Good morning and welcome to Landstar System Incorporated Third Quarter 2020 Earnings Release Conference Call. All lines will be in a listen-only mode until the formal question-and-answer session. Today's call is being recorded. If you have any objections, you may disconnect at this time. Joining us today from Landstar are Jim Gattoni, President and CEO; Kevin Stout, Vice President and CFO; Rob Brasher, Vice President and Chief Commercial Officer; Joe Beacom, Vice President and Chief Safety and Operations Officer. Now, I would like to turn the call over to Mr. Jim Gattoni. Sir, you may begin.

Thank you, Missy. Good morning and welcome to Landstar's 2020 third quarter earnings conference call. Before we begin, let me read the following statement. The following is a Safe Harbor statement under the Private Securities Litigation Reform Act of 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 Landstar's business objectives, plans, strategies and expectations. Such information by nature is subject to uncertainties and risks, including, but not limited to, the operational, financial and legal risks detailed in Landstar's Form 10-K for the 2019 fiscal year, described in the 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 or 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 entered the 2020 third quarter facing one of the most unpredictable and challenging freight environments in the company's history. The dramatic swing in demand from the sudden significant decrease in mid-March to the bottoming out in April and May to the gradual sequential improvements we experienced through the summer months and continuing through the end of September was unlike any other period in the history of the company. Although we all recognize the impact of the COVID-19 pandemic on the economy is far from over, the company's variable cost business model, highly diversified customer base and geographically dispersed network of independent agents and third-party truck capacity provided resiliency and flexibility to Landstar as we manage through this unprecedented time. Landstar's third quarter financial results far exceeded the third quarter financial guidance that we first…

Thanks, Jim. Jim has covered certain information on our 2020 third quarter, so I will cover various other third quarter financial information included in the press release. Gross profit (defined as revenue less the cost of purchased transportation and commissions to agents) was $160.9 million and represented 14.8% of revenue in the 2020 third quarter compared to $152.6 million or 15.1% of revenue in 2019. The cost of purchase transportation was 77.3% of revenue in the 2020 third quarter versus 76.6% in 2019. The increase in the PT rate was primarily due to an increased rate of purchase transportation on truck brokerage carrier revenue, which was 187 basis points higher than the rate paid in the 2019 third quarter. Commissions to agents as a percentage of revenue were 7.9% in the 2020 third quarter compared to 8.4% in the 2019 third quarter. The decrease in commissions to agents as a percentage of revenue as compared to 2019 was due to a decreased net revenue margin, revenue less the cost of purchase transportation divided by revenue on loads hauled by truck brokerage carriers. Other operating costs were $7.4 million in the 2020 third quarter compared to $10.4 million in 2019. This decrease was primarily due to decreased trailing equipment rental costs, decreased contractor bad debt, decreased costs related to the annual BCO event cancelled due to the COVID pandemic, and increased gains on sales of trailing equipment. Insurance and claims costs were $21.9 million in the 2020 third quarter compared to $24 million in 2019. Total insurance and claims costs for the 2020 quarter were 4.4% of BCO revenue compared to 5.1% in 2019. The decrease in insurance and claims expense compared to the prior year was primarily due to decreased net unfavorable development of prior year's claims and decreased severity…

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

[Operator Instructions]. And the first one is from Jack Atkins of Stephens.

Jim, let me start first. If you could maybe pull out your economic crystal ball. I know it's so tough to kind of think about and triangulate sort of where we're going from here, given all the uncertainty out there with the election and the pandemic and everything else. But when I think about the different items that are really impacting your business over the next 12 months, the industrial economy feels like it's improving from here, construction activity is looking strong next year. Automakers can't produce enough cars. I know energy remains a challenge. Can you maybe kind of help us think through how you're looking at your end markets as we head into 2021? Because it certainly feels like, if you think about maybe additional stimulus and infrastructure bill, there are a lot more pluses and negatives when we kind of think about where we're trending into the next calendar year.

