Q2 2023 Landstar System Inc Earnings Call

Good morning, and welcome to Landstar System, Inc. Second quarter earnings release Conference call all lines will be in a listen only mode until the question from a 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 Sony <unk>.

And N C E L. James Todd Vice President and CFO , Joe Beacom, Vice President and Chief Safety and operations Officer, now I would like to turn the call over to Mr. Jim got Sony Sir you may begin.

Thank you.

And welcome to last or is 2023 second quarter earnings conference call before we begin let me read the following statement. The following 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 <unk>.

<unk> business objectives plans strategies and expectations.

Such information is by nature subject to uncertainties and risks, including but not limited to the operational financial and legal risks detailed in <unk> Form 10-K for the 2022 fiscal year described in his section risk factors and other SEC filings from time to time.

Risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated investors should not place undue reliance on such forward looking information that lesser undertakes no obligation to publicly update or revise any forward looking information.

Given the current freight environment with soft demand and readily available truck capacity last are performed relatively well into 2023 second quarter before beginning my discussion of our 2023 second quarter financial performance I want to briefly discuss two big picture items freight cycles and seasonal trends that provide context to this year's results.

<unk> revenue performance through the great cycles that occurred over the past three years ultimately set the stage for where we are today generally in the ordinary course of our business, we experienced spot market down cycles to drive revenue from peak to trough as well as up cycles that drive revenue from trough to peak in both cases with typical spot market freight cycle from peak to trough or trough to peak.

<unk> over a period of six to eight quarters.

And these cycles are typically driven by three main factors the level of industry demand for freight services the level of bell truck capacity industry, and the industry and the differential between industry wide contract and spot pricing at any given point in time during the cycle.

Looking back over the last three years Landstar is trough quarterly revenue occurred in the 2022nd quarter at the beginning of the pandemic.

Landstar peak quarterly revenue occurred eight quarters later in the 2022 second quarter.

Yeah.

Yeah.

From 2022nd quarter revenue dropped to the 2022 second quarter peak revenue grew by over $1 billion or a 140%.

Since hitting peak quarterly revenue in the 2022 second quarter Landstar has experienced a down cycle during which quarterly revenue has thus far decreased each quarter over the past four quarters.

Current conditions make it difficult to predict exactly when the current down cycle will end and revenue will again begin to cycle upwards.

Two of the three key factors that drive the spite cycles are trending normally given the period of the cycle. We are in one at the truck availability truck orders have recently slowed and industry wide D. O T truck medications have exceeded Chuck authorizations and seven of the last eight months through may.

And two contract freight rates remain well above spot fragrance. However, the third key factor driving cycles demand continues to be soft, which makes the timing of the end of the downcycle less predictable.

Throughout my remarks, I will also make mention of the concept of normal seasonal patterns for purposes of my remarks today normal seasonal patterns for first two revenue load count and or pricing trends from 2015 to 2019 and excludes 2000 22021 and 2022 due to the highly unusual dynamics reflected in those quarterly metrics during.

The pandemic driven freight cycle now.

Not to the 'twenty two 'twenty three second quarter include.

Included in our April 26, first quarter earnings release, we provided revenue guidance of $1 $4 billion to $145 billion.

We updated second quarter guidance via an 8-K filed the SEC on may 23rd in anticipation of an upcoming Investor Conference.

And that 8-K, we lowered revenue and earnings guidance due mostly to both revenue per truckload and the number of loads hauled via truck through mid may trading below the estimates for those metrics used in our initial guidance that update reduced our revenue guidance to $1 $3 billion to $5 billion to $1 37 5 billion.

Our initial second quarter earnings per share guidance was $1 90 to $2. Our updated earnings per share guidance based on the lower revenue guidance was $1 75 to $1 85.

2023 second quarter revenue and earnings per share both came in at the high end of the revised guidance.

As we enter 2023 it was clear we were facing a very difficult year over year financial comparisons coming off back to back record years in 'twenty, one and 2022, driven by the strong consumer demand and tight truck capacity.

In fact, beginning in the 2022nd quarter and through the 2020 to first quarter.

Both truckload volume and revenue per load.

Consistently outperform sequential quarter to quarter normal seasonal patterns.

This outperformance came to an end in the 2022 second quarter from the 2022 third quarter through the 2023 second quarter less source truckload volumes and revenue per truckload underperformed normal seasonal trends.

Overall total truck revenue was $1 $247 billion into 2023 second quarter, 29% below the 2022 second quarter on a 16% decrease in load volume and a 15% decrease in revenue per load.

Rail Air and Ocean services in the 2023 second quarter were 50% or $102 million below the 2022 second quarter. The significant decrease in non truck transportation revenue was in line with our expectations of lower volumes across all non truck modes, and the expectation of a significant decrease in.

