Landstar System Inc

NASDAQ:LSTR

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, and welcome to Landstar System, Inc.'s Second 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.

[Jim Gattoni, President & CEO]

Thank you. Good morning, and welcome to Landstar's 2023 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 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 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-K for the 2022 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 unless or undertakes no obligation to publicly update or revise any forward-looking information.

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

Landstar's revenue performance through the freight cycles that occurred over the past three years, ultimately set the stage for where we are today. Generally in the ordinary course of our business, we experienced spot market down-cycles 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 a truck capacity industry -- in the industry; and the differential between industry-wide contract and spot pricing at any given point in time during the cycle.

Looking back over the last three years, Landstar's trough quarterly revenue occurred in the 2020 second quarter at the beginning of the pandemic. Landstar peak quarterly revenue occurred eight quarters later in the 2022 second quarter. From 2020 second quarter revenue trough to the 2022 second quarter peak, revenue grew by over $1 billion or 140%.

Since hitting peak quarterly revenue in the 2022 second quarter, Landstar has experienced a down cycle during which quarterly revenue has thus far decreased each quarter over the past four quarters. Current conditions make it difficult to predict exactly when the current down-cycle will end and revenue will again begin to cycle upwards.

Two of the three key factors that drive these up cycles are trending normally given the period of the cycle we are in. One, at the truck availability, truck orders have recently slowed and industry-wide DOT truck revocations have exceeded DOT truck authorizations in seven of the last eight months through May.

And two, contract freight rates remain well above spot freight rates. However, the third key factor driving cycles, demand continues to be soft, which makes the timing of the end of down cycle less predictable. Throughout my remarks, I'll also make mention of the concept of normal seasonal patterns. For purposes of my remarks today, normal seasonal patterns refers to revenue load count and/or pricing trends from 2015 to 2019 and excludes 2020, 2021 and 2022, due to the highly unusual dynamics reflected in those quarterly metrics during the pandemic-driven freight cycle.

Now to the 2023 second quarter. Including our April 26 first quarter earnings release, we provided revenue guidance of $1.4 billion to $1.45 billion. We updated the second quarter guidance via an 8-K filed with the SEC on May '23 in anticipation of an upcoming investor conference. In that 8-K, we lowered revenue and earnings guidance due mostly to both revenue per truck load and the number of loads hauled via truck through mid-May, trending below the estimates for those metrics used in our initial guidance.

That update reduced the revenue guidance to $1.325 billion to $1.375 billion. Our initial second quarter earnings per share guidance was $1.90 to $2. Our updated earnings per share guidance based on the lower revenue guidance was $1.75 to $1.85. 2023 second quarter revenue and earnings per share both came in at the high end of the revised guidance.

As we enter 2023, it was clear we were facing very difficult year-over-year financial comparisons coming out back-to-back record years in '21 and 2022, driven by the strong consumer demand and tight truck capacity. In fact, beginning in the 2020 second quarter and through the 2022 first quarter, both truckload volume and revenue per load consistently outperformed sequential quarter-to-quarter normal seasonal patterns. This outperformance came to an end in the 2022 second quarter. From the 2022 third quarter through the 2023 second quarter less our truckload volumes and revenue per truckload underperformed normal seasonal trends.

Overall, total truck revenue was $1.247 billion in the 2023 second quarter, 29% below the 2022 second quarter on a 16% decrease in load volume and a 15% decrease in revenue per load. Our rail, air and ocean services in the 2023 second quarter were 50% or $102 million below the 2022 second quarter.

The significant decrease in nontruck transportation revenue was in line with our expectations of lower volumes across all non-truck modes and the expectation of a significant decrease in ocean revenue per shipment. Although revenue in the 2023 first half was below the 2022 first half by 29%, one needs to put the impact of the pandemic-driven growth in perspective.

Even given the significant softness in demand compared to the fiscal 2022, 2023 first half revenue exceeded 2019 first half revenue by more than 35%. As it relates to truckload volume, Landstar's normal seasonal patterns exhibited average growth of approximately 8% from the first quarter to the second quarter. Given the softness in freight demand, actual second quarter truckload volume was 1% below the 2023 first quarter, in line with our updated guidance, but well below normal seasonal patterns.

Even with the decrease we experienced in truckload volume from the first quarter to the second quarter, truckload volume in the 2023 second quarter was still Landstar's third best all-time second quarter truckload comp, behind only the consecutive second quarter record set in 2021 and 2022.

The inconsistency in pricing month-to-month has been very atypical from a seasonal perspective, making it difficult to project spot pricing even in the near-term. Late in the 2023 first quarter, truck revenue per load stabilized and the stabilization continued into early April prior to our release of the second quarter guidance.

