Landstar System Inc

NASDAQ:LSTR

Earnings Call Transcript 2021-Q3

[Operator]

Good morning and welcome to Landstar System Inc. Third Quarter 2021 Earnings Release Conference Call. [Operator Instructions] Today’s call is being recorded. Joining us today from Landstar are Jim Gattoni, President and CEO; Fred Pensotti, Vice President and CFO; Rob Brasher, Vice President and Chief Commercial Officer; Joe Beacom, Vice President and Chief Safety and Operations Officer.

Now I would like to turn the call over to Mr. Jim Gattoni. You may now begin.

[Jim Gattoni, President and Chief Executive Officer]

Thank you, Messy. Good morning and welcome to Landstar’s 2021 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 is by nature subject to uncertainties and risks included, but not limited to, the operational, financial and legal risks detailed in Landstar’s Form 10-K for the 2020 fiscal year described in section Risk Factors and other SEC filings from time-to-time. These risks and uncertainties could cause actual results or events to differ materially from historical results were those anticipated. Investors should not place undue reliance on such forward-looking information and Landstar undertakes no obligation to publicly update or revise any forward-looking information.

Landstar’s 2021 third quarter performance was exceptional, extending the record setting pace that began in the mid-summer of 2020. With 3 more months to go in 2021, year-to-date 2021 revenue is about equal to revenue from all of fiscal year 2018 and operating income exceeds the 2018 full fiscal year amount, which were both record annual financial results. I expect the company’s strong performance to continue through the remainder of the year with annual revenue exceeding $6 billion and diluted earnings per share in excess of $9.55. To put the strength of the 2021 performance in perspective, assuming we achieve our 2021 fourth quarter guidance, full year 2021 revenue and diluted earnings per share would exceed revenue and diluted earnings per share of our existing fiscal year record set in 2018 by over 35% and 55% respectively.

As it pertains to the 2021 third quarter, revenue, gross profit, variable contribution, operating income, and diluted earnings per share were all-time quarterly records. Additionally, we ended the third quarter with a record number of trucks provided by BCOs and a record number of active truck brokerage carriers representing third-party carriers who have hauled a load of freight for Landstar in the past 180 days. Also, new agents defined as agents who contracted with Landstar within the last 15 months, contributed $36 million of revenue to the third quarter, the highest quarterly new agent revenue in over 10 years.

Landstar’s 2021 year-to-date performance has been historic and considering our financial results and ability to attract agents and truck capacity providers. Revenue in the 2021 third quarter increased 60% over the 2020 third quarter, which at the time was the second highest third quarter revenue in Landstar history. Landstar’s record 2021 third quarter revenue was driven by strong demand for transportation of consumer durables, machinery, metals, hazardous materials, building products and automotive parts and supplies and e-commerce services, where we provide truckload transportation services between hubs and parcel carriers.

Overall, revenue hauled via truck in the 2021 third quarter over the 2020 third quarter increased 57%. Truckload revenue hauled via van and unsided/platform increased 54% over the 2020 third quarter. Revenue per load on truckload services increased 29% and the number of truckloads hauled increased 19% over the 2020 period. While Landstar’s revenue per load is highly influenced by market conditions, the increased truckload volume of 19% against a relatively strong 2020 third quarter speaks to the ability of the network to flex when demand spikes. Truckload revenue hauled via van equipment led the increase at 59% over the 2020 third quarter, while revenue hauled via unsided platform equipment exceeded prior year by 44%. Other truck transportation revenue, consisting mostly of revenue generated through power only, expedited cargo bands, straight truck and other services, almost doubled over the 2020 third quarter. The primary driver of growth in other transportation services was from power-only demand, which contributed 75% of the category in the 2020 third quarter and 63% in the 2020 third quarter.

And finally, less in truckload revenue in the 2021 third quarter, which was 2% of truck transportation revenue, increased 23% over the 2020 third quarter. The number of loads hauled via truck in the 2021 third quarter increased 3.5% compared to the 2021 second quarter, while revenue per load on loads hauled via truck increased 5.8% over the 2021 second quarter. Both growth rates are stronger than normal seasonal trends when comparing the recent second quarter to third quarter results.

From an end market standpoint, consumer demand for building products, consumer durables and small package via e-commerce continue to drive record van volume in the 2021 third quarter. The number of loads hauled via unsided platform equipment also exhibited strong growth in the 2021 third quarter over the 2020 third quarter, mostly due to continued improvement in the U.S. manufacturing sector that began in March. Revenue per load on trucks hauled via van and unsided platform equipment increased 29% over 2020 third quarter and 7% over the 2021 second quarter, above normal seasonal trends as capacity continues to be constrained across all markets and equipment types.

As it relates to the new agent pipeline, we continue to attract qualified agent candidates with the model. As mentioned earlier, revenue from new agents in the 2021 third quarter was the highest quarterly revenue from new agents in over 10 years. As to truck capacity, we ended the quarter with 11,746 trucks provided by business capacity owners, 755 more trucks compared to our year end 2020 count. The increase in our truck count thus far in 2021 is being driven by improved retention as the number of BCO cancellations through the first three quarters of 2021 was 19% below the number we experienced through the first three quarters of 2020.

Year-to-date September, we have recruited almost the same number of BCOs as during the 2020 39-week period. Loads hauled via BCOs increased approximately 5% in the 2021 third quarter over the 2020 third quarter on a 12% increase in average truck count, partially offset by a 6% decrease in BCO truck utilization defined as loads hauled per BCO truck per quarter. We ended the third quarter with a record number of approved third-party carriers in our network, while a number of active third-party carriers, which we define as carriers who have hauled the load in preceding 180 days, increased 42% in the 2021 third quarter. Our network is strong and continues to attract third-party truck capacity.

I will now pass to Fred to comment on additional P&L metrics and a few other third quarter financial statement items.

