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

Thank you all for joining us. Today, we're joined by the management team from Landstar System. Sitting right next to me, I have CEO, Jim Gattoni; Jim Applegate, EVP of Business Intelligence and Strategy; and over there on the end is Jim Todd, third Jim, Vice President and CFO. Just kick us off maybe, Jim Gattoni, could you just give us a little bit of an overview of Landstar and what the company does?

Yes, can I quick ask, people everybody know who we are or should I start from scratch? It looks like we have to start from scratch. Born in 1987. Truck brokerage. When you think of the truck brokerage industry, we are basically, 90-something percent of our business is U.S. truck based, pretty much long haul, and it's cross-border Mexico, cross-border of Canada. In the brokerage space, we're a little unique compared to most brokers though because what we do is we actually have dedicated capacity called owner-operators that haul about 40% of our freight. Third-party trucks haul the other 60%, and it actually creates a different P&L profile than the true broker does. The dedicated capacity that we have with us are called owner-operators, they actually get a fixed percent of revenue. So the margins there are fixed. So if we have a $2,000 load, they get a certain percent of that. If we have a $5,000 load, they get the same percent of that. So there's no volatility in that margin when you talk about revenue less what we pay the trucks. The other 60% of our business is we put it on third-party trucks, and that is typical broker, right? You're putting freight on a third-party truck, you're negotiating with the shipper, you negotiate with a truck and you're settling and you're making the money on the spread. So that is where we tend to get margin compression and expansion based on the market conditions. In a tight supply environment -- in a tight environment where there is few trucks and a lot of demand, margins get squeezed. In a loose environment we're in today, margins expand. We prefer a tight environment where margins are tighter because generally, what happens, we don't necessarily look at our margins much, we look at the gross profit per load, the dollars that flow through. So as margins are tightening, we actually can make more money per load. So it's a kind of -- people talk a lot about our margins, but I like -- what we like to talk about on the per load basis, how much you're making per load to cover basically your cost. So when you think of the Landstar model, revenue, then we have a cost purchase transportation, 100% variable to a load. If we don't haul load, we have no purchase transportation. Then there's agent commissions. This makes us a little more unique, too. We don't really dispatch loads. We don't -- we have a sales force, but most of the sale is done by our agent family. They get paid 1% on load. So we take our revenue less what we pay the agents, less what we pay the capacity, and that's what we call our variable contribution and it's 100% variable. If we don't have a dollar revenue, we don't have PT and we don't have commissions, which makes the model -- it's pretty insulated from cycle upturns and downturns as it relates to profitability. We do cycle profitably, but we generally make money regardless of the environment, that kind of model protects itself. Below the variable contribution line, clearly, we have SG&A. We have people. We have about 1,300 heads doing -- this year over $5 billion of revenues, only 1,300 employees. We have IT costs, we have insurance costs, and then we have -- we own 14,000 trailers that are hauled by owner operators and then -- so we have other operating costs for maintenance tires, stuff like that. The most variable part of our business beneath the rather contribution margin is insurance. When you're a motor carrier, so true brokers have contracts to arrange freight. So if you're only a broker, you have a contract to arrange freight between a shipper, you're regulated, you have to have a brokers license to arrange freight between a shipper and a carrier. We have both. We're that, plus we're also a common carrier on the Department of Transportation's law. So our owner-operators actually have a Landstar placard and they're dedicated to Landstar, they're exclusive to Landstar. We have about 10,000 drivers dedicated to us. They provide their own truck, 100% variable. Like I said, they're running their own business. But what that does in a broker world, it actually puts us in a liability standpoint in the event of an accident. So they -- from how it differs from brokerage, typical brokers who just arrange freight don't end up in liability claims when there's a trucking accident, that part of our business generally doesn't end up in claims. Every one of our accidents on an owner-operator [indiscernible] been a claim. That creates a little volatility in our P&L as it relates to insurance and claim costs. We went public in 1993. We are referred to as basics and we only own trailers. And we did 2022 revenue of $7.4 billion, but as everybody knows, that's probably going to pull back 20%, 25% or 30% by the time we close out this year, just to the dynamics of the industry, both pricing and volumes being pretty far off from the record they set last year.

