Earnings Call: Q3 2021

Oct 21, 2021

Good morning, and welcome to Landstar System Incorporated's Third Quarter 2021 Earnings Release Conference Call. All lines will be in a listen only mode until the formal question and answer session. Today's call is being recorded. If you have any objections, you may disconnect at this time. Joining us today from Landstar are Jim Gattoni, President and CEO Fred Pensotti, Vice President and CFO Rob Brasher, Vice President and Chief Commercial Officer Joe Beacom, Vice President and Chief Safety and Operations Officer. Now, I would like to turn the call over to Mr. Jim Gattoni. You may now begin. Thank you, Missy. Good morning, and welcome to Landstar's 2021 Q3 earnings conference call. Before we begin, let me read the following statement. The following is a Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. 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 Lanstar's 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 WinStar's Form 10 ks for the 2020 fiscal year described in Section Risk Factors and other SEC filings from time to time. These risks and uncertainties could cause actual results or events to differ materially from historical results Were those anticipated, investors should not place undue reliance on such forward looking information and Landstar undertakes no obligation to publicly update or revise any forward looking information. Landstar's 2021 Q3 performance was exceptional, extending the record setting pace that began in the midsummer of 2020. With 3 more months to go in 2021, year to date 2021 revenue is about equal to revenue from all of fiscal year 2018 And our operating income exceeds the 2018 full fiscal year amount, which were both record annual financial results. I expect the company's strong performance Continued through the remainder of the year with annual revenue exceeding $6,000,000,000 and diluted earnings per share in excess of $9.55 To put the strength of the 2021 performance in perspective, assuming we achieve our 2021 Q4 guidance, Full year 2021 revenue and diluted earnings per share would exceed revenue and diluted earnings per share of our existing fiscal year records set in 2018 by over 35% And 55%, respectively. As it pertains to the 2021 Q3, revenue, gross profit, variable contribution, operating income and a record number of active truck brokerage carriers representing 3rd party carriers who have hauled a load of freight for Landstar in the past 180 days. Also new agents, defined as agents who contracted with Landstar within the last 15 months, contributed $36,000,000 of revenue to the 3rd quarter, The highest quarterly new agent revenue in over 10 years. Landstar's 2021 year to date performance has been historic and considering our financial results Revenue in the 2021 Q3 increased 60% over the 2023rd quarter, which at the time was the 2nd highest Q3 revenue in Landstar history. Landstar's record 2021 Q3 revenue was driven by strong demand For transportation of consumer durables, machinery, metals, hazardous materials, building products and automotive parts and supplies and e commerce services, where we provide truckload transportation services between hubs of parcel carriers. Overall revenue hauled via truck in the 2021 Q3 over the 2023rd quarter increased 57%. Truckload revenue hauled via van and unplanted platform increased 54% over the 2023rd quarter. Revenue per load on truckload services increased 29% and the number of truckloads hauled increased 19% over the 2020 period. While Lancer's revenue per load is highly influenced by market conditions, the increased truckload volume of 19% against a relatively strong 2023rd quarter speaks to the ability of the network to flex when demand spikes. Truckload revenue hauled via van equipment led the increase at 59% over the 2023rd quarter, The primary driver of growth in other transportation services was from power only demand, which contributed 75% of the category in the 2023rd quarter and 63% in the 2023rd quarter. And finally, less than truckload revenue in the 2021 Q3, which was 2% of truck transportation revenue, Increased 23% over the 2023rd quarter. The number of loads hauled via truck in the 2021 Q3 increased 3.5% compared to the 2020 2nd quarter, while revenue per load on Lowe's Solvia truck increased 5.8% over the 2021 Q2. From an end market standpoint, consumer demand for building products, consumer doorbells and small package via e commerce continue to drive record volume in the 2021 Q3. The number of lowest hauled via on-site platform equipment also exhibited strong growth in the 2021 Q3 over the 2023rd quarter, mostly due To continue improvement in the U. S. Manufacturing sector that began in March, revenue per load on trucks hauled via van and unsighted platform equipment increased 29% over 2023rd 7% over the 2021 Q2 above normal seasonal trends as capacity continues to be constrained across all markets and equipment types. As it relates to the new agent pipeline, we continue to attract qualified agent candidates to the model. As mentioned earlier, revenue from new agents in the 2021 quarter was the highest quarterly revenue from new agents in over 10 years. As to truck capacity, we ended the quarter with 11,746 trucks provided by business capacity owners, 755 more trucks compared to our year end 2020 count. The increase in our truck count thus far in 2021 is being driven by improved retention As the number of BCO cancellations through the 1st 3 quarters of 2021 was 19% below the number we experienced through the 1st 3 quarters of 2020. Year to date September, we have recruited almost the same number of BCOs as during the 2020 39 week period. Lowe's hauled via BCOs increased approximately 5% in the 2021 Q3 over the 2020 Q3 on a 12% increase in average truck count, partially offset by a 6% decrease in BCO truck utilization defined as loads hauled per BCO truck per quarter. We ended the Q3 with a record number of approved third party carriers in our network, while a number of active third party carriers, which we define as carriers who have hauled the load in preceding 100 180 has increased 42% in the 2021 Q3. Our network is strong and continues to attract third party truck capacity. I will now pass it to Fred to comment on additional P and L metrics and a few other Q3 financial statement items. Thanks, Jim. Good morning, everyone, and thanks again for joining us. Jim covered our revenue performance in detail and alluded to our gross profit and variable contribution. I'll make some additional comments about these metrics as well as other profitability metrics and And discuss briefly our balance sheet and cash flow performance. I'll start with gross profit. As we disclosed in our earnings release yesterday, Effective in the 2021 Q3, we revised our