[Fred Pensotti, Vice President and Chief Financial Officer]

Thanks, Jim. Good morning, everyone and thanks again for joining us. Jim covered our revenue performance in detail and alluded to our gross profit and variable contribution. I will make some additional comments about these metrics as well as other profitability metrics and expenses and discuss briefly our balance sheet and cash flow performance. I will start with gross profit.

As we disclosed in our earnings release yesterday, effective in the 2021 third quarter, we revised our definition of the term gross profit, which we are now defining as revenue less cost of revenue. Cost of revenue has two categories: variable cost of revenue and other cost of revenue. Variable cost of revenue includes purchase transportation and agent commissions and other cost of revenue includes numerous costs that vary in different degrees with revenue, including trailer depreciation and maintenance expenses, BCO recruiting, training and qualification costs, insurance-related expenses such as premiums paid and the cost of claims from various freight transportation-related insurance policies and other costs included in selling, general and administrative in the company’s consolidated statements of income, such as brokerage commissions and other fees incurred to administer the insurance programs available to BCO independent contractors that are reinsured by the company as well as costs related to our internally developed technology that directly support our revenue as detailed in the reconciliation of gross profit to variable contribution table included in our earnings release.

In addition, we now define gross profit margin as gross profit divided by revenue. In the 2021 third quarter, gross profit was $189.2 million, an increase of roughly 58% compared to $119.8 million in the 2020 third quarter. Gross profit margin was 10.9% of revenue in the 2021 third quarter, only slightly below 11% gross profit margin in the same period of 2020. In conjunction with the new definition of gross profit, we have initiated the use of the term variable contribution, a non-GAAP financial measure to refer to the amount represented by revenue less our variable cost of revenue, which again includes cost of purchase transportation and commissions agents as detailed in the reconciliation of gross profit to variable contribution table included in our earnings release. In addition, we now define variable contribution margin, also a non-GAAP financial measure, as variable contribution divided by revenue. This measure has always been and continues to be an important one for us.

Since purchase transportation and agent commissions are the primary expenses that are 100% variable with revenue and give us a view into spot market trends in the freight transportation industry on a shipment-by-shipment basis. In the 2021 third quarter, variable contribution increased roughly 51% to $242.3 million compared to $160.9 million in the 2020 third quarter, driven by strong revenue growth. Our variable contribution margin was 14% of revenue this year compared to 14.8% in the same period last year. The decrease in variable contribution margin compared to the 2020 third quarter mostly attributable to the mix between our BCO independent contractor capacity, majority of which is fixed margin and our brokerage capacity, the majority of which has a variable margin as our brokerage business increased from 44% of total revenue in the 2020 third quarter to 51% of total revenue in the 2021 third quarter. The year-over-year growth rate and margin performance of gross profit exceeded that variable contribution due to the ability of the Landstar model to leverage the mostly semi-variable cost I described earlier that are included in gross profit.

Other – excuse me, operating income in the 2021 third quarter was $131.4 million or 69.4% of gross profit compared to $82.4 million or 68.7% of gross profit in the same period last year. Operating income represented 54.2% of variable contribution in the 2021 third quarter compared to 51.2% in the same period last year. The 300 basis point improvement in operating income as a percent of variable contribution compared to prior year is primarily attributable to the significant growth and variable contribution that drove down insurance and claims expense and depreciation and amortization expense as a percent of variable contribution compared to prior year.

Getting into a bit more detail on the expenses noted in our consolidated statements of income, purchased transportation grew at a faster pace than our overall revenue growth, which I mentioned earlier, was driven by the change in mix of revenue generated by our BCO and brokerage capacity. Other operating costs were $10.6 million in the third quarter this year compared to $7.4 million in the same period last year. This increase came from higher trailing equipment maintenance and tire costs due to higher trailer count, contractor bad debt and increased recruiting, qualification and training costs related to our BCOs compared to last year.

Insurance claims costs were $29.6 million in the third quarter this year compared to $21.9 million in the same period last year. Total insurance and claims costs represented 4.3% of BCO revenue in the third quarter, roughly in line with 4.4% of BCO revenue in the 2020 third quarter as the impact of higher BCO revenue per load in the 2021 third quarter was roughly offset by higher severity or cost per claim, an increase in prior year claims development and higher insurance premiums compared to the same period last year.

Selling, general and administrative expense was $59.2 million in the third quarter this year compared to $38.9 million in the same period last year. As we discussed last quarter, the majority of the increase, roughly $13 million, is related to our variable cost, cash incentive compensation plan, and stock-based incentive plan driven by our record-setting financial performance this year. Wage and benefits pressure also contributed to the increase. This is probably not too surprising given the current environment that many companies are experiencing across the U.S. economy.

And lastly, depreciation and amortization was $12.3 million in the 2021 third quarter compared to $11.2 million in the same period last year primarily due to technology investments and enhancements put into service since last year. Our effective income tax rate was 24.4% in the 2021 third quarter compared to 23.9% in the same period last year. Increase in the effective income tax rate was primarily attributable to a higher provision for non-deductible executive compensation during the 2021 period and the impact of excess tax benefits on stock compensation in the 2020 period. Our net income for the 2021 third quarter was $98.7 million, up 59% from $61.9 million in the same period last year. Our diluted earnings per share in the 2021 third quarter, was $2.58, up 60% from $1.61 in the same period last year.

Moving to our balance sheet, we ended the quarter with cash and short-term investments of $267 million and cash flow from operations in the 2021 year-to-date period was $217 million compared to roughly $186 million during the same period last year. Before I turn it over back to Jim, I’d like to say that after my first quarter at Landstar, I am even more excited about this company than I was when I started. Business performance has significantly exceeded the expectations I had when I started towards the end of the second quarter.

Now we recognize we are riding an industry wave, but we are also very pleased with how Landstar is performing within the industry, continuing to be a leader with a unique business model with scale and technology that enables entrepreneurial success and in turn the company’s success. I have now had the opportunity to meet some of these entrepreneurs, namely our agents and our BCO independent capacity providers and the enthusiasm for working with the Landstar network is very evident as is the passion our employees put into continuing to make the Landstar network stronger everyday. I have also had the opportunity to meet some of you who are probably on this call today and look forward to getting to know more of you in the future. We look forward to keeping you updated on the business as we make our way through the home stretch of 2021 and start looking ahead to 2022.

