Good morning, and welcome to Landstar System Incorporated's Third Quarter Earnings Release Conference Call. All lines will be in a listen-only mode until the formal question-and-answer session. Today's call is being recorded [Operator Instructions]. Joining us today from Landstar are, Jim Gattoni, President and CEO; Jim Todd, Vice President and CFO; Joe Beacom, Vice President and Chief Safety and Operations Officer. Now I would like to turn the call over to Mr. Jim Gattoni. Sir, you may begin.

Thank you. Good morning and welcome to Landstar's 2023 third quarter earnings conference call. Before we begin, let me read the following statement. The following is the 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 statement. 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 include but not limited to the operational, financial and legal risks detailed and Landstar's Form 10-K for the 2022 fiscal year described in the section risk factors and other SEC filings from time-to-time. These risks uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking information unless or undertakes no obligation to publicly update or revise any forward-looking at information. Throughout my remarks, I will make mention of the concept of normal seasonal patterns or normal trends. For purposes of my remarks today, normal seasonal patterns and normal trends refer to Landstar sequential revenue, load count pricing or other trends for monthly or quarterly periods from 2015 to 2019 and excludes our historical results from 2020, 2021 and 2022 due to the highly unusual dynamics reflected in those metrics during the pandemic-driven freight cycle. Given the current freight environment with soft demand and readily available truck capacity, Landstar performed relatively well in 2023 third quarter Actual revenue and earnings per share both arrived within the ranges of the guidance we issued in our July 26 second quarter earnings release. We provided revenue guidance of $1.275 billion $1.325 billion and earnings per share guidance of $1.65 to $1.75. 2023…

Thanks Jim. Jim G's covered certain information on our 2023 third quarter, so I will cover various other third quarter financial information included in the press release. In the 2023 third quarter, gross profit was $128.1 million compared to gross profit of $185.7 million in the 2022 third quarter. Gross profit was 9.9% of revenue in 2023 third quarter, as compared to gross profit margin of 10.2% in the corresponding period of 2022. In 2023 third quarter variable contribution was $187.4 million compared to $245.7 million in 2022 third quarter. Variable contribution margin was 14.5% of revenue in 2023 third quarter compared to 13.5% in the same period last year. The increase in variable contribution margin compared to the 2022 third quarter was primarily attributable to one mix, and an increased percentage of revenue was generated by BCO independent contractors, which typically has a higher variable contribution margin than revenue generated by other modes of transportation. And to two, an increased variable contribution margin on revenue generated by truck brokerage carriers as the rate paid to truck brokerage carriers in the 2023 third quarter was 95 basis points lower than the rate paid in 2022 third quarter. Other operating costs were $50.2 million in the 2023 third quarter, compared to $13.4 million in 2022. This increase was primarily due to increased trailing equipment maintenance costs and an increase provision for contractor bad debt partially offset by increased gains on sale of used trailing equipment. Insurance and claims costs are $29.5 million in 2023 third quarter compared to $31.4 million in 2022. The decrease in insurance and claim costs as compared to 2022 was primarily attributed attributable to a decreased severity of accidents during the 2023 period, and a decrease in BCO miles traveled in the 2023 period, partially offset by…

Thank you, Jim. We don't expect let's change the overall freight economy in the 2023 fourth quarter compared to what we've experienced thus far throughout 2023. We also anticipate a muted peak season this year. Overall demand for freight transportation expect to remain relatively soft for the remainder of 2023, continue to drive truckload volumes significantly lower compared to 2021 and 2022. Directionally it is difficult to forecast truckload volume levels beyond the next few months as future economic conditions are very unpredictable. Yesterday earnings release make note that early October truckload cat was trending below historical sequentially monthly patterns. Given the lower starting truckload volume we have experienced at the beginning of the fourth quarter, we expect truckload volume from the 2023 third quarter to the 2023 fourth quarter to trend below normal seasonal patterns. Additionally, due to how our physical year calendar works the 2023 fourth quarter has one less operating week than a 2022 fourth quarter. Given we expect to remain below normal quarter-to-quarter seasonal trends, truckload count at 2023 fourth quarters is forecasted to be 20% to 22% below the 2022 fourth quarter. Excluding the extra week of operations from the 2022 fourth quarter truckload count, the decrease in truckload volume at 2023 fourth quarter compared to 2022 fourth quarter is expected to be similar to slightly worse than our performance in the 2023 third quarter compared to the 2022 third quarter. We expect 2023 fourth quarter truckload pricing to be 6% to 8% below the 2022 fourth quarter, seasonally in line to slightly ahead of normal seasonal patterns. We also expect revenue from our non-truck modes be similar to that of the 2023 third quarter. Based on the assumptions mentioned, we expect revenue in 2023 fourth quarter to be in the range of $1.225 billion to $1.275 billion and earnings per share to be in a range of $1.62 $1.70. The 2023 fourth quarter guidance incorporates a valuable contribution margin of 14.5% to 14.7%. And insurance and claim costs to approximately 5.5% of forecasted BCO revenue. And with that, we will open it to questions.