definition of the term gross profit, which we're now defining as revenue less cost of revenue. Cost of revenue has 2 categories, variable cost of revenue and other cost of revenue. Variable cost of revenue includes Purchased transportation and agent commissions and other cost of revenue includes numerous costs that vary in different degrees with revenue, including trailer depreciation and maintenance expenses, BCO recruiting, training and qualification costs, Insurance related expenses such as premiums paid and the cost of claims for various freight transportation related insurance policies and other costs included in selling, general and administrative in the company's consolidated statements of income, such as brokerage commissions and other fees incurred to administer the insurance programs available to BCO independent contractors that are reinsured by the company, as well as costs related to our internally developed technology that directly support our revenue as detailed in the reconciliation of gross profit to variable contribution table included in our earnings release. In addition, we now define gross profit margin as gross profit divided by revenue. In the 2021 Q3, gross profit was $189,200,000 an increase of roughly 58% compared to $119,800,000 in the 20 Q1 only slightly below 11% gross profit margin in the same period of 2020. In conjunction with the new definition of gross profit, We have initiated the use of the term variable contribution, a non GAAP financial measure to refer to the amount represented by revenue less Our variable cost of revenue, which again includes cost of purchased transportation and commissions agents, as detailed in the reconciliation of gross profit to variable contribution table included in our earnings release. In addition, we now define variable contribution margin, also a non GAAP financial measure, as variable contribution divided by revenue. This measure has always been and continues to be an important one Since purchase transportation and agent commissions are the primary expenses that are 100% variable with revenue and give us a view into spot market trends in the freight transportation industry on a shipment by shipment basis. In the 2021 Q3, variable contribution increased roughly 51% $242,300,000 compared to $160,900,000 in the 20 20 Q3, driven by strong revenue growth. Our variable contribution margin was 14% of revenue this year compared to 14.8% in the same period last year. The decrease in variable contribution margin compared to the 2023rd quarter is mostly attributable to the mix between our BCO independent contractor capacity, majority of which is fixed margin and our brokerage capacity, the majority of which has a variable margin, as our brokerage business increased from 44% of total revenue in the 2023rd quarter to 51% of total revenue in the 2021 Q3. The year over year growth rate and margin performance of gross profit exceeded that of variable contribution due to the ability of the Landstar model to leverage the mostly semi variable costs I described earlier that are included in gross profit. Other excuse me, operating income in the 2021 Q3 was $131,400,000 or 69.4 percent of gross profit compared to $82,400,000 were 68.7 percent of gross profit in the same period last year. Operating income represented 54.2% of variable contribution in the 2021 Q3 compared to 51.2% in the same period last year. The 300 basis point improvement in operating income as a percent of variable contribution compared to prior year is primarily attributable to the significant growth in variable contribution that drove down insurance and claims expense and depreciation and amortization expense as a percent of variable contribution compared to prior year. Getting into a bit more detail on the expenses noted in our consolidated statements of income. Purchased transportation grew at a faster pace than our overall revenue growth, which I mentioned earlier was driven by the change in mix of revenue generated by our BCO Other operating costs were $10,600,000 in the 3rd quarter this year compared to $7,400,000 in the same period last year. This increase came from higher trailing equipment Maintenance and tire costs due to higher trailer count, contractor bad debt and increased recruiting, qualification and training costs related to our BCOs compared to last year. Insurance claims costs were $29,600,000 in the Q3 this year compared to $21,900,000 in the same period last year. Total insurance and claims costs represented 4.3 percent of BCO revenue in the 3rd quarter, roughly in line with 4.4% BCO revenue in the 2023rd quarter as the impact of higher BCO revenue per load in the 2021 Q3 was roughly offset by higher severity or cost per claim, an increase in prior year claims development and higher insurance premiums compared to the same period last year. Selling, general and administrative expense was $59,200,000 in the Q3 this year compared to $38,900,000 in the same period last year. As we discussed last quarter, the majority of the increase roughly $13,000,000 is related to our variable Cost, cash incentive compensation plan and stock based incentive plan driven by a record setting financial performance this year. Wage and benefits pressure also contributed to the increase. This is probably not too surprising given the current environment that many companies are experiencing across the U. S. Economy. And lastly, depreciation and amortization was $12,300,000 in the 2021 Q3 compared to $11,200,000 in the same period last year, primarily due to technology investments and enhancements put into service since last year. Our effective income tax rate 24.4% in the 2021 Q3 compared to 23.9% in the same period last year. The increase in the effective income tax rate was primarily attributable to a higher provision for nondeductible executive compensation during the 2021 period and the impact of excess tax benefits on stock compensation in the 2020 period. Our net income for the 2021 Q3 was 98 $7,000,000 up 59 percent to $61,900,000 in the same period last year. Our diluted earnings per share in the 2021 Q3 was $2.58 up 60% from $1.61 in the same period last year. Moving to our balance sheet. We ended the quarter with cash and short term investments of $267,000,000 And cash flow from operations in the 2021 year to date period was $217,000,000 compared to roughly $186,000,000 during the same period last year. Before I turn it over back to Jim, I'd like to say that after my Q1 at Landstar, I'm even more excited about this company than I was when I started. Business performance has significantly exceeded the expectations I had when I started towards the end of the second quarter. Now we recognize we're riding an industry wave, but we're So very pleased with how Landstar is performing