Landstar System, Inc. (LSTR) Earnings Call Transcript & Summary

Okay. I think we're going to get started here. It's 9:00 on the dot. Well, thanks for everyone being here in the room and on the webcast. I'm really happy to introduce Landstar. One of the higher-quality companies that I cover in transportation and logistics. I like to say, they'll generate free cash flow in almost any environment, including an apocalyptic environment. A really, really great model and a great company. Super honored to have James Gattoni, President and CEO, the most optimistic man in transportation and logistics; and James Applegate, Executive Vice President, Business Development and Strategy. First, I want to congratulate you guys for being named to the Fortune 500. That's a pretty great, remarkable evolution from where you guys were a few years ago, given the strength of the market. One thing I want to start with is kind of zooming out, Jim, a little bit -- Jim and Jim -- and talk about where we've come from over the last 2 to 3 years. Demand has never been stronger. There's been constraints on capacity tangibly with the chip shortage. And so it's been really -- it's allowed companies like Landstar and a lot of trucking companies to really report these unbelievable record earnings.

And now we're starting to see the other side of it and what the other side of it looks like. And so I want you to sort of address what do you think the other side of this thing looks like? Are we giving back maybe -- are we unwinding some of the huge benefits that we had over the last couple of years? Has something structurally changed, alternatively, that maybe allows us to keep some of these gains that we've earned over the last couple of years in the trucking market?

We look at it -- you got to look at it twofold, right? And what's going to impact going into the future, both very unpredictable, is where is demand going to come from? Is it going to continue to stay where it is, where it's a consumer manufacturer? We play in both manufacturing and the consumer market. So where is the demand going to come from? And then it's how many trucks are going to be in the system, right? You clearly brought up the chip issues, stuff like that. Trucks are still not getting pushed off the market in any significant degree, right? So where people are driving older trucks -- and there's not a lot of drivers coming in. I know that the government is pushing the drivers, younger drivers to get them into market, trying to recruit drivers into the market. But things are -- capacity is starting to loosen up, so I'm not sure how excited they are about keep pushing that deal. If you go back 2, 3 years and what's different today, really is we just went through about 24 months of the strongest consumer economy I think we've ever had. And all that overflow freight, someone had to haul it, right? We used to be known as a manufacturing -- we are heavy manufacturing, right? Industrial production, we used to -- if you watch our load count, we traveled with industrial production, [ spike and dollies ], whether it be flatbed or on the van side. But when the pandemic -- even before the pandemic, probably '15, '16, we started getting a little bit into the Walmarts and the Home Depots and that kind of stuff, to some degree with full truckload. But when the pandemic hit, our consumer durables went from like 15% of our business to almost 30%, right? So all of a sudden, there was so much freight in the system coming out of the consumer. It was a great market for us, and that helped us build new relationships. So going forward, we have these relationships we didn't necessarily have before because it wasn't necessary to build -- the shippers needed capacity. They couldn't find it. So we've got new relationships on the consumer side. Not to say that the consumer is going to continue to be strong. I think that's where the unpredictable part of the going forward is, what's going to happen on the consumer durable side. You're already hearing some of the appliance manufacturers saying that their inventory is not moving as fast as it was, and that was a big part of our business in certain lanes. And then as it relates to the consumer, that was so strong. I'm not a believer that if manufacturing picks up, that the flatbed will offset the strength of the consumer. I don't think it's possible to have a manufacturing sector that's going to replace what the consumer did over the last 24 months. We're seeing positive stuff on the flatbed side, although reading in the industry statistics, it's like flatbeds falling through the floor, but it's not something we're seeing. In the flatbed, I don't want to call it strong, but flatbed rates in June were higher than they have ever been on the revenue per mile on a BCO, which excludes fuel. So there's a kind of a -- with us, what's pretty nice is we play in multiple markets, right? We have the van business, it's about 60% or 70%, and we have the flatbed which is 30% to 35%. So if one's strong, one's weak, it kind of balances itself out. I anticipate that the flatbed should carry us pretty well for the next 12 to 18 months when the consumer starts to slow down, but again, not offsetting that consumer strength. I think if you're sitting here today and we're talking about what's going to happen to the future, we're watching costs. I mean we were quoted, we were paying $35,000 for a van trailer a year ago, and the quotes now are $54,000, you still can't get them. I mean, so there's going to be a lot of inflation in the system that will head into the future. If we buy trailers today, that doesn't hit until next year, we start to depreciate it, right? And then you have -- we also on the trailer side, where you see cost inflation, and we've seen it this year, is maintenance -- labor and parts for the trailers. We don't have our own shops. We rely on third parties to fix our trailers. So there's this inflation coming into the system that I don't think it's -- I don't believe it's transitory. I think it's going to stay there and it's going to keep the rates elevated to some degree. My guess is -- I can't see us pulling back the 2019 rates. But I think we're at 30% above '19 about now. So you're going to have some pullback in rates, but I don't think you can get there. You've got insurance costs, you've got trailer costs. You got -- we've given 5% raises in the last 2 years. We typically give 3%. So what's happened in the market the last 2 years has elevated the cost of the business, and therefore, we'll keep the pricing elevated.