<unk> revenue per shipment.

Although revenue in the 2023 first half was below the 2022 first half by 29% one needs to put the impact of the pandemic driven growth in perspective.

Given the significant softness in demand compared to the fiscal 2022 2023 first half revenue exceeded 2019 first half revenue by more than 35%.

As it relates to truckload volume Landstar as normal seasonal patterns exhibited average growth of approximately 8% from the first quarter to the second quarter.

Given the softness in freight demand actual second quarter truckload volume was 1% below the 2023 first quarter in line with our updated guidance, but well below normal seasonal patterns.

Even with the decrease we experienced in truckload volume from the first quarter to the second quarter truckload volume in the 2023 second quarter was still our third best all time second quarter truckload count behind only the consecutive second quarter record set in 2021 and 2022.

The inconsistency in pricing month to month has been very atypical from a seasonal perspective, making it difficult to project spark pricing even in the near term.

Late in 2023 first quarter truck revenue per load stabilized and the stabilization continued into early April prior to our release of the second quarter guidance as Eric will came to an end rates took a sharp downturn in settled almost 5% below March.

Over the past 16 months since reaching its peak in February 2022 months of advanced sequential change in truck revenue per load have trended worse, the normal seasonal patterns and all but four months.

Most recently in a positive development made a June revenue per truckload increased modestly however performance was still below normal seasonal patterns.

As to the breakdown of truck transportation revenue by equipment type onsite it platform equipment held up better than revenue hauled via van equipment and other truck transportation services.

Quarter over prior year quarter revenue comparisons for van are much more challenging than that for revenue hold on onsite it platform equipment, especially as it pertains to revenue per load depend.

The pandemic driven spike in consumer demand drove van revenue per load from its trough in may 2020 to its peak in February 2022 up 76%, while revenue per load on outside of equipment increased.

Revenue per load I'm, sorry, while revenue per load on outside of equipment increased 54% from its low point in May 2020 to its peak in July 2022.

I believe the rates in the spot market will stay relatively higher than pre pandemic levels, given the significant amount of additional cost to operate a truck today.

Based on industry data from atrophy.

The cost to operate a truck excluding fuel costs in fiscal year 2022 was approximately 20% greater than in 2019 during which also experienced a relatively soft freight environment bcl revenue per mile on van equipment, alongside equipment were 20% and 30% respectively above June 2019, I believe that due to these cost pressures, particularly on smaller carriers theirs.

Relative to the little room for further spot market rate decreases.

Total loans in the 2023 second quarter was 17% below the 2022 second quarter.

Truckload volume was somewhat influenced by <unk> customer type for example, Landstar provides truck capacity to other trucking companies three pls and truck brokers, where volumes tend to vary more widely period to period with change in the levels of freight demand.

Revenue hauled on behalf of other truck transportation companies was 16% and 20% of transportation revenue in the 2023 and 2022 second quarters respectively.

During periods of tight truck capacity other trunk trucking companies three pls and truck brokers reach out the last startup provide truck capacity more often than during times of more readily available truck capacity the.

The freight hauled by last on behalf of other truck transportation companies.

Includes almost all of our commodity groups, including our substitute line haul service offer.

Overall, the number of loads hauled on behalf of other truck transportation companies in the 2023 second quarter was 28% below the 2022 second quarter contributing significantly to the overall decrease in quarter over prior year quarter volume.

During the quarter Bto truck count decreased by 261 trucks relative improvement compared to the 472 truck decrease we experienced in the 2023 first quarter overall Bcl truck truck count has decreased approximately 11% since the end of the 2022 second quarter. It is typical to incur increased turnover in bcf or truck count when <unk>.

Truck rates decrease over the past 12 months truck rates have decreased at a rapid pace, especially on loads hauled via van equipment. The primary equipment type hauled by Vcs.

Theres not seem to be any unusual factors driving the recent reduction in bto truck count 12 month Rolling average turnover is currently about 37%, which is very similar to the 36% term rate landstar experienced in 2019 during the most recent relatively comparable soft freight environment.

I'll now pass to Jim Todd to comment on other additional P&L metrics regarding the 2023 second quarter performance. Thanks, Jim Jim has covered certain information on our 2023 second quarter. So I will cover various other second quarter financial information included in the press release.

2023 second quarter gross profit was $139 7 million compared to gross profit of $208 1 million in the 2022 second quarter gross profit margin was 10, 2% of revenue in the 2023 second quarter as compared to gross profit margin of 10, 5% in the corresponding period of 2022.

2023 second quarter variable contribution was $198 2 million compared to $267 5 million in the 2022 second quarter.