within the industry, continuing to be a leader with a unique business model with scale and technology that enables entrepreneurial success and in turn the company's success. I've now had the opportunity to meet some of these entrepreneurs, namely our agents and our BCO independent capacity providers And the enthusiasm for working with the Landstar Network is very evident, as is the passion our employees put into continuing to make the Landstar Network stronger every day. I've also had the opportunity to meet some of you who are probably on this call today and look forward to getting to know more of you in the future. We look forward to keeping you updated on the business Thanks, Fred. That was excellent for job security. Freight demand began to significantly improve in August 2020 from increased consumer spending as U. S. Economy recovered from the initial impact of the pandemic. The strength in the freight environment that began in August continued through the end of 2020. As such, year over year financial comparisons normalize as we move through the 2021 Q3. My expectations are that the strong freight environment Landstar has experienced in 2021 will continue through the Q4. I expect quarter over prior year quarter revenue growth to decelerate The quarter over prior year quarter growth rate experienced in the 2021 Q3, given that the 2021 Q4 compares to a record 4th quarter revenue reported in the 2024 quarter. However, that decelerated growth rate should in no way be viewed as a signal of a change in the very strong freight environment. On a year over year basis, I expect 2021 Q4 load volume on loads hauled via truck to increase in the 13% to 16% range over the 2020 Q4. This is particularly impressive given the strength in business we experienced in the 20 24th quarter when the number of loads hauled via truck exceeded the 2019 Q4 with what we would consider normal historical volume trends from the Q3 to the Q4 of a given year. I expect revenue per load on loads hauled via truck in 2021 Q4 to also move in line with what would be what we would consider normal seasonal rate trends based on historical experience. As such, I expect revenue per load on load sold via truck to increase a healthy 15% to 18% over the 2024 quarter. Given those assumptions, I expect total revenue in the 2021 Q4 to be within a range of $1,700,000,000 to $1,750,000,000 Assuming insurance and claims costs are 4.3 percent of estimated BCO revenue in the 2021 Q4, I'd expect diluted earnings per share to be in a range of $2.55 to 2.65 Overall, I'm extremely pleased with Landstar's 2021 performance. Revenue in 39 week period ended September was by far the highest ever revenue in the company's history Over the period, an increase of approximately $1,200,000,000 or 34% compared to the previous record set in the 2018 39 week period. The 2021, 39 week period variable contribution, gross profit, operating income, net income and diluted earnings per share were by far the highest ever achieved in any 39 week period in the company's history, and we expect each of these metrics to significantly see the amounts Landstar achieved during its previously record setting 2018 fiscal year. In our view, the overall volume for Lancer continues to be as strong as it has been at any point over the last 2 decades, and Lancer is positioned to complete the year with tremendous success. We continue to increase our available capacity and remain focused on providing and enhancing technology based tools for the thousands of small business owners In both the agent and capacity side of our network. I expect 2021 to continue at its record setting pace as we have to easily surpass $6,000,000,000 in annual revenue for the first time And with that, Missy, we will open for questions. Certainly, sir. We will now begin the question and answer session. We have multiple questions on queue and the first one is from Bascome Majors of Susquehanna. Your line is now open. Yes. Thanks for taking my question and congratulations on another Excellent quarter and outlook for the 4Q. Jim, as we look into next year, I mean, clearly, things are going exceptionally well this year. Could you help us think about what a more normalized base after the incentive comp and stock comp would be on the G and A number as we think About how the model and your margins flex into whatever happens in the trucking market next year. I don't know If that's talking about what this year would look like without the excess comp from that or just calling out that comp, but anything to help us bridge Kind of where we stack on a reset G and A for next year would be really helpful. Thank you. Yes. I would say if you take the 39 week period this year on SG and A And Ed, we believe we're probably going to be slightly lower than the Q3. I think the Q3 is about $59,000,000 I think we'll have a couple of million Lower than that in the Q4. So if you add that in, you have the full year guess of what our SG and A is for the full year of 2021. And right now there's probably $30,000,000 to $35,000,000 of variable comp that would not be in next year unless we blow it out again. If we have a normal If we go back to a normalcy where we're not growing revenue 60%, you will have a $30,000,000 to $35,000,000 tailwind in SG and A related to our variable comp programs. And Jim, does that include both the stock comp and the cash comp part? Yes, that's both. They kind of move in tandem. The difference between the 2 is the cash comp is kind of a short term thing. It's an annual target. And the stock comp varies based on like a They vest over a 5 year period based on growth over that period. So it's just a longer tail in the stock comp than it is the cash comp, but they kind of tend to move in similar directions. In a great year, they kind of elevate and when things slow down, they pull back. So in a normal year, it's We're going to probably have a $30,000,000 $35,000,000 downwind going on next year in SG and A. And do you not to put too fine a point to it, it's just a pretty big variance, but Do you have a sense of from hiring and just general wage inflation, what we should think about that base rising? Yes, I would tell you that we have about $80,000,000 $90,000,000 salary component here, maybe actually a little bit higher than that. And Fred had mentioned that the quarter was impacted by some of that wage inflation. We had made a decision early to actually do 5%. Our increases are July 1 annually for the entire pretty much the entire organization. And we had made a decision based on what we're seeing in the environment as it relates Retaining or recruiting employees that things were increasing 5%. We also took a look at the inflation rate and what was going on in the economy And we try and keep up with cost of