And just on the demand side, you talked about, I think, more recently, you talked about stable trends in May, June and into July, at least seasonally speaking. I mean obviously, it seems like you guys have updated today, so you're seeing sort of similar trends. But just talk about what the rest of July and kind of August has looked like from a demand trend perspective?

It's consistent with what we said 2 weeks ago, stability we're seeing, we're seeing the pricing on the revenue per load typically climbs into July, and it did climb from June to July. July is typically our highest price month for some reason, we do shorter hauls and drive the rate up in July. And it's typically our highest. So you see in June and July increase typically. It just wasn't as big as an increase. So seasonally, we -- it's stable. I mean we're fine and we're stable through today. I mean there's -- we're not seeing a lot of the stuff you're reading in the news about in the industry data about that we're still 30% back behind in spot pricing. As it relates to volumes, we're still seeing that sub-line haul. I don't think that's coming back. We had the sub-line haul hit us pretty big in the second quarter.

It was down, what was it, it was down like 20% or something...

Yes, I think that was a volume number, I think it was down. And you'll continue to see pressure on the volumes when it relates to some of the consumer stuff and the substitute line hauls a lot of consumer stuff because it's the parcel carrier. So they're using us to get in and out when they have excess freight.

Any more clarity on peak season? I know you rely on the parcel guys and maybe some big box retailers to give you a little bit of insight into -- I know you talked about there's just a lot of differences in opinions right now on what that looks like. But any more clarity on that?

I think we're getting the same opinions. The 2 parcel guys were on either ends of the spectrum. It's like somebody thinks it's going to be a strong peak, someone -- the other one thinks it's going to be a slow peak. And then we have the big -- one big box retailer that they want to make sure we have capacity available just in case it becomes strong, but they're more of a neutral play. So of the 3 guys we talked to who need us a lot going into peak, each one of them had a different scenario of what they think is going to happen.

One of the bull cases, I guess, when you look at like asset based -- you guys obviously have a huge access to capacity and there's trailer pooling that goes on that makes you -- makes large trucking companies with scale have a little bit more of a competitive advantage. Do you think that's also a factor in terms of maybe allowing shippers having that relationship deeper with shippers where trailer pooling and the way they access capacity is different this time that leads to less maybe of a bust?

I think it's the agents that lead that, right? I think we're -- being a different model, we have 1,200 agents in geographic locations spread all around the country. There's a personal handholding type in our business as opposed to just that Uber-ized freight. And when you're talking about providing trailing equipment and putting that trailing equipment into a system, having an agent manage that fleet of trailers as opposed to running that out of a corporate office, that agent has a personal relationship with that traffic manager, and they're working through that. So it's not just putting the equipment and -- it's the way we manage it. I think the combination of having the personal touch and the availability of our trailers is pretty big for some of the guys pushing up 5, 10 loads a day and they just -- they load our trailer 3 days from now, we bring a truck [ for haul ] and it's great -- it's great for the capacity, too, because there's no downtime, right? The guy brings an empty trailer into a yard, hooks up to a full one and he leaves. So I think we do it very well with the shippers who need that kind of service. And it draws more and more in as they hear about it, and they draw more and more in. We get them to drive our trailer count up.

On the BCOs side, I know you guys talked about -- obviously, you would expect BCO cost to come down a little bit in the current environment that we're in. But just talk about -- has that stabilized at all? Or what are you seeing on the BCO side right now?

