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

Thank you again for joining us for day 1 of Stephens Investment Conference. This our 24th Annual event. We're very pleased to have Landstar System here with us for the 3:00 Central panel. For those of you that do not know Landstar, these guys are headquartered in Jacksonville, Florida, and they are an asset-light provider, principally of truckload, but also they have LTL, other logistics services as well. And they're not just in the U.S., they also do cross-border work with Canada and Mexico, too. I would say that I'm a big fan of this company. These guys have one of the highest returns on invested capital in the transportation sector. And so to me, that's always an important metric to fly for investors. And so it's great to have Landstar here, 40% return on invested capital, not too shabby, Jim. So joining us today from the company, we're -- fortunately, we have what I would call Jim cubed. We've got Jim Gattoni, Landstar's Chief Executive Officer. We've got Jim Applegate, who's the EVP, Business Intel and strategy. We've got Jim Todd, who's Chief Financial Officer. So Jim G., I'm not going to turn over to you. I’m going to turn it over to Jim A. to maybe give a little brief introductory comment, and then we'll go from there. So I hand the floor over to you.

Thanks, Jack. For those of you that don't know Landstar, we are a really unique model in the marketplace. We operate through a network of entrepreneurs. On the supply chain -- on the supply side, we have our business capacity owners, we call them our BCOs. They're really exclusive capacity in to Landstar. They bring the trucks and the capacity for the network. On the demand side, we have agents. We have freight agents. We have a network of really over 1,200 freight agents located in the United States and Canada, really all over the country and really in every major metropolitan area you can think of. In the middle is Landstar. And we provide support to that entire network. And on the support side, we provide them technology. We provide them access to cash. We provide them our brand. We provide them selling opportunities, really everything that you need to be a successful entrepreneur, that's what we do. We make sure that these guys are successful in the marketplace. It's a variable cost model. We pass through commissions to the agent, transportation costs back into the BCOs. And then over on the support side, it's really a high level of support that we're providing. We want them to be successful. Why this works so well is in the spot market. And when you get into the transportation spot market, it really takes an entrepreneur to really uncover every opportunity that's out there and provide that extra level of service that you need out to the customers that are really looking for help really in a real time of need within the industry. So we've got a great model, and it's just been a real successful model within the spot market to be able to provide not only the capacity in a flexible way, but they're really motivated agents that can service customers, we feel better than anybody else in the industry.

All right. Well, Jim, I think you just lost your introductory from here on out. That was pretty good. Well, great. Well, Jim Applegate, thank you very much for that. Gattoni, I'm going to start using last names here if that’s all right. Why don't we maybe talk a little bit about what you're seeing in the marketplace today? I think the expectation through earnings season in October and early November was we're going to see a very muted peak season. Is that what's playing out? Walk us through what you're seeing out there today.

Yes. We like to compare -- when speaking about trends and stuff in our business, we talk about month-to-month, what happens from September to October, October, November, November, December. And we look at a normal period. So what we're looking at when I talk about what we're looking at today compared to normal period, that normal period for us is ‘15 to 1’9, 2015 to 2019, and those 5 years of trend. 2020 clearly was impacted significantly by the pandemic. And those were abnormal trends. '21 was just a growth year. Every month, rates went up, which is unusual. And ‘22, things started to soften up. So we exclude that. So when you look at what we projected for the fourth quarter, our guidance for the fourth quarter is as Jack says, a muted peak season. Beyond that, what it really is, we looked at that seasonality from 2015 to 2019 and volumes from September to October, October to November, November, December is actually we project it's going to be slower than historical. So the seasonal, we're going to see softness in those -- in the volume side and similar on the rate side. We anticipate that the rates are going to continue to soften up and we're not going to get that seasonal uptick that we typically get as we've seen in the fourth quarter. So right now, we're holding to -- we have seen the guidance -- compared to the guidance, I would say that our load volume is maybe a little softer than what we had thought just slightly. And then our rates are actually slightly better than what we thought. But when you're talking slightly, you talked about or 2. But still, we would reaffirm the guidance of what we said our earnings release at the end of October, an EPS revenue.

So it doesn't sound like -- and Jim Todd, if you -- did you have some comments you want to weave in there, too? Does it sound -- it doesn't sound like things are all that different than what you're anticipating before. Any surprises or customer verticals or anything else that's particularly better or worse than you would have thought?