As April came to an end, rates took a sharp downturn and settled almost 5% below March. Over the past 16 months since reaching its peak in February 2022, month-to-month sequential change in truck revenue per load have trended worse than normal seasonal patterns in all but four months. Most recently, in a positive development, May to June revenue per truckload increased modestly. However, performance was still below normal seasonal patterns. After the breakdown of truck transportation revenue by equipment type, unsided platform equipment held up better than revenue hold the van equipment and other truck transportation services.

The quarter over prior year quarter revenue comparisons for van are much more challenging than not for revenue called on-site platform equipment, especially as it pertains to revenue per load. The pandemic-driven spike in consumer demand drove van revenue per load from its trough in May 2020 to its peak in February 2022, up 76%, while revenue per load on on-site equipment increased -- revenue per load -- sorry, while revenue per load on onsite equipment increased 54% from its low point in May 2020 to its peak in July 2022. I believe the rates in the spot market will stay relatively higher than pre-pandemic levels given the significant amount of additional cost to operate a truck today.

Based on industry data from ATRI, the cost to operate a truck, excluding fuel costs in fiscal year 2022 was approximately 20% greater than in 2019, during which also experienced a relatively soft rate environment. BCO revenue per mile on van equipment and on-site equipment were 20% and 30%, respectively above June 2019. I believe that due to these cost pressures, particularly on smaller carriers, there is relatively little room for further spot market rate decreases.

Total loans in the 2023 second quarter was 17% below the 2022 second quarter. Truckload volume is somewhat influenced by Landstar's customer type. For example, Landstar provides truck capacity to other trucking companies, 3PLs and Truck Brokers, where volumes tend to vary more widely period-to-period with change in the levels of freight demand.

Revenue held on -- hauled on behalf of other truck transportation companies was 16% and 20% of transportation revenue in the 2023 and 2022 second quarters, respectively. During periods of tight truck capacity, other trucking companies, 3PLs and Truck Brokers reach out the Landstar to provide truck capacity more often than during times of more readily available truck capacity.

The freight haul by Landstar on behalf of other truck transportation companies includes almost all of our commodity groups, including our substitute line haul service offer. Overall, the number of loads hauled on behalf of other truck transportation companies in the 2023 second quarter was 28% below the 2022 second quarter, contributing significantly to the overall decrease in quarter over prior year quarter volume.

During the quarter, BCO truck count decreased by 261 trucks, a relative improvement compared to the 472 truck decrease we experienced in the 2023 first quarter. Overall BCO truck count has decreased approximately 11% since the end of the 2022 second quarter. It is typical to incur increased turnover in BCO truck cap when truck rates decrease.

Over the past 12 months, truck rates have decreased at a rapid pace, especially on loads hauled by van equipment with primary equipment type BCOs. There does not seem to be any unusual factors driving the recent reduction in BCO truck count. 12-month rolling average turnover is currently about 37%, which is very similar to the 36% term rate Landstar experienced in 2019 during the most recent relatively comparable soft rate environment.

I will now pass to Jim Todd to comment on other additional P&L metrics regarding the 2023 second quarter performance.

[Jim Todd, VP & CFO]

Thanks, Jim. Jim has covered certain information on our 2023 second quarter, so I will cover various other second quarter financial information included in the press release. In the 2023 second quarter, gross profit was $139.7 million compared to gross profit of $208.1 million in the 2022 second quarter.

Gross profit margin was 10.2% of revenue in the 2023 second quarter as compared to gross profit margin of 10.5% in the corresponding period of 2022. In 2023, second quarter, variable contribution was $198.2 million compared to $267.5 million in the 2022 second quarter. Variable contribution margin was 14.4% of revenue in the 2023 second quarter compared to 13.5% in the same period last year.

The increase in variable contribution margin compared to the 2022 second quarter was primarily attributable to: one, an increased variable contribution margin on revenue generated by truck brokerage carriers as the rate paid to truck brokerage carriers in the 2023 second quarter was 170 basis points lower than the rate paid in the 2022 second quarter; and two, mix as 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.

Other operating costs were $13.5 million in the 2023 second quarter compared to $10.4 million in 2022. This increase was primarily due to an increased provision for contractor bad debt and increased general equipment maintenance costs, partially offset by increased gains on sales of used Australian equipment.

Insurance and claims costs were $29.8 million in the 2023 second quarter compared to $34.1 million in 2022. The decrease in insurance and claims cost as compared to 2022 was primarily attributable to a decreased severity of accidents during the 2023 period. However, total insurance and claims costs were 5.8% of BCO revenue in the 2023 period and 4.9% of BCO revenue in 2022 period.

The 90 basis point increase in insurance and claims cost as compared to BCO revenue was almost entirely attributable to the 14% decrease in BCO revenue per loan. The sequential increase in insurance and claims cost as compared to the 2023 first fiscal quarter was primarily attributable to increased cargo claim expense.

