plane.

Okay.

I guess, maybe following up when I sort of look through the different lines of business one area that kind of surprised me to the upside with the strength and it's a smaller bucket by the strength in air and Ocean.

Is that due to.

New agent additions that specialize there do you think thats just sort of lagging.

The slowdown that we're seeing kind of in the international markets any kind of commentary there that's been a it's been a nice nice tailwind for you guys over the last couple of years, yes. When we look at that Jack it's mostly rate right I think our volumes there I think it only looks like there are about 10%. We did 11500 loads air and Ocean. This year in the quarter compared to only 10000 last year. So.

It's really a rate driven.

I mean rates are still elevated to about 50% of where they were compared to last year and yes. The other thing is we did add a few agents into the ocean Eric category.

Which drove a little bit of that volume increase, but it's mostly on the rates as you know at one point I think the ocean rates were four five times, where they were a year ago, and that's pulled back a little bit, but that's what's driving it okay I'll turn it over thanks again for the time guys.

Thank you and our next question is from the line of Todd Fowler of Keybanc capital markets. Your line is now open.

Okay, great Thanks, and good morning.

So Jim I know that we've talked about this quite a bit in the past and you had some comments about this in your prepared remarks, but I just wanted to spend a little bit more time on your commentary around how your revenue per load is trending versus some of the spot rate data that's out there.

Look at 'twenty, one van revenue per load was up 30% and that seem to track a little bit more in line with spot rates and right now it seems like it's a little bit more correlated with with contract and so can.

Can you just spend a little bit more time, I mean is that much more on the shift of power only in some of the mixed things or are you expecting that theres more that we will see van revenue per load start to decline more to move into 'twenty three.

Wanted to spend a little bit more time on kind of what youre seeing with the decoupling between revenue per load in spot rates.

Like I said, a significant part of it is that when you put trailers that when you put trailers in the system and our drop and hook.

That does work a little bit more it's a little more steady a little more stable and true spot market pricing.

Tenant not kick you out as fast if you're providing trailers and so you kind of can lock in a little longer on those rates and hold them a little more steady youll get pressure. There. There is no question. It just takes a little while longer.

The other thing is when you think about our bcl they tend to look for premium.

Mother load right. So theyre trying to they're trying to find the load that pays pays on the most and their utilization is a little bit down because like we talked about you saw rates slide a little bit so theres still sitting out there theyre not haul as many loads because theyre looking for the mother Lode, So theres a little bit of that to keep the rates up.

They will only hall theyre not going to walk away and six months are going to not going to drive as much if rates are down 20%, they're going to still look for the model and so there's a whole bunch of things the non routine the flatbed like part of the if you look at total revenue per load.

Combined flatbed stabilizes it because we actually have flatbed up a little bit. So that's driving the overall thing so youre seeing a little softness in the van side.

With supporting from the.

Flatbed side.

We haven't correlated since February .

When we first started seeing freight waves and them coming out with this we're 20% below not us, but the spot market at 20% below last year and to be honest with you Todd.

I'm struggling with figuring out why were so far off from where the industry is now a lot of the stuff we read on the data as X fuel and I've done some back of the envelope and even when you pull fuel out were like 10% behind so not 40% or 30% that you're reading in the industry. The other thing I mentioned was.

I believe truckstop data is is the paid to truck value not necessarily what's billing to the shipper, we talk about actual billed to the shipper numbers as opposed to what's going on and what trucks are getting paid and if it's a posted rate it doesn't mean.

It does not necessarily mean that the freight moved.

And then the other piece of it kind of stabilized we don't put fuel in for the Bcl as another stabilizing factor. So you don't have the volatility from the fuel piece on the BCS side because of fuel surcharges are removed I forget what the number was but I think the bcl fuel surcharges upwards of over 100.

$70 million or 120 million I forget Jim may have the number so thats not in the numbers. So that takes a little volatility out too. So we don't have the effect of fuel spikes in declines for that 40% of our revenue.

Yes, that's helpful and I know I know, we spoke about it and I know you've done some work on it and so it's just helpful. As we continue to try and think about the correlations and everything and what we're seeing so I appreciate the thoughts there.

Just for a follow up.