No, I don't think it's a surprise, but we saw strength in flatbed through the summer, as you know, when we talked about it. And we did see it to slow down like we -- I think our peak rate was July or August and we'll start to pull back. I think that continues to slightly pull back. I don't know if we anticipated that, but not enough that would pull us off our guidance. And it's not a significant surprise. But with industrial production where it is, you are a little surprised to see that continue to go down a little bit. I think rates were slightly below where they were last year.

Okay. As you think about -- as you think about how the next maybe 3, 4, 5 quarters play out, obviously, nobody has a crystal ball. But Jim Gattoni, how do you think about the capacity attrition and maybe when we start seeing a bottoming of fundamentals? Do you think that's first half of next year? Do you think maybe later than that? How are you thinking about it right now?

Yes. I don't think it's first half of next year. I think we've got a longer trend. If you look at -- we're heavily spot market. And if you look at the world of the spot market, there's a very consistent cycle. Peak to trough on revenue per load for us is probably an 18-month cycle. So for us, February of 2022 was the peak revenue per load on truckload, which is very strange because February is usually a soft month, and it was our highest on-record revenue per loan. So coming into this year, when you come into 2023, we're already -- the rate we're using for our guidance in the fourth quarter is already 10% behind the first quarter. So you already jumping into next year, 10% behind last year's first quarter, and we typically see a downward trend from December to January, about 5% to 8%. So going into the first quarter, I think our comps are very difficult. We're looking at rates that could be 15% to 20% down in the first quarter compared to last year -- this year's first quarter, which is a fabulous first quarter. And volumes are soft. So you're looking at a very challenging environment in the first quarter as it relates to comps, and I think we're going to see the similar thing in the second quarter. That 18-month cycle with revenue per load being its highest in February, if you go 18 months out, we're looking at an improvement in those dynamics sometime in the summer or later in the fall next year. And I'm a cycle guy. I'm not sure what would accelerate that and why the trough of earnings would be sooner than that or revenue per load.

In the trough, load would be sometime in the summer of '23?

Yes, early summer, maybe or later some of...

Or maybe things bottoming in the second half of next year.

Yes. I just don't think that like the consumer demand, we've seen, like I said, on the flatbed side, you're seeing a little -- not softness, but it's pulled back a little bit from July. So when you look at all those things, it's -- you're not seeing where is the strength is going to come from. The only thing that could happen is if the market gets that bad, what happens to capacity and what happens to why -- right now, I understand the tone of rejection rates are pretty low. Everybody is accepting the freight they offered, which would indicate that there's plenty of trucks in the system to haul the freight that's out there. And when you have to see some equipment leave in the industry, to get a benefit from a supply reduction. So if it's demand-driven, I think we do have that normal cycle, 18 months.

And obviously, the demand piece of the equation is the unknown as we're thinking about when we get back in the supply-demand balance. But you guys have a lot of smaller carriers that are operating within your ecosystem, whether it's BCOs or as third-party broker carriers. Are you seeing anything in the data, the leading edge of the data that would make you think that capacity is beginning to attrit for the market? Spot rates are so low. You would think that it's difficult for these small carriers to stay around.

Let's go for our owner-operators first. In this environment, you typically see those guys step aside and our turnover goes up. So from an owner-operator perspective, the guys who are dedicated on our network and exclusive to us, that attrition started somewhere a couple of months ago, maybe it was summer. So as rates drop, you see them park their trucks or utilize or they drive less. So we've seen it within our internal network, clearly. As it relates to the external network, we have 100,000 carriers on our database. They are clearly more available today than they were before. It's easier for us just to access them. But as to the fact that they've left the market, there's no sense that we've seen any of that.

Okay. But maybe looking at your own data. Would you think you'd be able to see it in the third-party broker carrier?