Variable contribution margin was 14, 4% of revenue in the 2023 second quarter compared to 13, 5% in the same period last year. The increase in variable contribution margin compared to the 2022 second quarter was primarily attributable to one an increased variable contribution margin on revenue generated by truck brokerage.

Carriers as the rate paid to truck brokerage carriers in the 2023 second quarter was 170 basis points lower than the rate paid in the 2022 second quarter and to mix as an increased percentage of revenue was generated by <unk> and kind of contractors, which typically has a higher variable contribution margin and revenue generated by other modes of transportation.

Other operating costs were $13 $5 million through 2023 second quarter compared to $10 4 million. In 2022. This increase was primarily due to an increased provision for contractor bad debt and increased trailing equipment maintenance costs, partially offset by increased gains on sales of used trailing equipment.

Insurance and claims costs were $29 8 million in the 2023 second quarter compared to $34 1 million in 2022, the decrease in insurance and claims costs as compared to 2022 was primarily attributable to a decreased severity of accidents. During the 2023 period. However, total insurance and claims costs were five 8% of <unk> revenue is June <unk>.

Three period, and four 9% of <unk> revenue in 2022 period, the 90 basis point increase in insurance and claims cost as compared to <unk> revenue was almost fully intact was almost entirely attributable to a 14% decrease in <unk> revenue per load the.

The sequential increase in insurance and claims cost as compared to the 223 first fiscal quarter was primarily attributable to increased cargo claim expense.

Selling general and administrative costs were $54 $5 million for the 2023 second quarter compared to $59 million in 2022, the decrease in selling general and administrative costs was primarily attributable to a decreased provision for compensation under the company's variable programs and a decreased provision for customer bad debt, partially offset by.

Increased information information technology costs and increased wages in the 2023 second quarter the provision for compensation under variable programs was $200000 compared to $8 3 million in the 2022 second quarter.

Depreciation and amortization was $14 9 million in the 2023 second quarter compared to $14 3 million. In 2022. This increase was due to increased depreciation on software applications, resulting from continued investment in new and upgraded tools for use by agency capacity, partially offset by decreased depreciation on the Companys trailer fleet.

The effective income tax rate was 24, 6% in both the 2023 and 2022 second quarters.

Looking at our balance sheet, we ended the quarter with cash and short term investments of $419 million cash flow from operations for the first half of 2023 was $192 million in cash capital expenditures were $30 million back to you Jim.

Thank you.

The 2022 second quarter made for a very difficult year over year comparison to the 2023 second quarter. Following the 2022 second quarter 2022 third quarter truckload pricing in truckload volume both experienced below normal seasonal average sequential growth rates.

One would expect this to make 2020 <unk> third quarter 2022 third quarter comparison comparisons slightly less challenging than what we have faced during the two most recent quarters.

To date through the first few weeks of the 2023 third quarter, we've not seen significant consistent and truck revenue per load on a day to day basis, Accordingly volatility in revenue per load and to a lesser degree truckload volume make predicting near term performance very challenging.

Yesterday's earnings release made note that early truck July truckload count was trending below historical sequential monthly pattern.

Given the low start in truckload volume in the quarter, we have forecast sequential month to month patterns in truckload count to trend below normal seasonal patterns throughout the third quarter, assuming we remain at below normal month to month seasonal trends, we expect truckload count in the 2023 third quarter to be 16% to 18% below the 2022 third quarter.

We expect 2023 third quarter truckload pricing to be 10% to 12% below the 2022 third quarter given those estimates the number of loads hauled via truck is expected to be approximately 6% below the 2023 second quarter compared to a normal seasonal pattern of minus 1% and our revenue per truckload to be approximately one 5%.

Above the 2023 second quarter slightly below normal seasonal patterns.

So expect revenue from our non truck most be similar to that of the 2023 second quarter based on the assumptions mentioned, we expect revenue in the 2023 <unk> be in a range of $1 75 billion to $1 $3 billion to $5 billion.

And earnings per share to be in the range of $1 65 to $1 75.

The 2023 third quarter guidance incorporates a variable contribution margin range of 14, 4% to 14, 6% and insurance and claim costs somewhat similar to 2022 first half as a percent of Bcl revenue.

We don't expect much change to overall freight economy in the 2023 third quarter compared to what we experienced in the 2023 first half overall, though demand for freight transportation expected to remain relatively soft in the 2023 third quarter continuing to drive truckload volumes significantly lower compared to the 2021 and 2022.

Directionally is difficult to forecast truckload volume levels beyond the next few months as future economic conditions are very unpredictable.

Regardless of the economic environment last year's challenging year over year comparisons the resiliency of Landstar provided the cost business model continues to generate significant free cash flow through the first half of 2023, less our generated free cash flow of $179 million.