Selling, general and administrative costs were $54.5 million in the 2023 second quarter compared to $59 million in 2022. The decrease in selling, general and administrative costs was primarily attributable to a decreased provision for compensation under the company's variable programs and a decreased provision for customer bad debt, partially offset by increased information technology costs and increased wages.

In the 2023 second quarter, the provision for compensation under variable programs was $200,000 compared to $8.3 million in the 2022 second quarter. Depreciation and amortization was $14.9 million in the 2023 second quarter compared to $14.3 million in 2022. This increase was due to increased depreciation on software applications resulting from continued investment in new and upgraded tools for use by agency capacity, partially offset by decreased depreciation on the company's trailer fleet. The effective income tax rate was 24.6% in both the 2023 and 2022 second quarters.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $419 million. Cash flow from operations for the first half of 2023 was $192 million and cash capital expenditures were $13 million. Back to you, Jim.

[Jim Gattoni, President & CEO]

Thanks, Jim. The 2022 second quarter made for a very difficult year-over-year comparison to the 2023 second quarter. Following the 2022 second quarter, 2022 third quarter truckload pricing and truckload volume both experienced below normal seasonal average sequential growth rates. One would expect us to make 2023 third quarter to 2022 third quarter comparison slightly less challenging than what we have faced during the two most recent quarters.

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

Yesterday's earnings release made note that early July-truckload comp was trending below historical sequential monthly patterns. Given the low start in truckload volume in the quarter, we have forecast sequential month-to-month patterns in truckload count to trend below normal seasonal patterns throughout the third quarter.

Assuming we remain at below normal month-to-month seasonal trends, we expect truckload comp in the 2023 third quarter to be 16% to 18% below the 2022 third quarter. We expect 2023 third quarter truckload pricing to be 10% to 12% below the 2022 third quarter. Given those estimates, the number of loads hauled via truck is expected to be approximately 6% below the 2023 second quarter compared to a normal seasonal pattern of minus 1%, and a revenue per truckload to be approximately 1.5% above the 2023 second quarter, slightly below normal seasonal patterns. We also expect revenue from our nontruck most to be similar to that of the 2023 second quarter.

Based on the assumptions mentioned, we expect revenue in the 2023 third quarter be in the range of $1.275 billion to $1.325 billion and earnings per share to be in the range of $1.65 to $1.75. The 2023 third quarter guidance incorporates a variable contribution margin range of 14.4% to 14.6% and insurance and plant costs somewhat similar to 2023 first half as a percent of BCO revenue.

We don't expect much change to overall freight economy in the 2023 third quarter compared to what we experienced in the 2023 first half. Overall, though, demand for freight transportation is expected to remain relatively soft in the 2023 third quarter continued to drive truckload volumes significantly lower compared to the 2021 and 2022. Directionally, it is difficult to forecast truckload volume levels beyond the next few months as future economic conditions are very unpredictable. Regardless of the economic environment, Landstar's challenging year-over-year comparisons, the resiliency of Landstar's [indiscernible] business model continues to generate significant free cash flow. Through the first half of 2023, Landstar generated free cash flow of $179 million.

Additionally, at the beginning of my remarks, I discussed the significant unprecedented favorable impact of pandemic-driven consumer demand and supply chain disruption had on the company's revenue in fiscal years '21 and '22. Although we're in a freight cycle that vary significantly from 2021 to 2022, where revenue increased over those two years by 80%. Assuming we achieve the revenue provided in the third quarter guidance plus a similar amount of revenue during the fourth quarter, fiscal year 2023 revenue will exceed pre-pandemic 2019 by 30% to 35%.

And with that, Bill, we'll open to questions.

[Operator]

Thank you very much sir. At this time, we will begin the question-and-answer session. [Operator Instructions] We have the first question coming from the line of Jon Chappell from Evercore. Your line is now open.

[Jonathan Chappell, Evercore ISI]

Good morning, thank you. Jim, thanks for all that detail. Between trying to -- I know you don't unpack by line item, but given the fact that Landstar is such a big mover of the needle. And you mentioned that some of the more difficult, I think comparisons are there. I'm just trying to figure out, is it bottoming from a load perspective. It seems like maybe the third quarter may be the bottoming from the load perspective, whereas the revenue per load may have already bottomed in the second quarter. Is that the right way to think about that just from using the van and backing into your bigger picture guidance in the quarter?

[Jim Gattoni, President & CEO]

I would like to be able to confirm that. But as we mentioned in my prepared, we actually are anticipating some continued seasonal softness on both the van and flat, if you break it down to that level of detail because we've seen nothing to indicate that we're going to start seeing either the bottom, which we hope we are at the bottom or any acceleration of growth off of this where we are today.