It's very difficult with the amount of capacity that we have. But your sets based on your BCO data is that it's…

I don't know if I link the 2. One of the things going on a maybe -- I mean there are some trends that people put out that say our BCO data ties to what's going on in the overall truck market with supply. Some of the data we have internally for our owner-operators is, look, our guys drive older trucks, they don’t buy new trucks. And the cost for maintenance or just the availability of parts right now or the cost of labor is just huge. So what's going on is when a guy goes out for maintenance, it's taken longer to get the parts. And he's got to work up -- he's got to get some money to pay for it. So he's sitting out longer. And he may disconnect his truck from us for a while until you get that truck repair. So part of our turnover is that, and then there's the normal attrition. So can I link that into the overall market? If these old guys are driving old trucks, f the -- what is it, 80% of the carriers in the U.S. have had a few retracts or something like that if those guys have the same issues, you might not see a whole carrier go up, but this fleet might be down because it takes too long or it's too expensive to fix them, especially where rates are. But to quantify it, I think that’s pretty difficult.

Okay. Got it. Jim Applegate, you touched on this in your opening comments, but it's something that was really discussed on the third-quarter call to some degree. But the ability for the company to flex its cost down. I think that's an important distinction for Landstar. You talked about the -- if gross revenues were down 20% in 2023, you'd still be able to maintain a 50% net operating margin. I guess, could you maybe walk us through the key drivers of what's going to allow that to have -- I don't know who wants to take that question, but I'll just more to discuss.

Jack, I'm happy to take it. So we -- we did a breakpoint of where would that 50% net operating margin we're assuming normalized insurance, where will we have pressure to hold it. And at the time, $7.5 billion was we did this probably mid-summer. At the time, consensus revenue for '22 was $7.5 billion. So at the 20%, if you look at '19 as compared to 2018, so the last time we had a soft market freight recession coming off of red hot 2018, we picked up 60 basis points of variable contribution margin expansion as the share contributed by truck brokerage carriers falls off faster than the core. And a lot of that, we should be able to incrementally push through down the operating income. Also is another big factor there is the compensation under variable programs. So we had $57 million in '21. $32 million is the accrual for '22 and then a target, that would be another $12 million in '23 as compared to '22. And in a bear case could be in $20 million. And then depending on the BCO count and how many of those guys are using our equipment and the strength of the used trailer market, you could have some gains on disposal. So that's -- those were the key inputs of how we got to...

You mentioned normalized insurance.

No, absolutely. Assuming normalized insurance.

Yes. Okay. Absolutely. And so that's -- that's pretty encouraging in my mind that you'd be able to maintain that type because I remember when I first recover in Landstar the idea was we're just trying to get to operating margin. Net-net on net revenue now, now we're seeing it even in a tough freight cycle. I mean how do you think about incremental margins in your business longer term?

Well, we still believe that we can push 70% of the incremental variable contribution growth through down to operating income. Clearly, in 2023 on a down year, you're not -- there is no income. But coming into 2024, we still think we can maintain the cost structure below variable contribution. So when you think about the model, 85% of our cost -- if you have a dollar revenue, 85% of the cost is variable. It goes to the truck or it goes to the agent, and then you left with your pool of money, as I call -- the infrastructure is built to support a pretty large model. And we have to hire some people to do collections or pay -- there's some clerical hire, but it's not that detrimental to our margins -- so you can put a lot more revenue on top of this model with the infrastructure we have built, which drives that what we believe you can push that 70% incremental growth environment contribution through including not ‘23, but coming to the ‘24, the things start to turn, we still believe that.

Okay. Got it. I mean are there other investments thinking about the platform that you built, other investments that you make maybe Jim Applegate, if you want to chime in on this as well to be able to either to support the BCOs or support the agents in a more robust way?