Additionally, at the beginning of my remarks, I discussed the significant unprecedented favorable impact of the pandemic driven consumer demand and supply chain disruption had on the companys revenue in fiscal year, 'twenty, one and 'twenty two.

Third quarter may be the bottoming from the load perspective, whereas the revenue per load may have already it bottomed in the second quarter or is that the right way to think about that just from using the van and backing into your bigger picture guidance numbers with a quarter.

I would like to be able to confirm that <unk> as we mentioned in my in my prepared we actually are anticipating some continued <unk> seasonal softness on both the van and flats. If you if you break it down to that level of detail because we've seen nothing to indicate that we're going to start seeing either either the bottom, which we hope we are at the bottom or.

Or any acceleration of growth off of this where we are today. So I I would say that both equipment types are kind of generally trending in the same direction and it's not a significant drop off we're just you know.

Well you might see rates typically go up one percentage of the third quarter were seen him maybe good softener b a half a percent of one per cent down you know, it's not there's not significant it's not like it was but it's still trending seasonally softer on both equipment types as compared to you know the history that we've had uh-huh.

Huh, Okay. That's helpful. And then secondly, there's a lot of disruption in the market right now I'm, probably more so than any time since spring of 2020 have you seen any changes in the sentiment around from your customers and again this kind of relates to any segment. We had company is potentially going out of business potential strikes I think.

Free flow shift from one side of the country to the other any kind of view from your your customers that are in a bit more of a rush for capacity. Then maybe you know over the last 12 months in to any direct benefit to you to land start specifically from some of these moving chess pieces.

Two of the bigger Disrupters that had been discussed recently or the little more L. T. L. Partial type businesses that don't directly affect us other than the fact that if if something does occur with one of those when we need to move right between D. C for a different carrier that could impact us, but I wouldn't say, it's it's very significant as to shifts in geographic regions.

I think those would be you know.

Stop was moving to the east coast over the last few years of West Coast. So I don't think there's any impact their directly that hasn't already occurred for us.

So I'm not seeing that you know when you speak to.

There are some things happening and you know you're talking about carrier bankruptcies or carriers, leaving the market or the number of available trucks out there and and very isolated areas right. Now we are seeing trucks push rates up a little bit, which we hadn't seen probably since the end of 2022, but it's not across the board. It's it's very specific.

Probably west coast, where they're dealing with some regulatory issues on how many trucks are out there an independent contractor status other than that it's kind of seems it's been for the last six or eight months. So nothing special really driving us to have any considerations of an upward tick yet.

Got it that's very helpful. Thank you Jim.

Yeah.

We will move to the next person I'm coming from the Scott group of off research or your line is now open.

Hey, Thanks. Good morning, just wanted to clarify a couple of things first so <unk>.

Volumes, starting July are underperforming she's not Jim you're assuming that they continued to underperform seasonality in August and September is that right, yes that is absolutely right.

And the thought process on that is.

To be honest, we missed the second quarter. When we released April thick and what we projected when we put the second quarter guidance together was sequential improvement in normal seasonal patterns and since we haven't seen that in in you know six or seven months. We just we played a little conservative trending sees.

Emily kind of where it's been as missing the seasonal trends by one or 2%. So that that was a logic do I see patterns.

Can I guess August .

No, there's nothing indicating other than trends to be honest with you Scott.

Apparently and then I'm not that the yellow question do you are you seeing any pick up in your substitute Line-haul business. Do you think you would start to see that is maybe some carriers picking up share need some some increased mine all capacity.

Would expect yes, we would see that but I would say, it's clearly not going to be material to any.

Third or fourth quarter, it's not.

By the end of the third quarter, if we get something that probably wouldn't even be something that hit our radar even talk about so not material.

I'm, a big picture taken a step back if you've had good views cause of where we are in the cycle do you.

Are we at the bottom is are you are you comfortable enough to say that and you see that what's your view.

I would like to say that I don't know if I can to be honest with you because as we just talked about as our seasonal trends continue to be more below normal which would indicate that we're not there yet now I'd say that the seasonal.

The abnormal below seasonal trends slowed a little bit, but we're still tracking it slightly below seasonal trends. So I would not declare bottom yet I am you know I'm, a psycho guy I believe in the cycles, especially because we're spot more you got that it's not just demand and the number of trucks on the system and actually has to do with the contract and and spot pricing right.

Spot pricing and contracted pretty far away right now but.

But we are still seeing a little more pressure on the contract side in the spot prices aren't coming up yet, but I think you know on that when I talk about the six to eight quarter trends I am still a believer that puts us in sometime the end of 2023, beginning of 2024 and I'm still a believer that happens.

But you know, it's who knows what happens with demand.

To me. The Big question is just a man continued to slip or is it gonna actually gonna start to improve coming off this where we are right now and that that's kind of where I'm Ah hesitate on giving a an answer on that four at the bottom.