As you know, we always speak to how we're pretty tied to the industrial sector. And when you have industrial production or manufacturing production which is negative, still a little bit shy of where it was last year, you'd expect our model to not produce the kind of performance that it just came out of. But I think some of my emphasis of my points within my prepared remarks is really to speak to the agent family and how they penetrate into new markets or they penetrate into existing customers who may experience a surge or some kind of supply chain disruption. So, I think what we're looking at now is just the ability of the network to expand in an environment where industrial production has still remained soft. And that to me really just provides a positive into the future because I don't think anybody anticipates industrial production is going to stay negative throughout the rest of the 12 – the forward-looking 12 to 18 months. And any strength there is just going to add to what we've already done where the agents have penetrated into some – consumer durables, as you know, was a great quarter for us. Substitute line haul with the ecommerce demand coming through those parcel carriers. I would say that, if you were to ask me, my expectation is, going into next year, I think that substitute line haul would probably the one area I'd watch that would soften. But I see no reason why any of the other stuff would soften. Even Landstar here, we're talking about what percent of our employee base can remain at home indefinitely, right, even after COVID clears out, which means you've got – saving money on travel and stuff like that and continue to spend into the economy. So, you've got the consumer durables and all that stuff. I see a lot of that continuing. So, if we can get the manufacturing start picking up and other than substitute line haul, like I said, which is probably kind of more of a surge right now and we're providing some surge capacity there probably for the next maybe three to six months, that one I can see softening. But everything else, I see pretty strong throughout the next 12 to 18 months. I see no reason to pull back on the environment.

Okay. That's very encouraging. Maybe for my follow-up question, just kind of going to the insurance point for a moment, if I go back to the second quarter call, you guys talked about some potential actions on the insurance front that – I think the idea was to maybe improve your cost recovery there. So, I guess, either for Kevin or for Jim, could you maybe talk about maybe – I guess if you could, some more details around some steps you could take there to may be impact your net insurance expense as we go into 2021 because I would imagine the insurance markets aren't going to turn into a tailwind next year?

You're right there. I don't see that our premium – the amount we pay in premiums for insurance coverage, especially in the commercial trucking line, I don't see that pulling back over the next six or eight months. As you know, we renew every year on May 1. And our anticipation right now is that the premiums will stay elevated through that renewal period, but hopefully not. There are actions we can take. We have significant amount of coverage, probably one of the higher coverage in the industry when you talk about the layers and how high up the coverage is. We could look and think about maybe reducing that a little bit without exposing the organization on a per occurrence basis. You might get a little savings there. We're looking at other programs on the insurance side where we might be able to reduce some of the potential equipment, maybe we could influence our BCOs to maybe put in the truck to help influence maybe some of the specific accidents we had, which is unmeasurable. You could put an equipment in the truck, but you don't – if an accident doesn't happen, you don't know it. So, it's a lot of things we're looking into. And clearly, the move we just made to improve our recruiting efforts and retention efforts to eliminate the agent incentive commissions was a big offset and that's a tailwind going into next year, right? So, you've already picked up – as I said in the opening remarks, there is about – not that it was intended to offset the insurance, but it was a decision that was made to improve our recruiting efforts internally and to improve our field locations in recruiting and retaining BCOs. But it turns out that we have about a $10 million spend every year within the commissions line that would go forward. So, it was a $14 million increase of premiums year-over-year. So, we think we'll cover that with various programs by the time we jump into January 1 or some time through the year.

Our next question is from Todd Fowler of KeyBanc. Your line is now open.

I guess I wanted to start with – it looks like you had some continued success in attracting both BCOs and then also third-party carriers to the network. Jim or maybe Joe, can you talk a little bit – we've heard a lot about the challenges in the driver market right now. It seems like you're doing a good job in moving the BCO count up. Can you talk a little bit about why you think maybe you're having some success in doing that and then the ability to continue to do that as you move into 2021?