Yes. I think from an investment standpoint, obviously, your equipment trailers is something that we invest in. But outside of that technology has been something that we've been investing pretty heavily into really for several years now, making sure that our agents and our BCOs have the right tools throughout the life cycle of the shipment, from the time that they actually have to go to market and sell to a customer, receiving orders from that customer pricing business. And in the spot market, that's -- it's a pretty complicated process, building some technology around that is really helpful in that area when you can get the accurate insight into how they should be pricing the business. When they do receive the order from the customer, making sure that they have a really seamless TMS that automates a lot of that life cycle, the shipment from the time they get that order all the way through billing. And then as that shipments in transit, making sure that they get visibility, not only to our capacity, the BCOs, but to the third-party capacity that's traveling in our network so they can get the right status updates, they can get out in front of problems and just make sure that, that network is running smooth. On the back end, there's a lot of own administration that we're doing, making sure that we can allow carriers to upload paperwork to be able to review that paperwork in a more automated environment. And then obviously, from a direct customer standpoint, there's a lot of benefits that you can get when you can directly integrate back into that customer, whether it's orders coming in or in the billing process, making sure that you're making that seamless to the customer. So all those areas are areas that we're investing into. We're trying to get our agents more up to speed on the technology tools at their disposal. It's not something that we force out to the network, but it's tools that we do provide them that they can be more successful. Over on the carrier side, there's quite a bit that we're doing over on the carrier side, especially in the mobile app area, we're not only pushing them loading opportunities, but we're filtering those opportunities based on their preferences. So we're saving them a lot of time as far as searching for opportunities that might fit their capabilities. And then when they do want to accept those opportunities, linking them back into the agents and making sure that, that process is seamless. And then along the road giving them options on fuel, just things that make their trip a lot easier from start to finish. The whole back end is supported by analytics. We want our entrepreneurs to be successful. We want to give them the tools to better understand their business. So we're doing quite a bit on the back end to with analytics, making sure that we're giving them data to better run their business.

Okay. That's exciting. So it sounds like there's investments that you're making that would make everybody more efficient. And ultimately, that speeds the throughput up for length.

Absolutely.

Can we talk about investments in trailers for a minute, Jim Gattoni? I feel like I've been pounding the drum here for last to maybe expand who gets to pull Landstar trailers. And I guess we're seeing more asset-based carriers letting third-party carriers pull their trailers. You remain pretty consistent that you don't want to do that with your own trailer pool. You want to collect the BCOs pool and start trailers. How are you thinking about your trailer pool over term? Would you ever consider opening it up to your third-party broker carriers?

We definitely would consider -- there's a lot of things we've got to work through first. We're breaking some news here today.

Well, this isn't new news internally. I'm surprised it's externally because we do -- we talk about it often in the office about doing this, but it's pretty far down the road, maybe that's why we haven't talked about it because if you do it the way we do it, the way our owner operators handle our trailers today, we'll have -- just say we have -- in the drop-in look situation, well, 20 trails at a shipper. The agent gets a phone call, one of the trials is loaded. It could happen any day during the week, any time during the week, you get an owner-operator goes in, grab the trial drops an empty, picks up the tail and drive it someplace else. So what happens in that scenario, you think about the way that works is that BCO handle that trailer once and then he drops it off. When you talk about maintenance and inspection and things that don't go wrong, you're pulling through an inspection station on the side of a highway somewhere, and there's something wrong with that that you just picked up and the prior guy did not take care of something wrong. That creates a lot of internal branding issues for us because generally, the BCOs aren't happy when they get some citation or something because your trail had some inspection issue, whether it's tires or gauges or something like that. And it disrupts the flow of the bat. But our BCOs understand it. We require 120-day inspections. So if a BCO is on that trailer, he brings it in for an inspection. So there's a very routine process about the maintenance and handling of that trailer that we can't get our hands around when you put on a third-party truck today. It's completely different than an organization that may lease a trailer to a carrier. When you lease a trailer to a carrier, that carries your spot for all that maintenance. We don't lease the trailer. It's our trailer and it's being called by one of -- so there's some complexities in there that we think we can get our hands around it, but we're still working through it. So it's not something that works right now in the spot market the way we work, if you think about it. So you're going to have a third-party carrier, pick up a trailer at a location, drop it in another location and then total disregard for how that trailer looks at fields, and we have no control over that carrier. There are some issues that we're trying to get our hands around. So that's why we haven't -- we think we can get our hands around just -- we're still working through it at a slow pace.

I just think about the pooling moves that we were out of Knight and Schneider, increasing Warner and other carriers, and it feels like that's just an exponential growth in that market. And Landstar -- you were a country before country was cool with power only. So why not lean into that?

Well, they have maintenance facilities. If you're an asset-based carrier, you maintain your own equipment today. We pay third parties. We don't have any maintenance facilities. So I think it's easier for them to route trailers through their properties or their trail inspection sites or even their mobile trailer sites. We don't have that today. We rely on our BCOs to look at the train their spectrum on the trailers and get them fixed and they do that. I don't think you can count on a third-party carrier to do that. So we haven't worked through that yet. And I think we need that infrastructure. We even need that infrastructure to be able to maintain a trailer when it's being called once by a third party and then getting hold another time by a third party all in a week. And whose response for the damage and who's going to take care of it? Our BCOs are responsible and they know it. And when they're hauling our trailers, there's a benefit to them by hauling our trailer because they don't want to on their own trailer. So there's some benefits. That's why our network works so good. We're probably the best at handling spot market drop and hook compared to anybody, but part of that is because we have a committed, dedicated capacity in our property.