So hopeful but visibilities level okay.

Yeah.

Thank you Jim appreciate the time yeah.

Ooh now to the next question coming from the line out Jack Atkinson Stevens for Atlanta is not open hey, great. Good morning, guys. Thanks for taking my questions. So I guess you know maybe if we could kind of go back to the cycle thoughts for a moment I'd love to kind of take a look at this from a capacity perspective, and Joe is there anything maybe you can kind of.

Help us with the terms of thinking about the the decrease that you're seeing both in terms of the Beast on the V C L front and and the the the active broker third party broker carriers, maybe talk about what do you think's driving that does that retirement, maybe or is that are that you know the effect of capacity attrition.

Yeah, Jack I think what's what's driving it is kind of all of the above I think was primarily the driver is the demands environment in the right environment I think of Jim said in his remarks that you don't when rate declines we tend to see more terminations Ah and I I really think that we react very I think quickly on the V C O front too.

Changes in demand in price and I'm just gonna go back here I've got some just some quick numbers from back to 17 as we saw the economy you know strengthen from 16 into 17. So we added 257 trucks and 17, Alright continued strength of the 18, we added 903 that year it softened a little bit and 19, we Wheeler.

356.

We all know what happened in 2020, we added 748 in the back three quarters of the year.

We had an 873 and 21 because it was a good year, we lost 583, mostly in the back half of last year and we're down 733 in the first two quarters of this year. So we are B C. O is it just tend to be very reactionary to that right in price in it and and so a lot of them. Some of them have retired for sure. So I'm took the.

[noise] opportunity to sell their equipment when it was at such a premium and decided to either to retire or do something different or he'll drive for somebody else. We saw some of that we saw repairs and the difficulty and the costs was a pretty big impact for the last few quarters, that's lessening a little bit.

It's really it it's kind of a all of the above kind of answer to the question Jack from from a B C. L perspective on the carrier side.

You know the net reputations are moving negative I think the the the number of carriers that people thought might be leaving the industry is maybe a little lighter than it.

Then some were thinking and I would agree with that I just don't know if the data that we get is is accurate and timely as the V. C. O data that obviously that we have and that there's still do carriers coming into the system at a rate that's a little bit above where maybe you think it would ah. So I don't know if that's optimism I don't know if that's a cat.

Foreign you, where you can't be an owner operator, you gotta be on your own authority. There's there's some impact there I think.

But but generally I mean, if you look at like the trucking conditions index from F. T R or anything of that sort. It's just a tough time the accurate data speaks to that I mean, it's just a tough time I think to be out there and and so I think that's what's leading to some of the the turnover.

And to the market as it stands today, if you're a small carrier are an owner operator, who might looked at landstar. Okay. That's super helpful. Thank you for that and then I guess, maybe you know.

Jim for for you you know any sort of indication from your customers around peak season, I know it may be it's still early but are you hearing anything around.

[noise] commentary from them on on what they might might need from you how to prepare for that or is it just kind of still T. B D.

I think it's all TBB I think from a customer standpoint, I think they're probably about as.

Confident as we are coming into peak season.

I will give you one little thing.

This is not a big thing, but we hear that there is one thing that during peak season, we get requests for travelling equipment coming in to the end of the year.

And it's the.

The requests were trailing equipment has been way way down over the last.

Two three quarters, but we did see a slight increase in requests for journalists coming into the fourth quarter, but that's all I got other than that it just seems like we're going to just grind through this at the end of the year. Okay. Okay. I really appreciate the the commentary guys. Thank you yep.

We will most not the next question coming from the line of basketball major southwest airline is now and.

Jim Your self described cycled guy here, if I look at how you've operated through cycles. Historically, usually when you have down years Landstar is top line and bottom line recover.

Pretty quickly and the year. After if we look at so you have 2014 or second half of 20 or or or even some earlier periods, but yeah. There. There is one analog around the peak of the mid 2000 cycle, where things kind of flat line for a few years and really didn't go anywhere I'm curious as you look at the cycle that we're coming out of the day.

Is there any rhyme or reason to some of these historical analogues what does it feel like compared to 222 downturns you've seen in your history and.

Are you are you cautious are concerned that we might have an extended downturn that really doesn't habit snap back that you typically see after it down here.

Very unusual down this year right because the peak to trough is bigger than it's ever been.

So it's really hard to gauge where the next peak is I mean, I think that's what we're trying to figure out and we try and figure that internally.

You look at truck rates right now and where they are you know over the next 12 to 18 months I can see employment back, 10%, which is pretty beneficial the peak to trough over the last six probably years has been much more significant than it was prior to that and I'm not sure. If that's due to access the pricing information coming from the coming from the <unk> world stuff like that because.