And now, I will turn it back to Jim to discuss our outlook for the fourth quarter and wrap up our prepared remarks.

[Jim Gattoni, President and Chief Executive Officer]

Thanks, Fred. That was excellent for job security. Freight demand began to significantly improve in August 2020 from increased consumer spending as the U.S. economy recovering from the initial impact of the pandemic. The strength in the freight environment that began in August continued through the end of 2020.

As such, year-over-year financial comparisons normalized as we move through the 2021 third quarter. My expectations are that the strong freight environment Landstar has experienced in 2021 will continue through the fourth quarter. I expect quarter over prior quarter revenue growth to decelerate from the quarter over prior year quarter growth rate experienced in the 2021 third quarter given that the 2021 fourth quarter compares to a record fourth quarter revenue reported in the 2020 fourth quarter. However, that decelerated growth rate should in no way be viewed as a signal of a change in the very strong freight environment.

On a year-over-year basis, I expect 2021 fourth quarter load volume on loads hauled via truck to increase in the 13% to 16% range over the 2020 fourth quarter. This is particularly impressive given the strength in business we experienced in the 2020 fourth quarter when the number of loads hauled via truck exceeded the 2019 fourth quarter that is before the impact of the COVID-19 pandemic by 13%. This estimate of truck volume for the 2021 fourth quarter would also be in line with what we would consider normal historical volume trends from the third quarter to the fourth quarter of a given year. I expect revenue per load on loads hauled via truck in the 2021 fourth quarter to also move in line with what would be – what we would consider normal seasonal rate trends based on historical experience. As such, I expect revenue per load on loads hauled via truck to increase a healthy 15% to 18% over the 2020 fourth quarter. Given those assumptions, I expect total revenue in the 2021 fourth quarter to be within a range of $1.7 billion to $1.75 billion. Assuming insurance and claims costs are 4.3% of estimated BCO revenue in the 2021 fourth quarter, I expect diluted earnings per share to be in the range of $2.55 to $2.65.

Overall, I am extremely pleased with Landstar’s ‘21 performance. Revenues 39-week period ended September was by far the highest ever revenue in the company’s history over the period and increased approximately $1.2 billion or 34% compared to the previous record set in the 2018 39-week period. The 2021 39-week period variable contribution gross profit, operating income, net income and diluted earnings per share were by far the highest ever achieved in any 39-week period in the company’s history and we expect each of these metrics to significantly see the amounts Landstar achieved during its previously record-setting 2018 fiscal year.

In our view, the overall volume for Landstar continues to be as strong as it has been at any point over the last two decades and Landstar is positioned to complete the year with tremendous success. We continue to increase our available capacity and remain focused on providing and enhancing technology based tools for the thousands of small business owners in both the agent and capacity side of their network. I expect 2021 to continue at its record-setting pace as we easily surpassed $6 billion in annual revenue for the first time in our history.

And with that, Messy, we will open for questions.

[Operator]

Certainly, sir. [Operator Instructions] We have multiple questions on queue, and the first one is from Bascome Majors of Susquehanna. Your line is now open.

[Bascome Majors, Susquehanna]

Yes. Thanks for taking my question and congratulations on another excellent quarter and outlook for the 4Q. Jim, as we look into next year, I mean, clearly, things are going exceptionally well this year. Could you help us think about what a more normalized base after the incentive comp and stock comp would be on the G&A number as we think about how the model and your margins flex into whatever happens in the trucking market next year. I don’t know if that’s talking about what this year would look like without the excess comp from that or just calling out that comp? But anything to help us bridge kind of where we stack on a reset G&A for next year would be really helpful. Thank you.

[Jim Gattoni, President and Chief Executive Officer]

Yes. I would say if you take the 39-week period this year on SG&A and add, we believe we’re probably going to be slightly lower than the third quarter. I think the third quarter is about $59 million. I think we will have a couple of million lower than that in the fourth quarter. So if you add that in, you have the full year guess of what our SG&A is for the full year of 2021. And right now, there is probably $30 million to $35 million of variable comp that would not be in next year unless we blow it out again. If we have a normal – if we go back to a normalcy where we’re not growing revenue 60%, you have a $30 million to $35 million tailwind in SG&A related to our variable comp programs.

[Bascome Majors, Susquehanna]

And Jim, does that include both the stock comp and the cash?

[Jim Gattoni, President and Chief Executive Officer]

Yes. Yes, that’s both, they kind of move in tandem. The difference between the two is the cash comp is kind of a short-term thing. It’s an annual target. And the stock comp varies based on like a – they vest over a 5-year period based on growth over that period. So it’s just a longer tail in the stock comp than it is the cash comp, but they kind of tend to move in similar directions. In a great year, they kind of elevate. And when things slow down, they pull back. So in a normal year, we’re going to probably have a $30 million, $35 million tailwind going in next year in SG&A.

[Bascome Majors, Susquehanna]

And do you – not to put too fine a point to it, it’s just a pretty big variance. But do you have a sense of, from hiring and just general wage inflation, what we should think about that base rising?

[Jim Gattoni, President and Chief Executive Officer]

Yes. I would tell you that we have about an $80 million and $90 million salary component here, maybe actually a little bit higher than that. And Fred had mentioned that the quarter was impacted by some of that wage inflation. We have made a decision early to actually do 5%. Our increases are July 1 annually for the entire – pretty much the entire organization. And we had made a decision based on what we’re seeing in the environment as it relates to retaining or recruiting employees that things were increasing 5%. We also took a look at the inflation rate and what was going on in the economy, and we try and keep up with cost of living. So we did pop a 5% raise across the board. We put a pool together of 5% for the employee base and – which is a little higher than we typically do. And if you’re thinking about, say, a $90 million salary base, that adds about $4 million or $5 million next year to SG&A.