Okay. Got it. So that helps explain that. So something you'd look into just figure out somewhat...

I've been looking into it for a long time. Yes, I think there's a market there. It's just how do you penetrate it and how do you protect your trailer.

To maybe invest in some maintenance facility. Would you consider that sorts of places?

We were thinking about high on a bunch of gem applications to sit inside the trailing and just be able to monitor it throughout the [indiscernible].

Probably cubes to build maintenance… Okay. Maybe another growth opportunity for you guys is Landstar Blue, explain -- maybe take a step back, explain to the audience, what is Landstar Blue, and what's the potential there?

So Landstar Blue is an agency that we actually purchased a couple of years ago, and we went out and actually purchased the tech company as well, too. And his main role is incubation. As we get out and we're developing tech for our agents, we want to make sure that we live it, we breathe it and we understand it, and our technology group can actually sit there in the operations and understand how it works. There is a side benefit. It does run real freight, and that real freight actually creates spot market opportunities for our agents. So we really see this as being very value-added to the network. It's something that we can continue to build out our technology. And as we are servicing the customers and building out that technology, we're providing spot market opportunities out to our agents. The freight does not compete. It's if we find that, that freight is suitable for an agent, that freight goes to an agent. And that's -- the whole purpose of this venture is just making sure that we've got a live freight environment to incubate these opportunities. But it's a really exciting place and it's really nice to see the tech teams working with the business teams and creating stuff and getting excited about it and then translating that over to agents, it's a really nice test kitchen to make sure that what we're developing is adding value in the network.

I think when you go back on the big picture here is prior to setting up Landstar Blue in the summer of 2020, Landstar did not move – Landstar corporate – Landstar employees, the 1,300 employees we have to not move a single low freight. Every load of freight was dispatched and either obtained from the shipper by the agent, dispatch by the load was dispatch to a truck by the shipper and there was an agent getting paid for that. We didn't live that life/So when you think about it, no one of the corporate obviously that like, we wanted to set up like a mini agency to live the life of an aged so we can actually test the tools and use the tools and execute with the tools to show them how we use them. But at the same time, we didn't want to compete with the agents. So we will not take BCOs, we're not using BCOs because the BCO network is developed to the agents. We also will take freight that we don't believe is kind of conducive to an agent. It's more managed capacity here. And then we can live the life of an agent in that world without competing with them at the same time. And it's actually, it's been good for the employee base for those people who work there to understand it. And it's been good for some of the families who come they spend a lot of -- we can actually have a conversation about running an office that's dispatching freight similar to the way the agents would do. So it's been beneficial.

So with Landstar Blue, I like to think of it as a potential growth driver for the company longer term. Is that not correct? Or is it really more of just to your point, Jim, an incubator of potential solutions you could scale across the broader company? Is there ongoing you can maybe attack in the market?

It's a growth driver and a different type of freight. It's that dedicated lane type business more than the spot irregular out non-routine stuff Is a…

What do you need to -- we need to...

We need a little more time in getting the automation built into the -- as Jim said, we bought a small technology company for TMS. We've attached certain modules to it, and we're creating out a seamless network. We don't -- we could dump a lot of people in there, which is an option if we get more freight, but we really want to get through the automation process. And we've built a lot of it out. I think there's just time. And then there's the sales cycle. You got to be able to sell it. So we -- I believe the numbers -- it's already doubled in revenue from last year. I think it was -- I don't know the numbers exact, but I'm on a webcast. I'm probably going to live right here. But I think we've doubled the revenue in 2022 where it was in '21 -- it was only doing $30 million. I think we might be close to $90 million this year. So it's actually got -- it's got some legs. And we're getting some legs in there. We really need to finish the automation of the paperwork and everything to make it seamless. The interesting thing about running an agent network is you can build all the tools you want, but you can't convince the agent to necessarily use them. When I'm 60 years old and someone gives me new technology, but I've been doing an old way, I'm going to continue to do it the old way. We experienced that. And by opening up that, by opening up this Landstar Blue, there's people talking about book it now where the truck can just push a button and he accepts a lot without making a phone call. Our freight in the agent world isn't necessarily conducive to that, but we can build out the tool and automate that process. We got to put that in place where you got managed capacity, you have dedicated lanes and the freight showing up on your phone and you're just accepting it with the trucks accepted manually, automatically without a phone call. So that's what's building up. Our agents -- the book it now tool, they want phone calls. Our guys are trucks want to make phone calls of the agents, they find what the freights about. They just want to take phones things okay. So that happens in our real world in the core. We're trying to streamline that before we roll it out to the agents.

