Earnings Call: Q2 2021

Jul 22, 2021

Good morning, and welcome to Lancer Incorporated Second Quarter 2021 Earnings Release Conference Call. Today's call is being recorded. If you have any objections, you may disconnect at this time. Joining us today from Lancer 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 Stadium Operations Officer. I would like to turn the call over to Mr. Jim Gattoni. Sir, you may begin. Thank you, Kirby. 2021 Second Quarter Earnings Conference Call. Before we begin, let me read the following statement. The following is a Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts or forward looking statements. During this conference call, we may make statements that contain forward looking information that relates to Landstar'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 Landstar's Form 10 ks for the 2020 fiscal year described in the section Risk Factors and other SEC filings from time to time. These risks and uncertainties system. This 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, System. Our 2021 second quarter sales performance was by far the best quarterly performance in Lancer's history. 2nd quarter revenue, gross profit, operating income, operating margin and earnings per share were all each All Time Quarterly Records. To put this performance in perspective, prior to 2021 Q2, assisted. Lancer achieved its all time quarterly record for revenue in the 2024 quarter and its all time quarterly records for gross profit, operating income and earnings per share in the 2021 Q1. Lancer's financial performance in its 2021 Q2 System. Exceeded the company's existing all time quarterly records for revenue, gross profit, operating income and earnings per share by 21%, system. In reviewing the company's 2021 second quarter performance, Q2 over prior year quarter financial comparisons to the 20 22nd quarter are not meaningful. This is due to the significant downturn in the 20 22nd quarter in demand for freight services and the U. S. Economy in general relating to the COVID-nineteen pandemic and various initiatives taken by Lancer in response to the pandemic to support its network of agents and BCOs. During our Q1 2021 earnings conference call, We provided 20 21 Second Quarter revenue guidance to be in a range of $1,400,000,000 to $1,450,000,000 System. And diluted earnings per share to be in a range of $2.20 to $2.30 Revenue in the 20 21 Q2 was 1.571 $1,000,000 and diluted earnings per share was $2.40 Our guidance for the 2021 Q2 was at that Systems. Entirely based on the most recent sequential month to month trends and short term expectations relating to those trends. Our initial guidance assumed truckload count would increase in a mid single digit percentage range over the 2021 Q1. As it related to truck revenue per load, Systems. 1st quarter truck revenue per load typically is lower than that of the second, third and fourth quarters. However, revenue per load on Lowe's Tobiya truck in March Systems. Was an all time monthly record. Our initial guidance for the 2021 Q2 anticipated that truck revenue per load would continue at the record March 2021 level throughout the Q2, implying a softer month to month seasonal trend and an overall increase in the 20 21 Q2 above the 2020 Q1 in the mid single digit percentage range. Our expectations that revenue per truckload would stabilize at March Assisted. This record level held true in April as April revenue per truckload was about the same as in March. However, truck revenue per load further increased in May from April at higher rate than we anticipated based on historical seasonal trends, while June truck revenue per load compared to May was slightly below typical seasonal trends. Systems. However, June truck revenue per load was at an all time record level for any month. In In anticipation of an upcoming investor conference call, we updated our initial 2021 Q2 guidance on May 28 via a Form 8 ks filed with the SEC. Systems. The updated guidance reflected truckload volume at the time trending above the 2021 Q1 in the low double digit percentage range and revenue per load on loads to hold via truck trending above the 20 21 Q1 in a high single digit percentage range. Based on those trends, the updated guidance called for 2021 Q2 revenue and diluted earnings Systems. Actual second quarter truckload revenue was generally in line with our May 20 guidance, Assisted. While total revenue came in a little better than we expected compared to the updated guidance, mostly due to strong performance in our non truckload transportation services. To To help give a sense of actual 2021 month to month trends compared to recent seasonal trends experienced at Lancer covering the same time periods, We compare the 2021 trends with our performance from 2016 through 2019. We're not including results system. Given the significant adverse impact the COVID-nineteen pandemic had on the freight industry. Systems. On average from 2016 to 2019, the number of loads and revenue per load on loads hauled via truck increased from the 1st to second quarters Systems. Finances are 6.8% and 2% respectively. The number of loads hauled via truck in the 2021 Q2 increased 12% Assist. Compared to the 2021 Q1, while revenue per load on Lois Hovia truck increased 7.5% over the 2021 Q1. Clearly, both growth rates are much stronger than recent first or second quarter trends. As it relates to the number of loads hauled via truck, the change from March to April Assis. 