That was good. I think it's very much everything we need to know. Maybe we could just talk about the marketplace you operate in. I think the expectation, you kind of [indiscernible] through earnings season in October. It was a muted peak season kind of similar to last year. But as we've kind of progressed through early November, has there really been -- has there been any surprises either to the upside or the downside, just kind of on what you're seeing out there?

No, no surprises. It's been consistently below seasonal for quite a while. And unfortunately, we weren't surprised on the upside or the -- well, good thing was we weren't surprised on the downside, but we also weren't surprised on the upside. We look at volumes month to month. So when we talk about seasonal patterns, what we use is we take 2015 through 2019 month-to-month, and we look at the changes in volume and rates during those month-to-month periods. Clearly, don't use 2020, 2021 and 2022 because they're very abnormal years because of the pandemic. So you take those and you say, okay, how are we trending this year compared to the average of those 5 years. So for example, January to February in those 5 years, say the volume dropped off 1%. And then we look at that what happened this year. Every month this year, it's been seasonally softer in volume from January to February, February to March, March to the end. So it's no surprise that we continue to see that softness coming in October. We're seasonally still a little bit softer on the volume side. We do the same thing for truck rates. Again, I said it was 90%, and our revenue is pretty easy, rate times volume. Truck rates are a little bit more inconsistent. And if I recall that seasonal trend, I think this year, we've been, 4 of our months were below normal, 4 above normal and 1 neutral to normal. So rates are a little bit more unpredictable. And we talked about where we're headed into the fourth quarter. So we put out our guidance probably October 26, 2 weeks ago. We mentioned that we are still tracking below seasonal normal trends for both rate and volume. And right now, we put out guidance of $1.25 billion to [indiscernible] billion. And right now, based on what we're seeing on the rate side, it's actually sequentially a little softer, not a lot softer, a little softer than what we thought it was going to be just only 2 weeks ago. But still within the range of the guidance more towards probably somewhere between the mid and the low point. So we're kind of comfortable with the guidance we put out. But -- and then looking forward for the rest of the quarter, we did project that it was going to continue to be seasonally soft through from October, November, November, December. We don't anticipate a peak season. There's no excitement out there by whether it's the parcel carrier, the shippers or anybody who thinks that this thing is going to turn anytime soon. So we're probably going to get through the year, just chugging along at the pace we're at, which is basically below normal seasonal trends.

You mentioned the parcel carriers, within other customer verticals, is there anything notable to call out? Or is it just fairly general softness across the board?

Consumer durables actually climbed to about 30% of our business over the last -- through the pandemic because that just got so crazy. That's down. So that can impact significantly, and I think that's one of the verticals that I would say has turned pretty big negative, but it was so big positive. So it's -- in reality, we're probably back to where we were in 2019. Automotive, people keep asking about automotive products, that's probably, Jim, about 8%, 10% of our parts and.

Say it's about 8%, it might be 11%...

Jim likes to give exact numbers. It's 11.57% of our revenue. So we had the recent strikes, right? So that actually brought that down a little bit temporarily. But we have a good mix of nonunion and union stuff in there, but it's a pretty decent part of our business that can -- but there's not exciting there. Building products is another one, and that's a little unpredictable what's going on in the housing market or commercial. And then the other one is that we have materials and metals and generally stuff that goes on our flatbed. What I didn't mention is about 30% of our business is flatbed [indiscernible], and the other 70% is van. So we talk about the consumer market and we talk about the sectors that provide us freight, but then we also break it d down, okay, but you've got how the manufacturing sector impacts our flatbed business a little bit more and the consumer business on the band side. So when you look at history over the last 5 years, the consumer business drove our van business through the roof, right? So comparatively, as things slow down, the van business slowed down a lot compared to the flatbed business. And it's only because it's a comparison. The flatbed business did not have the manufacturing sector grow like consumers did over the last 2 or 3 years. So you'll see that -- so that's kind of a softer landing, only because it's coming off less of a peak. So from an equipment standpoint, there's -- I think both are kind of trending similarly where I think the vans are down from a percentage standpoint more than the flats are, but that's because flats weren't as hot as the van side of the business.