But I go back in 2010 11.

We were getting bids from 12 shippers and we're putting our pricing and they're using that now they can see all the price of data that may be driving this higher to lower so my expectations were not gonna see near the Spike Lee.

2021 to 2022 peak spike when it through the end pricing grew 76%, but I would expect you're going to see better than those flat ears, just based on the performance here and the things we've done with whether it's technology and and you know the driving agent you'll sales in recruiting more agents into the system.

Other than that it's really hard to project that we really need demand to to pick up and.

From the consumer side, but I think a well prepared with the new tools. We you know we built up pricing tools were building efficiencies within the agent's office. So they can do more with the same number of people that have that's really our goal is to make sure. When this thing turns we can attack volume better than we have in the past.

Well, thank you for that and I don't know, which Jim wants to answer this but can you know whenever that return to.

Maybe not quite as fast as 2000, 2021 recovery, but but still but but not a flatline when that calms can you walk us through you know how you flex the model on the upside financially you know what needs to come back from instead of calm for other costs are kind of out of the system in the downturn just cause how do we think about the leverage you get when.

We met revenue line starts pointing up again, thank you.

Wow.

We've always talked about is incremental as we grow the variable contribution which is you know I'm an old guy so I I'm not allowed to refer to it as gross profits. So I'll have to call a valuable contribution we talk about the the leverage we get off of growth and valuable contribution in 2022, clearly hopefully going to be 2023, clearly hopefully going to be our trough year, we believe.

That we can push 70% of the growth in incremental growth and diary of a contribution through the through the the bottom due to operating income right. That's our goal one.

Then you Gotta think about though is coming off a year like 2023, where our incentive compensation are variable programs are relatively low or or you know almost zero, sometimes we do have that headwind going into the 2000 2004 year.

But come into 2025, when you start book and that things start to grow again, we do believe we can get back to that 70% or 70% pass through of incremental growth invaluable contribution due to the bottom line. So there's a lot of leverage in the organization because the infrastructure is built 70 70 or so per cent of our SG&A. His head count, but we don't really have to grow head count too much.

As we put more volume on top of this business model. So I'd say, we would not I wouldn't project of 2024 being a 70 per cent push do because we do have that variable top top compensation programs that actually travel with our earnings of 2025 I think the goal is to go back to pushing 70% growth variable contribution.

And Jim can talk about the incentive top and the valuable contribution the variable compensation programs and what kind of headwind we're talking about.

Yeah, a bathroom. So if you recall back in February I gave.

I gave a 18 to 20.

Tailwind.

In a bear case scenario and then first quarter I updated that to 16 to 18 will now second quarter I can say $20 million as best case Best case now on Ah Tailwinds twenty-three verse 22, and as such a flip into 2004 to gyms point.

Kind of a one time, if we hit our numbers I would anticipate about an 11 million dollar headwind on those programs 24 23.

Thank you both very helpful.

The biggest variable for our costs and unpredictably the insurance line everything else is pretty confident other than a little bit of inflation, you've got inflation on on the maintenance on trailers.

Had a little bit of inflation on wages and other than that but typically the infrastructure is kind of set except for the unpredictability of the insurance line and the variable compensation program.

Thank you both.

We will move to the next question coming from the line of Stephanie more of Jeffrey Scalenus Nelson.

Hi, good morning, Thank you.

You know I appreciate that.

Type of color and that that you've given so that's far and I think it would be helpful. I think in the past you definitely have talked about worldly and start can often maybe lag the market maybe for various reasons. How you called out you know what there's no agent response times are in Joplin that trailer things like that so maybe can you talk a little bit about in the event we are.

Seeing a turn in the cycle <unk> interesting standpoint, when it would start to be able to it more apparent and <unk> Harper you guys. If that makes sense. Thank you.

We watch a lot of the industry data and everybody else watches right, whether it's coming up a D. H D or the F. D R data or things like that we try and track now or when you look at our revenue per mile compared to the industry data, we kind of help premium for a little bit on the <unk> side, So a little higher but tense a trend in similar directions on a slight lag lag as maybe.

30 days did see that maybe the pricing and you're looking at the industry, starting climb a little bit, but we're still relatively flat.

Tend to not react fast enough on both sides on the downside of the upside. So if we start to see pickups in that industry data, we probably lag that by a month or two but right. Now we're not you know you're not seeing much. The only other positive sign we had actually I think it was the first time in 15 months.

Bcl revenue per mile, which excludes fuel actually picked up from May to June alright. So there's there's another small thing we saw that kind of.

Could imply that you know maybe we're seeing the end of the downturns, but we're not confident enough to say that because it was one month. So we see that we think a little bit hey look we've seen the positive trends on the band revenue per mile on the <unk> side, but it's it's one month that we're not confident yet that it's going to stay.