They're doing what we expected. We're losing some. Turnover is going up slightly. So we're not seeing the -- I think we ran like 16 months of constant adding. It's slipped. Now we're going to see some dropping off here. And we would expect that, though, in this environment, when you've got spike in fuel costs, rates dropping down, I don't know why they do it because we're still, like I said, 20%, 30% above 2019 rates. But -- and you saw it in our numbers in the second quarter, too, they drove less, right? I think utilization was down like 4%. So they're driving less and we've got a couple of guys parking the trucks.

Yes. And one of the interesting things is that people like to look at Landstar as a proxy for the spot market. And you guys have continuously, I felt like the results don't show that. They're just more muted on the downside, more muted on the upside, a little bit more of a lag effect. Can you just talk about the dynamics that go on there in terms of why maybe -- what's happening on the load boards? We talked about a little bit before this chat started, but just talk about why maybe it's not the best indicator of what you guys are seeing from a pricing perspective?

I wish I knew. It's very difficult to figure out why we are so off -- far off from the public load boards. Some of it's fuel, they take out fuel -- they take fuel of their numbers. I don't know how they do it, right? I'm not sure -- are they taking the full fuel out and assuming that the guy is burning 6.5 -- getting 6.5 miles per gallon, then they are taking the full fuel out. Are they just taking out that piece of fuel surcharge? So it's hard to tell how they're pulling the fuel out. And we have BCO that does not have fuel in it, like our revenue per mile doesn't have fuel in it. The other thing, too, is kind of what data you're looking at. I believe, not 100% sure if anybody knows, but I believe truckstop.com data is posted rates. So it's not where you're billing the shipper. It's what you're offering to a carrier. I don't know that -- I don't know if that actually moved. I don't know if that was actually a transaction that transpired, right? That's an offer to move a load. I'm not sure what they're putting out to people is this is what it actually moved for. This is what I actually paid the truck. And in the environment, this is a [indiscernible] that has started within the last few months, seeing things move the way they're moving. Look, if I'm a broker and I see FreightWaves putting data out that says capacity is loosening, you can get a truck cheaper, I'm going to start posting price -- my posted rate to the truck is not going to start dropping artificially because I think there's more available capacity. And that's the data we're seeing, right? And I know our agents do it. That's what you're trying to make the extra $0.10 a mile. I mean, that's what you're doing. You're trying to squeeze the truck. So it's really hard to determine what that data is and why it's so different than what we're seeing. Directionally, do we move in the same direction that -- if DAT or Truckstop starts dropping in rates, so do we, but it's just not to the extent. I mean we're pretty far off from what they're saying right now. I do think in June, Jim, our revenue per mile was above last June, but everybody else was saying it was 30% below on the BCO revenue per mile. So we were still ahead of prior year in June on revenue per mile for BCO, which excludes fuel. Yet I'm reading reports in the industry saying that without fuel, spot rates are 25% to 30% behind last year. And just -- I can't -- the correlation is not there. I can't figure out the -- I can't connect.

I'm going to get Jim Applegate in here a little bit to talk about just the digital side for a minute. I think -- you guys have a great model, and you guys have had apps for a long time. You just don't talk about it as much. But just talk about kind of this transition that's occurring to just get a little bit more efficient, being able to drive more load growth might by keeping that OpEx base low and automated as much as possible.

Thanks for asking that question. We've been, as you know, for the last...

Jim just showed me the app, by the way. You want to move to a load from Savannah -- anybody in here can haul a load. 638 miles, 41,000 pounds. If you guys want it, just come and see me after the meeting.