Jim Todd on the variable contribution margin, it's been relatively consistent for the last four quarters or so I know that the mix is changing can you. Just can you maybe share with us thoughts on fourth quarter variable contribution margin and then just if the freight market does weaken and we see some shifts away from kind of the elevated.

Brokerage loads and the shift back to <unk>, how would that trend as we move into 'twenty three.

Yes, sure Todd I think if you look back the last two years work getting variable contribution margin <unk>, we predict about 50 to 70 bps. We don't we don't see that as exaggerated this year <unk> to <unk>, because if you think about the starting point the utilization utilization started to soften up a little bit <unk>.

More than we thought we expected it to be soft in <unk>, which it was so we've got a little bit of compression from <unk> to <unk>, but not as much as recent recent years and it seems like.

International is expected to be a little bit of a smaller share in <unk> in the last couple of quarters.

And Jim Jim made a comment early on about the when things slow down we'll get some margin expansion would you say how many bps.

Brokerage you guys know the brokerage freight typically falls off faster in a downturn right. So.

Hypothetical 20% decrease I use 19 as a guidepost, we picked up about 60 bps on bcm.

Yes, okay. Good I did catch that in it that's helpful. Thanks for the time this morning.

Yes.

Thank you and our next question is from the line of Scott Group of Wolfe Research. Your line is now open.

Hey, Thanks, good morning.

I was wondering is there any.

Hurricane or FEMA benefit in the fourth quarter Guide and then Jim as you maybe contemplate potentially revenue down.

20% next year I want to think about the mix between volume and price.

As to as to the first part of the question, we do not anticipate in our guidance any hurricane and it wasn't material in the end of the third quarter, either so there's nothing material in there.

<unk> relief related.

When I think about the volatility it's always not always always is such a bad word, but it's more often than not price volatility with us our volumes tend to not.

No impact the model as much as the spot market pricing does if you look at the history.

Over the last 10 or 15 years, our volumes year over year, probably dropped off three or four of those years, it's always been the volatility and price.

So going into next year I would think the same thing I think we're going to my the biggest question Mark is on pricing. It's the hardest part to predict and I would say, we probably will see we had record volumes like just crazy. This year I expect a decline in volumes next year, but I think the bigger impact is going to be on the revenue per loan.

Okay and then.

Then.

The <unk> talent inflicted lower year over year, just curious what youre seeing from that.

Do you think that continues and then just more bigger picture.

Or do you make of this.

<unk> thing and how big of a risk to the model is that is that kind of becomes a national issue.

Yes, Scott this is Joe so, yes, bto kind of I would I would say we saw.

The peak in revenue per load in February we saw utilization start to decline in the second and into the third quarter and with that truck count decline.

I think that there is a couple of pieces to that one is the number of additions is off from where we typically see and thats up.

A lot of time as a function of the ability or inability to get used trucks and we're also seeing terminations up because of either the decline in price or a reduced demand, but also the inability to get their trucks repaired in a timely fashion. So that's kind of factoring into bto count.

Some of those things.

Normalized I think the <unk> count will kind of hit bottom and increased much like it did in 2019, where we saw kind of a similar scenario I would expect us to see it dropped a little bit further.

In the fourth quarter of this year, and then hopefully bottom out going into next year.

And on the on the <unk> front.

As we mentioned last quarter of around 360, <unk>, who were affected by 85.

And in contact with.

All of them are all but a few of them.

Have made their decisions as to whether they relocate from California stay in California, not outbound, California break.

They will get their own authority.

Majority of those are going to either stay in that hall, California loans or have started the relocation process.

So we don't see a significant.

Impact for our ability to.

Service, California or in the Bto count going forward.

Yes, sorry, I was talking about.

Proposal to sort of.

Makes that more of a national issue, maybe I asked around when I studied retirement of labor proposal.

Yes, that's correct.

Okay, Yeah. So on that one Scott, so, it's a little bit different or quite a bit different actually.

This is as it relates to the fair labor standards, the governance of minimum wage and overtime.

And right now truck drivers are exempt from overtime. So there'd have to be a congressional action to actually change that for truck drivers.

85% as you recall, there's three prongs to that and if you feel any one of the three youre an employee driver with the Dol proposal, it's more of a holistic look at the relationship that you would have with your owner operator, and there are a number of different <unk>.