So I would say that both equipment types are kind of generally trending in the same direction. And it's not a significant drop up. We're just where you might see rates typically go up 1% into the third quarter, we're seeing maybe soften or be 0.5% or 1% down. It's not -- there's not significant. It's not like it was, but it's still trending seasonally softer on both equipment types as compared to the history that we've had.

[Jonathan Chappell, Evercore ISI]

Okay. That's helpful. And then secondly, there's a lot of disruption in the market right now, probably more so than any time since the Spring of 2020. Have you seen any changes in the sentiment around from your customers? And again, this kind of relates to any segment. We had companies potentially going out of business, potential strikes. I think free flow shift from one side of the country to the other. Any kind of view from your customers that they're in a bit more of a rush for capacity than maybe over the last 12 months? And two, any direct benefit to Landstar specifically from some of these moving chess pieces?

[Jim Gattoni, President & CEO]

Yes, I'd say two of the bigger disruptors that have been discussed recently are a little more LTL parcel type businesses that don't directly affect us other than the fact that if something does occur with one of those and we need to move freight between DCs for a different carrier that could impact us. But I wouldn't say it's very significant. As the shift in geographic regions, I think those were -- as stuff was moving to the East Coast over the last few years of West Coast, so I don't think there's any impact there directly that hasn't already occurred for us.

So I'm not seeing that. When you speak to -- there are some things happening. You talk about carrier bankruptcies or carriers leaving the market or the number of available trucks out there. In very isolated areas right now, we are seeing trucks push rates up a little bit, which we haven't seen probably since the end of 2022, but it's not across the board. It's very specific to probably West Coast, where they're dealing with some regulatory issues on how many trucks are out there in independent contractor status. Other than that, it's kind of the same as it's been for the last six or eight months. So nothing special really driving us to have any considerations of an upward tick yet.

[Operator]

We will move to the next person coming from the Scott Group of Wolfe Research. Your line is now open.

[Scott Group, Wolfe Research]

Hey, thanks. Good morning. I just want to clarify a couple of things first. So volumes starting July are underperforming seasonality. Jim, you're assuming that they continue to underperform seasonality in August and September. Is that right?

[Jim Gattoni, President & CEO]

Yes. That is absolutely right.

[Scott Group, Wolfe Research]

And the thought process on that is...

[Jim Gattoni, President & CEO]

To be honest, we missed the second quarter when we released April, I think what we projected when we put the second quarter guidance together with sequential improvement in normal seasonal patterns. And since we haven't seen that in in six or seven months, we just -- we played a little conservative on trending seasonally kind of where it's been is missing the seasonal trends by 1% or 2%. So that was the logic. Do I see patterns? Can I guess, August? No, there's nothing indicating other than trends, to be honest with you, Scott.

[Scott Group, Wolfe Research]

Okay. Fair enough. And then on the yellow question, do you -- are you seeing any pickup in your substitute line haul business? Do you think you would start to see that as maybe some carriers that picking up share need some increased line haul capacity?

[Jim Gattoni, President & CEO]

I would expect, yes, we would see that, but I would say it's clearly not going to be material to any -- to the third or fourth quarter. It's not -- by the end of the third quarter, if we get something we probably wouldn't even be something that hit our radar even talk about. So not material.

[Scott Group, Wolfe Research]

Okay. And then just big picture, taking a step back. You've had good views, calls of where we are in the cycle. Do you -- are we at the bottom? Are you comfortable enough to say that? Do you see that? What's your view?

[Jim Gattoni, President & CEO]

I would like to say that. I don't know if I can, to be honest with you, because as we just talked about, is our seasonal trends continue to be below normal, which would indicate that we're not there yet. Now I'd say that the seasonal -- the abnormal below seasonal trends has slowed a little bit, but we're still tracking at slightly below seasonal trends.

So I would not declare a bottom yet. You know I'm a cycle guy. I believe in the cycles, especially because we're -- you got that -- it's not just demand and the number of trucks in the system, it actually has to do with the contract and spot pricing, right? And spot pricing and contracts are pretty far away right now. But we're still seeing a little more pressure on the contract side and the spot prices aren't coming up yet.

But I think on that when I talk about the six to eight quarter trends, I am still a believer that puts us in sometime the end of 2023, beginning of 2024. And I'm still a believer that happens. But who knows what happens with demand. To me, the big is, does demand continue to slip? Or is it going to actually going to start to improve coming off this where we are right now? That's kind of where I hesitate on giving an on if we're at the bottom.

[Scott Group, Wolfe Research]

So hopeful, but visibility is well. Okay.

[Jim Gattoni, President & CEO]

Yes.

[Operator]

We will move now to the next question coming from the line of Jack Atkins of Stephens. Your line is now open.