Todd, this is Joe. I think to the extent that the demand environment changed and that the pricing environment changed to – moved in a positive direction, those are two excellent catalysts that drive the BCO growth historically. And so, to the extent that we continue to be solid on both of those fronts, I think our BCO count hopefully can remain – grow through the balance of this year. And then, I would anticipate not really having a crystal ball into next year, but if it remains pretty solid, hopefully, we'll be able to maintain our count and grow it a little bit more in 2021. But I think just the model itself, how we compensate on percentage pay versus mileage and the tools that we have that allow people to come in and take advantage of this strong demand environment and make good decisions for their business, I think that's really the foundation behind it. I think if you're in the company driver market, I think it's a little bit more difficult because you're trying to get people to come back to a position that maybe they just lost in the owner operator, small carrier environment. This is their career decision. They've made their decision. It's just a matter of where they want to align themselves. And I think we've got a very good platform from which to align themselves with us and be successful. And as Jim pointed out, our centers that we're initiating in 2021, that's just one more step that we'll take to try to improve recruiting and retention. Most of our growth, Todd, has been not so much on the recruiting side. We did recruit a little bit better quarter-over-prior-year quarter, but it's really been on the retention side where we saw about a 30-some-percent reduction in the number of termination. So, once we get them here, get them acclimated, get them in a position to make good money, make agent relationships, and our agents do a great job of taking care of capacity whether it's BCOs or carriers, we like our chances in a good freight environment.

Todd, the other thing there, and I think Joe mentioned the tools, right, you know our business model. We've had an app out there forever to simplify it, to make it easy for the BCO to identify the opportunities. We have 8,000 to 10,000 loads on the board at any given point in time. So, the network and the ability for us to just automate that whole process and some of the things we've done over the last two or three years to improve that app and being able to sort functions and stuff like that, and I think that helps improve and would attract more drivers into the system also as we make things easier on them and the communications become more automated.

Yeah. All of that makes sense. And to me, it sounds like maybe that's one of the big differences, that you're not as dependent on the new drivers and the driver schools than maybe some of the large company driver fleets might be. And then, of course, the strong freight market and the technology helps. So, that helps kind of square that away. Just for my follow-up. Kevin, can you share with us what you think – based on your guidance where total incentive comp will be for all of 2020 as well as stock-based compensation, so kind of the full year number? And then what you would expect it to be into 2021 just based on kind of the normal target or the normal run rate that you'd have going into next year?

Todd, as far as incentive comp goes, we're pegging the number to a one-time payout for 2020, which would be about $8 million. So, we're putting up $2 million a quarter. Assuming we hit exactly on our target for 2021, it would be the same number, about $8 million annually. On stock comp, we're about between $3 million, $4 million this year, right at $4 million. I would expect the same thing for next year.

And I agree with, Jack. Great quarter. And I know it's been a quite a volatile environment, so nice job.

Our next question is from Scott Group of Wolfe Research.

I want to ask just about some of the guidance pieces for the fourth quarter. Have you seen the flatbed volume and price inflect positive yet with van or not yet? And then I think I read that you're assuming the rates sort of stay flat from here. Is there a reason why you don't think they take another step-up at the end of the quarter as we typically see around peak season?

I don't think we're anticipating that they remain flat. I think seasonally, sequentially, we're expecting them to be normal. Typically, what you see from September to December is you do see some increase in rates. And I think we've built that into the model. We are expecting – I think, on average, you see it from September. By the time you close out December, you're up maybe $80 to $100 on a per load basis, and I think we did build that in our guidance. As to flatbed, you've seen the improvement sequentially in July, August and September. I don't believe we've seen an inflect positive yet, but it's still soft as compared to where the van side is. So, I don't think we expect that to pick up and stay relatively flat throughout the remainder of the year.

The back about 50% net operating margins, do you guys think that's sustainable going forward as long as the trends remain positive or is there anything unusual from a cost standpoint that means that the margin should go back below 50%?