Okay. Got you. So I guess maybe last question on Landstar blue and I don't know who wants to take this, but what's the timeline for getting those automation tools in place? Is this going to be -- is this a 2023 event? Or is this something that could go on for a little bit maybe ‘24?

As far as it's ongoing. I don't think that ever stops. But I think from a core TMS standpoint, we hope to have the basic building blocks done by the, I would say, end of next year would be a good way to…

After that, the really -- we should maybe see it scale faster.

And again it's — I know, but it.. No, I got to tell you, and this is the thing that we've learned with technology...

On the permanent record for...

And this is nice about having an incubation. There's so much stuff to learn. And every time that you go around a new corner, you're uncovering something that you can really dive into, and it becomes something, and it starts pushing other things from a priority standpoint. So I hate given an actual date, I've been burned away too many times on that. But the TMS that we are building out, at least the customers that are operating in it today should have a real stable platform here by the end of next year. And then the real question is, how does that scale? And I can't tell you here if that's something that can scale. But I can tell you, we'll be handling live customer freight and would be something that can be built on top of.

It will have the ability to scale. Now you got to sell it. And you're selling against guys who do all time. So I think that's where the hesitation is...

Okay. Understood. Maybe another opportunity set is cross-border. You guys have one of the largest cross-border franchises out there. It's got to make you feel pretty confident as we look forward and you hear more and more about near-shoring and how supply chains are changing. Talk about your cross-border business? And is that an area where we could see maybe Landstar invest more to capitalize on the potential growth there?

We have a facility in Laredo that we built. In 2017, we opened it. And what we used to have was this little concrete slab that could translate on low at the time. And that was with one truck backed up, dropped the load, pulled away and we had a forklift, but it was just a mess. But in 2017, we built a brand-new building with a -- I think a 30-door cross-dock...

I've been there.

Yes, you went with your buddy.

I did. Yes.

You didn't tell me you're going. Was it nice? Why don't you talk about it?

[indiscernible]

So as the Mexico cross-border for us was building up, we needed a better solution than this one little concrete block plus we have -- we actually have -- I think it's 7 cross-border locations, but the primary one is in Laredo, which I think is about 70% of comes across for us. So we saw the opportunity there. So we built out this facility. Now we can do -- we do the transload there with 30 doors where we couldn't have done it 6 or 7 years ago. But yes, clearly, opportunities there. We got -- we have -- we're putting in a sales guy to try and sell cross-border. So we're doing everything we can to enhance that. We were totally capable of doing more. Right now, we're doing -- I want to say last year, it was about $600 million across border, Mexico, U.S. and we'll continue to attack it. We also have a small business in Mexico that just does intra -- it does about $20 million or $30 million and trying to link that carrier base and those -- that relationship, they have a relationship with shippers, if we can get those shippers to start doing that cross-border so we can track the Mexico market for Northbound for the Mexico shippers while we're attacking the U.S. market for Northbound. The thing about it, though, is one thing you struggle with, there's clearly an imbalance. There's -- I don't know if it's 2 or 3 1 loans. There's one load going Southern coming for -- there's 3 coming north where everyone going south, and it creates a trans truck imbalance. And you got to be able to manage through that. You got to have the trailers. And we are now -- the demand has been so high there that we're paving additional lot for how many? A couple of hundred trailers. I don't remember the number. Yes, but -- so we bought the facility, but we didn't pay about the entire lot because we didn't think we need it. 5 years later, we're paying up a lot. So that's the volumes coming through -- so we -- so it's very active. We're very active down there, and we do have an active sales force trying to sell more cross-border. And we do have the facility in one location at least to do a high volume.