It's -- you hear a lot about what's going on with digital disruption. You hear a lot of the digital models that are going to come up and disrupt the space. And ever since they've been introducing, before that, we've been working on a road map to really kind of upgrade our technology, get off of legacy systems and make sure that we arm our entrepreneurs, we call them or entrepreneurs, our agents, our BCOs with the best available technology so they can compete in the market space. And our approach and our belief is that you're much better off with an individual that knows the market that's helping you to develop these tools than a bunch of tech guys that are sitting behind some kind of curtain back there saying, "Hey, I'm going to come in and disrupt an industry." And we've really been listening to our entrepreneurs to kind of help us build out that tech -- really that tech road map that we've been rolling out here over the past probably 6, 7 years. We've really kind of started with a shipment order all the way through billing, making sure that we've identified everything within the shipment life cycle, engaged focus groups within our agent base, and they've really kind of helped us develop tools where there's pricing tools, visibility tools. Jim showed just some apps for the drivers. Our drivers are very vocal on what they want to see from mobile applications and we build out things that have made it easier for them to not only identify loads, but to book loads through applications. Back-office stuff as it relates to billing, uploading paperwork, making sure that you've got throughout the life cycle of the shipment, the right information all the way throughout. So by the time it gets to billing, you're not kind of billing 2 or 3 times or working and chasing people for paperwork. We've got it handled actually within the actual orders and the automation. The end result is a really efficient network of entrepreneurs that, to Jim's point, we live and die in the spot market, right? These guys are really good at identifying opportunities, but they can go into those opportunities with the right type of technology so they can efficiently move that freight and make sure that they're not adding bodies and they can continue to go look for additional opportunities. What we've seen with the tech that we've rolled out, not only from a driver standpoint, if you take a look at the driver tech that we've rolled out, we'll match that up against any of the digital providers that are out there. You go on the App Store, and you look at our ratings, our ratings are higher than what you're seeing with the traditional Ubers and everybody that's out there that's saying that they're disrupting the industry, with the assets that we're delivering because we've got real live people actually that are on those apps that have been kind of part of our focus groups, developing those applications since we started. From an agent standpoint, a lot of efficiencies that we set out to actually deal with our agents, a lot of the younger agents that are starting to get in, they're doubling their revenue without actually adding the headcount that our traditional agents had to do. We see that as very encouraging. And is the point that, hey, the automation is working, it doesn't replace them. They still know their local industry. They still know the local market. They can be first to identify opportunities, look for disruption. I think this freight cycle is a little bit different from a disruption standpoint. There are -- there is so much disruption that's out there in the industry. Even though the market might be softening, there's plenty of opportunities for these guys to be successful and identify new industries to jump into. And that tech obviously helps them open the door and do it a lot more efficiently. So we'll continue to invest within our agents. We're well on our way to delivering a lot of these tools. Outside of that, outside of the agent family, we have identified something as well to a direct shipper, direct customer model where we're going to be looking at more of that contract freight market, where we're not going to be as reliant on the agents, if you look at the spot market freight. We developed something called Landstar Blue, which is our tech incubator that's going after own business. It's a direct shipper to carrier automation model. And we kind of put this together a couple of years ago, we went out -- we bought one of our agencies. We went out and we bought a technology company as a base platform to start doing that. So we're starting to play around with that market as well, too. And at the end of the day, have the best of both worlds, we can identify benefits of the technology that we can hand over to our agents. Our agents can give us introductions to customers over on that contract freight market. And we feel that we're going to be pretty far in the lead when it comes to technology because of that market that we're -- because of the model that we're dealing with.

Yes. That's interesting about the contract piece. So I mean, right now, it's pretty big departure from maybe the model you have now, which is fixed revenue, you have BCO and then you're splitting the commission with the agent. When you think about leaning into more of the contract business going direct. Does that just create a little bit more variability because you're actually long contract rates at the wins of the spot market from the way you buy capacity?

So we look at it as value added to the network. What we're finding with the customers that we're servicing in that model today, is if you own that customer, a lot of times, spot market opportunities come to you without actually having to go out to the greater market because you're part of a core group of carriers that are handling that business. So what we're doing and our agents are really very accepting of it is, they're putting us in place is kind of a lead capacity provider within a customer and that overflow freight is transitioning back over into the agents, and it's really kind of -- they're feeding each other. And where agents are now identifying opportunities and say, "Hey, go after this big customer, do it with tech, do it with lower margins, we can't support that type of a price point. And by the way, when spot market opportunities occur, come back over to me and I can help you find the capacity and I've got the right model in place to operate within the spot market." And we're seeing they feed off of each other.