[Jack Atkins, Stephens]

Hey, great, good morning guys. Thanks for taking my questions. So I guess maybe if we could kind of go back to the cycle thoughts for a moment. I'd love to kind of take a look at this from a capacity perspective. And Joe, is there anything maybe you can kind of help us with in terms of thinking about the decrease that you're seeing both in terms of the -- on the BCO front and in the active broker -- third-party broker carriers. Can you maybe talk about what you think is driving that? Is that retirements maybe? Or is that the effect of capacity attrition?

[Joe Beacom, VP, Chief Safety & Operations Officer]

Yes, Jack, I think what's driving is kind of all of the above. I think what's primarily the driver is the demand environment and the rate environment. I think Jim said in his remarks that when rate declines, we tend to see more terminations. And I really think that's -- we react very, I think, quickly on the BCO front to changes in demand and price. And I'm just going to go back here. I've got some -- just some quick numbers from back to '17 as we saw the economy strengthen from '16 into '17. So we added 257 trucks in '17. Continued strength into '18, we added 903 that year. It softened a little bit in '19, we lost 356. We all know what happened in 2020. We added 748 in the back three quarters of the year. We added 873 in '21, because it was a good year. We lost 583 mostly in the back half of last year, and we're down 733 in the first two quarters of this year.

So our BCOs just tend to be very reactionary to that rate and pricing. And so a lot of them -- some of them have retired for sure. Some took the opportunity to sell their equipment when it was at such a premium and decided to either retire or do something different or go drive for somebody else. We saw some of that. We saw repairs and the difficulty in the cost was a pretty big impact for the last few quarters. That's lessening a little bit. It's really -- it's kind of all of the above kind of answer to the question, Jack. From a BCO perspective.

On the carrier side, the net revocations are moving negative. I think the number of carriers that people thought might be leaving the industry maybe a little lighter than it -- than some were thinking, and I would agree with that. I just don't know if the data that we get is as accurate and timely as the BCO data that, obviously, that we have. And that there's new -- still new carriers coming into the system at a rate that's a little bit above where maybe you think it would.

So I don't know if that's optimism. I don't know if that's California, where you can't be an owner operator, you got to be on your own authority. There's some impact there, I think. But generally, I mean, if you look at like the trucking conditions index from FTR or anything of that sort, it's just a tough time. The ATRI data speaks to that. I mean it's just a tough time I think to be out there. And so I think that's what's leading to some of the turnover and the reluctance to come into the market as it stands today if you're a small carrier or an owner-operator who might look at Landstar.

[Jack Atkins, Stephens]

Okay. That's super helpful. Thank you for that. And then I guess, maybe, Jim, for you. Any sort of indication from your customers around peak season? I know it may be still early, but are you hearing anything around commentary from them on what they might need from you? How to prepare for that? Or is it just kind of still TBD?

[Jim Gattoni, President & CEO]

I think it's all TBD. I think from a customer standpoint, I think they're probably about as confident as we are coming into peak season. I will give you one little thing and don't -- this is not a big thing, but we hear that there's -- one thing that during peak season, we get a request for trailing equipment coming into the end of the year. Then it's -- the request for trailing equipment has been way, way down over the last probably two, three quarters, but we did see a slight increase in request returns going into the fourth quarter. But that's all I got. Other than that, it just seems like we're going to just grind through this through the end of the year.

[Jack Atkins, Stephens]

Okay. I really appreciate the commentary guys. Thank you.

[Jim Gattoni, President & CEO]

Yes.

[Operator]

We will move now to the next question coming from the line of Bascome Majors of Susquehanna. Your line is now open.

[Bascome Majors, Susquehanna]

Jim, you're a self-described cycle guy here. If I look at how you've operated through cycles historically, usually, when you have down years, Landstar's top-line and bottom-line recover pretty quickly in the year after, if we look at and say 2014 or second half of '20 or even some earlier periods. But -- there is one analog around the peak of the mid-2000 cycle where things kind of flatlined for a few years and really didn't go anywhere. I'm curious as you look at the cycle that we're coming out today. Is there any rhyme or reason to some of these historical analogs? What does it feel like compared to downturns you've seen in your history? And are you cautious or concerned that we might have an extended downturn that really doesn't have a snapback that you typically see after a down year?

[Jim Gattoni, President & CEO]

Well, very unusual down year this year, right, because the peak to trough is bigger than it's ever been. So it's really hard to gauge where the next peak is. I mean, I think that's what we're trying to figure out, and we trying to figure that internally. You look at truck rates right now and where they are over the next 12 to 18 months, I could see employment back 10%, which is pretty beneficial. The peak to trough over the last six probably years has been much more significant than it was prior to that. And I'm not sure if that's due to access to pricing information coming from the DATs or oral stuff like that. Because if I go back in 2010, '11, we're getting bids from 12 shippers, and we're putting our pricing in their use.