Okay. That's great. What are your customers maybe just following up on what are your customers telling you about how -- are you beginning to actively look to relocate some of their production? Or are you may be seeing some of this near-shoring stuff actually pan out? Or is that still just all talk?

All talk. It's we just hear for people like you.

To take that for what it's worth. Okay.

Well, we believe in you, Jack.

That's good. Okay. Maybe shifting gears a little bit. Jim Todd, I would love to get your input on insurance inflation. It's been a source of cost rate for Landstar in the last several years. I know you guys have been working on things to offset that. Can you have additional leverage you can pull to maybe offset some of the insurance inflation that Landstar corporate is bearing? And then how do you think -- how are you thinking about that going forward?

We are very fortunate, Jack in that our BCO independent contractors are very good at what they do in terms of industry. But to be frank, the trend is not your friend on insurance or pre-pandemic, that was an area of inflation, and that's continued both in availability and cost for premiums and you see these settlement and jury verdicts that are putting big tailwinds on the severity line. So we manage as best we can.

I think just so everybody in the audience understands, we're a truck broker in the U.S., but since we have owner-operators, they actually drive under our motor carrier authority. Since the other operators driving our motor carry authority is actually subject to insurance risks, we are self-insured up to $5 million per accident. It adds a lot of volatility to our P&L line. And with nuclear verdicts recently, the exposure there, I think we're looking at maybe $120 million of insurance expense this year compared to about $70 million just 4 or 5 years ago. So it's been an industry -- it's not just us. It's an industry-wide issue that will continue. You don't see it subsiding. I think you continue to see inflation in that area for insurance.

Okay. Another topic I want to discuss is digital competitors. If I think back to the last, 7, 8 years, it's been really we've been talking about in terms of – it's been a major focus for investors, new competition coming in, how would that potentially erode Landstar's franchise, among other larger incumbents. But interest rates are a lot higher today than they were a year ago. And I think that creates some barriers around these larger-comer brokers like Landstar. So how are you guys thinking about the risks from digital competition? Is you thinking maybe it's a little bit less of an issue today than it has been in the past?

I don't know if it's less of an issue. I think it's -- look, I don't want to -- I'm not going to downplay the value that they provide. But I just believe that if doing regular route, -- if you're doing regular out freight that's very predictable and you can get carriers on it and you can actually -- and it's not a high-value type move, which they probably disagree with everything I'm saying. But if you're shipping marbles to Chicago – from Chicago down to Houston every day and your loads leaving at 10:00 every Monday morning. Well, you can put a truck on that, you can automate the whole process and everybody is happy, the paperwork moves and all that stuff. It's not necessarily the world we play in. But I do think there's a place for it. It's just the competition for us. It hasn't really hit. We have all the tools they have. But what we have is the support behind it when something goes wrong. The agents actually provide a service beyond just the technology. I've never been a believer that technology in this industry should be you should let it become one. And I don't think we -- I don't think there's anything out there that we don't have. It's funny, we get the question on the board all the time. They tend to think there's something out there. So I can understand why investors think there's something out there because our Board thinks we're missing something. I'm like, look...

Give me a circular reference.

Yes. I don't know maybe -- Have you been taking about the Board [indiscernible]? Were they out too? No, when you think about where the money is made is not based on the technology. It's made on who moves the freight. So you got the trucks moving to freight and what do you want to do? You want to provide a seamless order to the truck to make the data in there accurate. Well, I can look up any load you want right now, and it will -- as I have access to our load board. I just go in there and I can show you all the loads leave in Chicago into Houston. And if I want it to, I call the agent and get the load. So that -- it seems it's very easy. We don't necessarily do book it now, as I said, where the truck actually has to call the agent, instead of hitting a button, we tried the button on round to use it so we got rid of the button. So you've got seamless on a front end when the order comes in. The biggest part of the revenue transaction is actually the safe driving of the load from point A to point B, getting the truck. That's important. They're trying to get trucks. We're trying to get trucks. We have agents making phone calls a lot trying to find the truck because they don't just -- people aren't just , "Oh, yes, I'm going to take it.” There are not 1 million trucks sitting on the sideline there are passenger cars waiting for an Uber lift for a pickup. The trucks are busy. So they're picking up everybody else's loads. They're not waiting for that Uber load, Landstar load or transfixed load or Convoy load. And if you get them in your network and you're reliable and you're paying on time and you have a support if someone goes wrong, like an agent or a corporate office, I think that helps. But again, it's the type of business. It's the nonroutine irregular spot business, unpredictable that we find it's very difficult to automate the entire process. There's a lot of phone calls happening on the front end and the back end of that transaction. Again, they're not going to down play, but they have not dented. We've been talking about the surprise since 2021. And we have all the tools they have to execute.