Factors inside what they call an economic reality test.

And as we look at that.

Current proposal as we understand it again it just came out.

Something we're going to watch however, we don't really interpret that at this point is there anything that we feel uncomfortable about but again, we're going to watch it and.

Get more detail as more details come out, but right now it's something that.

We remain comfortable with our relationship satisfying that expectation.

Very helpful. Thank you guys.

Thank you and the next question is from the line of Elliot Alper of Cowen. Your line is now open.

Great. Thank you so you discussed.

The free cash flow you generated through the first nine months of the year would be curious to hear any thoughts.

On M&A, given the freight environment that is pressuring carriers.

Are there any attractive opportunities coming across the desk within your portfolio.

And kind of where do you think the best place would be for <unk>.

Organic growth.

Yes, the model doesn't really.

Support just wide open acquisitions, because anything we look at generally conflicts with the small business small business owners that we support if we were to look at buying a trucking company or even a broker here in the U S. Moving truckload freight it would compete against those agents. So when you talk about domestic ground transportation there there aren't a lot of opportunities for us.

That wouldn't create a conflict within the model.

So we always lean on what is what's out there and it wouldn't really conflict with our modeling there are very few options for us.

So our M&A, we see stuff all the time, but we don't pull triggers on it we're not a big M&A organization, we focus on the core support the agent support the business capacity owners. So we're generally the plan we have no long term or short term plan to do any M&A and I would just take our cash flow and do we have done before and return it to shareholders via dividends or.

Share buybacks, we do keep our eyes open I don't think Theres any question I'm not going to sit there and say it's a it's not a never thing. It's just what's the opportunity we would have that wouldn't compete could it be freight forwarding could be international could be some kind of tech play.

But nothing's popped as of yet we're always looking but theres nothing on the horizon for us.

Okay, great. Thanks, I guess, one other one just on the visibility within the network.

So peak season that has come in kind of below expectations compared to a few months ago. I guess what has changed since then because as we move through peak season, and what are the largest uncertainties.

We are still kind of invisible within the rest of Q4.

With us the volumes are pretty good I mean I think.

Our volume estimates, we're pretty good at that I think it's the unpredictability of the pricing and what's going to happen on the demand side. If you we did anticipate a little bit of slowdown in rates coming into the fourth quarter compared to third quarter, which is pretty unusual for us to be negative I think the most unpredictable thing is not necessarily the the demand coming across I think clearly it's going to be.

Everybody thinks it's going to be soft I think what happens to pricing as we move through the quarter.

We do anticipate our subsequent line haul to continue to be down compared to where it was over the last year.

Even though Jack talk about building products, and where that goes with a slowdown in housing automotive is still relatively strong which is that's the one thing keeping keeping volumes up a little bit so keep an eye on and then the other piece would be the demand from.

<unk> one of the things we're very good at is finding truck capacity and a lot of the three pls are the other carriers look to us when they can't find a truck and a very tight market and is that loosens up we see that drop off a little faster. So that's another thing we're keeping our eye on it dropped off those it was 23.

That three PL business, where we haul for another carrier another broker or a three PL when theyre just looking for truck capacity or they use us permanently like we're part of their network that drops off a little quicker. It was 23% of revenue last year and it dropped down about 18% of revenue now so we're keeping an eye on that too is the demand coming in.

As tender rejection rates go from 80% up to 95% when you're accepting 95% that business slows down a little quicker than most.

And the subsequent line haul line.

Alright, Thank you I appreciate it.

Thank you and our next question is from the line of Scott Schneeberger of Oppenheimer. Your line is now open.

Thanks, very much good morning.

I can tell you.

Building products category is that are you predominantly.

Is it <unk> or is there a large non res component and can you give us give us an idea.

For where that shakes out and then I'll have a follow up similar thanks.

It's a mix of both its not generally.

You could be doing lumber into commercial so.

And it's not we're not doing a lot of the home stuff, we're doing shingles and stuff like that for some of the new buildings.

I don't think we split it out between whether it's whether demands coming in from residential or it's coming in from the commercial side. We did generally may not even know what it is right we may be moving stuff to yards and stuff, we're not necessarily bringing the final destination.