[Bascome Majors, Susquehanna]

Thanks for that. And tying it all together, I mean, even if next year is a normal year and revenues are flat or even down a bit, you have a pretty big cushion here. I mean do you think that earnings could be flat to up if the market isn’t just really challenging on the truck pricing? Just any preliminary thoughts on how you guys feel heading into next year?

[Jim Gattoni, President and Chief Executive Officer]

Feeling pretty good for the first half. Like when we were talking at the end of June, it was hard to predict when this thing turns. But with the strength we’re seeing, we were saying that some time first half, we might see start to cycle back. Now we’re thinking maybe it’s more toward the end of the first half because I think still remain very strong. Coming into the fourth quarter, we don’t see anything pulling back. We see no metrics of trucks coming into the system or demand slowing down. So I think – look, do I expect this market to continue? No. Do I expect pricing to stay elevated higher than historical? Yes, because I think the costs that are now into the – in the industry, whether it’s driver wages or insurance or things like that, the costs are elevated. So I don’t think you’re ever going to pull back to where we were back in ‘16, ‘17. But in our cyclical business, you do expect a pullback. If we get that pullback, I still think we will perform well. And can we cover? So I’m talking about $35 million of variable comp offset by $5 million. So we have that $30 million cushion. I think we can grow earnings, but I want to put a commitment to that. I think there is – it’s very unpredictable right now sitting here and trying to look into the next 12 to 18 months of what the market is going to look like in an environment where we see a – clearly, if we see a 20% or 30% pullback, which I don’t expect, you wouldn’t see earnings growth. On a 10% pullback, I think you’d still see earnings growth.

[Bascome Majors, Susquehanna]

Thanks for all that. We really appreciate the color.

[Jim Gattoni, President and Chief Executive Officer]

Alright. Thanks.

[Operator]

Thank you so much. Our next question is from Charles Vukovic [ph] of Evercore ISI. Your line is now open.

[Unidentified Analyst]

Good morning. Thank you for taking my call. I wanted to talk about freight mix across industries and your views on trends that are here to stay versus shifts that may be more temporary in the long-term. Clearly, the pandemic continues to result in outside consumer retail and the chip shortage is really weight on autos. But when you think about the current mix versus pre pandemic levels, what sector shifts do you see as permanent? And which ones do you think will eventually reverse?

[Jim Gattoni, President and Chief Executive Officer]

Well, we will just talk about the consumer side. Look, we’re highly affected by the manufacturing sector in the U.S. So at least we used to be – if you go back 5, 6, 7 years, we used to tie our load volumes to the changes in industrial production here in the U.S., right? And when you think about that, if industrial production was growing 3%, we feel we could have grown volume 6% or 7%. If it was down 2%, we’d see volumes go down, right? And we tied pretty tightly to that. The strong demand we’re seeing now and we’ve seen for the last 2 years is really a lot of consumer-driven based – whether it’s consumer durables, building products, stuff like that for home improvement. That’s a lot of what’s driving us today. But like I said, we go back 6 or 7 years. We’ve been kind of penetrating a little bit more into the consumer before the pandemic hit with some of the – some building product stuff and appliance type stuff. So we are slowly getting into that, but it just really ramped up.

It’s a difficult question to answer based on what we’re sitting in an environment that really hasn’t happened in my lifetime driven by high consumer demand, the government printing money and supply chain bottlenecks. And you take all that stuff and then you got to think about what – when the supply chain bottlenecks start to clear out and that disruption goes away, clearly, it’ll have an impact on pricing, right? Pricing will come down. Trucks will be a little more readily available regardless of whether there is trucks and more trucks coming into the marketplace. So whether it’s – and then you got the U.S. domestic manufacturing sector on the flatbed side, which we feel still hasn’t jumped off. It’s still relatively – I don’t want to say it’s soft, but it’s not where we think it should be. And so you might see in my world, I would say, you’re definitely sooner or later, you’re going to see the consumer market pull back. You can only buy so many dryers and washing machines or repair your house. So that will slow down. The consumer will start burning up some of the cash that they are sitting on. That might balance out with some of the U.S. production coming back and flatbed market coming back. You’ve got this infrastructure bill that’s hung up in the U.S. We’ve been talking about infrastructure bills for 20-plus years. They have never been able to pull it off. But anything there that would help on the flatbed market on the equipment side, if the infrastructure bill got signed and they are talking about heavy equipment and building roads and bridges and stuff like that, that’s very favorable to the market. So in summary, sooner or later, the consumer is going to pull back. And if you got an infrastructure bill that will help the flatbed market or – and if manufacturing starts to improve better than where it is today, I’ll see the – I think eventually, we will see the flip where the van starts to – the van rates start to pull back a little bit, but the flatbed kind of stay strong into the – maybe next 12 to 18 months would be in my thoughts.

[Unidentified Analyst]

Okay, great. That’s really helpful. Would you say that the current environment impacts the way you think about the current trailer fleet at all?

[Jim Gattoni, President and Chief Executive Officer]

Alright. Well, our trailer fleet is really driven by how many BCOs we have. So it’s really more tied to our BCO count and the number of BCOs we have using trailers. We keep a ratio of 2:1. For every BCO who’s using our van trailers, it’s a 2:1. So if we have, say, 6,000 or 7,000 guys using our trailers in a drop and hook operation, we have 14,000 trailers. So it’s really demand-driven. If we get – it’s demand and BCO count. If we get a lot more consumer demand and drop and hook, we will have more opportunity. Throw us more BCOs into the network, and we buy more trailers. That’s kind of the trailer thing. We generally don’t just buy 1,000 trailers and try and put them into the market and get used by third-party capacity. That really hasn’t been a niche for us. Kind of hard to control the use of the trailer by a third-party capacity that isn’t committed to maintain – I don’t say maintaining it, but pick it up from 8.8, they drive to point B, and they disappear. That hasn’t really worked in our network. So it’s really tied to our BCO count more than it is anything else.

[Unidentified Analyst]

Okay, great. That’s very helpful. Thanks a lot.