2021 trended consistently with the seasonal trends based on our 2016 to 2019 history. Although the sequential performance in April 2021 Systems. Was most likely better than the historical trend as we believe March 2021 load volume was elevated due to freight moving system from fiscal February to fiscal March due to the storms that hit the U. S. In late February. The growth in the number of loads hauled via truck from April to May was 100 40 basis points better than the average increase from 2016 to 2019, while growth from May to June was in line with historical trends. As it relates to revenue per load, March through April 2021 was 140 basis points below the 2016 Systems. The growth from April to May was 200 basis points above the 2016 to 2019 average. Assisted. Growth for May to June was slightly below the seasonal trend reflected in the average change we experienced in 2016 to 2019. Assist. From an end market standpoint, consumer demand for building products, consumer durables and small package via e commerce continue to drive record band volume in the 2021 Q2. Systems. The number of loads hauled via the on-site platform equipment grew 35% over the 20 22nd quarter, mostly due to improvements in U. S. Manufacturing sector beginning in March. As it relates to the new agent pipeline, we continue to attract qualified agent candidates to the model. Systems. Revenue from new agents was $24,300,000 in the 2021 Q2, the highest revenue from new agents in over 12 quarters. Assist. As to truck capacity, we ended the quarter with a record 11,557 trucks provided by business capacity donors, over 560 more trucks compared to our year end 2020 count. Systems. During the 2021 Q2, we recruited 10% more BCOs than during the 20 22nd quarter. Systems. Our BCO retention rate also improved as compared to the 20 22nd quarter as the number of BCO cancellations in the 2021 Q2 3% below the 2020 Q2. Overall, the net increase in the number of BCOs BCO trucks in the 2020 Q2 speaks to Lancer's ability to track Assisted Qualified Capacity in the Tight Truck Capacity Market. Loads hauled BCOs increased approximately 26% in the 2021 Q2 Systems over the 2020 Q2 on a 12% increase in average truck cap plus a 12% increase in BCO truck utilization system defined as loads per BCO truck per quarter. It is worth noting that both BCO truck count and utilization in the 20 22nd quarter were Assist. We ended the 2nd quarter with a record number of approved third party carriers in our network, Assist. While a number of active third party carriers, which we define as carriers who have hauled the load in the preceding 180 days, increased 43% in the 2021 Q2 over the 20 22nd Systems. Our network is strong and continues to attract 3rd party truck capacity. I will now pass it to Fred to comment on additional P and L metrics and a few other second quarter financial statement items. Assist. Thanks, Jim. Good morning, everyone, and thanks again for joining us. Jim covered our revenue performance, so I'll make some additional comments about our P and L, specifically our gross profit, operating costs, operating income and taxes as well as the balance sheet and cash flow. Gross profit in the 2nd quarter increased 95 percent to $220,800,000 compared to $113,100,000 in 20 Systems. Gross profit margin was 14.1 percent of revenue in the Q2 this year compared to 13.7% in the same period last Assisted. The increase in gross profit margin was mostly attributable to the impact of $12,600,000 of pandemic relief incentive payments Systems made to the company's BCOs and agents in April May of 2020, partially offset by mix. As a 60% of revenue contributed from our fixed margin business, which has higher gross profit margin, decreased from 51% of total revenue last year Systems this year. Due to the impact of the COVID pandemic on our 2020 Q2, a more relevant comparison is to look at Assisted our sequential growth in the 2021 Q2 compared to the Q1 of this year. Even by this measure, we performed extremely well, Systems with gross profit increasing $31,500,000 or 17 percent to the highest gross profit in the company's history. Sequential decrease in gross profit margin from 4.7% in the 2021 Q1 to 14.1% in the 2nd quarter was mostly due to mix, Assist. As truck brokerage revenue became a larger share of our revenue in the 2021 Q2 and agent commission incentives tied to achievement of revenue thresholds on loads hauled by BCOs also grew as a percentage of revenue compared to the Q1. Moving on to our indirect costs and expenses. Systems. Our other operating costs were $8,900,000 in the Q2 of this year compared to $7,400,000 in 2020. Systems. This increase was primarily the result of higher trailing equipment maintenance and tire costs due to a higher trailer count and improved utilization. Assistance and qualification costs related to our BCOs and fewer gains on trailer disposal during the 2021 period compared to last year. Insurance and claim costs were $24,100,000 in the Q2 this year compared to $19,800,000 in 2020. Assisted. Total insurance and claim costs represented 3.7 percent of BCO revenue this year compared to 5.2% of BCO revenue last year. The decrease Systems. The increase in insurance and claims expense was primarily due to the increased severity of current year claims during the 2021 period, additional miles driven by our BCOs and a $1,800,000 increase in insurance premiums. Partially offsetting these Assisted. Was a $1,500,000 benefit from the decrease in net unfavorable development of prior year claims in the 2021 Q2 Systems. Selling, general and administrative costs were $54,100,000 in the 2021 Q2 Systems, compared to $40,600,000 in 2020. The increase in SG and A costs was almost entirely driven by the estimated cost of the company's variable cash incentive compensation plan and equity incentive plan increasing by $12,600,000 sales over the 20 2Q2 due to the expectations of a record setting financial forecast for fiscal year 2021. Systems. Partially offsetting those cost increases was a lower provision for customer bad debt. In addition, depreciation and amortization Assistance expense was $12,100,000 in the 2021 Q2 compared to $11,500,000 in 2020. Systems. Operating income was $122,200,000 or 55.4 percent of gross profit in the 2021 quarter Systems. Versus $32,200,000 or 28.4 percent of gross profit in 2020. Operating income represented a new all time quarterly record for Lancer. System. Our effective income tax rate was 23.9 percent in the 2021 Q2 compared to 22.3% in 2020. System that reduced the 20 22nd quarter effective tax rate, as well as a higher provision for non deductible executive compensation during the 2021 period, fiscal year 2019, partially offset by the recognition of increased excess tax benefits during the 2021 Q2 compared to the same period last year related to the vesting of share based compensation. Our net income for the 2021 Q2 was $92,300,000 Systems, which was up from $31,200,000 in the same period last year and up from $77,200,000 or 19.5% compared to the 2021 Q1. Systems. Our diluted EPS in the 