Thank you very much, sir. At this time, we will begin the question-and-answer session. [Operator Instructions] And we have the first question coming from the line of Scott Group, Wolfe Research. Your line is now open.

Hey, thanks. Good morning. So I want to try and understand the volume situation a little bit better. If you look, your guidance for Q4 volumes are going to be about 10% lower than they were in Q1. You go back historically, they typically grow I don't know if 5%, 10% or something from the beginning to the end of the year. What's -- it's hard to sort of understand, is this just the freight environment? Is this something about your model with the BCO camp that keeps falling so sharply? Is this-- is it the auto strike? What do you think is really causing such a continued underperformance of seasonality on volume?

The only thing I would touch on as it relates to our model is the variability in the volume we hauled for other 3PLs and trucking companies. As I described in my remarks when capacity is really tight, and it's hard to find truck capacity, our agents are very good at putting trucks on loads. And so, the other 3PLs and the other brokers and truck companies reach out to us more frequently in a tight environment they do. So that would be a model differentiator. Other than that, it's just the environment. I just when you look at what's going on in manufacturing and in the U.S. it's been soft all year it's since March has been negative. So I just don't think that demand is there and that but I don't think it's anything specific to the model at this point. I would also say coming to October, we have so I had mentioned that our six sequential trend from September to October is actually below normal season as it relates to truckload volume, part of that clearly is due to some of the automotive plants shutting down, but that's not entirely it. It's contributing to that seasonal underperformance from September to October. But other than that, it's just -- it feels pretty much economic on the demand side.

Okay. And then I know it's probably hard to predict. But when do you think you have a shot for revenue per load to start inflecting higher year-over-year? Do you think -- would you expect that rates and earnings could grow in 2024? Is that too hard to know. How are you thinking about that?

Well -- you look at the spread, what could drive -- if demand doesn't pick up, the only thing that's going to drive rates is the spread between contract and spot rates, right? But right now, the gap looks like it's maybe $0.40 between contracts being hired in spot. So in our world since we're heavy spot eventually, that kind of transitions and the shippers start taking advantage of the spot market discount to contract rate. Haven't really seen much of that happen yet. And if you look at the year, that gap has -- it's tightened a little bit, but not as much as I would expect. So we've been sitting on this gap for like 8 months it's kind of hard to predict when that will turn. Assuming demand stays relatively flat, it's going to turn where the shippers start coming back into the spot market to get a little bit of a discount. But I don't see that happen. We haven't seen it happen yet. But the expectation is that's part of the normal cycle. My prediction now is sitting here, is I think in the second quarter, I said we're hoping for a late fourth quarter, early 2024, maybe inflection of that gap. I'm a little more pessimistic today. I'm looking at maybe the our cycle might be instead of on the short end of the six-quarter cycle more to the eight, which puts us in the summer next year.

And just for -- just one quick thing to clarify, that $0.40 gap with contracts still above spot. What's normal in your mind? And just do you think there's further risk to contract from here?

I think that's a very large number, the $0.40 on a $2 revenue per mile. So to be honest with you, I'm a little surprised that, that gap is holding as large as it is. Maybe it's because shippers are scared to start playing in the spot market. They like the consistency of the contract rates. And the contract rates, the other thing that looks good in a shipper's mind, the contract rates have been coming down at the same time. So they're looking at their history, thinking hey, I'm getting a better deal today than it was 12 months ago. So you might be hesitant to take a little longer to make the shift back in the contract, which to me might delay this is why I think it might be delayed a little longer. I'm a true believer in cycles, it's going to cycle back and Scott, I just don't know when. Right now, I'm going to say it's going to be more toward the end of the typical peak to trough cycle, trough to peak is going to be more of the eight quarters right now as opposed in the short line where it's six quarters.

Make sense. Thank you for the thoughts, Jim. Appreciate it.

Yeah.

Thank you. We have the next question coming from Jason Seidl of TD Cowen. Your line is now open.

Hey, thanks operator. Good morning, Jim and team. Jim, going back to that $0.40 gap between contract and spot. You said it's held in there for about eight months. When is the last time you've seen that something hold that long on a cycle?