Maybe to that point a bit. When we look at rejection rates, if flatbed trended a little stronger throughout the early part of the year and has kind of fallen off more in the second half where it seems you're driving and kind of maybe found that bottom that [indiscernible] time frame is kind of bumped along the bottom. Would you say that's fairly consistent with the trends you've seen across your business that maybe the -- any incremental weakness towards the second half of the year has been a little bit more weighted towards the flatbed, maybe more industrial end market side of your business?

I don't think that's true for us. I think that we're seeing about equally dropping. And actually, we do have -- there's a flatbed component that actually is working pretty well, the stepdeck, like -- so you talk about different type -- like a lot of our stuff is special equipment. It's not just a regular flatbed. So the stepdeck stuff is actually still pretty -- doing pretty well. It's the other -- like the general flatbed stuff is kind of soft. But I'd say, they're equally tracking, maybe unlike the industry.

You also mentioned the UAW strike, the impact that had on your business. With that kind of resolved now looking forward, have you begun to see any kind of catch-up from your automotive customers? Are you expecting maybe any kind of benefit there? Or it's kind of still little early for them to really get back on track with you?

We've been fortunate enough over the last 4 or 5 years to actually create better diversity within the automotive product because -- not the automotive product, but the services we provide to automotive industries, and we've managed to grow the nonunion side with several manufacturers that weren't related to the big 3. So for the big 3, we saw a dip a little bit in October, nothing dramatic. And then you saw -- you're probably going to see it just come back, but it's not material to what we do.

Sure. Got it. Maybe if we could kind of flip over to the capacity side of the equation. You've been talking about the demand your seeing in the market. But have you started to see capacity come out at a quicker pace? I know you kind of see it in your own business with your BCOs, you talked about owner-operators and then also the broker carriers you partner with. Any incremental signs of that capacity attrition beginning to accelerate in the market healing maybe?

It's really hard to measure. I mean, getting a true active truck count in the U.S. is almost impossible. I mean, you can have -- there's a lot of registered Class A trucks out there that may not be moving or they're sitting because of maintenance or they don't have a driver. So it's really hard to tell what the population is. So we hear the stuff, you hear about bankruptcies, which hasn't been a lot, haven't heard a lot about bankruptcies or anything like that. But the metrics we look at, what makes us think that whether it's supplier demand right now, nothing is really changing. The spreads between the price to the shipper and the pay to the carrier are still relatively high, which means trucks are just looking for freight. So it's still a very loose market, and not turning that we see and it hasn't turned in a while. And so we see that probably come in through the rest of the year. As it relates to the -- that's on the third-party trucks. As it relates to the guys we have, the owner-operators, our turnover this year has been 39%. We started the year probably about 11,600 drivers. We've done about 10,000 -- owner-operators, I'm sorry. We've done about 10,000, 39% turnover. And the most recent comparison to that turnover rate, it's not unusual because in 2019, it was 36%. So 2019 was a year that you saw very -- you saw rates decreasing, volumes are decreasing. So the owner-operators tend to just either park their truck, they can't make money and they go do something else. We're going through the similar pattern now. And in addition to that, I think there's a little bit of a different metric trying to get your truck fixed. So maintenance taking a little bit longer, the cost to maintain your trucks get little bit higher. And if you want to swap -- our guys only buy used trucks. So if you want to swap you're broken-down truck for a used truck, the used truck market -- the prices are still relatively high there, too. So that -- there's not just the normal turnover because pricing isn't any good, and I don't think they can make money. But now -- and on top of that is you've got maintenance issues and used truck pricing -- used truck market is pretty high. So I think they're just sitting on the sidelines to see some things break, whether rates come up or used truck prices come down.

So when you put that kind of commentary on the demand and the supply piece together, just on the overall market, I know there's a lot of uncertainty still out there, but you have maybe a guess when you look into your crystal ball and kind of how 2024 plays out? Do you buy the kind of mid-year recovery that some people are talking about? Or do you think that you could take more time for capacity to really correct, you kind of see [indiscernible] positively?