And it's pretty impressive to see agents be able to double the revenue without not adding any more headcount or anything like that. Obviously, I'm sure that's one end of the extreme. But just talk about the tools that they have. I mean, because my understanding is like there's a lot of different steps in a whole life cycle of a load and some are easier to automate than others. Just talk about what tools are the agents getting that allow them to do that? Is it just kind of the first -- the visibility of freight and the matching? Or is it further down the ladder?

That's part of it. Visibility is not just part of it. It's an entire approach to the business where you're embracing automation. And in the past, what we found is that our agents would accept the shipment, and they would go off and it would be on pieces of paper and file folders kind of going around the office, not using a system to manage that whole experience. And then when that freight bill was -- that shipment delivered, they'd go in and create the freight bill and just kind of close that out in the system. Getting them to buy into, "Hey, you know what, if you get the right information in the system to begin with, and you get them a standard process, and you kind of carve out a carrier base that you train to go ahead and kind of service your agency, and when freight opportunities come up, you're e-mailing them as opposed to actually making phone calls and they're waiting for e-mails and they're responding and they're accepting those freight opportunities." And that trail of information follows all the way through billing. And if you train people how to kind of really think differently around automation and accepting that automation, not jumping out of customer service, but just really kind of buying into automating their operations, we're seeing pricing, visibility, billing, all these things kind of start coming together and start whittling away time as it relates to actually handling a shipment. It's not one thing. It's a combination of a whole bunch of different automation points that really kind of drive that time out and get those efficiencies into the agents. And you could see the difference. You could see the younger people that are in there that are kind of embracing the tools. And, hey, I want to track freight for my customer. I know it's a little bit more work upfront, but the flip side is, I'm not having a customer calling me surprised that I'm spending a whole day trying to chase down a shipment. Now it's part of their base standard operating procedure where they're saying, "Hey, you know what, I'm going to do this upfront because I know at the end of the day, it's going to make me more efficient. It's going to help me better service my customer and I'm buying into the automation." And it's all throughout the spectrum of the shipment life cycle.

We started 5 years ago or 6 years ago with the transaction cycle just as you asked -- said. Order all the way to paperwork and collection. And identified what we can automate. If you looked at that wheel 6 years ago, it was almost 100% manual, right? Making phone calls, writing things down on boards, that mode of, "Oh, just left Houston", writes it down. That now, that whole process, the capability is to every -- we are [ now ] capable to automate that whole thing. If an agent wants to automate, he can do the whole cycle without having to do it. Like credit, right before an agent, we take credit risk. So before an agent can move a load, they've got to make sure the customer has a proper credit, right? That used to be a phone call into our 30 credit people, right? And then the person called back an hour later and said, okay, we gave you $100,000 of credit and then they can move the load. That's auto -- we built -- that was one of the first things we built out. It's all -- the agents and their keys and "I need this" and boom, they'd pop it right back. Price, we didn't -- a little embarrassing. We didn't even have a pricing tool, right? Because our theory -- and the reason -- there was a theory is that the guys out in the field, through the agents, they know pricing better than we did. Why would we get involved with that? It's like, well, maybe when they hire people to come in and work for them and that person knows nothing about pricing, right, maybe a tool would be nice. So we rolled out the pricing tool. So you come in -- so now you've covered order, right? You've got credit approval and when the order comes in, you can quickly go, hey, Memphis and Jacksonville, put that in there. Oh, it's a regular van load, no special delivery required? Boom, boom. It's going to give you a price. The algorithms we built. And then you got pickup and how we get notified. We put out something called Clarity. So if the thing needs visibility, we can track the freight as soon as it's on the track. So that's the -- we were highly manual up to about 5 years ago. We did have the stuff for the truck. I mean, we always had the app. So maybe the truck's life was okay, but internally, at the agencies is where we started to focus on building efficiencies. And I think we're pretty much done most of that. We're still in the process of rolling out the TMS, where the paper workflow is automated, too, so the paper is in the system. No more faxing stuff back in -- we're getting there on the automation. But you've got to remember that the service we provide, the service the corporate office provides, is to support the entrepreneurs and the business owners, the agents and the capacity. That's what we do. But the primary service is hauling load from point A. And you can't forget about what -- we get paid for that, right? The customer is paying us to move a load. So the primary thing that really happens, regardless about technology, what you do, pick up on time, drop off on time and do it safely, right? That's what you're doing, right? And if you want to call a guy to get that done, do you want to be on an app to get that done, we just combined any way the shipper wants to talk to us about it. You do it on the phone, you can place your order on the phone. You can EDI us your transactions or call a guy. It doesn't matter.