Does that kind of stuff, we watch it it's mostly on the right side, the volume sides up to us to drive volume right and demand all drive our volumes a little bit, but we're out there trying to sell.

Got it and I appreciate it and then just like I <unk> I wanted to <unk> kept on vacation and maybe a few there have been any kind of change in strategy Uhm.

Given and there appeared to be kind of avoid of share repurchases. It in the second corner, which seems a little unlike you guys sound just saving up their thoughts on it I'm sure repose in normal capital allocation.

Hey, Stephanie.

No change same approach you know when we are price sensitive and we don't chase run ups will be patient and and the cost of being patient is a lot less today than it was 12 18 24 months ago.

Yep, absolutely alright, thanks, so much.

We will move not that the next person who he sent me tomorrow.

H a banker Linus Taliban.

Hi, Good morning. This has been more calling in for a minute wanted to ask.

A little further about your <unk> account down to the 97 100 handle it looks like and four Q19 his leg down further at the time to 95 handle and then once you 20 Covid let down.

Further to a 94 handle what would you say the current 97 handle that's signaling to you.

Look at a 0.2 with respect to where we are in the cycle could've looked down further do you sense that that might be the bottom.

Yeah, I've been I I think it you know in in July we're seeing a little bit further decline, but I I would.

Q2 overall I think we saw a slower net decline I I would like to think we'll see something similar in Q3, and then really again, depending on demand and price made we hoped hooked a flattened out in queue for but right now you know with the queue to to the flooring that decline are ads are improving sequentially.

Additions of of new equipment, both sequentially and year over year are terminations are improving sequentially, but still well behind the prior year and our utilization is improving so b C utilization is improving it was minus five per cent in Q1, it's minus three per cent in Q2 in in the month of June It was actually flat.

Prior ear. So so hopefully that's a good trend line that continues based on the you know the macro environment and what happens with the man, but I think we could be coming close to the bottom by year round.

Great, Thanks, and kind of piggybacking on question earlier on on the.

The rest of the industry.

Focusing on the yellow situation.

Would you say it might be benefiting you in terms of outsourced lying hall for truckload in the rails portion that you have not just the LPL free.

And if so what would you expect the cadence of this right.

Finding new carriers could it be a few months to settle.

We don't anticipate any significant volume coming to us from any kind of yellow.

Bankruptcy or anything like that there might be something but like I said I I can't imagine something we'd be talking about moving enabled needle in the third quarter.

Or for the year actually.

A relationship in that arena isn't like it is and stuff with other than some of the other parcel and a small package carrier.

Okay.

Great. Thanks for the time.

With most not that the next person who is Bruce channels piece off your line is now open.

Every one thanks for the question gym, maybe getting away from the cycle, a little bit where.

They'll call. It five years in a couple of cycles pass the hullabaloo with digital brokerage and you were saying, maybe a new kind of perk disruption does your in AI. So I wanted to ask you I guess number one.

You see much potential for disruption from AI and either you know your business or in the brokerage industry and you know are there any early investments or exploratory investments that you know you can make here on behalf of your agents.

Yeah, you know.

Oh, I would say that you get paid to move freight from point a to point B right and it's how efficiently and effectively you communicate the data back and forth between the truck and the shipper and pricing. So the AI technology to me is more about improving communications as efficiency and how you communicate between the carrier and the customer and satisfy their needs, but remember what we get paid to do is.

Pick up.

Move a to point B and AI does not change that unless you're talking about autonomous vehicles. We are I mean, we have a team of people in the building that are actually working on improving our efficiencies within whether it's call volumes are pricing tools or how quickly can get printed out the other carriers and how we communicate with customers absolutely. We are on it do I think it's anything different than Uber or those guys coming in and.

And they're gonna.

They're going to disrupt the industry.

This this intermediate brokers I don't think that's there I think what you Gotta do is just keep up with the latest technologies and I think everybody's doing the same thing.

If you recall blockchain being a big thing and everybody got on that bandwagon for Awhile AI has probably got more there's definitely got more useful usefulness in with blockchain had but we're on it but I don't think there's one thing we talk a lot about here is the accurate spot spot market price and predictions right and you use all these historical stop yet they're algorithm.

On top of it and for someone to tell you that they can tell you what spot pricing is six months, you're using data that changes daily and no and I think I remember about six or seven years ago, we had someone competing us and they could give you a spot market pricing in six months I think kind of the same thing about AI right. It's it's taken historical data and turning it into something they're trying to trying to.

Project in a very volatile spot market industry and the other thing like I said, it's going to be very useful in communications with chats and stuff like that and communicating and getting quotes are quicker to the customers and getting information quick until the customer to me. That's what I was all about and improved algorithms.