living. So we did pop a 5% raise across the board. We put a pool together of 5% for the employee base and Which is a little higher than we typically do. And if you're thinking about, say, a $90,000,000 salary base, that adds about $4,000,000 or $5,000,000 next year to SG and A. Thanks for that. And tying it all together, I mean, even if next year is a normal year And revenues are flat or even down a bit. You have a pretty big cushion here. I mean, do you think that earnings could be flat to up if the market isn't just Really challenging on the truck pricing. Just any preliminary thoughts on how you guys feel heading into next year? Feeling pretty good for the first half. Like when we were talking at the end of June, it was hard to predict when this thing turns. But with the strength we're seeing, We were saying that sometime first half we might see it start to cycle back. Now we're thinking maybe it's more toward the end of the first half Because the things still remain very strong coming into the Q4, we don't see anything pulling back. We see no metrics of trucks coming to the system or demand slowing down. So I think if look, do I expect this end market to continue? No. Do I expect pricing to stay elevated higher than historical? Yes, because I think the Costs that are now into the in the industry, whether it's driver wages or insurance or things like that, the costs are elevated. So I don't think you're ever going to pull back to where we were back in 16, 17. But in our cyclical business, you do expect a pullback. If we get that pullback, I still think we'll perform well. And can we cover so I'm talking about the $35,000,000 of variable comp offset by $5,000,000 So we have that $30,000,000 cushion. I think we can grow earnings, but I want to put a commitment to that. I think there's it's very unpredictable right now sitting here and trying to look into the next 12 to 18 months of what the market's going to In an environment where we see a clearly, if we see a 20% or 30% pullback, which I don't expect, you wouldn't see earnings growth. On a 10% pullback, I think you'd still see earnings growth. Thanks for all that. We really appreciate the color. All right. Thanks. Thank you so much. Our next question is from Charles Yukovich of Evercore ISI. Your line is now open. Good morning. Thank you for taking my call. I wanted to talk about freight mix across industries and your views on trends that are here to stay versus shifts Maybe more temporary in the long term. Clearly, the pandemic continues to result in outside consumer retail and the chip shortage has really weighed on autos. But when you think about the current mix Well, we'll just talk about the consumer side. Look, we're highly affected by the manufacturing sector in the U. S. Or at least we used to be. If you go back 5, 6, 7 years, we used to tie our load volumes to the changes in industrial production here in the U. S, right? And when you think about that, if industrial production has grown 3%. We feel we could have grown volume 6% or 7%. If it was down 2%, we'd see volumes go down, right? And we tied pretty tightly to that. The strong demand we're seeing now and we've seen for the last 2 years is really a lot of consumer driven based, whether it's consumer durables, building products, stuff like that for home improvement. That's a lot of what's driving us today. But like I said, we go back 6 or 7 years. We've been kind of penetrating a little bit more into consumer Before the pandemic hit with some of the some building product stuff and appliance type stuff. So we are slowly getting into that, but it just really ramped up. It's a difficult question to answer based on what we're sitting in an environment that really hasn't happened in my lifetime, Driven by high consumer demand, the government printing money and supply chain bottlenecks. And you take all that stuff and then you got to think about what are the When the supply chain bottlenecks start to clear out and that disruption goes away clearly, you'll have an impact on pricing, right? Pricing will come down. Trucks will be a little more Available regardless of whether there's trucks in the more trucks coming into the marketplace. So whether it's and then you got the U. S. Domestic manufacturing sector on the flatbed side, which we feel still hasn't jumped off. It's still relatively I don't want to say it's soft, but it's not where we think it should be. So you might see in my world, I would say you're definitely sooner or later going to see the consumer market pull back. You can only buy so many dryers And washing machines or repair your house, so that will slow down. The consumer will start burning up some of the cash that they're sitting on. That might balance out with some of the U. S. Production And flatbed market coming back. You've got this infrastructure bill that's hung up in the U. S. We've been talking about infrastructure bills for 20 plus years. They've never been able to pull it off. But Anything there that would help on the flatbed market on the equipment side if the infrastructure bill got signed and they're talking about heavy equipment and building roads and bridges and stuff like that, That's very favorable to the market. So in summary, X, sooner or later, the consumer is going to fall back. And if you get an infrastructure bill that will help Flatbed market or and if manufacturing starts to improve better than where it is today, I'll see the I think eventually we'll see the flip where the van starts to The van rates start to pull back a little bit, but the flatbed kind of stays strong into the maybe next 12 to 18 months would be in my thoughts. Okay, great. That's really helpful. Would you say that the current environment impacts the way you think about the current trailer fleet at all? Well, Our trailer fleet is really driven by how many BCOs we have. So it's really more tied to our BCO count and the number of BCOs we have using trailers. We keep a ratio of 2:one for every BCO who's using our van trailers. It's a 2:one. So if we have, say, 6,000 or 7,000 guys using our trailers in a drop Hook operation, we have 14,000 trailers. So it's really demand driven. If we get it's demand and BCO count. If we get a lot more consumer demand and drop in hook, We'll have more opportunity to draw us more BCOs into the network and we buy more trailers. That's kind of the trailer thing. We generally don't just buy 1,000 trailers and try and put them into the market and get used by 3rd party capacity that really hasn't been a niche for us. Kind of hard to control The use of the trailer by 3rd party capacity that isn't committed to maintain I don't say maintaining it, but They pick it up from a point A, they drive it to point B and they disappear. That hasn't really worked in our