2021 Q2 was $2.40 up from $2.01 in the 2021 Q1. Business. Looking at our balance sheet, we ended the quarter with cash and short term investments of $239,000,000 Cash flow from operations year to date in 2021 Systems. Was $137,000,000 compared to $198,000,000 during the 2020 period. The decrease in cash flow from operations was mostly due to changes in working capital, Systems with a 63% increase in revenue year over year, driving up net receivables defined as accounts receivable less accounts payable, Systems compared to a decline in working capital in the same period last year, which generated cash from working capital in the year to date 2020 period. Before I wrap up, I'd like to just say that I'm very pleased to be at Lancer and look forward to talking with and meeting many of you, hopefully even in person as schedules and events permit. Systems. Jim and I and the rest of the Lancer team are really pleased by the company's performance this past quarter and we look forward to keeping you updated on the business as we make our way throughout the remainder of 2021. And now I'll turn it back to Jim to discuss our outlook for the Q3. Thanks, Fred and welcome to this superior management team. Freight demand began to significantly improve in August 2020 as the U. S. Economy began to improve from increased consumer spending. Systems. The strength in the freight environment that began in August continued through the end of 2020. As such, year over year financial system. Comparisons should begin to normalize as we move through the 2021 Q3. As it relates to our 2021 Q3 expectations, Systems. I anticipate the strong freight environment to continue from the 2021 Q2. In a normal freight environment, with the supply of trucks and freight demand remains stable, Systems. The company's 3rd quarter truck revenue per load typically slightly exceeds the 2nd quarter, while a number of loads, albeit truck, typically tracked slightly below the 2nd quarter. When we experience those trends, 3rd quarter revenue often approximates revenue of the 2nd quarter, while gross profit tends to decrease slightly from the second quarter due to a lower gross profit margin. Currently, revenue per load and the number of loads hauled via truck are at historical Systems. In the 1st few weeks of July, truck revenue per load and the number of loads hauled via truck are tracking in line with typical June to July trends. Systems. Based on this performance, we believe there is a season there is seasonal stability at these elevated price and volume levels. Based on the current environment, I system. I expect 2021 Q3 truck revenue per load to exceed the 2021 Q3 in the low 20s percentage range and the number of loads, albeit truck, to exceed the prior year 3rd quarter in a mid teen percentage range. As such, I expect Q3 revenue to be similar to the 2021 second quarter revenue In the range of $1,550,000,000 to $1,600,000,000 I also anticipate insurance and claim costs Systems in the 2021 Q3 to be approximately 4.6 percent of BCO revenue, above the 3.8% of BCO revenue experienced in the 21 First Half. This increased estimate of insurance and plans cost is based on increased premiums relating to auto liability coverage assistances that we are paying the 3rd party insurance companies. Increased severity, we have already experienced during the 1st several weeks of July as compared to the 2021 first half, mostly due to a small number of specific incidents. And our experience that over longer periods of time, claim costs tend to track more in line with historical trends that we have experienced thus far in 2020 Systems. Based on that range of revenue and assuming insurance and claim costs at approximately 4,600 BCO revenue, I anticipate 20 21 Q3 diluted earnings per share to be in a range of 2.20 Assisted $2.30 The projected increase in insurance and claims costs reflected in our 3rd quarter earnings per share guidance as Compared to actual insurance and claim costs in the 2021 Q2 would adversely impact 20 21 Q3 earnings per share by approximately $0.12 Overall, I'm extremely pleased with Landstar's first half twenty twenty one performance. 2021 first half revenue is by far the highest first half revenue in the company's history, an system. An increase of approximately $628,000,000 or 28% compared to the previous record set in the 2018 first While gross profit increased approximately $83,000,000 or 25% compared to the 2018 period, 2021 first half gross profit, operating income, net income and diluted earnings per share were by far the highest ever achieved in any first half in the company's history. In our view, the overall buy system. Lancer continues to be as strong as it has been in any point over the last 2 decades and Lancer is positioned for a year of tremendous success. We continue to increase our belt capacity and remain focused on providing system enhancing technology based tools for the thousands of small business owners in both the agent capacity side of our network. I expect 2021 to continue at its record setting Assist as we look to easily surpass $5,000,000,000 in annual revenue for this first time in our history. And with that, Kirby, we will open to questions. Systems. Thank you very much, sir. At this time, we will begin the question and answer session. The line of Jack Atkins of Stephens. Systems. Your line is open. Please go ahead. Hey, Jack. How are you? Hey, great. Jim, good morning. Good morning, Rob and Joe and Fred. Congratulations on your role with the company. Systems. Thank you. Good morning. Good morning. Good morning, Zach. So I guess maybe to start, Jim, kind of going back and picking up off of a comment you made Systems. On the last conference call, you were talking about net operating margins and sort of how they could trend once We begin to see the cycle maybe begin to normalize into 2022. And I know that Systems. It's very, very difficult to anticipate and predict sort of how things are going to trend from here. No one would have anticipated we'd be where we are today. Systems. But I know that there are a lot of costs that sort of flex up and flex down in your business depending on sort of what's happening with the top line 60% next year. Even if we were to see a slower spot market from a freight