I don't think eight months is that unusual. I think the fact that we're not seeing it move directionally much is more of the -- it's more of the indication. I mean when you think about it, if the spot versus contract is tight, it's not that far apart and shippers are sitting on 12-month contracts, that could last all 12 months, right, before they jump in a spot market or even if they do. So I don't have a good historical perspective because this -- it's a little to me, it seems like there's a larger gap than we've had historically. And again, as I'll say, I'm a little surprised that that it hasn't pulled back. Like clearly, 2019, there was a gap, but then that was disrupted by the pandemic. That cycle was kind of disrupted by the pandemic. So it was a shorter-term where the -- so it's hard to look back when you look back at 2017, right, when we had the massive ELD, the run-up because these were getting implemented. At the same time, industrial production was cleaning up. So that disrupted that cycle. So there's been a lot of disruptions in the cycles when I look back five or six years, and so it's really hard to look at that as a trend.

All right. That makes sense. And you talked a little bit about in terms of pricing in the fourth quarter expectations a little bit above normal seasonality, I think, was your line. With a muted peak season and an auto strike, so should we conclude that you're finally starting to see a little bit of capacity coming out of the marketplace?

It's hard for us to measure the capacity to come out of the marketplace. We read kind of what you read about bankruptcies and truck covers shutting down. What we aren't seeing is load acceptance rates dropping. We're not seeing that. Some of the stats we're looking at, it doesn't show that a significant amount of capacity is coming out of the market yet. But we are hearing about the capacity coming out. I just look at our BCO count, right, being down 39% because things are more expensive. Clearly, there's capacity coming out right now, but I just don't believe that it's had a significant impact on the supply-demand equation to start turning the needle on that metric, supply and demand.

Yeah, that make sense.

And the level of available capacity.

My final one here is you're talking about your expectations are now pushed out to the summer of 2024 to see any type of inflection. Should we assume that the inflection on year-end will come first on the dry van side and then maybe followed by your platform? Or do you think they're going to sort of roll together.

Well, two completely different dynamics, right? One is more consumer driven. One is more manufacturing U.S. type machinery and stuff like that. So I would say that my expectation really would be -- the consumer side, it's -- there's more volume there. There's a heck of a lot more volume within the U.S. on the van side and consumer can drive that up or down. And a lot of the capacity that comes out of the market is van capacity. The flat bit guys kind of chug along. They're used to having ups and downs and spikes in the environment. So I would say that I think I'd be watching it more on the van side. The other thing too is about the flatbed side. It's relatively inconsistent, right, whether we're doing heavy haul or we're doing regular flatbed. The industry is a lot more diverse. Is it lumber? Is it -- and what kind of -- what end markets are you delivering on the flatbed side as opposed to the consumer? So that actually travels a little bit different than van. Van has got a little more consistency in the cycle.

Jim, I appreciate the time as always.

Yeah.

Thank you. We have the next question coming from the line of Jack Atkins of Stephens. Your line is now open.

Okay, great. Good morning, guys. Thanks for taking my questions. So I guess, Jim, I wanted to go back to the guidance for a minute. Just so we've got a clear understanding of it. I mean if I understand what you're saying correctly, the thought is that we're going to have sub-seasonal volume performance in the fourth quarter, I think fairly significantly sub-seasonal, but the revenue per load trends are kind of more in line with normal seasonality. And I guess, so much of the fourth quarter typical quote unquote seasonality weighted to later in the quarter, if volumes are that sub-seasonal, wouldn't revenue per load be sub-seasonal? Or is there -- do you think we're kind of decoupling at this point based on the earlier commentary around contract versus spot?

It's all based on what's jumping out from third quarter into October. We're seeing relatively look a little more favorable as the first three weeks of October. So we're just carrying that forward so if you take that October number where we think October is coming out, and yet trended seasonally, the quarter will be over -- will be sequentially better than expected, right? So it's really because we're starting at a higher jump-up point heading into the quarter. That's how we got there.

Okay. All right. I got that. Makes sense. Maybe just a quick follow-up on the guide for a moment. But in terms of like Jim, Todd, maybe this is for you, but can you maybe give us a thought on 4Q G&A and maybe the gross margin or net revenue margin that you're assuming in the fourth quarter just within the guide?

Yeah, hey, Jeff. So given the step down at the midpoint for revenue, we're looking at 14.5 to 14.7 on VC and the majority of the good guy there is assumed mix. On the G&A side, pretty consistent, of course, insurance being -- we're utilizing 5.5% there for the guide versus a 5.8% actual in the third quarter. But your other lines are fairly stable sequentially.