network. So it's really tied to our BCO count more than it is anything else. Okay, great. That's very helpful. Thanks a lot. Yes. Thank you so much. Our next question is from Jack Atkins of Stephens. Your line is now open. Okay, great. Good morning, everyone. Hey, Jack. Jack, you there? Jack? I think we lost Jack. We now have Scott Schneeberger of Oppenheimer. Your line is now open. Thanks. Good morning, everyone. I guess, I'm curious, Jim, obviously, a very robust demand environment. Could you speak to existing accounts and then growth in new accounts? Where are you seeing new business? Is it predominantly In the consumables or consumer durables or, I mean, just kind of curious where you see that popping up? Thanks. Yes. From an account standpoint, it's kind of difficult for us to talk. We have over 25,000 accounts and even the top 25 only make up about 30% or 40% of our business. So we kind of nickel and dime it. There's a lot of new accounts in our system that are doing $500,000,000 to $1,000,000 And when you do a 1,700,000,000 really hard to talk about where it is. I think Scott, it's really across the board. It's anybody the truck market right now is so tight that anybody's looking for capacity. And when you have 1200 agents all around the country, locally in market, I think that just gives us an advantage. Our guys are hungry to go Satisfied customer demand right now and customer demand is pretty hot regardless of what kind of commodity you're talking. Is it softer in other areas than some? Absolutely. Consumer doorbells is hot, right? Building products There are things that are hot and things that aren't so hot. Foodstuffs for us, it's never been a great category. Very big. We have a couple of agents Specializes, so that's the refrigerated market is not really something we play in, but it's kind of across the board. And it comes from A lot of it's coming from these small shippers who we may not have ever dealt with before, but they see us as a capacity resource. And that's kind of what we see happening. There's no Did we add any large customer in the quarter? No. Over prior year. It's more nickel and diamond. It's just all these small customers that we pull in. Some customers clearly have grown. We've talked about the Subsue linehaul guys, clearly a lot of growth there from the e commerce market Driving that growth on the sub line haul, which is primarily just a couple a handful of accounts that we do. But I would say it's just coming from all different directions. Great. Thanks. Appreciate that. And then just kind of delving into the other truck transportation services That new breakout for your reporting, of the sub components, power only, expedited, straight truck, cargo van, How would you just you might not give it 5%, but by order of magnitude, what are the Can you kind of rank order those as in that bucket? And then just expectations going forward for what you see from that category? Thanks. Yes. Rob will probably talk about what he sees in that category, but I'll give you the and like I said, power only was 75 And this is a year to date. So the number I think in the revenue for year to date was like $518,000,000 right? So you're talking about So if I break it down, I would 75% of that is power only where we provide a tractor and there's a loaded trailer somewhere, it's somebody else's trailer, we haul it away. There's some the ground expedite is probably about $70,000,000 $80,000,000 of that. And then there's container that's in there maybe $30,000,000 to $40,000,000 And then there's a bunch of other small categories within there that almost add to nothing. But really if you break it down, I'd say power only, Then expedite on ground and then some container moves in that order from large to biggest to smallest and then a bunch of other small stuff that our agents get involved in. And then Rob can speak to what he's thinking about the Power Only future and expedite. Yes. Scott, so this is Rob. The power only base, as Jim kind of put it, it's really the reason we kind of broke it out is We've seen the consumer spending in e commerce kind of continue to grow, and we decided it really needed its own category. So again, we do a great deal of won't say a great deal. We do a lot of port work, especially now, a lot of dray work, if you will, a lot of chassis, a lot of containers, things like that, not compared to e commerce. And as The international backlogs continue to happen. We continue to get involved a little bit more in that, but it's mainly driven by the e commerce and consumer spending. Great. Thanks, Rob. Thanks, Jim. I'll turn it over. Yes. I think one thing about the power only too is if you think about the trailer market right now, carriers don't have many trailers available. So I think the Shippers are doing a lot to put stuff into trailers and just waiting for it. Like if they can access a trailer, they're going to load it, they're going to try and get a truck to move it. That makes sense. Thank you so much. We now have Jack Atkins back of Stephens. Your line is now open. Okay, great. Guys, good morning. Can you hear me now? We can hear you now. Okay, great. Thanks for taking my questions. Sorry about that earlier. I guess just kind of going back to the trailer question a moment ago. As you guys think sort of longer term about the business. I know it's sort of 2 trailers to 1 BCO. Are you maybe is it maybe worth considering Extending out your trailer program to the 3rd party broker carriers. Other folks in the industry have sort of had success With that, I'm just curious if you guys are looking for ways to maybe expand that because it's been so successful with your BCOs. Just curious if you could maybe talk about that and if that's a consideration. I know trailers are hard to come by right now, but as you look out over the next several years. Sure. Yes, Jack, this is Joe. We have conceptually talked about that some, and Jim alluded to some of the utilization and Repositioning some of those things that would be challenges for us. We currently do it on a kind of a case by case basis in Those situations where we can make sure that we capture the trailers and get the right kind of utilization, it's not like we don't ever do it. It's just that we're pretty selective And how we do it? In order to do it on a larger scale, there'd be some things that we would need to do, I think, internally from a systems perspective that would allow us to Make sure that we're tracking and utilizing trailers that are essentially then going to be on 3rd party capacity and kind of Out of our BCO's hand. But again, it's something that we revisit, we talk about, we do it on a case by case basis, but nothing large, but certainly something that is A topic of conversation from time to time, especially