perspective, Assist. Do you think that's realistic? I get a lot of questions just around the sustainability of trends and if folks can grow earnings in 2022. I would just be curious to get your thoughts on that subject. Yes, Jack, one of the things to take into consideration, as you know, our Systems. The management team and employees here, that we have the incentive compensation plan that's highly variable to our results. Assist. And you look back at 2019, 2nd best year ever, and we didn't necessarily hit our bonus targets and therefore there wasn't one. So Assist. But then on the flip side on a great year like we're having that variable comp plan is going to be elevated. And I'll tell you right now that our projection for this Assisted. The year is probably in the $20,000,000 to $25,000,000 range for that and typically it's $8,000,000 And then the equity comp actually works in a similar fashion because it's Assisted. Our equity awards best based on growth and earnings and therefore we have a similar variability there. Assist. And you're probably looking at about an equity comp probably another $25,000,000 this year for that. So you're looking at about a combined $45,000,000 to $50,000,000 in comp that's in this year. Assist. And in a normal year, it will be about 20% combined. So you've got that supporting that 50% operating margin. Like there's a lot of pressure on the margin this year and we're putting 55 assist. Right. So you can we can have a decent decrease in gross profit and still support a 50% margin just because Assist. The tailwinds of the way our variable comp programs, which benefits everybody. The theory here is that if the BCOs and the agents aren't doing that well and the mark Assist. The executive team shouldn't get awarded and if we're having a great year, it's the same thing. Agents and BCOs are doing great and then we do great. So the model kind of protects itself when it comes from that kind of margin perspective when you have a little softening into the into a year. Systems. And I would think and I haven't run numbers, but we could probably have a decent sized pullback in gross profit and still stay above 50% or around 50% Because of that tailwind on the SG and A line. Okay. That makes a lot of sense and I appreciate that additional color Systems. And I guess for my follow-up question, you guys have been accelerating your investments in technology over the last several years Systems. And I think people underappreciate just how much technology you guys have and have pushed forward to the agents and to your BCOs over the past few years. But given how strong this year is from a top line and a gross profit perspective, Are there any thoughts to maybe accelerating some of those technology investments just because you have this sort of windfall from a profit perspective? No, Joe. I would say, Jack, back in 2015 when I stepped in the role, I told everybody it was an open checkbook to make our tools better. And we're spending what we can to get it done. We have so many projects in the air right now. There are there's nothing that stands assist. There's nothing that stands out right now that we would add or to the project list. What we're focused on the front end of this is user experience, right? Agents and trucks, Assist. Making them more efficient, making things more effective on the tools that already existed, but making them more effective. And we have a lot of stuff in the pipeline there. Assist. On the back end that we don't have to rush into is an ERP and billing system because our stuff is pretty much from the 80s. Assist. And it works today administratively, but sooner or later we'll jump on that. But there's no reason to jam that in. It will help build efficiencies within the building, but it's we're really Assist. So I don't think there's anything that I would say, hey, we should spend another $50,000,000 on tech today. Might we trickle in Systems. Are there projects that will be maybe move forward a little bit, but I wouldn't say there's anything where I'm going to be telling the world that all of a sudden we Systems. We're going to accelerate this project into a year and it's going to cost $50,000,000 I think we're still going to do what we do and spend an extra $20,000,000 or $30,000,000 incrementally. And actually that incremental is no longer incremental because that's probably the spend rate where we are right now, where we used to be. You're probably $20,000,000 to $30,000,000 over where we were 4 years ago and that level of spending is probably going to stay where it is. Unless like you say, we're not aware of anything we're going to pull forward. But if there was something, I wouldn't say it's going to jump from 25, 30 to 50 to 60. How is that? Okay. That makes total sense. Thanks again for the time guys and congrats on a great quarter. Systems. Thank you. Our next question would come from the line of Todd Fowler of KeyBanc Capital Markets. Your line is open sir. Please go ahead. Hey Todd. Hey, good morning, Jim. Fred, welcome to the self proclaimed superior management team. Nice to have everybody on board. Thank you. Good to be here. Assisted. Jim, so on the guidance, and I understand it makes sense to set up the guidance based on what you've seen from historical seasonal patterns. I know that the year over year Systems. The last couple of quarters, you've run ahead of seasonal patterns. Are there things that you're seeing right now, Systems. Either an underlying demand or things on the supply side that suggest that we're going to shift to more in line with seasonal Assist. Friends, is there anything that you're seeing that would bias you one way or another versus seasonality as we move to the back half of the year? Well, Todd, in the Q1, I got a little skeptical and I was I flattened out the Q2 because March was so great. But Assist. But this time, I think it's a little bit different. June was good. We're sitting at all time high revenue per load. But what we've seen through June, if you when I went through my comments, Systems. You heard that May to June was more seasonally in line when it comes to loadings. And then May to June revenue per load was slightly below the seasonal trend, Assisted. Again, talking 2016 to 2018 2019 trends. I think