Now they can see all the pricing data, and that may be driving this higher or lower. So my expectation is we're not going to see near the spike, the 2021 to 2022 peak, spike when it grew when van pricing grew 76%. But I would expect you're going to see better than those flat years. Just based on the performance here and the things we've done with whether it's technology and the driving agent sales and recruiting more agents into the system.

Other than that, it's really hard to project that. We really need demand to pick up from the consumer side. But I think we're well prepared with the new tools. We rolled out pricing tools. We're building efficiencies within the agent's office. So they can do more with the same number of people they have. That's really our goal is to make sure when this thing turns, we can attack volume better than we have in the past.

[Bascome Majors, Susquehanna]

Thank you for that. I don't know which Jim wants to answer this, but can -- whenever that return to, maybe not quite as fast as 2020, '21 recovery, but still -- but not a flat line. When that comes, can you walk us through how you flex the model on the upside financially? What needs to come back from incentive comp or other costs that are kind of out of the system in the downturn? Just how do we think about the leverage you get when that revenue line starts pointing up again? Thank you.

[Jim Gattoni, President & CEO]

Well, one thing we've always talked about is incremental -- as we grow the variable contribution, which is -- I'm an old guy, so I'm not allowed to refer to it as gross profit, so I have to call variable contribution. We talk about the leverage we get off of growth and variable contribution, and 2022, clearly, hopefully going to be our -- 2023, clearly, hopefully going to be our trough year. We believe that we can push 70% of the growth in incremental growth and direct contribution through to the bottom -- through to the operating income rate. That's our goal.

One thing you got to think about though is coming off the year like 2023, where our incentive compensation, our variable programs are relatively low or almost zero sometimes. We do have that headwind going into the 2024 year. But coming to 2025, when you start booking that things start to grow again. We do believe we can get back to that 70% pass-through of incremental of the growth in variable contribution due to bottom line.

So there's a lot of leverage in the organization, because the infrastructure is built, 70% or so percent of our SG&A is headcount, but we don't really have to grow headcount too much as we put more volume on top of this business model. So I'd say we would -- I wouldn't project for 2024 being a 70% push through, because we do have that variable compensation programs that actually travel with our earnings. But in 2025, I think the goal is to go back to pushing 70% growth of variable contribution. And Jim can talk about the incentive comp and the variable compensation programs and what kind of headwind we're talking about.

[Jim Todd, VP & CFO]

Yes, Bascome. So if you recall, back in February, I gave an 18 to 20 tailwind in a bear case scenario. And in the first quarter, I updated that to 16 to 18. Well, now second quarter, I can say $20 million is best case now on tailwinds, '23 versus '22. And as such, flipping to '24 to Jim's point, at kind of a one-time, if we hit our numbers, I would anticipate about an $11 million headwind on those programs, '24 versus '23.

[Bascome Majors, Susquehanna]

Thank you both. Its very helpful.

[Jim Gattoni, President & CEO]

That's the biggest variable for our cost. Well, that and the unpredictability of the insurance line, everything else is pretty constant other than a little bit of inflation. You've got inflation on the maintenance on trailers. We had a little bit of inflation on wages and other than that. But typically, the infrastructure is kind of set, except for the unpredictability of the insurance line and the variable compensation program.

[Operator]

We will move to the next coming from the line of Stephanie Moore of Jefferies. Your line is now open.

[Stephanie Moore, Jefferies]

Hi, good morning. Thank you. I appreciate all the type of color that you've given so thus far. And I think it would be helpful. I think in the past, you definitely have talked about where Landstar can often maybe lag the market maybe for various reasons, how you called out, whether it's agents response times or dropping of trailers, things like that. So maybe -- can you talk a little bit about in the event we are seeing a turn in the cycle broadly from an industry standpoint, when it would start to be a little bit more apparent for you guys, if that makes sense. Thank you.

[Jim Gattoni, President & CEO]

Well, we watch a lot of the industry data that everybody else watches, right, whether it's coming up a DAT or the FDR data or things like that. We try and track, now when you look at our revenue per mile compared to the industry data, we kind of haul premium freight a little bit on the BCO side. So a little higher, but tend to trend in similar directions on a slight lag. And if the lag is maybe 30 days. You'd see that maybe the pricing is looking at the industry is starting to climb a little bit, but we're still relatively flat. We tend to not react fast enough on both sides on the downside or the upside. So if we start to see tick-ups in that industry data, we probably lag that by a month or two.

But right now, we're not -- you're not seeing much. The only other positive sign we had actually, I think it was the first time in 15 months, BCO revenue per mile, which excludes fuel, actually ticked up from May to June, all right? So there's another small thing we saw that kind of could imply that maybe we're seeing the end of the downturns, but we're not confident enough to say that, because it was one month. So we see that. We think a little bit, hey, look, we've seen the positive trends on the van revenue per mile on the BCO side. But it's one month that we're not confident yet that it's going to stay. That's kind of stuff we watch. And it's mostly on the rate side. The volume side is up to us to drive volume, right? And demand will drive our volumes a little bit, but we're out there trying to sell.