[Jim Gattoni, President and Chief Executive Officer]

Yes.

[Operator]

Thank you so much. Our next question is from Jack Atkins of Stephens. Your line is now open.

[Jack Atkins, Stephens]

Okay. Great. Good morning.

[Jim Gattoni, President and Chief Executive Officer]

Hey, Jack. Jack, are you there? Jack?

[Operator]

I think we lost Jack. We now have Scott Schneeberger of Oppenheimer. Your line is now open.

[Scott Schneeberger, Oppenheimer]

Thanks. Good morning, everyone. I guess I’m curious, Jim, obviously, a very robust demand environment. Could you speak to existing accounts and then growth in new accounts. Where are you seeing new business? Is it predominantly in the consumables or consumer durables? Or I mean just kind of curious where you see that popping up. Thanks.

[Jim Gattoni, President and Chief Executive Officer]

Yes, from an account standpoint, it’s kind of difficult for us to talk. We have over 25,000 accounts. And even the top 25 only make up about 30% or 40% of our business, so we kind of nickel and diamond. There is a lot of new accounts in our system that are doing $500 million to $1 billion. And when you do a $1.7 billion, it’s really hard to talk about where it is. I think, Scott, it’s really across the board. It’s anybody – the truck market right now is so tight that anybody is looking for capacity. And when you have 1,200 agents all around the country, locally in market, I think that just gives us an advantage. Our guys are hungry to go satisfy customer demand right now and customer demand is pretty hot regardless of what kind of commodity you’re talking. Is it softer in other areas than some? Absolutely. Consumer durables is hot, right. Building products is hot. There are things that are hot and things that aren’t so hot. Food stuff for us, it’s never been a great category. Very big. We have a couple of agents specialized. So that’s the refrigerated market is not really something we play in, but it’s kind of across the board. And it comes from – a lot of it is coming from these small shippers who we may not have ever dealt with before, but they see us as a capacity resource. And that’s kind of what we see happening. There is no – did we add any large customer in the quarter? No, over prior year. It’s more nickel and diamond. It’s just all these small customers that we pull in. Some customers clearly have grown. We’ve – we talked about the substitute line haul guys. Clearly, a lot of growth there from the e-commerce market driving that growth on the sub-line haul, which is primarily just a couple – a handful of accounts that we do. But I would say it’s just coming from all different directions.

[Scott Schneeberger, Oppenheimer]

Great. Thanks. Appreciate that. And then just kind of delving into the other truck transportation services, that new breakout for your reporting of the subcomponents, power-only expedited straight truck, cargo van, how would you – just you might not give it by percent, but by order of magnitude, what are the can you kind of rank order those as in that bucket and then just expectations going forward for what you see from that category? Thanks.

[Jim Gattoni, President and Chief Executive Officer]

Yes. Rob will probably talk about what he sees in that category, but I’ll give you the – like I said, power only was 75%. And this is a year-to-date. So the number, I think in the revenue for year-to-date was like $518 million, right? So you’re talking about – so if I break it down, I would – 75% of that is power only, where we provide a tractor and there is a loaded trailer somewhere. It’s somebody else’s trailer, we haul it away. There is some – the ground expedite is probably about $70 million, $80 million of that. And then there is container that’s in there maybe $30 million to $40 million. And then there is a bunch of other small categories within there that almost add to nothing. But really, if you break it down, let’s say, power only, then expedite on ground and then some container moves in that order from large biggest, the smallest and then a bunch of other small stuff that our agents get involved in. And then Rob can speak to what he’s thinking about the power only future and expedite.

[Rob Brasher, Vice President and Chief Commercial Officer]

Yes, Scott, this is Rob. The power only basically, as Jim kind of put it, it’s really – the reason we kind of broke it out is we’ve seen the consumer spending and e-commerce kind of continue to grow, and we decided it really needed its own category. So again, we do a great deal of – I won’t say a great deal. We do a lot of work, especially now, a lot of dry work, if you will, a lot of chassis, a lot of containers, things like that, not compared to e-commerce. And as the international backlogs continue to happen, we continue to get involved a little bit more on that, but it’s mainly driven by the e-commerce and consumer spending.

[Scott Schneeberger, Oppenheimer]

Great. Thanks, Rob. Thanks, Jim. I will turn it over.

[Jim Gattoni, President and Chief Executive Officer]

I think one thing about the power only, too, is if you think about the trailer market right now, carriers don’t have many trailers available. So I think the shippers are doing a lot of put stuff into trailers and just waiting for – like if they can access a trailer on to load it and there going to trying to get a truck to move it.

[Scott Schneeberger, Oppenheimer]

That makes sense.

[Operator]

Thank you so much. We now have Jack Atkins back of Stephens. Your line is now open.

[Jack Atkins, Stephens]

Okay, great. Guys, good morning. Can you hear me now?

[Jim Gattoni, President and Chief Executive Officer]

We can hear you now.

[Jack Atkins, Stephens]

Okay. Great. Thanks for taking my questions. Sorry about that earlier. I guess just kind of going back to the trailer question a moment ago. As you guys think sort of longer term about the business, I know it’s sort of two trailers to one BCO. Are you maybe – is it may be worth considering extending out your trailer program to the third-party broker carriers? Other folks in the industry have sort of had success with that. I’m just curious if you guys are looking for ways to maybe expand it because it’s been so successful with your BCOs. Just curious if you could maybe talk about that and if that’s a consideration, I know trailers are hard to come by right now, but as you look out over the next several years?

[Joe Beacom]

Sure. Yes, Jack, this is Joe. We have conceptually talked about that some. And Jim alluded to some of the utilization and repositioning, some of those things that would be challenges for us. We currently do it on a kind of a case-by-case basis in those situations where we can make sure that we capture the trailers and get the right kind of utilization. It’s not like we don’t ever do it. It’s just that we’re pretty selective in how we do it. In order to do it on a larger scale, there’d be some things that we would need to do, I think, internally from a systems perspective that would allow us to make sure that we’re tracking and utilizing trailers that are essentially then going to be on third-party capacity and kind of out of our BCO’s hands. But again, it’s something that we revisit, we talked about, we do it on a case-by-case basis, but nothing large, but certainly something that is a topic of conversation from time to time, especially when you find yourself in a somewhat of a drop and hook capacity constrained environment, it tends to come up. So – but it’s on the radar from a tech perspective.