on the rate, it's really because of May spike, right? So the softer June May to June was probably because May Assist. So and in the 1st couple of weeks here, we're sitting in July, the 1st 3 weeks into July and I'm seeing the normal June to July trend. So I'm basing this on about a 6 or 7 week stability, right? I think we're seeing I got 6 weeks of stability right now of seeing things that are tracking normal as we would have seen Systems in those 3 years of 2016 to or 4 years from 2016 to 2019. So there's nothing pushing us either higher or lower than that at this point. So that's how we get to Assist. And we think it's going to continue. And we always clearly, we're meeting with Rob meets with his team and Joe talks to his team about what they're seeing in the market. And Systems. And it's supported by the commentary coming out of the field and talking to the agents and the customers is how we come up with that. We're looking at a more normal second or third quarter trend. Okay. Yes, that makes sense and that's helpful. So it sounds like more rooted in what we've seen in the last 6 weeks or so, Assist. Kind of more consistency and more stability. And so maybe just along those lines, can you speak to anything specific or different between what you're seeing on the van side and what you're seeing on unsighted platform side from a seasonal standpoint and what your expectations would be for both of those for the rest of the year. And I'll turn it over after that. Assist. Yes. The strength really is still on the van side. It's whether the building products, consumer durables or substitute linehauls really I mean, it's really where the market stands, where flatbed has gotten a little bit better. It's not gangbusters, but most of the performance is still coming out of van with Systems. And it's still most of those customers and shippers that we're hearing from that are they're still concerned about the back quarter, Systems. Right, in the peak and stuff like that. So it just feels like a normal seasonal trend on the van side and then the flatbed side is maybe a little improvement as we go through the quarter. Systems. But yes, there's nothing specific that changed in either of those dynamics that I'm aware of. The one thing, we talk about sectors, right, and everybody is talking about the automotive and the lack of chips. We only had 2 commodities that or sectors that Systems. Dropped in load volume from the Q1 to Q2 and one was automotive, right? And I think we expected that coming into the quarter. And I expect that one's going to continue. But other than that, there's nothing really unusual in the trend that we're looking at trends for the rest of the year. Systems. Okay. Yes, all of that makes sense. Okay. Thanks so much for the time this morning. Thank you. Our next question would come from the line of Pasco Majors of Susquehanna. Your line is open. Please go ahead. Yes. Thanks for taking my questions here. Jim, your stock is certainly Systems. A lot higher in absolute terms than when it was when you were buying more aggressively in past Systems. But the multiple has come down as your earnings have come up. Do you feel that we're approaching the point Assisted. Would that normal return on capital be more attractive or do you think we're still in the special dividend mode if when that time comes? Assisted. As you noticed, we bought about 150,000 shares back in the quarter. That's kind of a light quarter for us. We had seen a pullback in the stock about 10%, and We didn't really see anything in the change in the business dynamics. So clearly, when you look at what the Street said at $8.85 for the year or $8.83 for the year, Yes, our PE is now a lot more reasonable than it was 6, 7 months ago. So yes, I think we're in a buying opportunity situation now. And I would expect that Systems. We're going to be opportunistic and if it stabilizes where it is, I think it's opportunistic. We're in an Systematic position right now. It doesn't count out especially at the end of the year and we will still always discuss that in December Assisted by looking at cash on the balance sheet and any opportunities we have in the market. But right now, I'd expect something similar to what we did in the second quarter as long as the price stabilizes within a certain range. And again, if it starts we don't compete against investors if we start seeing a climb up, Systems. We like the stability of where it was and we didn't see any change in the business dynamics. Thanks for Asserts. One housekeeping question. I don't know if I heard thoughts on where the gross margin should shrink. Can you give us an update on that? And I We didn't say it because we're keeping it a secret. No, actually it's Similar, but maybe a little less than the 2nd quarter. You typically see a little bit of a downturn. And I think the Q1 was 14.1. I think we're using like maybe 69 to 14 at this point. And it really is Mick. I mean, we just end up seeing a little more brokerage come across. I mean, it's nothing to do with any pressure from the Assisted tightness of capacity. It's really just the way we typically trend. And if I could get one more in there. I mean, you did make some comments to an earlier question about Assisted. You've been able to maintain a pretty good operating margin even if net revenue dollars turn against you next year. Systems. It looks like at least the sales side is settling out at somewhere with a mid to high single digit EPS decline next year. I mean, does that feel Systems. Reasonable based on your July 2021 crystal vaults, any thoughts on how we bridge from this year to next? I think it's very difficult in this environment to project 12 months out because of the unpredictability of the pandemic, stimulus stops, people coming back to work, people maybe traveling. I think Systems. Difficult to answer, of where that EPS. Now I know what The Street has. Is it reasonable? Systems. It's a better question toward the end of this year than it is right now. But I think as a management team here, we do think we're going to see some softness sometime in the first half. Systems. And I still think that softness is not going to I don't think it's get to the point where it's going to get us below that 50% margin, especially