Is there also like opportunity to collect money that might be left on the table when you're pricing ZIP code to ZIP code, for example, there's limited access locations or special destinations that right now, maybe you don't have the technology or the ability to kind of have visibility into that? And that's just like real money that's being left on the table.

Without a doubt. Credit is a great example, right? But before we had the credit tools, before we had a way to kind of quickly approve customers and raise their credit limits, some of our agents would be kind of capped out before they could get opportunities. This automation has improved that visibility and speeded up collections and everything to kind of raise those credit limits, people go after additional business. They're getting paid quicker. I mean it just all feeds in together.

A lot of what we're trying to do with some of the agent stuff is a shipper would call an agent, but an agent wouldn't accept the load right away, right? He'll go, "Let me call you back," then he starts looking for trucks -- for the truck on it. Then he has to call the shipper back. We're building out tools to stop that phone call. We should -- the agents today can see where the available trucks are. They can get a pricing tool to price it. And hopefully, they are now starting to transition into instead of hanging up that phone, give that guy a price and say, okay. So that's a big piece of what we're trying to do.

Is it hard to get the agents on board with that process?

They're old.

Yes. They're used to a certain process and they get scared.

We need to get them -- part of what Blue is about is showing them how that works and proving it out and saying it works, just do it. Just give -- take that price off of our pricing tool, give it to the shipper, you're going to find a truck. I mean...

No, I've been doing this for [indiscernible]

Yes, I'm just going to hang up on that. Why are you going to hang up on a shipper? He's trying to give you some freight and they will -- the shipper will call somebody else. So that's one of the things that all -- the automation helps with that. It doesn't move the load, but it helps us get the load, right, and keep the tender.

And I got to tell you, when you convert a legacy guy that is all manual into the automation, they become the biggest proponent once they get converted, but that...

It's hard.

It takes a while to get them there.

I get it. Can we talk about AB5 for a second? I know you're probably sick of answering questions about this, but you've had a few years to prepare for it. So obviously, I assume you guys are well prepared for. But just talk about do you think it gets actually implemented or executed? And what's the process around do you take the few hundred capacity providers that are impacted by that and change their residence status? Or what do you do? Like what's the process?

Same thing we're going to do in 2019, nothing has really changed. So when this came out and was passed in end of '19, early '20, it basically made it impossible for independent contractors to live and operate in California. And we have 365 guys, BCOs who reside in California. Supreme Court turned it down. So now it's just waiting for the -- I think it's some California judge to just release the injunction. Do we believe that's going to happen? Absolutely. The governor has no interest in debating it. He came out and said, "You've known about this for 2 years, I don't understand why it's coming up now." But really, that's your response? Well, because we thought the Supreme Court was going to take it. It's still a bad ruling. I mean, that doesn't not make it a bad ruling. But no, it's definitely going to get turned around. It's going to get -- the injunction will be lifted and they won't be able to haul for us. The 3 options our guys have is, one is we believe that they can live in California, they just can't -- the load can't originate in California. So that's where the day starts right? That means they're in California, doing a job. So they cannot pick up loads in California. They can live in California, not pick up loads in California. The other one is they can just get their own operating authority and we would help them do that and they can haul all the loads they want for us. And the third one is they just move out, right. Whether any -- look, they can all be challenged. Every one of those positions could be challenged, but we think we're in a pretty good position. There are some precedents out there with some other similar situations with all the scenarios we just went through would get us there, but it's going to turn into private lawsuits and stuff. But again, we've got 365 guys that have been talked to, and we're working through to see how many of them are going to...

I guess the risk is if it spreads to other...

Yes, Jersey's got one on the -- they're waiting to see what happens. I think Illinois has got it. We've got a couple of hundred drivers there too. You have to go state by state. Pretty soon, we won't have any truck drivers. It's unfortunate because I don't know what they're trying to accomplish other than unionization is pushing it, right? People want -- the unions are pushing this. And there's -- unions are removing a choice, right? Today, if you want to be a long-haul truck driver, you basically have 3 choices, right? You drive for somebody, you're an employee and you drive somebody else's truck. You go out on your own as an owner operator and you just drive -- you haul freight for anybody. Or you'd sign on with Landstar and drive under our motor carrier. Those are your 3 choices. Well, California got rid of one. I don't think that's the way this country was built. You're removing choices. They're very legitimate choices and have been around for 30 years, right? It's been very successful. And the owner operators are with us because they want to be. They have a choice. They can go on their own.