[Jim Gattoni, President and Chief Executive Officer]

I think, Jack, one of the things that’s become – that’s actually had us talking about it more now is that the fact over the last 3 to 5 years is trailer trucking has been a lot more efficient right now as opposed to – like when we use a hook trailer, we didn’t really need that much trailer tracking because we had BCOs and agents managing them and watching them, right? So you always knew you could call a BCO and ask them what trailers on stuff like that. It’s easiest to track. That’s hard to do with third-party capacity. But now with all our trailers having reliable trailer tracking devices, it’s easy to monitor and it’s easy to manage utilization and tracking. So there is clearly more discussion about that third-party capacity usage of trailers today than we would have had 5 or 6 years ago here at Landstar.

[Jack Atkins, Stephens]

Okay. Okay. That makes sense. And I guess for my follow-up question, Jim, you touched on it in your prepared comments, but you guys are just experiencing extremely rapid growth here cycle to cycle. And I’m just kind of curious, as you sort of think about the resources that maybe you need at headquarters to support your agents and your carriers over the next several years to the degree that growth continues, how are you thinking about the need to maybe invest in additional headcount? Do you feel like that you’ve got any areas where you may need to sort of add folks, enable – just as you think about kind of keeping those sort of a growth engine going, I guess. I’m just sort of curious if there are some areas of additional investment that may be needed or if you feel like you’re in a good spot.

[Jim Gattoni, President and Chief Executive Officer]

Yes, absolutely. I think there is going to be additional investment. I will tell you the scenario that’s going on this year is we came into this year. We had our target for the year coming out at the end of 2020. We kind of internally here, we have internal budgets, targets for volume, truck volumes and rates and all that kind of stuff. And we kind of base our headcount on what we think that’s going to be because we do have – we handle all the payables, receivables and all the transaction processing here on behalf of the agent. So, we do have a decent-sized group of people who are in transaction processing. They are all working at home today, and it seems – it’s working fantastic, actually. I think they like it and it hasn’t – productivity has been fine. But with the volume exceeding what we anticipated, there has clearly been some headcount adds. I mean early summer this year, we are sitting down with the administrative group going through, the throughput of number of calls, revenue, the receivables people make or – and there is a backlog. So, we are jumped on it. We had – we quickly approved about 30 people to handle payables and receivables. So yes, you are going to see some headcount additions that will drive. So, when I talk about that $4 million or $5 million just from a year just from salary increases, you are going to see another – a couple of million or more as we add headcount to – as the volume increases throughput. But I am – it’s not – clearly, the revenue is going to offset anything we put in the system because we do have efficiencies. So, it’s not anything where you are like for every one load or every 100 loads, you got to add a head. That’s not the kind of the way it works here. With the new systems we are putting and everything like that and new workflows we have put in and they are starting to put in, we will be able to get more throughput per head, but we are still not going to overburden our people, and we have got to keep an eye on how hard they are working and if they are doing any overtime or stuff like that. So, it is – there will be more headcount coming in from that standpoint. And we have also enhanced our IT department. Now if you think back to about 4 years or 5 years ago, we were pretty much a mainframe company, an RPG coding and stuff like that. We didn’t have a lot of app developers or website type people. So, we have made us transformation. Rick Coro came out in 2017, and he has kind of transformed the IT organization to move to cloud based as opposed to just the old mainframe stuff. So, we have mainframe people and we have converted now into – we also have groups of people who into the new world and the new technology handling it, whether its cloud-based applications or operational data stores and the information highway, right. So, there is that stuff. But that’s kind of already baked in. Those people are baked in, and there might be a few more of those people coming in, but it’s more of the transaction processing people that you will see coming in and some headcount growth.

[Jack Atkins, Stephens]

Okay, that’s really helpful. Thanks for all the color.

[Operator]

Thank you so much. Our next question is from Stephanie Moore of Truist. Your line is now open.

[Stephanie Moore, Truist]

Good morning.

[Jim Gattoni, President and Chief Executive Officer]

Good morning.

[Stephanie Moore, Truist]

I want to touch a little bit on the commentary in the release just about that for what you are seeing thus far into October, you are seeing both revenue per load and load really following normal consistent sequential patterns. So, I am just curious, I think that’s kind of an abnormal trends that we have just seen throughout 2021. And given all that we are seeing with supply chain disruptions and record low inventory levels, just curious on what you think is driving that return to more sequential trends into the fourth quarter. And at the same time, what are your thoughts going into the first quarter. I think last year, we saw an extension of the – a lot of the seasonal trends just given the delays in inventory and restocking. So, I would love to hear your thoughts, obviously what you saw so far going into the fourth quarter and then expectations for the first? Thanks.

[Jim Gattoni, President and Chief Executive Officer]