Yes understandable.

Tricky to answer this next one two it's along the same milk, but.

Just given the limited visibility in the business model, but.

Infrastructure Bill things coming up for next year are you catching any wind.

Through through shippers of.

And not just limited to that but maybe chip chip plants large.

Energy alternative energy projects are you catching wind or anything like that that can be very.

Beneficial are contributing next year, just not have the visibility there.

There is nothing right now that would move the needle that we're aware of.

Any of the sectors where people are.

Talking about some spike in business coming off from a from some of the things you mentioned.

Not right now.

Okay Fair enough last real quick one for me.

Any any thoughts on it.

Investment spending as you as you kind of touched upon it earlier in the call, but thoughts about any changes acceleration or deceleration with investment spending in the business going forward.

I think you've got the two things, where we spend right is trailing equipment and then technology. The technology spend is probably going to be consistent year over year. So.

What's happening on that side, it's the cash spend is probably going to be about the same but the depreciation as we rollout. These new tools depreciation starting to growth as youre starting to capitalized stuff that was sitting in prepays as we as we launch so youre going to see an increase in the depreciation on the technology going forward, maybe not the cash spend but the technology and then as it relates to <unk>.

Trailing equipment.

Still I think the industry is struggling with keeping enough building out enough trailers for the demand.

As I said I think at the end of the second quarter. We're looking at we're getting quotes on new trailers.

$50000 range, when we're paying 35000.

We have been unable to reach that we keep our trailers about seven years and we've been unable to replace them on a seven year cycle.

And so there is when we start replacing them clearly the depreciations going be higher the cash spend is going to be higher because no. One can predict what the trial is going to cost us as we start trying to get them back new ones back into the system next year, mostly replacement, we're not growing the fleet. We're just trying to replace but the cost of a trailer significantly higher today than it was just a year ago, So thats really where we spend right.

Two biggest points of investment is our trailing equipment or technology.

The technology for US is a little more predictable the trailers, we will see what happens when we can get our orders in for next year and see what those trailers are going to cost.

Got it thanks very much.

Thank you if you would like to ask a question. Please press star one on your Touchtone phone once again that is star one to ask a question.

Our next question is from the line of Bruce Chan of Stifel. Your line is now open.

Hey, good morning, Gents appreciate all the color here on end market demand.

But if I look at things from a geographic standpoint wondering if theres anything to maybe call out here is there more maybe east to west and do you think that's having any impact on your revenue per load.

I don't think theres any mix issues and the revenue per load were pretty spread out geographically like we don't have any I mean, clearly the concentrates coming out of California, Texas and Florida.

Major hubs, but I don't think theres been a shift in geographic that would drive that change in our revenue per load.

That's not moving the needle.

Not much at all.

Okay got it no that's clear and then maybe just one quick one here on intermodal I know, it's small but.

Volume drop offs.

Continuing to kind of get steeper there or is that just rail fluidity or cheaper truck spread anything anything else happening there Bruce this is rob.

Couple of different things for us is very small.

Really for us it constitutes kind of it goes with the consumer spending.

Two main customers to our agents one electronics and one is food base, so thats kind of been our decline there.

Okay, and then has that kind of leveled off or do you expect that to kind of continue to think a little further.

I think it's leveled off for now the electronics piece of it the food.

Ebbs and flows.

For.

How we work in that market.

But I don't see I don't anticipate anything different in those.

Those two accounts.

Okay perfect I appreciate the time.

Sure.

At this time Im showing no further questions I would like to turn the call back over to you Sir for closing remarks.

Thank you looking forward the current economic environment with high inflation and slowing consumer demand makes for what we anticipate will be a more challenging freight environment. During the 2022 fourth quarter than we experienced during the first three quarters. This year. Nevertheless, our 2022 performance. Thus far has been exceptional going forward, we expect that even with inflation driving cost driver.

Higher cost tied to labor equipment and insurance the resiliency of Landstar is variable cost business model will continue to generate significant free cash flow and financial returns. Thank you and I look forward to speaking with you again on our 2022 fourth quarter and year end conference call currently scheduled for Thursday February .

Have a good day.

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

Sure.