Okay. Great. And I guess maybe just as last question here, kind of more bigger picture, but you guys are the first what I would call either truck broker or logistics provider to report so far. And we've had a lot of news here in the last couple of weeks around some of your high-flying competitors facing some financial difficulties, one of which has closed. I guess, Jim Gattoni, I'd love to get your thoughts on maybe how you're seeing longer term the landscape within the brokerage market, maybe evolving year with higher interest rates and higher cost of capital? How do you think that's going to affect the competitive landscape longer term, not shorter term but longer term?

Well, in a light asset business model that I believe one of the ones you're talking about was a light asset business model that shut at stores or at least temporarily shut its stores. Cost of capital for us is really how it affects the -- and interest rates really has affected demand in the economy more than affects us, our financial results, right? So we look at it more that way and where we think that's going to take the economy and the brokerage model. The digital freight matching or the digital freight brokers, look, look, their tools were working. It's just -- I don't know what happened to the business model in that one scenario where they closed. We did see a couple of -- we got a couple of loads from when they shut the doors. There were some freight coming over. I'm not sure that's going to be long term for us. We didn't build anything into the fourth quarter. But long term, on brokerage, it's just the service isn't going to change. The shippers are looking for high-quality service, on-time delivery, like we've been preaching for the last five or seven years. We -- I've always said that anybody can build an app, it's the way you execute with it. And we've been executing with technology since 1999. We are posting boards to some website where the spouses of the drivers were sitting home and calling up, right? So we've been on that. I think there's a viable business out there when it comes to digital, but I think you need the human factor behind it. So it's just to us, another competitor into the broker space that we think we compete better than anybody against those start-ups with the human factor that we have geographically dispersed field throughout the U.S. Long term, I don't see this industry changing much. You talk about AI and stuff like that. It's -- what we do -- what we get paid to do is move freight from point A to point B, right? And your build efficiencies around that by improving your communication flow, the accuracy of data, the speed of sharing information and visibility. That's what it is, whether it's AI, back-office systems or stuff like that. So I don't see a significant change as it relates to technology going forward on the broker side, when truck brokers or the cycle, the way the cycle works out. I don't see anything disrupting that.

Okay, really appreciate the thoughts. Thanks, guys.

We have the next question coming from Stephanie Moore of Jefferies. Your line is now open.

Hi, good morning. Thank you for the question. I wanted to touch a little bit again on maybe the BCO count coming down, continuing in the third quarter. I think we're kind of at a multiyear low here. And we love to -- I know you provided a little bit of commentary in your prepared remarks. But -- maybe if you could touch a little bit about do you think that this is kind of signaling we're at the bottom here? Do you think it could kind of take a leg down further? And then maybe just for context, maybe if you wanted to provide some color on just how BCO utilization has trended in the third quarter and kind of into October.

Great. Thanks, Stephanie. Yeah. So I think BCO count, you're correct. I mean we've seen some elevated turnover really the result of the economic backdrop that we've been talking about here for the last few minutes. I would think that as long as that stays the way it is, I think the duration of this downturn where rates are down and volumes are down and demand is down. I would anticipate that we would continue to see some decline in the fourth quarter. And we're talking about a more likely recovery in the eight-quarter range versus the six-quarter range. So early into next year, it's kind of hard to say. Seven of the last 11 first quarters, we've seen a decline, that's pretty typical for us. So I don't think we're at the bottom from a BCO account because I think that just the demand is there. But our BCO count, if you look back, has been pretty volatile and really as a result of where the economy is. In '17 and '18, we were up about 1,200 trucks, right? In '19, we took a small drop, and we're declining through the first quarter of '20 until the pandemic and then over the next couple of years, we went up 1,600 trucks or more. So it does move pretty quickly with the economic backdrop. So while I continue to see some declines in the coming months, I do think we will bounce back when this thing turns. And then from a utilization standpoint, we were down 5% year-over-year in the first quarter. We were down 3% in the second quarter, but we were up 2% in the third quarter. So -- and in the quarter, we were down 1% in July, up 3% in August and up 3% in September. So there is some improved utilization. I think we do a lot here to make sure we've got analytics tools for the BCO so that they can understand kind of their business better. And ultimately, we try to take the surprises out of the equation for them, but the environment has been difficult. They really didn't see this decline coming as rapidly as it came. But really, I think it's the duration. I think most BCOs can withstand a decline that lasts a period of time. But this -- the duration of this one, I think, has had some impact on the viability of some of those BCOs and I think they're taking the opportunity to either do something else and come back later or perhaps, in some cases, maybe get out of the business for a time. But -- that's kind of -- the ads are not an issue for us. Our additions coming into the fleet have actually been fairly strong. It's just keeping those that are here, and I think a lot of them are making the decision to sit on the sidelines until some of this stuff works itself out.