when you find yourself in a somewhat of a drop and hook capacity constrained environment. It Tends to come up, so but it's on the radar from a tech perspective. I think, Jack, one of the things that's become that's actually had us talking about it more now is that the fact over the last to 5 years is trailer tracking has been a lot more efficient right now as opposed to like when we used to hook trailer, we didn't really need that much trailer tracking because we had BCOs and agents managing them And watching them, right? So you always knew you could call a BCO and ask them what trailer he's on, stuff like that. It's easy to track. That's hard to do with 3rd party capacity. But now with all our trailers having reliable trailer tracking devices, it's easy to monitor and it's easy to manage utilization and tracking. So there is clearly more discussion about that 3rd party capacity usage of trailers today than we would have had 5 or 6 years ago here at Landstar. Okay. Okay. That makes sense. And I guess for my follow-up question, Jim, you touched on it in your prepared comments, but you guys are just experiencing extremely rapid growth here cycle to cycle. And I'm just kind of curious as you sort of think about the resources that maybe you need At headquarters to support your agents and your carriers over the next several years to the degree that growth continues, How are you thinking about the need to maybe invest in additional headcount? Do you feel like that you've got Any areas where you may need to sort of add folks enable just as you think about kind of keeping Those sort of that growth engine going, I guess. I'm just sort of curious if there's some areas of additional investment that may be needed or if you feel like You're in a good spot. Yes, absolutely. I think there's going to be additional investment. I'll tell you the scenario that's going on this year is we came into this year. We had our target for the year coming out at the end of 2020. We kind of internally here, we have internal budgets, Targets for volume, truck volumes and rates and all that kind of stuff. And we kind of base our headcount on what we think that's going to be because we do have we handle all the payables and receivables and all Transaction processing here on behalf of the agents. So we do have a decent sized group of people who are transaction processing. They're all working at home today and it seems it's working Fantastic, actually. I think they like it and it hasn't productivity has been fine. But with the volume exceeding what we anticipated, there's clearly been some headcount adds. I mean, Early summer this year, we're sitting down with the administrative group going through the throughput of number of So yes, you're going to see some headcount additions that will drive. So when I talk about that $4,000,000 or $5,000,000 just from a year, just from salary increases, you're going to see another Yes, a couple of million or more as we add headcount to as the volume increases throughput. But it's not Clearly, the revenue is going to offset anything we put in the system because we do have efficiency. So it's not anything where you're like For every one load or every 100 loads, you got to add ahead. That's not the kind of the way it works here. With the new systems we're putting everything like that and with new workflows we've put in and they're starting to put in, Yes. We'll be able to get more throughput per head, but we're still not going to overburden our people. We got to keep an eye on how hard they're working and if they're doing any overtime or stuff like that. So it is there will be more headcount coming in from that standpoint. And we have also enhanced our IT department. If you think back About 4 or 5 years ago, we were pretty much a mainframe company in RPG coding, stuff like that. We didn't have a lot of app developers or website type people. So we have Made a transformation. Rick Coro came on in 2017 and he's kind of transformed the IT organization to move to cloud based As opposed to just the old mainframe stuff. So we have mainframe people and we've converted now into we also have groups of people who into the new world and the new technology handling it whether So cloud based applications or operational data stores and the information highway, right? So there's that stuff. But that's kind of already baked Those people are baked in and there might be a few more of those people coming in, but it's more of the transaction processing people that you'll see coming in and some headcount growth. Okay. That's really helpful. Thanks for all the color, Jim. Appreciate it. Thank you so much. Our next question is from Stephanie Moore of Truist. Your line is now open. Hi, good morning. Good morning. I wanted to touch a little bit on The commentary in the release just about that for what you're seeing thus far to October, you're seeing both revenue per load and load I'm really following normal consistent sequential patterns. So I'm just curious, I think that's kind of an Abnormal trends that we've just seen throughout 2021 and given all that we're seeing with supply chain disruptions and record low inventory levels, just Curious on what you think is driving that return to more sequential trends into the 4th quarter? And at the same time, what are your thoughts going into the Q1? I think last year, we saw an extension of the A lot of the seasonal trends just given the delays in inventory and restocking. So I'd love to hear your thoughts, obviously what you saw so far going into the Q4 and then expectations for first. Thanks. Yes. I think when you look at where we were in September, we were our BCO revenue per mile On Van and Plattpad, we're both at all time records, right? And so it's you're not going to the supply Chain disruption in the demand dynamic has been around now for quite a while, 6 or 7 months. And sooner or later, it's going to stabilize. And I think what we're saying is We're kind of saying that we're seeing some coming in October that we're or for the Q4, we're actually anticipating some stable The stable seasonal trends not necessary to continue to grow because you just feel that supply chain disruption And the lack of capacity has leveled off. It's look, it's a very strong freight environment. It's going to stay very strong, but that doesn't mean it's going to drive Another step up in seasonal above seasonal norm. The other thing that you're thinking so we're seeing that October the other thing that There's a lot of talk about what's going to happen in December. I think December is a little unpredictable right now. I know there's a lot of ships off the West Coast and that's probably going to carry into December and all that freight market. There was talk early on about how everybody