No. I think Kevin explained some of the big variables we got, right? Our bonus program is highly variable, right? But I think what he had said that those should be consistent year-over-year into 2021. You talk about the incentive comp, no pressure there. That's not a tailwind or headwind. Those are relatively flat. So, you're not feeling pressure on the margins there. Insurance clearly is a margin pressure with the $14 million more of premiums. That only started May 1 of 2020, so you've got some pressure there. But we feel like we've got enough ideas in our heads to kind of offset that, maybe not on the insurance line, but on various other lines within the P&L. So, I think if our gross profit stays elevated and we continue down the path that we're going with the growth and the performance we put there, yes, I think that 50% margin is achievable. I don't want to talk about quarterly because the first quarter clearly is a softer quarter and the infrastructure costs might push that below 50%. But on an annual basis, over a longer period of time, yes, I think that 50% is achievable and realistic.

And then, just last question just on the sustainability of the cycle. You've been a straight shooter over time, and I get your points about – maybe the industrial demand hopefully getting better next year. What about on the supply side? Are you seeing signs of supply coming back as quickly as it's come in prior cycles? Are there reasons why it's going to come back faster this time, slower this time? How do you think about the supply side of the equation?

This is Joe. I think there has been supply that's been sitting on the sidelines, especially when you think about owner operators and small carriers, which are the bulk of our capacity at this point. I think they've been around. I just think they've been a little bit sidelined or dormant or waiting for things to change, whether that's their ability to feel comfortable about operating in a COVID environment or whether it's the feeling that the markets and the pricing and those kind of things have bounced back to the point that it's worth their while. I think a lot of them look at it as a cost benefit type decision. And as we've seen the demand improve and pricing improve pretty dramatically, I think you've seen a lot of carriers or owner operators that were sidelined come back into the market. How much of that is left to go? It's hard for me to say that. It doesn't look at this point in time like there's going to be a lot of new truck production. From what little I've seen, it's going to be more about replacement levels in 2021. So, if that's the case, I think capacity remains tight, but it's not really clear as to how much is still out there that's not coming back and operating in this environment. I would think it's not that much.

Our next question is from Michael DiMattia of Wells Fargo.

You mentioned some of the declines in the industrial markets throughout the quarter, but it sounds like there is indeed a brighter picture shaping up for 2021. Could you sort of bucket the new growth opportunities and customer potential wins in terms of how to think about those businesses as we head into 2021?

It's very difficult for us to get down to a customer level because we are highly diversified. If you think of our agent model, with 1,200 agents all around the country, they're in all different customers. When we look at things, we kind of look at more of a broad array of sectors. We look at the sector level. We don't look necessarily down at the customer level because clearly no customer is more than 3% of our revenue. I haven't looked recently, but generally. I know there's nothing 5%. And so, when we look at it, it's really a sector thing. So, you talk about end markets more – we speak to more what's going on in manufacturing and especially on the machinery and metals side, steel production and stuff like that, that's how we look at. It's hard to drill into customers. Now, on the substitute line haul, that's really customer-driven. There's four or five heavy customers there. And like I said, to that sector is where – we could experience softness there if things ease up on the ecommerce coming into next year. But it's really difficult for us to pull apart what our projections are at a customer level because one single customer does not drive the business. It's really more industry side and sector side.

And just one follow-up thinking about the supply side again. I think your BCO count inflected positive by 1% for the first time in five quarters, which still seems moderate. What sort of trajectory should we think about as we head into 2021 as the market continues to remain tight?

This is Joe again. I think we anticipate a little bit of growth still in Q4 in October where our net growth is about 100 trucks in October so far. So, I don't think it will continue at that pace for the rest of the quarter. I think it will slow down. And then, in next year, I think the growth will be a little bit more modest, maybe in that net growth 100 to 200, somewhere in that range would be – kind of where we sit now and what it looks like now, that would be more of achievable, I think. Just given that I think things are going to stabilize, pricing is going to stabilize, volumes will be what volumes will be once we understand how next year shapes up.