They like that flexibility.

They like the flexibility, and they can go out on their own, right, and be an owner operator. Or they can drive for another company store and be an employee driver somewhere. But all they're doing is just -- they're not paying attention to that. No, none of these guys have ever [ done this ] before or even talked to our owner operators to get their opinion and they're just going to make it go away. And hopefully, California collapses and no trucks are there.

Tell me what you really think.

Love it. I love guys trying to run businesses from the government's office.

We're winding down now. Any questions from the audience that want to ask? I want to ask a few more on the substitute line haul and some of the cycle stuff. But any questions? Okay. So on substitute line haul, I just want to make sure -- so you're not seeing any stabilization there? It continues to be -- yes, interesting. So I mean, I guess that would make sense with the people taking more vacations.

If it goes back to the way it was, one of those large carriers in -- we did -- we hauled -- 70% of the stuff we hauled for them was all in November, December, right? So if it goes -- forget about stabilization. If it goes back to normal, that one carrier doesn't do much with us January through October, right? And the other one, pretty much did consistent business throughout the year and then a little more during peak at the end of the year. So stable to me would be good because we're still consistently -- we'd have some of that business coming in from that carrier who didn't do much with us for a few months there. But I eventually think they get back to the -- we're back to that substitute line haul, we're going to do peak for that one, that one carrier in November, December and will continue to do freight throughout the year for the other.

I mean is there -- we're coming up close to the end of the year here, but is there a project work that you guys typically do for peak that is different this time around than maybe in past years? Can you just talk about that and get...

No, every year, we meet with both of them in the summer and they put us on lanes. "We're going to need you here in some to" -- that's kind of the project work, I guess, yes. And that's kind of how it works. Until last -- summer of '20, they came in early and said, "We need you now" right? And so we were just in -- we were just thrown in. And I think eventually, maybe not this year because we're still doing some of that freight for that one carrier now. Next year, they'll probably go back to the -- we're going to be in there in peak, they're going to -- when we sit with them in summer, they're going to ask how many lanes and miles we need and stuff like that.

When we -- were met in Florida, I think it was April at the convention, it feels like we were in a different world than we are now. I mean we were in max fear in April on the back of the immune freight recession and Walmart and Target were blowing up on inventory and now Walmart reported today and the stock is up and they redid their guidance and the world is not ending. I think back in April, you expressed a little bit more of a pessimistic view on how this all plays out and the stresses of the consumer. Has that changed at all for you? I mean I'd just be curious, do you think the consumer has the ability to, in your opinion, your best guess, has the ability to kind of hang in there a little bit more than maybe what you were thinking in April? And maybe the cycle is just muted and we're coming off of an all-time high level, but we're not going to nearly reach just where we were prior to the pandemic.

I would say, in my pessimistic brain, I think we're going to have a tough 12 to 18 months. I just -- whether they're spending money on consumer goods or they are doing services and travel and stuff like that, that's the one thing that can happen, right? I think inflation has taken a lot of money out of people's pockets where they would have been spending. On the flip side of that, they're like, all our employees are placed to -- they're working from home, so they're not spending money on fuel, but food is way up, right? And we have a lot -- when you think about our employee base, there -- we gave them 5% raises but inflation is 9%, but they're not catching up. So I think they're going to struggle. I think you don't see it yet. It's like when I talk about the fact that a van trailer today -- our latest quote was $54,000, we were paying $35,000 for it last year. That doesn't hit us until next year until we buy it, right? And I think that's what you're going to see into the future is inflation hasn't really impacted us yet. I think it's going to be a little...

Cost structure catch-up?

Yes. Yes, exactly. You're going to start catching up to it. I think it's going to slow things down. I don't think we back up from a rate standpoint, I still think the rates will stay elevated to some degree. They're going to slide back, not 30 -- I don't think 30%, they'll slide back.