when we have about that tailwind of about $30,000,000 worth of variable comp Syttenant SG and A this year. If we hit targets next year, you'd have that tailwind. So I'm sitting here, I'm comfortable that we'll maintain a 50% margin next year with a little softness in gross profit. Systems. Thank you. Our next question would come from the line of Scott Group of Wolfe Research. Your line is open. Please go ahead. Systems. Hey, thanks. Good morning, guys. Good morning, Jim. Jim, this uptick in insurance costs, should we think about this as a 1 quarter event or is Assist. Is this in your mind sort of the new normal range on insurance costs? Part of it is probably just special system. We are aware of a little bit of increased severity coming into the 1st 3 weeks of July. And when you have an incident, you hear about it, Systems. Getting the facts takes a lot longer than it used to and sometimes facts change. So we don't know exactly the outcome of a couple of Systems that happened in the Q1. So there's a little bit of excess in there. I would if I were to guess now without those in there, you're probably at 4.2%, 4.3%, not Assisted 4.6%. But we're hoping that we we're very conservative on that number. And things and the incidents we know about Systems. The fact patterns and stuff support maybe a lesser severity than what we think they have that they sound like. So I think it's a little hefty, the 4.6 to be honest with you. I think it's Systems. But it's so hard to predict what's going to happen in insurance and claims. Based on history, it's probably a little heavy. Systems. Your point about the last 6 or so weeks have been seasonally normal after such a long period of outperforming seasonality. What's your history? Do we typically after we have this period of in line with normal, do we have a shot to get back to better than normal or Is this typically or historically the beginning of the transition to underperforming normal? What's your crystal ball here? Assisted. My crystal ball is very hard to decipher what we think is going to happen at peak, right, October, November, December. Capacity is still tight. There's no question there. And if demand creeps up, I think you're going to be seasonal or better than seasonal. Demand for trailing equipment is still very strong. I'm not sure there's going to be enough System's trailing equipment in the market to satisfy all the demand coming across. And we're still anticipating a pretty strong Q4. So We might see a stability coming in here through August, September, but if we get peak as strong as it was last year, you might be seeing acceleration above seasonal. Now I'm a pessimist Systems. Do I believe that? No, but that is a scenario that could play out. Right now, as I sit here, I would tell you that I think our Q4 is going to look like the 3rd quarter, which look like the quarter and we'll just finish out the year at this more seasonal trend. Okay. And then if I can just ask Fred one, the model generates Systems. Such tremendous cash flow and I don't know that there are amazing acquisition opportunities in your model. Systems. Is there an argument that you guys can just run with some more debt on the balance sheet and sort of dramatically increase assist the pace of shareholder returns. That's a tough one. I mean, the company can support more debt. Systems. No doubt. The question is what do you do, right, if you raise debt with that cash? Something we'll consider over time, but right now no plans to change the capital structure. Look, Lancer has pretty much been debt adverse our whole lives, right? And then unless we see an opportunity to throw debt on the balance sheet, we Systems. I like the way the model is. We have flexibility in when we buy and when we pay dividends. And loading up the balance sheet with a lot of debt to me feels like just a one time hit. Assisted. We're not totally adverse to putting debt on the books, but there's got to be an opportunity and a reason to do it. Got it. All right. Assist. Thank you for the time guys. Thank you. The next question would come from the line of Bruce Chan of Stifel. Your line is open. Please go ahead. Systems. Yes. Thank you, operator, and good morning team. Jim, you talked about some of the shipper concerns about peak and the end of the year. Assist. And I know you don't have tons of visibility here, but just based on some of the conversations that you've been having, what do you make of where their inventory levels are right now and how long it Assis. Hey Bruce, this is Rob. Good question. Inventory levels, I mean, I think again, especially when you look Assist. E commerce and consumer spending as it is inventory levels, everything is disrupted. I mean, you take into consideration kind of things that are going on in the rail, things that are going on Systems. At the ports from overseas, we haven't seen a whole lot of stabilization yet. So the conversation that we're having with our customers that operate in a true peak is They don't know. And we've been having these conversations since late Q1 as to aligning with them, making sure that they've got capacity, Assisted. So I think it's a big unknown. All indications that we have right now that again, there's all kinds of variables that could happen based on A new uptick of the pandemic, but consumer spending still seems to be high, home sales seem to be high, remodels, things like that. So they're looking for a Systems. They're concerned about how strong peak is going to be moving into, we'll call it now late 3rd, early and through the Q4. Systems. That's great color. And maybe just one more follow-up, if I could. We've been sort of chipping around the edges of the question. Systems. Jim, I know you said that you were expecting maybe some potential softness in the early part of next year. But as you think about Systems. Your comments around peak as you think about where inventory levels are right now. Earlier this year, you said that you were expecting a kind of normal 12 to 18 month rate cycle. Systems. Do those comments still hold true? No. Look, I was I'm a pessimist, right? Back in January at our year end release, I Assisted talking about the back half of this year because we're heading into that 12 to 16 month cycle where the