Our next question is from Bascome Majors of Susquehanna.

I wanted to follow-up on some of the cost items. Can you share with us the SG&A levels anticipated in the guidance? And maybe on a go-forward basis, is there any SG&A or operating costs you're taking on to – that is a partial offset to some of the commission savings from the buyout you're doing in 4Q?

Bascome, this is Kevin. I think in fourth quarter, our SG&A line is going to be somewhere between $40 million and $42 million. That should be a pretty consistent number. If you look back over time, our numbers have been ranging probably $38 million to $42 million over time. I don't anticipate any significant increases. We might add a headcount here or there for the recruiting, but nothing significant going forward.

So, just like history, incentive comp will be the big variable to move that up if it needs to go up?

On the SG&A line, yes.

There's a couple of small things we've got to think about. As Joe starts to implement his plan over the centers, the operation centers, there's probably a little – we're talking operating costs maybe driving up $500,000 to $1 million next year. It's small stuff. So, the other thing that happened this year, if you're doing a comp year-over-year, if you're looking at 2020 compared to 2021, there are some expenses we didn't incur this year that will may be roll back next year. We had an agent convention that we canceled, which is a couple of million dollars that – we did have some penalties we had to pay there, but you have that. You also have -- we have a BCO All-Star Event that is $1 million over the summer that we had to – we canceled out on too. And again, some penalties there we had to pay, but there's another $1 million, I would call, a headwind. There is some nickel and diming into the P&L that will roll in next year. Clearly, I don't think there's is a company in the country that hasn't reduced their travel and entertainment expenses over the last – since March. So, we're going to have a little headwind there. And if you add all that up in my head, there is going to be some costs coming back in, in the extent of – if I did it real quick in my head, $4 million, $5 million. But it's spread throughout each individual line item. And we'll try and manage to that. We're not through our budget process, and we'll figure out whether we can reduce that. It's a year-over-year thing, it's not a spending issue, and we'll see if there is other spots where we can kind of offset some of that. But right now, in my head, due to the pandemic, there is some year-over-year comps that are a little bit different than you would get in a normal year. But again, on the other side, we did pay $12.6 million of BCO pandemic relief where we paid the $50 to the agents of BCOs. We have that. And then this year, clearly in the fourth quarter, another $15 million one-time charge for the buyouts of the commission incentives. So, we've got a little bit of noise coming into next year, but I think I might have just kind of walked through what we know of as being the noise.

I would add medical benefits to that too as people stop going to the doctor.

Yeah, yeah. It's incredible that medical benefits dropped off during a COVID pandemic. But we had a favorable experience on – I guess people just basically – if you just had a cold, you weren't going to the doctor, so we had that drop off. So, there are some pieces in there. But I would still say it's maybe $4 million or $5 million of expense. And then we had about $30 million of one-time charge going the other away.

Thanks for walking through all that. That's helpful as we think about next year. Maybe moving up to the gross profit side of the P&L. On a per load basis, it looks like you passed the $300 mark again this quarter, which is quite a pickup from where the first half was. And you haven't really been there other than a very good year, which was 2008 where I think you were above that in each quarter and got as high as $313, $315 in your best quarters. From the other commentary, it sounds like you've seen more market positives than negatives in next year. As we think about gross profit per load as a really key financial performance indicator for your business, do you have any sense of where you think that can go and how high it needs to be before it feels like it's cyclically unsustainable?