[Stephanie Moore, Jefferies]

Got it. I appreciate it. And then just my follow-up, I wanted to touch a little bit on capital allocation and maybe if there has been any kind of change in the strategy, just given that there appear to be kind of a void of share repurchases in the second quarter, which seems a little unlike you guys. So just maybe an updated thoughts on share repos and normal capital allocation?

[Jim Todd, VP & CFO]

Hey, Stephanie, no change, same approach, as when we are price sensitive and we don't chase run-ups. We'll be patient and the cost of being patient is a lot less today than it was 12, 18, 24 months ago.

[Operator]

We will move now to the next person, who is Amit Mehrotra of Deutsche Bank. Your line is now open.

[Unidentified Analyst]

This is Ben Moore [ph] calling in for Amit. I wanted to ask a little further about your BCO count down to the 97 to 100 handle. It looks like in 4Q '19, it lagged down further at the time of 95 handle. And then 1Q '20 COVID led down further to a 94 handle. What would you say the current 97 handle that's signaling to you, what could have point to with respect to where we are in the cycle? Could it lag down further? Do you sense that that might be the bottom?

[Joe Beacom, VP, Chief Safety & Operations Officer]

Yes, Ben, I think in July, we're seeing a little bit further decline, but I would -- in Q2, overall, I think we saw a slower net decline. I would like to think we'll see something similar in Q3. And then really, again, depending on demand and price, maybe we hope to flatten out in Q4. But right now, Q2 it is slowing that decline. Our adds are improving sequentially, additions of new equipment, both sequentially and year-over-year. Our terminations are improving sequentially, but still well behind the prior year, and our utilization is improving. So BCO utilization is improving. It was minus 5% in Q1, it's minus 3% in Q2. And in the month of June, it was actually flat to prior year. So hopefully, that's a good trend line that continues based on the macro environment and what happens with demand. But I think we could be coming close to the bottom by year-end.

[Unidentified Analyst]

Great. Thanks. And kind of piggybacking on a question earlier on the rest of the industry, just focusing on the yellow situation. Would you say it might be benefiting you in terms of outsourced linehaul for truckload and the rails portion that you have, not just the LTL freight? And if so, what would you expect the cadence of this freight in terms of finding new carriers, could it be a few months to settle?

[Jim Gattoni, President & CEO]

We don't anticipate any significant volume coming to us from any kind of yellow bankruptcy or anything like that. There might be something, but like I said, I can't imagine something we'd be talking about moving the needle in the third quarter, or for the year, actually. Our relationship in that arena isn't like it is with other than some of the other parcel and small package carriers or LTL.

[Operator]

We will move now to the next person, who is Bruce Chan of Stifel. Your line is now open.

[Bruce Chan, Stifel Nicolaus]

Everyone, thanks for the question. Jim, maybe getting away from the cycle a little bit where call it, five years and a couple of cycles past the haul of a little digital brokerage. And we're seeing maybe a new kind of tech disruption detour in AI. So I wanted to ask you, I guess, number one, do you see much potential for disruption from AI in either your business or in the brokerage industry? And are there any early investments or exploratory investment that you can make here on behalf of your agents?

[Jim Gattoni, President & CEO]

Yes, I would say that you get paid to move freight from point A to point B, right? And it's how efficiently and effectively you communicate the data back and forth between the truck and the shipper and pricing. So the AI technology to me is more about improving communications and efficiency and how you communicate between the carrier and the customer and satisfy their needs.

But remember what we get paid to do is pick up freight at point A and moving to point B and AI does not change that, unless you talk about autonomous vehicles. We are -- I mean, we have a team of people in the building that are actually working on improving our efficiencies within whether it's call volumes or pricing tools or how quickly we can get credit out to the carriers and how we communicate with customers. Absolutely, we are on it. Do I think it's anything different than Uber are those guys coming in and saying they're going to disrupt the industry and disintermediate brokers. I don't think that's there. I think what you got to do is just keep up with the latest technologies. And I think everybody is doing the same thing.

If you recall, blockchain being a big thing and everybody got on that bandwagon for a while. AI has probably got more. It has definitely got more usefulness than what blockchain had, but we're on it. But I don't think there's -- one thing we talk a lot about here is that the ancillary spot market price and predictions, right? And you use all these historical stuff, you get their algorithms on top of it.

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

And the other thing, like I said, it's going to be very useful in communications with chats and stuff like that, and communicating and getting quotes out quicker to the customers and getting information quicker to the customer. To me, that's what AI is all about and improved algorithms on optimizing your freight lanes and stuff.