Does that start to hit your margins a little bit tough? I mean could you have a growth -- disproportionate growth in your operating cost structure and then basically the revenue -- the gross margin stay stable, but you have a more bloated OpEx base?

Well, the infrastructure is kind of built to handle the 2.5 million loads, right? And if it's -- if it's a revenue per loan thing, I still need all those people processing freight. So the infrastructure doesn't move. The only variability -- the biggest variability we have is our compensation program where you can get $20 million up, $30 million out in those comp programs. But everything else, we need it to support the business regardless of how large the -- if it's a revenue per load decrease, we still need all that stuff. The other thing you got is the insurance program. The insurance is just -- I don't know where that's ever going to end. And it is not getting better. So that is up double where it was 5 years ago.

I know it's not really your wheelhouse right now, but when you -- if you have to best guess contract rates next year? Down 5% to 10%?

Contract rates?

Yes.

You think they're down?

Okay. Maybe that's the answer. They're up. Do you think they are up?

I think spot rates are going to circle back up, right? Sooner or later spot rates, just could collapse pretty quick based on what industry is saying. And people follow industry...

Seasonally, they move...

Seasonally -- you see spot rates coming back sometime early in the year next year because the -- they're lower than contract right now. According to what I'm seeing in the news. And my guys are telling me that we are getting some contract rates that are a little bit higher than the spot rates right now, okay? So -- but we didn't do a lot of contract. And if the rates move, they kick us out, unless we adjust our contract rates, they're not very sticky. But typical cycle, 18 to 24 months, right? We'll see what happens. We're starting a down cycle in the spot market, which started to us in February, but sometime next year you see balancing.

Okay. That's good. Last question for me unless there's some in the audience. So the cash return policy, I mean, I think every December, the last few years, you guys have paid a special dividend. You're pretty quantitative about in terms of what dictates the buyback versus the dividend, which I think is really helpful and a great framework. So how are you thinking about the cycle, the outlook and then all the cash we're generating, what's...

Well, management doesn't like the dividends to tell you the truth. We prefer the buybacks. And we have a Board meeting in every December, and that's where we decide whether we're going to do the special or not. And it really -- we just look at how much cash is on the balance sheet, what we think we're going to need going into the next 12 months and make a decision. The Board believes that there's a certain amount of cash that's too much on the balance sheet, and I think we could probably get away with more on the balance sheet. And I always lose, so we end up doing a dividend. But you're looking at something, if we're ending the year with $300 million, $400 million on the balance sheet, they'll probably think about doing a dividend.

Is there any -- from a strategic perspective, any opportunity for inorganic growth for the business?

We sometimes talk about freight forwarding, to be honest with you, but shy away from it rather quickly. I mean, it's just we don't internally have the bandwidth to do it, to do -- we tried -- if you go back over the last 5 years, we actually tried to buy 2 little ones, little freight forwards. U.S.-based, both of them had about $200 million of revenue. And doing the due diligence, put bids on them, we didn't win the bids. And as I started thinking through it more and experienced a couple of small other acquisitions, I'm like those, they're too small. Very nichey. Heavily reliant on the guys who are going to give $100 million to and where are they going to go right? And no tech. So we kind of start from scratch. So I believe that if we were going to do one, you'd have to go a little bit bigger and something that was more sticky that actually had a management team that isn't going to become ridiculously rich because you just paid the owners out and then the owners disappear. So that's the thought process. But it's not on the time line. There's some discussion about once a year about it, but we're not that interested in it at this point. And the reason it's that is because it's the one area that doesn't conflict with the business model. If we buy a U.S.-based trucking company, it's going to compete with all our agents. We can't do that. But international freight forward would be the only one where I could see where we could get into some kind of -- but not in the near term, we're not looking at it -- and then actually, you probably see what's going on. All the small freight forwarders are trying to sell right now because they're thinking they're worth a fortune, right? Based on 1-year performance.

Peak on peak.

Had about 7 of them come across my desk in the last 2 months.

20-times EBITDA.

Yes.

Well, great. Well, listen, James. Jim, thanks for being here. For people that are on the webcast and in-person, so we have GXO and J.B. Hunt coming up next, but thanks a lot to Landstar for being here. Appreciate you guys.

Yes. Thank you.