Well, we know how high it can go because there is a cap. If you think about our business model, we're a mix of BCO and we're a mix of brokerage. And on a gross profit per load, the BCO gross profit per load is higher than the brokerage. And there is reasons for that. We have insurance costs, we have recruiting costs, we have a lot of things related to the BCO below the gross profit line that we don't have on the third-party truck side. There is pretty significant costs to maintain an independent contractor network within this organization. So, one of it is mix, right? So, if you have more BCO than you have broker, you're going to have that consolidated gross profit per load going to elevate if there is more BCO than there is brokerage. So, that's a piece of it historically. So, if you went back to – when we were 60% BCO and 40% broker, you would have probably seen a higher gross profit per load. Let's just believe that's all equal every year, so what drives it since the BCO gross profit per load from a dollar perspective is really based on rate. You have to hit a certain rate. If it's $2,000 a load, we're going to be up $2,000 to $2,300 per load on a BCO. That's going to help lift that gross profit per load. But at the same time, rates coming up, we're feeling pressure on the broker side and that gross profit per load is probably shrinking a little bit. And I think it's what we saw this quarter. We did see it. We saw gross profit per load shrink on the broker side, yet we saw it expand on the BCO side. So, it's a combination of those two things. I want to say we're at a very good number right now. I don't want to claim it's the top. There is clearly a – if you're going to tell me we did $5,000 a load, yeah, we're going to exceed the $300 by a lot. I wouldn't say there is a – I would say that we're pretty healthy right now on that number. And into the fourth quarter, we could maintain and grow it a little bit. But let's just go with, it's healthy now and I don't know how high it could go or how high it will go. It's hard to project that out.

So it sounds like the volume might be a bigger variable going forward than necessarily the unit gross profitability?

Yeah, because – like I said, the BCO gross profit per load really varies with the revenue per load. And then the brokerage really is either the expansion or compression of margins.

Our next question is from Stephanie Benjamin of Truist.

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

It's Kevin. My range is 14.5 to 14.8. We're showing a little bit more – going back to what Jim just talked about on the mix, a little bit more brokerage. Obviously, some tightening on in the capacity. So, there is going to be a higher brokerage PT rate in Q4. But the best range I came up with is 14.5 to 14.8 for Q4.

And then, just switching kind of to expectations for peak season. I think any company tied to e-commerce is expecting a pretty big year. But can you maybe tell us a little bit about what other customers are saying as they look at fourth quarter? And then also as say they continue into the first quarter, just kind of expectations from a demand standpoint? Thanks.

This is Rob. From the e-commerce and from the peak side of things, things continue to – from a customer standpoint, they continue to be strong through the fourth quarter. Consumer spending continues to be high, consumer-based spending continues to be high. They don't feel that the seasonal peak has even started yet. We're kind of running at peak levels right now. And then they fully expect peak to start early and to continue on through the season. As it goes into the first part of the year, the customers that we deal with feel it's going to be strong. But again, it kind of depends on what happens within our economy, kind of the workforce, if people go back to work and things of that nature. So, there's kind of some unknowns going into the first of the year, but still continue to believe it's going to be strong.

Thank you so much. Our last question on queue is from Scott Schneeberger of Oppenheimer.

Just curious, on free cash flow, what type of expectation – you've talked a lot about the P&L this year going into next year, curious what you're looking at as we move towards next year, Jim? Some considerations for CapEx, need for investments or perhaps technology investments? Thanks.

This is Kevin. Last 2019, free cash flow was $288 million. This year, our operating cash is in the $186 million year-to-date. So, I'm expecting that to be just north of $200 million this year. As far as next year, I would say $200 million to $250 million would be a good guess as to operating cash flow for 2021.

And then, just curious, it's been touched upon in the last few quarters, but you had a write-down for cross-border Mexico in the second quarter. And just curious if you're seeing any pick-up there. And then longer term with the consideration of near-shoring going forward, what might we think about for that business down there? Thanks.

The write-down wasn't cross-border. Actually, the cross-border Mexico, we have a Laredo facility and six or seven cross-border locations along the north-south border of US to Mexico. The write-down was actually for our Mexico entity. That is really just interim Mexico. It's a small business. It does about $15 million to $20 million of revenue. And so, there was an impairment there. And it really had to do with interim Mexico business at that Mexican entity. As it relates to the cross-border business, I think what we are experiencing is that the southbound freight was kind of soft and northbound freight was picking up. Joe might be able to provide a little more depth into that, but it's – and that continues. There is a little bit of imbalance with capacity, as you know. If southbound is soft and northbound is picking up, you just get truck imbalance. And Joe's team works through that. So, Joe might have better commentary.