contract rates are climbing and spot rates come through. Now Assisted. And put it in perspective, a significant majority of stuff is spot rates in the normal cycle of 12 to 18 months. Now we're yes, I think we're system. We're going to see a cycle. I think it's just extended and that's where we're kind of looking at it next year. Things sooner or later are going to stabilize. We're in a cyclical business. Systems. There's the theory of people starting to travel and get entertainment and not buy goods and stuff anymore. Systems. Maybe that's been pushed out a little bit, especially with the new variant coming in and maybe people are going to be home again or we're not traveling as much or going to hesitate a little bit to travel Assisted. And maybe more maybe that buying of goods will continue throughout the rest of the year. But sooner or later, we do still anticipate Systems. A slowdown in demand and contract rates coming up and some of the freight that we haul moving over to contract. Now we'll keep some of that, but some of it runs from the spot rate into Assist. And that I don't think that cycle changes. I think it's just extended. Perfect. Thank you. Thank you. Next question will come from Jason Seidl of Cowen. Your line is open. Please go ahead. Thank you, operator. Hey, good morning gentlemen. Hi. And Assist. I wanted to touch on the BCOs and how difficult it has been, if at all, to Systems. Keep attracting them and if you've seen any difference in some of the states that maybe remove some of the stimulus payments. And then maybe some thoughts next year if Assisted. We ever get Washington to agree on an infrastructure bill, how we should think if that hits that impacting Landstar. Systems. Yes, Jason, this is Joe. I would tell you that our as Jim made some comments on in his remarks, recruiting volume is up. Assisted. I mean, I think we I would be remiss to say we don't have to work pretty hard to get the BCOs in the door, but I think the environment and where things are Assist. And the network effect that we provide them makes it a pretty attractive location for them. So that's why you see our in the door number is up. And as long as the environment stays the way it is, I think we provide a lot of transparency into the opportunity at opportunity at Landstar and I think we get increasingly good at that over time. So if you're out on your own authority or if you're in another system, Systems. We show you what you can do at Lancer and I think it helps people make the decision to come our way and I think we continue to be good at that. I can't give you any Detail as to what states they're coming from or those kind of things. I don't know that we've seen anything that steps out to say they're coming from Assist that are with or without the enhanced unemployment benefits. But, I just think the overall environment for somebody who owns a truck and wants to get paid on percentage and who wants to really chart their own financial future, that's what we provide. And I think that's an incredibly attractive picture Assists. And we're trying to capitalize on that. And for the last several quarters, we've been able to do so. Okay. And in regards to a potential infrastructure bill and so the impact, how that Yes. I think if that happens and you see a lot of industrial activity going on. I don't think it directly impacts Landstar. We might haul a little bit of it, but I think what it does is it further Systems. The flatbed market and the market in general for those that may participate in that, which helps rates Systems. And of course, when rates are high, that opportunity at Lancer maintains very rosy and I think Systems. We continue to add equipment, but directly I don't see any really direct effect from the infrastructure bill, Jason. Okay. Systems. Appreciate the time as always, gentlemen. Congrats on your work. Thanks. Take care. Thank you. At this time, we have two more questions on queue. The next question would come from Scott Schneeberger of Oppenheimer. Please go ahead. Thanks very much. Good morning. Welcome Fred. Jim, I guess I have a Assists. A few questions on really end markets. I'm curious with regard to the substitute line haul business that's really been growing. What do you see with capacity for parcel carriers going forward, not just the back half of this year, but looking out a few years, assist. What happens for your business there and how do you view capacity in the industry playing out in the bigger picture? Thanks. Yes. On the substitute line haul, I think we Systems. I anticipated it's 2 or 3 large customers, right? Shippers for us, not even shippers, parcel carriers, right? We anticipate that they kind of realign. They decide to either put assets in there or Systems. They improved their networks and their carrier base and stuff like that. But what we're hearing right now is that and I anticipated that happening after the Q1 where they would bring more of that in house. But right now, we're hearing is just that's not the plan, right? I think that Systems. On that substitute line haul business, I think we stay elevated throughout the rest of the year and even into next year. It would stay as elevated as high as it is, but I think we'll always be participating Systems at a little bit elevated level compared to where we have historically because the inconsistency in the freight flow patterns and not wanting to put assets into the system or system. So I think that holds true for this condition, I think, will hold true for a while. I think that was your question on that e commerce side of the business Systems. And what it trends because it's right now, I can tell you in the from the first to second quarter, I mean, the load volume in that increased 25%. Systems. So it continues to outperform what a normal seasonal trend would be and especially for the substitute line haul, it's pretty elevated right now. Thanks. Appreciate that. And then I think I heard in, I think it was on Todd's question, you were talking about Systems. The chip dynamic in automotive and you said that and please correct me if I'm wrong, there were 2 sectors that were down Assisted Q1 to Q2 automotive being 1. Curious about the other, please correct if I heard that right overall. And then Systems. Just