[Bruce Chan, Stifel Nicolaus]

Yes, that's great. Thanks for the insight.

[Jim Gattoni, President & CEO]

Yes.

[Operator]

We have our last person to ask the question coming from the line of Scott Schneeberger of Oppenheimer. Your line is now open.

[Scott Schneeberger, Oppenheimer]

Thanks very much. Good morning all. I wanted to focus a little bit on the industrial end markets. It looks like machinery, building products, I'd say, doing a little bit better than consumer and other categories. Jim, could you speak to the kind of the trends that you're seeing. I think in one of the first questions you mentioned you didn't want to call a bottom on volume or rate on than or on-site. I was just curious, honing in more on unsided is -- how has it trended this year? Do you see a lot of opportunity for the back half? Is that just conservatism or maybe some green shoots of more opportunity to come?

[Jim Gattoni, President & CEO]

Yes, I mentioned the only green shoots I have, which was we saw BCO van revenue go up from May to June, and maybe carriers are looking for a little more money in certain regions, but that isn't really all over the place, it's very limited.

But when I look at what's going on with machinery and building products from a growth perspective, from a volume perspective, they're down less, because they weren't up as much as consumer durables, right? So I think you're looking at year-over-year comparisons to quarter over comparisons more than seeing flatbed doing much better than van at this point, right? I think the anticipation was that flatbed was going to turn the corner with manufacturing, and we're going to see improvement on the flatbed and van was going to slow down a little bit and flatbed would recover.

I don't think we're seeing what we anticipated probably six months ago. And I don't see any -- as that people would call green shoots yet that would indicate we're going to see any change in that. Again, like I said, building products from -- building products and machinery from a standpoint of year-over-year comparisons are doing better, but I think that's because they weren't the drivers of the growth or in the pandemic, there was a lot of consumer durables type things. So I would say that's what we're looking at. And I'll just stick with the -- we hope we're at a trough or a bottom, but I'm not the guy to call that yet.

[Scott Schneeberger, Oppenheimer]

All right. Thanks. Appreciate that color. And then kind of following-up on Bruce's question, he was asking more kind of about AI competitive threats in the industry. Curious want to ask about what you're doing with your tech spend this year? It seems like you were -- you're shifting the pattern given the market environment or given shifts in your spend a little bit this year. Just an update there and any comments you may have on digital tools and how that progress is going in your system? Thanks.

[Jim Gattoni, President & CEO]

Yes. We're -- when I took over back in 2006, when I got the role of CEO and President in 2015, I put on a big push to improve technology in the organization and create the digital tools as opposed to being on our IBM mainframe, which is green screens a little clunky. And we've accomplished a lot over the last six years, but we still will be tweaking everything. But the spend from '14 to '15, '15 to '16, '16 to '17 really climbed as we made investments.

I would say right now, our spend is pretty consistent year-over-year, which includes probably $25 million to $30 million, which is really building out more AI tools and digital as compared to prior six years ago. So the investments are still being made, and we're still working on whether it's AI or digital technologies. It's just now we're more consistent on how we do it. You only have so many subject matter experts within the building and the IT resources, and you can't do 1,000 things at once with two people. That's kind of logic. So we try and we're picking our spots where we think is beneficial, one being AI.

But you talk about digital tools. We've got digital tools, they weren't really called digital back then. But since '99, we had -- today, it's called Landstar 1, but it's the phone app, right? It's all 100% digital. The BCOs or the carriers can do anything they want on a phone. They can see their loads. They can look at pricing. They can identify where fuel stops are. So we're digital, and we tend to stay on top of the next best thing and trying to be innovative there.

And like I said, we do have a team within the building that's been watching AI and coming up with -- and using actually some outside help to identify areas where we can improve as it relates to efficiencies built with AI. But I'd say that we're right up with everybody else or ahead of everybody. The one differentiator for us is the BCO side. Our digital tools are different than people who are just doing broker freight, because they're very specific to the BCOs. So we've got experience providing digital tools to basically dedicated capacity to us since the mid-'90s. So we're kind of very good at knowing what the trucks want from us, and we kind of correlate that and push it out to the third-party carriers.

[Operator]

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

[Jim Gattoni, President & CEO]

Thank you. We knew we headed into this year that 2023 would be likely to be a very tough year coming off our record performance at '21 and '22. Nevertheless, on the U.S. recession, I expect the normal cyclical patterns common to the spot market freight industry to continue. As I said earlier, although it's difficult to say precisely when the current down cycle will turn into the next up cycle. History suggests we could see an inflection point in late '23 or early '24. And when that time comes, Landstar's network of agents, third-party capacity employees will be ready. Thank you, and I look forward to speaking with you again on our 2023 third quarter earnings conference call currently scheduled for October 26. Have a good day.

[Operator]

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