Yes. I think when you look at where we were in September, we were – our BCO revenue per mile on van and flatbed were both at all-time records, right. And so it’s – you are not going to – the supply chain disruption and the demand dynamic has been around now for quite a while, six months or seven months. And sooner or later, it’s going to stabilize. And I think what we are saying is we are kind of saying that we are seeing some coming in October that we are – or for the fourth quarter, we are actually anticipating some stable seasonal trends, not necessarily to continue to grow because you just feel like supply chain disruption and the lack of capacity has leveled off, right. It’s – look, it’s a very strong freight environment. It’s going to stay very strong. But that doesn’t mean it’s going to drive another step up in seasonal, above seasonal norm. The other thing that you are thinking, so we are seeing that, the other thing that there is a lot of talk about what’s going to happen in December. I think December is a little unpredictable right now. I know there is a lot of ships on the West Coast, and that’s probably going to carry into December and all that freight market. But there was talk early on about how everybody is pulling all their freight earlier. So, December is not that backlog. And they are trying to get people to order their Christmas gifts early. So, does December start to pull back a little bit. Now, I don’t think that’s going to happen, but there is a little bit of talk around here about maybe we are going to see this heavy demand and pricing come through December, and then maybe it starts pulling back. I don’t think that’s what happens. But as to the current trends, I think it’s really just to do with – we are at peaks right now. And I am not sure that we are going to see any change in the capacity tightness or the environment. So, stable seasonal is kind of what we are seeing coming into October. And as for the first quarter, look, like I said, it’s hard to sit here and talk about what’s going to happen in December and then transition into seasonally softer first quarter. If I go back to last year, I would have thought I am a pessimist. So, I would have thought the first quarter was going to slow down because it was the fourth quarter last year and beginning in August, it was really driven by consumers. And I really thought that was more of the holiday rush and all this other stuff. And I know people weren’t traveling and they had a lot of money. But it turned into a full – another nine months of strong consumer demand on building products and appliances and all the other stuff they are buying. Will we see – look, last – the first quarter this year was a very good quarter. Comps year-over-year are going to be tough in the first quarter even if it’s a strong first quarter. That’s about all I got on the first quarter. I think it’s just right now, a little hard to predict on what’s going to happen since the environment we are in is an environment like I honestly haven’t been in since my time here at 25 years.

[Stephanie Moore, Truist]

That’s very helpful. Thank you so much.

[Operator]

Thank you so much. We have two more questions on queue. And the next one is from Bruce Chan of Stifel. Your line is now open.

[Bruce Chan, Stifel]

Hi, good morning gents and thanks for taking the question. Jim, I just want to go back real quick to your comment on BCO utilization. I think you mentioned a 6% decrease. Is that just vacation and time off, like you talked about back in ‘17 and ‘18 when rates were really good or is there something else going on there?

[Joe Beacom]

Yes, Bruce, this is Joe. I think it’s a few different things that play into that. I think one is they are making a decent amount of money. And I think some percentage of BCOs, they have got a target of earnings they want to make in a given year. And once they surpass that target, they tend to slowdown a little bit. I think that’s part of it. I think there is still a COVID risk element to some of the utilization. And we are starting to hear more recently that as trucks need repairs, some of the parts for those trucks are just what used to be something you could take care of over the weekend. Now it takes 1.5 weeks to get the parts and get the truck back on the road. So, I think its multiple factors that lead to that. And I don’t have specific percentages by. But I mean those are the kind of things that we are seeing and we are hearing as we talk to our guys that are sitting for any length of time, and it’s usually one of those kind of reasons that they come up with.

[Bruce Chan, Stifel]

Okay. That’s helpful. And I know everyone is sick of talking about COVID right now. But you mentioned that retention rates for BCOs were good right now. And Joe, maybe just a follow-up question on the ETS’s vaccine mandate or potential mandate for drivers. As you are looking at that proposal, is that a concern for you, or is it may be a benefit given your IC composition? Do you think vaccine-related attrition is going to be something that shippers should be or need to be worried about?

[Jim Gattoni, President and Chief Executive Officer]

Well, I think it’s – from a Federal standpoint, the mandate for Federal contractors, of which we are one, I think it’s really too early to tell how the impact is going to play out there because the specifics really haven’t been determined or released. Clearly, we have more than 100 employees. So, people in the office are here, maybe have a different impact to us than would be others who service government installations, if that BCOs just that applied to them or not. And I think that customers, as they go about trying to figure out what the mandate means. I think there right now, from what we have heard from a handful of customers, very exploratory as to if this happens, what happens. And we don’t have a sense right now as to what number or what percentage of our BCOs are, our carrier drivers are vaccinated or not. But clearly, if you think back to the beginning of the pandemic when we were kind of working our way through different temperature checks and mask wearing at all of the shipper locations and our agents were doing their best to accommodate all those different requirements. I kind of look at the vaccination mandate, if that were to come out and be more broad, that our agents would have some work to do to figure out what each customer’s requirements are. And then up to us to help them source capacity to make sure that they are getting the right kind of capacity to meet their customers’ expectations. So, I think it’s a little early because they don’t have a lot of specifics out of OSHA, on the one hand. And then again, customer-by-customer, depending upon how they feel they need to implement on the other side.

[Bruce Chan, Stifel]

Okay. Great. Thanks for that. And then Jim just a real quick point of clarification. You have mentioned that you can still grow earnings in a 10% pullback type scenario. Was that specifically demand pullback, or was that 10% on total revenue?

[Jim Gattoni, President and Chief Executive Officer]

No, I think I didn’t say that we could grow – I don’t think I said I could grow earnings. I think I could – in a 10% pullback scenario, I think we could – in a 10% pullback in the market, I think is what I meant to say. I think we could still either hit or grow earnings a little bit just based on the tailwind of the expenses.

[Bruce Chan, Stifel]

Got it. Thank you.

[Operator]

Thank you so much. Our last question on queue is from Todd Fowler of KeyBanc Capital Markets. Your line is now open.

[Todd Fowler, KeyBanc Capital Markets]

Great. Thanks and good morning.

[Jim Gattoni, President and Chief Executive Officer]

Hi Todd.

[Todd Fowler, KeyBanc Capital Markets]

Jim, listening on the call, you are almost starting to sound like a little bit more of an optimist, but I will let that be determined by guests.

[Jim Gattoni, President and Chief Executive Officer]

Yes. It’s pretty difficult not to be happy today. I tried.

[Fred Pensotti, Vice President and Chief Financial Officer]

Look what it takes, Todd.

[Todd Fowler, KeyBanc Capital Markets]

I thought that I mean lot be a pessimist with these results, it’s difficult. So no, congratulations. So, I guess what I wanted to ask about the strong volume growth, you guys are going to end this year if the fourth quarter comes together over 20%. How do you help us think of – can you help us think about how much of – how sticky some of that volume growth is? I mean I think that there is a perception that you are much more transactional. But I know that some of your underlying business has some stickiness to it. So, is there a way to think about how much of that volume is really considered overflow and transaction would go away in a more balanced market or how much of that you really keep as kind of a recurring basis as we move into next year?