pulling all their freight earlier, so December is not that backlogged and they're trying to get people to order their Christmas gifts early. So Does December start to pull back a little bit? Now I don't think that's going to happen, but there is a little bit of talk around here about maybe we're going to see this heavy demand and Pricing come through December and then maybe it starts pulling back. I don't think that's what happens. But as to the current trends, I think it's really just to do with We're at peaks right now, and I'm not sure that we're going to see any change in the capacity tightness or The environment, so stable seasonal is kind of what we're seeing coming into October. And as to the Q1, look, like I said, It's hard to sit here and talk about what's going to happen in December and then transition into seasonally softer Q1. If I go back to last year, I would have thought I'm a pessimist, so I would have thought the Q1 was going to slow down because it was a lot the Q4 last year and beginning in August, it was really driven by consumers. And I really thought that was more of the holiday rush and all this other stuff. And I know people weren't traveling and they had a lot of money, but it turned into a full Another 9 months of strong consumer demand on building products and appliances and all the other stuff they're buying. Well, we see a look, the Q1 of this year was a very good quarter. Comps year over year are going to be tough in the Q1, Even if it's a strong Q1, that's about all I got on the Q1. I think it's just right now a little hard to predict of what's going to happen Since the environment we're in is an environment, I honestly haven't been in since my time here in 25 years. No, that's really helpful. Thank you so much. Thank you so much. We have two more questions on queue and the next one is from Bruce Chan of Stifel, your line is now open. Hey, good morning, gents, and thanks for taking the question. Jim, I just want to go back real quick to Your comment on BCO utilization, I think you mentioned a 6% decrease. Is that just vacation and time off like you talked about back in 2017 2018 when rates really good? Or Is there something else going on there? Yes, Bruce, this is Joe. I think it's a few different things that play into that. I think one is They're making a decent amount of money and I think some percentage of BCOs, they've got a target of earnings they want to make in a given year and once they surpass That target, they tend to slow down a little bit. I think that's part of it. I think there's still a COVID risk element to some of the utilization. And we're starting to hear more recently that as trucks need repairs, some of the parts for those trucks are just What used to be something you could take care of over the weekend, now it takes a week and a half to get the parts and get the truck back on the road. So I think it's multiple factors that lead And I don't have specific percentages by, but I mean those are the kind of things that we're seeing and we're hearing As we talk to our guys that are sitting for any length of time and it's usually one of those kind of reasons that they come up with. Okay. That's helpful. And I know everyone's sick of talking about COVID right now, but you mentioned And the retention rates for BCOs were good right now. And Joe, maybe just a follow-up question on the ETS vaccine mandate or potential mandate for drivers. As you're looking at that proposal, is that a concern for you? Or is it maybe a benefit given your IC composition? Do you think Vaccine related attrition is going to be something that shippers should be or need to be worried about? Well, I think it's From a federal standpoint, the mandate for federal contractors, of which we are 1, I think it's really too early to tell how the impact is going to play out there because the Specifics really haven't been determined or released. Clearly, we have more than 100 employees, so people in the office are here maybe have a different Impact to us than would be others who service government installations, if that's BCOs, does that apply to them or not? And I think that customers as they go about trying to figure out what the mandate means, I think they're right now from what we've heard from a handful of customers, Very exploratory as to if this happens, what happens. And we don't have a sense right now as to what number or what percentage of our BCOs Our carrier drivers are vaccinated or not. But clearly, if you think back to the beginning of the pandemic when we were Kind of working our way through different temperature checks and mask wearing at all of the shipper locations and our agents were doing They're best to accommodate all those different requirements. I kind of look at the vaccination mandate if that were to come out and be more broad, That our agents would have some work to do to figure out what each customer's requirements are and then up to us to help them source capacity to make sure They're getting the right kind of capacity to meet the customers' expectations. So I think it's a little early because they don't have a lot of specifics out of OSHA on the one hand. And then, again, customer by customer depending upon how they feel they need to implement on the other side. Okay, great. Thanks for that. And then, Jim, just a real quick point of clarification. You mentioned that you can still grow earnings in a 10% pullback type scenario. Was that specifically demand pullback or was that 10% on total revenue? No, I think I didn't say that we could grow. I don't think I said I could grow earnings. I think I could in a 10% pullback scenario, I think we could not grow 10% in a 10% pullback in The market, I think, is what I meant to say. I think we could still either hit or grow earnings a little bit. Okay. Super helpful. Just based on the tailwind of the expenses. Got it. Thank you. Thank you so much. Our last question on queue is from Todd Fowler of KeyBanc Capital Markets. Your line is now open. Great. Thanks and good morning. Hey, Tom. Jim listening to the call, you're almost starting to sound like a little bit more of an optimist, But I'll let that be determined, I guess. It's pretty difficult not to be happy today. I tried. Look what it takes, Yes. I thought that. I mean, Lloyd, to be a pessimist with these results, it's difficult. So, no, congratulations. So I guess what I wanted to ask about the strong volume growth, you guys are going to end this year if the Q4 comes together over 20%. How do you help us think of or can you help us think about how much of how sticky some of that volume growth is? I mean, I think that there's a perception And that you're much more transactional, but I know that some of your underlying business has some stickiness to it. So is there a