curious, you guys have done a lot of auto parts movement. I'm curious about that Systems' dynamic versus new car and how you're handling Mac going forward? Thanks. Yes. So yes, you're right. I mean, you got it. Automotive Systems. And this is a sequential volume comment, what it was from Q1 to Q2. We saw 2 sectors that had actually had negative volume growth. Systems. And one was automotive, which is 7%, 8% of our revenue volume Systems. And the other one was electrical, which is less than 3%. It was down 2%. So nothing it Assist. It wasn't one of our major categories, but every other sector that we had was positive volume growth Q1 to Q2. As it relates to new cars, we still aren't playing in that business. We may move a little bit of that. But the significant piece, Systems. Over probably 90% something of its parts going in and out of plants. We're not doing new car moves. Systems. Great, thanks. And just a follow on there, and thanks for the detail. Your other category is quarter of overall. I know it's a catchall, but one of the lesser growing year over year. Just curious anything you'd call out in Systems. That category, that since it's so broad, just anything in the minutiae that's worth noting. Part of the broad is called Freight All Kinds, Systems. It's like probably 10% of that of our total loadings for the quarter. So Systems. So when the agent puts it on there, he just puts FAK. So some of it we know the customers don't necessarily know what the commodity is. It's generally just a typical non toxic, not hazmat type commodity. But there's nothing within there that's any significant that's the biggest category within that other. Yes, there's some other stuff in there. Government's relatively small, foodstuffs is small, but nothing that moved dramatically within there. Some are up 7%, some are up 23% Systems. But nothing really moved the needle as much as your consumer durables building products or your substitute line haul. Got it. Thanks for that. Yes. Thank you. Next one queue would come from the line of Stephanie Moore of Truist. Your line is open. Please go ahead. Hi, good morning. Good morning. Good morning. I wanted to touch on a topic of Landstar Blue and just any update there in terms of how assist some of the tech initiatives that you've been rolling out with, I know it's a small portion of your business, but it is, a little bit of a shift towards actually kind of, exposure to contractual Systems. So I'd love to get any kind of update there on, Landstar Blue, but also maybe an update on just some of the technology initiatives. I know it's been a multiyear rollout Systems across the organization, but as well as with Lancer Blue. So any color there would be helpful. Thanks. Yes. Lancer Blue on the technology side is kind of twofold. One is, Systems. Our systems here are the core systems here are really designed for the spot world and they've been built out over 20 or 30 years and they're very good. Systems. They're very good for what we do in that arena. And as you mentioned, we're getting into that maybe dedicated more contractual business, which needs a kind of a different TMS. So there is that component of Blue that is a little bit different than our core business from a TMS standpoint to run dedicated business, assigned capacity, dedicated capacity with contract rates, right? So that's a little bit different. Systems. The stuff that we're using over there that's similar is like Lancer Clarity, which is our visibility tool, right? Lancer Blue also has access to our pricing tool assist. And all the EBI connectivity and stuff like that, so there's similarities. Clarity is one of the best examples is to give the ability for us to use that to Assist. How effective it is with 3rd party trucks. As you know, getting data from the 3rd party trucks is kind of an industry Challenge. If the trucks don't want to share their information with you or they don't want to load your app, you got to figure out ways to do it. So you go through aggregators. Assist. And it gives us the opportunity there to actually get dedicated capacity to work directly with us on specific lanes and work Systems. Through that communication piece on the clarity side on the visibility to the freight. The other thing too is we parade agents through there too Assist. To show them what we're doing, they help us, we help them kind of on how to run that kind of dedicated business if they ever want to get into it. Systems. It's running probably $20,000,000 to $30,000,000 of freight right now and it will we'll continue to grow out the technology there as we progressed down the road with we're not in that dedicated capacity world, so that tool is going to be able to handle assist. Pushing freight or the dedicated capacity just picking the freight right off where we're pushing the freight to them and it's automated. Assist. The one thing it does that we don't have a lot of traction here is we call on the Book It Now product that we have, right, where the carrier just can push a button and accept the load, Systems. Our world a lot of our agents want to take a phone call and a lot of trucks want to talk to the agents, right? In Landstar Blue Assist. It's where we'll get traction on the Book It Now concept, right? Because when the freight is owned and the capacity knows that's their freight, all they got to do is push a button and let us know that they Systems. Okay. So there's those are the variations between Blue and the core. And we're in the early stages of getting that technology up and running. Systems. I was told the other day that in a few weeks we will have the TMS running and we'll start running loads through it. So it's progress and It's a good way to test some of the existing tools that the agents are using. Great. Well, thank you so much for the color. Systems. At this time, I see no further questions. I would like to turn the call back over to you, sir, for closing remarks. Yes. Thank you, Kirby, and thank you. And I look forward Systems speaking with you again on our 2021 Third Quarter Earnings Conference Call currently scheduled for October 21. Have a good rest of your week. Systems. Thank you for joining the conference call today. Have a good morning. Please disconnect your lines at this time.