[Jim Gattoni, President and Chief Executive Officer]

I would think the sticky stuff, clearly, the drop and hook is 30% of our business about. So, I mean that’s clearly sticky business, government. I mean we are kind of playing that. That’s where – they are committed to us. We are committed to them on the government side. Automotive is a little more that less sticky. When demand is high, we do better, when demand is low in automotive. But supply chain disruption is good for us, which is what you talk about. They are hazardous. If you look at hazmat in the A&E, that has met stuff. Every one of our BCOs is hazmat certified. So, that isn’t true for a lot of the carriers out there. But so we have 11,000 guys who can haul hazardous material, so everybody comes to us for that. So, if that market is hot. It’s sticky. I think our cross-border Mexico is probably $400 million or $500 million annually, maybe not that high. But that’s about $400 million. That’s about right. And so that’s a little because it’s hard to disrupt that. That’s a very coordinated effort to move third-party, use Mexican carriers, stuff like that. So, it’s – that’s a little more sticky. So, when you add it up, you got 30% on the drop and hook operations. It’s a decent sticky. Do I know the exact number, but it’s clearly more than half is sticky. If I really think about the true spot world where people are just calling us, we are moving one load for a guy and then they are leaving us. It’s not a big piece of the business. When we talk about being in the spot world, it’s really – from a customer standpoint, not necessarily spot, the rates move up and down, right, for these customers. We are really buying capacity in the spot market. And so we look at it two different ways. We live in the spot world as it relates to capacity, but a lot of the relationships we have with our customers, they are good – is it sticky, is it guaranteed that we are going to move people’s freight, absolutely not. But I think they are a little bit sticky as it relates to agent relationships and being able to provide capacity in tough times, and they kind of stick with you, especially with their own trailers at them, we are moving their hazmat or helping them with the situation. But putting the percent on it, it would be difficult.

[Todd Fowler, KeyBanc Capital Markets]

Yes. No, I understand it’s a tough question, but that context is helpful and what it sounds like is it just the overall base of the business has moved up pretty substantially. And now going forward, there will be some cyclicality and some seasonality, but it’s off of a higher base, and it’s not that we are going to revert back to 2019 levels as soon as things normalize?

[Jim Gattoni, President and Chief Executive Officer]

Yes, I wouldn’t expect. It’s – the great thing about the agent model is they built the relationships when people need capacity like this, and it just – it elevates us. You are going to see us cycle back. I don’t think there is any question, but then we launch higher, and you have seen it since our inception.

[Todd Fowler, KeyBanc Capital Markets]

I don’t give you a chance to be a pessimist. You take the bait on that one. So, just my last one, maybe Fred. In the past, I think that there has been some metrics around how much cash you want to keep on hand, maybe as a percent of revenue or total assets. As you think about the business and kind of the cash that you are generating at this point, have the metrics changed as far as how you feel kind of the cushion level that you want from cash on the balance sheet at this point? And then kind of any differences. I think it’s been talked about a little bit on the call, but investments and opportunities and kind of where you deploy capital going forward? Thanks.

[Fred Pensotti, Vice President and Chief Financial Officer]

Yes. So, as far as cash, we obviously have way more cash than we need to run the business. We have deployed it successfully historically with dividends, buybacks, special dividends. And I think that makes sense going forward. I personally prefer share buybacks to any kind of special dividends, but that’s just kind of how I think about it. And so I think we will continue to do that. And as far as deploying it through other opportunities, we will keep our eyes open to see if there is any potential M&A kind of opportunities. But we haven’t really historically done a lot of that, in part because of potential conflict with the business model. So, I think the historical ways we have returned capital to shareholders will continue perhaps with maybe a little bit more focus on share buybacks.

[Jim Gattoni, President and Chief Executive Officer]

Yes. Todd, as you know, to the cyclicality of our business is – the business model is just fabulous it relates to cash in a growth – like we collect receivables in 50 days. We pay our carriers in about 20. So, it’s – we are financing the capacity, right. It’s kind of the way this works. And in an environment wherein you can see our receivables just grew over $1 billion for that, I think the first time in our history. And it’s a little bit of – it’s not a – we are definitely cash flow positive. But when things start to soften up, we become bigger cash flow positive. We are collecting more pay and less. So, cyclicality as things – and if things do pull back, we end up actually bringing in more net cash over that period and have more opportunity. So, it’s – the model kind of protects itself in any environment. And like Fred, if you go back, we haven’t borrowed in a long time against our revolver by stock, which is – there is two times we borrowed on the revolver. One is I think we are buying stock pre-2010. And the other one was because we had that contract with the FAA, where we actually had about $275 million due from the government. They didn’t pay until the tasks were done. It was all. That’s how the contract was written, so we needed to borrow then. But do we need to keep cash on the balance sheet to run the business, we don’t really have a set in mind. I don’t see us borrowing to do a buyback program. Some of that cash is collateral for our insurance claims. So, what you see on the balance sheet is there some of it is locked up. But we kind of more look at how much cash do we have and how do we deploy it to shareholders. And that’s kind of what we have done historically and as you know.

[Todd Fowler, KeyBanc Capital Markets]

Yes. That helps. That makes sense. Alright. Thanks a lot for the time this morning guys. Congratulations again.

[Jim Gattoni, President and Chief Executive Officer]

Sure Todd.

[Todd Fowler, KeyBanc Capital Markets]

Thanks.

[Operator]

Speakers, at this point, we do not have any more questions on queue. You may continue.

[Jim Gattoni, President and Chief Executive Officer]

Thank you. And I look forward to speaking with you again on our 2021 fourth quarter earnings conference call currently scheduled for January 27th. Have a good day.

[Operator]

Thank you so much, everyone. And that concludes today’s conference. Thank you all for participating. You may disconnect your lines at this time.