Got it. Thank you. And then just second for me. I know your guidance assumes a pretty muted peak season in the fourth quarter. Can you give maybe an indication what you're hearing from your customers around peak season? Thanks.

Volumes being down pretty significant coming into the fourth quarter. I mean they just -- the expectation is compared to prior year's fourth quarter, they're talking 10% or 20% volumes down. You're talking about the -- some of the parcel carrier, where we do substitute line haul, specifically that doesn't necessarily mean -- it's not the flatbed side, it's the band side, but the -- just as we said, based on the conversations my field guys have had with the customers. They're not giving us exact metrics, but saying they expect not a dynamic peak season.

Thank you.

Thank you. [Operator Instructions] At this time, we have the next questioner from the line of Bruce Chan of Stifel. Your line is now open.

Hey, good morning, team. This is Andrew Cox on for Bruce this morning. I just wanted to get your commentary on the J.B. Hunt acquisition of BNSF Logistics. I wanted to know if they compete with Landstar for agents, is there any kind of overlap there, any commentary? Thank you.

Yeah. We've seen no -- when BNSF Logistics existed prior or any of that stuff, we didn't see any pressure from that when it existed under a different name and don't expect that we would see any kind of pressure as it exists in its form moving on to J.B. Hunt. So the answer to that would be at this point, we haven't seen anything either from the existing legacy BNSF brokerage to when it's going to transfer with J.B. Hunt.

Okay. Great. And another one, I'm thinking we haven't heard about the trailer fleet on the call today. I just wanted to get an update on there where you stand in terms of size, age and any potential CapEx requirements headed into next year?

Yeah, hey, Andrew, this is Joe. I'll take a shot at that. The trailer fleet is just under 15,000 currently. And as you may know or if you don't know, due to the inability to really acquire new trailers for a couple of years there during the pandemic, we held on to some of our older equipment, and we're in the process of cycling some of that out. Some of that is what's attributed to what Jim Todd talked about earlier with the increased maintenance costs. So we're in the process of trying to rightsize the fleet now. We typically have two van trailers for every BCO pulling vans in the drop and hook market, and we're a little north of that. So we're trying to rightsize that through some sales, which you saw in the quarter. And then looking forward, the intent is to maybe get into some new equipment in 2024 at some point. But again, watching BCO count pretty carefully.

Okay. That's all I got. Thanks, guys.

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

Well, I would guess that everybody ran to the EPS call, but I'm going to close with a statement regardless. Before I close, I want to briefly discuss freight cycle dynamics to provide additional big picture context to this year's results. Landstar's revenue performance through the freight cycle that occurred over the past three years, ultimately set the stage for where we are today. Generally, in the ordinary course of business, we experienced spot market down cycles that drive revenue from peak to trough as well as up cycles that drive revenue from trough to peak. In both cases, the typical spot market freight cycle from peak to trough or trough to peak occurs over a period of six to eight quarters. And these cycles are typically driven by three main factors: the level of industry demand for freight services, the level of available truck capacity industry and the differential between industry-wide contract and spot pricing at any given point in time during the cycle. Looking back over the recent down cycle, Landstar's peak quarterly revenue occurred five quarters ago in the 2022 second quarter. Since hitting peak quarterly revenue in the 2022 second quarter, Landstar's experienced a down cycle during which quarterly revenue has thus far decreased each quarter over the following five quarters. Recent overseas conflicts, the impact of student loan repayments on consumer spending, labor disruptions in the U.S., increasing interest rates, political uncertainties and many other factors make it difficult to predict exactly when the current down cycle will end and the revenue will begin to cycle imports. Due to the overall economic and geopolitical environment, I expect the start of the upcycle may be delayed towards the latter part of a typical cycle. Nevertheless, even with the challenges in the freight environment that we, along with many others in our industry have experienced through 2023. Landstar's driver cost [ph] business model has continued to generate solid returns. Our balance sheet has never been stronger. We remain focused on the elements of our business that we can control. We continue to invest in digital tools, process improvements and people to empower agents' capacity providers for continued success. Thank you, and I look forward to speaking with you again on our 2023 fourth quarter earnings conference call scheduled for February 1. Enjoy your day.

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