Really, in its essence, though, it was just new competition.

Yes. Absolutely. It’s another broker. If the cost -- the cost to bear the AR and working capital and just come in and compete, you can't bear the losses like I would think that, that would create a little bit more of a challenge for the new entrants to come in over the course of the next cycle than it has in the past.

Jack, we started seeing that in the beginning, though. I think in the beginning, it was a lot of buying business, and I think that was really scary in the beginning because there were some deep pockets and people going out and actually just cutting on rate. And at that point, it's really tough to compete. I think that's leveled out, and I think they're more focused now on profitability. And at that point, it comes down to who has a better model. And it's a lot about what model you bring to the business. And like Jim mentioned with our agents and you've got a pretty flexible, adaptable model with some really motivated people that if you pair with technology, it's pretty powerful. And then behind that, you've got network scale. The amount of shipments and the amount of customers that we deal with on a yearly basis is it's something that's been in place for decades. And that's really tough to replicate. So if you take all those things you put it together, I think we're in a really good position. And we're investing in the same spot that they're investing in. There's nothing really proprietary out there that any of us aren't working on. It's just how do you put it all together.

Makes sense. Last question for me. And if there are any questions from the audience, feel free to chime in. But when we think about capital allocation, you guys have historically been a cash flow machine. And I think in the past, when the valuation got a little bit more elevated, the Board has been a little hesitant to really take the reins totally off let stock. Now it feels like that you guys are being more aggressive on the buyback here with the stock where it is. How should we think about Landstar capital allocation? I know M&A is really not moving the cards between buybacks, dividends, things like that at this point.

I would first speak to the Board. They're pretty flexible in letting us buy back. And when you see us not buying, it's more of the management's decision not to buy back because you see -- we don't buy against a rate incurs. Like for stock price is climbing, we don't buy against the competition. So we're more opportunistic. So they do tell us -- we've got an authorization. Every time we're down 1 million shares authorized, they just issue they authorize another in or 2 million shares or whatever it is. But I don't want to step on my new chief here. But just from the Board, I just want to talk from the board standpoint. They're very comfortable with our buyback programs and how do we handle them from a management standpoint. It's the special dividend versus the buybacks with the discussion is where we get into and I'll pass that to my newly appointed July...

Thanks, Jim [ G ]. Jack, to your point, I mean, we had 593 men and women generate $1 million or more of Landstar revenue in 2021 and contributed 93% of the revenue. We don't want to -- there's a big percentage of opportunities or targets out there that would conflict with that. So to Jim's point, I think I'm going to use round numbers here. We bought 700,000 shares in the first quarter, 700,000 shares in the second quarter. We only got 500,000 in the third quarter because we were on the sidelines in August as the whole market ran up a little bit when to we got aggressive. So management continues to prefer the buyback. I think if you go back 10 years, the pretax pool is up 3x and shares out are down 25% to me it's incredibly attractive. It’s something that we should continue to do at good prices.

That's right. And I think as you know, Jack, and we've talked about this before, is early December. We always have a Board meeting it's every year, and we get together, and that's what we decided whether they're going to do. We look at the cash on the balance sheet. If it's just simple. We look at how much cash is on the balance sheet, we look to see how much cash we think we're going generate next 12 months. And the decisions are made whether we should get back dividends or we should do a special or we should just hold on and do buybacks. It's not simple. There's no -- we just bought management, the thing when he's talking about the Board's management actually prefers the buybacks. And I think most of our -- when we talk to shareholders or investors or stuff like that, they the buybacks over the -- the dividends. But we'll see what happens come in December.

Yes. All right. Sounds good. Well, unless there are any questions -- final questions from the audience? We'll let these guys keep on moving. Okay. Gentlemen, thank you very much for your time. Really appreciate it. Thank you.