It's absolutely true what Jim stated. There is an imbalance. There was also quite a bit of congestion at the border in the early stages of COVID probably through June. We've started to – because Mexico I think was hit a little bit harder in certain areas and it's been a little bit slower to recover. So, you had a lot of congestion of trailers at the border, customers or vendors not open and that kind of thing. A lot of that is starting to come apart and we're getting things delivered and getting back, a little bit more normalized. And then, we've seen the volumes down there, when you look at northbound and southbound combined, continue to get better from flat in July, 6% in August and 8% in September grow. So, it's starting to loosen up and improve, as you would expect. And as things continue to get a little bit more parity with what's going on in Mexico from an operational perspective relative to the COVID, I think you'll see it gets even more normalized.

And we have one more question from Jack Atkins of Stephens.

Thanks for the follow-up, guys. Just a couple of additional questions here. I guess, when we think about capital allocation from here, Jim, I'd just be curious to get your sense for how you and the board are thinking about buybacks versus dividends. There is some potential tax policy changes that could be on the horizon depending on how the election shakes out. You guys are in a great position with the net cash balance. How are you sort of weighing all that? I know you did a special dividend that was paid in January. Any thought of maybe doing another special dividend this year or it's just too hard to tell at this point?

Those discussions actually happen in December. We'll have those discussions with the board. I would anticipate we're not going to change our philosophy of where we stand. I do think – even though we're coming out of very strong environment right now and we anticipate that strong environment to continue, let's be serious, the environment has been – it's three months old right now. So, I think there is still little unpredictability. So, we prefer the share buyback program clearly. But if we end up at the end of the year with excess cash on the balance sheet, we're going to do what we've done historically, look at dividends or buybacks. And so, that's what we will have our discussion about in December. And we'll look at market conditions and where we think 2021 is playing out and we'll consider any tax implications also. I think if you look back when there was going to be a proposed increase in the taxes on dividends back – I think it end of 2012, we actually got a pretty big dividend check. So we'll be watching the election and what we think is going to happen with tax rates. Also, look at what our cash flow looks like for next year and what market conditions look like.

And then, I guess, maybe a last question. Also, there's a capital allocation bit to it, but just curious how you guys are thinking about your trailer pool? I think given the freight backdrop, we continue to hear about just a pretty significant shortage on the trailer front. Do you feel like your trailer pool gives you a pretty strong competitive advantage relative to other asset-light players? And is there any thought to maybe investing incremental capital there just given the demand outlook perhaps over the next 6 to 12 months?

This is Joe. We saw in the third quarter, just to kind of make your point a little bit, about 35% of our total truck volume was on a Landstar trailer and about 70% of our BCO revenue is on a Landstar trailer. So, clearly, an important part of the model. We think we are in very good shape as it relates to the number of trailers that we need to support our business. And we've continued to operate on the philosophy that for every BCO that is pulling a company trailer that enters the fleet, we provide two trailers, right? And I think that's the philosophy that we'll continue to utilize. Our trailers are very new. They show very well. We've got great tracking technology and it helps us keep our maintenance in line. So, I think that's – we feel pretty comfortable as we see the BCO fleet grow. We've been pretty effective at getting new equipment builds and delivered in time for peak and those kind of things. So, I think we'll continue to operate on that basis.

And the other thing is, we kind of rollout our trailers every seven years, so it's a replacement cycle. The two things we look at as to spending on trailers is, we're trying to anticipate what our BCO count is going to look like three months out and add trailers based on that, and then replacement cycle is about seven years.

Thank you so much. At this time, I show no further questions. I would like to turn the call back over to you, sir, for your closing remarks.

Yes. Thank you. And I look forward to speaking with you again on our 2020 year-end earnings conference call currently scheduled for January 28. Have a good day.

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