way to think about how much of that volume is really considered overflow and transactional would go away in a more balanced market? Or how much of that you really keep on a kind of recurring basis as we move into next Sure. I would think the sticky stuff, clearly, the drop in hook is 30% of our business about. So I mean that's clearly sticky business. Government, I mean we're kind of playing that. That's They're committed to us. We're committed to them on the government side. Automotive is a little more that less sticky. When demand is high, we do better. When demand is Slow on automotive and it's but supply chain disruption is good for us, which is what you talk about. They're hazardous. If you look at hazmat in the A and E, Yes. That hazmat stuff, every one of our BCOs is hazmat certified. So that isn't true for a lot of So we have 11,000 guys who can haul hazardous materials, so everybody comes to us for that. So if that market's hot, it's sticky. I think our cross border Mexico was probably $400,000,000 or $500,000,000 annually, maybe not that high, but it's about $400,000,000 is about right. And so that's a little thick because those it's hard to disrupt that. That's a very coordinated effort to move third party use Mexican carriers, stuff like that. That's a little more sticky. So when you add it up, you got 30% on the drop and hook operations. It's a decent sticky. I do I know the exact number, but it's clearly more than half is sticky. If I were really thinking about the true Spot world where people are just calling us, we're moving one load for a guy and then they're leaving us. It's not a big piece of the business. When we talk about being in the spot world, it's really From a customer standpoint, not necessarily spot, the rates move up and down, right, for these customers. We're really buying Capacity in the spot market is so we look at it 2 different ways. We live in the spot world as it relates to capacity, but a lot of the relationships we have with our customers, They're good. Is it sticky? Is it guaranteed that we're going to move people's freight? Absolutely not. But I think they're a little bit sticky as it relates to Agent relationships and being able to provide capacity in tough times and they kind of stick with you, especially if we're throwing trailers at them or moving their hazmat or helping them with the situation. But putting a percent out, it'd be difficult. Yes. No, I understand. It's a tough question, but that context is helpful. And what it sounds like is that The overall base of the business has moved up pretty substantially. And now going forward, there'll be some cyclicality and some seasonality, but it's off of a higher base, and it's not We're going to revert back to 2019 levels as soon as things normalize. Yes, I wouldn't expect. The great thing about the agent model is they build the relationships and When people need capacity like this and it just it elevates us. You're going to see a cycle back. I don't think there's any question, but then we launch higher and you've seen it since our inception. I even gave you a chance to be a pessimist. You didn't take the bait on that one. So just my last one, maybe Fred. In the I think that there's been some metrics around how much cash you want to keep on hand maybe as a percent of revenue or total assets. As you think about the business and kind of the cash that you're generating at this point, have the metrics changed as far as how you feel kind of the cushion level that you want from cash On the balance sheet at this point and then kind of any differences, I think it's been talked about a little bit on the call, but investments and opportunities and kind of where you deploy capital going forward? Thanks. Yes. So as far as cash, we obviously have way more cash than we need to run the business. We've deployed it successfully historically with dividends, share buybacks, special dividends. And I think that makes sense going forward. I personally prefer share buybacks to any kind of special dividends, but that's just kind of how I think about it. And so I think we'll continue to do that. And as far as deploying it through other opportunities, we'll keep our eyes open to see if there's any potential M and A kind of opportunities. But we haven't really historically done a lot of that In part because of potential conflict with the business model. So I think the historical ways we've returned capital to shareholders will continue, perhaps with maybe a little bit more focus on share buybacks. Yes. Todd, as you know too, the cyclicality of our business is the business model is just fabulous. It relates to cash. In a growth environment like we collect receivables in 50 days, we pay our carriers in about 20 days. So it's we're financing the capacity, right? It's kind of the way this works. And in an environment we're in, you can see our receivables just grew to over $1,000,000,000 for that, I think the first time in our history. And it's a little bit of it's not a We are definitely cash flow positive. But when things start to soften up, we become bigger cash flow positive. We're collecting more, paying less. So cyclicality, As things have and if things do pull back, we end up actually bringing in more net cash during that period and have more opportunity. So it's the model kind of protects itself in any environment. And like Fred said, if you go back, we haven't borrowed in a long time against our revolver to buy stock, which is there's Two times we borrowed on the revolver. Once is I think we're buying stock pre-twenty 10. And the other one was because We had that contract with the FAA where we actually had about $275,000,000 due from the government. They didn't pay until the tasks were done. It was all That's how the contract was written, so we needed to borrow then. But do we need to keep cash on the balance sheet to run the business? We don't really have a set in mind. I don't see us borrowing to do a buyback program. Some of that cash is collateral for our insurance claims. So what you see on the balance sheet is There's some of it is locked up, but we kind of more look at how much cash do we have and how do we deploy it to shareholders. And that's kind of what we've done historically and as you know. Yes, yes. No, that helps. That makes sense. So all right, thanks a lot for the time this morning, guys. Congratulations again. Sure, Todd. Thanks. Speakers, at this point, we do not have any more questions on queue. You may continue. Thank you, and I look forward to speaking with you again on our 2021 Q4 earnings conference call currently scheduled for January 27. Have a good day. Thank you so much everyone and that concludes today's conference. Thank you all for participating. You may disconnect your lines at this time.