Optimizing your freight lanes and stuff.

Yeah, that's great. Thanks for the insight yeah.

We have our last person to ask the question coming from the line of Scratched me Burger Oppenheimer and a line is now open.

Thank you very much good morning, all I wanted to focus a little bit on on the industrial and markets It looks like.

Machinery building products.

I'd say, you're doing a little bit better than consumer and other categories.

Jim J could you speak to the the kind of trends that you're seeing I think one of the first questions. You mentioned you didn't Wanna Colombard on volume or right on on van or onsite. It I was just curious hunting and one sided.

It's how is it how is it trying to this year do you see a lot of opportunity for the back half.

That just conservatism or or maybe some green shoots are more opportunities to come.

Yeah, I mentioned, the only green shoots I have which was we saw bcl van revenue grow up.

Made of June and maybe carriers are looking for a little more money in certain regions, but that doesn't really.

All over the place it's very limited.

But when I look at what's going on with machinery and building products from a growth perspective from the volume perspective.

You know the the they're down west because they weren't up as much as consumer durables right. So I think you're looking at a year over year comparisons a quarter of comparisons more than year seeing flatbed doing much better than Dan at this point I think the anticipation wasn't flatbed was going to turn the corner with manufacturing and we're going to see improvement on the flatbed van was going to slow down.

But in flatbed would recover I don't think we're seeing what we anticipated probably six months ago and I don't see any as if people would <unk> that would indicate we're going to see any change in that.

Again, like I said building products from a building products and machinery from the standpoint of your comparisons are doing better, but I think that's because they weren't the drivers of the growth during the pandemic. There was a lot of consumer durables type thing. So I would say that's what we're looking at and.

And I'll just stick with the yeah, we hope we're at a trough or a bottom, but I'm not the guy to call back yet.

Alright. Thanks, I appreciate that color and then kind of following up on Bruce's question about it he was asking more kinda about AI competitive threats in the industry curious wanted to ask about what you're doing with your tech spending this year. It seemed like you were you were shifting the the pattern given the market environment.

Shipped in your you spend a little bit this year, just a an update their and and any any comments you may have on digital tools and how that how that progress is going in your system.

Yeah, you know or.

When I took over back in 2000 tape, while took over when I when I got the role as President in 2015, I put on a big push to improve technology in the organization and create the digital tools as opposed to being on our Ibm's mainframe, which was green screens at a little clunky and we the pumps a lot over the last six years, but we still will be tweaking everything but the spend.

From 14 to 15, 15, or 16, 16, and 17 really climbed as we've made investments I would say right now or spend is pretty consistent year over year.

Which includes probably $25 million to $30 million.

Which is really building out more AI tools and digital as compared to probably six years ago. So the investments are still being made and we're still working on whether it's AI or digital technologies. It's just now were more consistent on how we do it you know you only have so many sub subject matter experts within the building and the resources and you can't do you know a thousand things that.

Once with two people.

Logic, so we try and we're picking our spots, where we think it's beneficial one being AI, but you're talking about digital tools with a digital tools. They weren't really called digital back then but since 99, we had.

Today, it's called Landstar, one, but it's the ball nap right. It's all 100 per cent digital the <unk> or the carriers can do anything they want on a fall and they can they can see their load that can look at pricing. They can they can identify where fuel stops are so we're we're digital and we tend to stay on top of that the next best thing and trying to innovative there and like I said, we do have a team with.

The building, that's been watching AI and coming up with and using actually it's an outside help to identify areas, where we can improve as it relates to efficiencies built with AI.

But I I would say that.

We're right on yeah, we're we're right.

Right up with everybody else or ahead of everybody.

One with differentiator for us as the BC outside our digital tools are different than people, who are just doing a broker for it because they are very specific to the BC owes.

So we've had experienced providing digital tools to basically dedicated capacity to us since since the mid nineties. So we're we're kind of very good at knowing what the trucks want from us and we kind of correlate that and push it out the third party carriers.

Gotcha, Thanks very much.

Yeah.

At this time I'm showing no further questions I would like to turn the call back offer T. As sorry for closing remarks, well. Thank you we knew headed into this year. The 2023 would be likely to be a very tough year coming up a record performance of 21 and 22, Nevertheless apps under U S recession, I expect the normal cyclical patterns come to the spot market freight industry to continue.

As I said earlier, although it's difficult to say precisely when the current down cycle will turn into the next upcycle history suggests we could see an inflection point in late twenties early 24, and when that time confluence there's network of agents third party capacity fries employees will be ready. Thank you and I look forward to speaking with you again on our 2000 2000 for the third quarter earnings Conference call currently scheduled for October .

26 have a good day.

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