July 7. Put it on my calendar. The next question. Look, the only thing I speak is cycles. And the one thing, we're in spot market. And generally, supply and demand in our world, clearly affects the peaks to troughs. But the other thing that affects it is that we work in the spot market. So we're negotiating rates every day. Not we, our agents are negotiating rates every day with shippers. Now we have contract rates. We have lot of stuff. But your contract rates are only good as the market will support. If our contract rates is $2 a mile and the market is paying $1.50, the shipper is going to kick you out. So we don't guarantee a truck, they don't guarantee the freight. There's a contracted rate, but neither was committed to it. So when you -- where was I going with this. The spread, right? So we look at contract rates. So contract rates generally 12 -- during a pandemic, they called mini bids, right? People were bidding like 3 months. The shippers didn't want to lock up a rate for more than a year or a year and neither did the carrier. So they're doing these mini bids, 3-month bids at a certain rate, we'll haul your freight for that, and then we'll look at it again in 3 months. Those contract rates came back. Now they're back negotiating these 12-month contracts. And those stay relatively stable. So your contract rates do this and spot rates, the stuff we do, which is day to day, hey, I got a load today, can you move it, do this, right? Right now, it would seem that on a per-mile basis, contract rates are about $0.40 a mile over spot rate, right? So over time, what happens, what drives our cycle, not just supply and demand, the shippers start to go, hey, wait a second, I can buy here at $0.40, what am I paying my contract rate for? So as these contracts start expiring, they'll run the spot rate for a while. They'll stay in that market, and you'll see that spot rates start climbing back up. So that actually is part of what drives us too. It's not just the supply and demand. It's also what's the pricing differential between the people who are doing contract and the people who are running this spot rate. And a lot of times, it's different type of freight. I mean, contract freight really is more repetitive, more routine, regular route, dedicated capacity. Spot rate is, hey, I got 10 loads coming out this week. I can't tell you when. But they do tend to move contract rate -- contract rate guys will move into the spot market if the spread is that far apart. And right, it's been -- what's surprising it's been -- it's had a pretty large spread between the contract and spot for a while, it's holding on. We haven't seen it coming back together yet, which is a little surprising, so I'm not sure when that's going to happen.

You touched a bit on our dedicated and contractual capacity and that kind of freight. How do you think things have changed throughout the pandemic, and as shippers set up their supply chains? And how does that impact the part of the market you play in with the spot market? And as we look ahead, how do you think things will be different in the next rate cycle compared to prior one for you?

Well, it's not going to be volatile. I mean, it was absolutely crazy the demand that came in when you print money and people start increase demand, but you don't think about supply. I mean, that's just really what happened. I think we're going to go back to the normal trends of 2015 to 2019. I mean, which seemed there was very normal years, except for the one blip to that is in 2017, towards the end of 2017, it was mandated that all trucks had to have the electronic logging devices. So everything was going to be monitored by Big Brother. So they got rid of the paper logs. Then there was a panic that, that was going to cause reduced productivity by the truck drivers in the U.S. So freaking rates went like this. So that was an artificial blip in rates that was created. But if you just look at normalized years, you just end up back there based on the cycles we just went through, I think you just end up back there. You don't end up with -- I think our van rate was up 76% from the trough that hit in May of '20 to the peak that hit in February '22, 76% in rates. I mean, that's not -- you can't continue to run 76%. I think that's what we're seeing. And I think we're going to pull down. We're continuing to pull down. But I think by the time we get into 2024, maybe mid-summer, we'll start seeing regular seasonal patterns again.

Maybe just kind of continuing on the broader brokerage landscape. Another topic I'd like to get your take on is digital competition. Obviously, we saw a large bankruptcy. About a month ago, the environment for the newer unprofitable digital brokers has definitely become more challenging from an interest rate and fundamental business perspective. But so how are you -- how has it changed the way you view competition in the brokerage market moving forward?

It doesn't change the way we look at it. I mean, we've been paying attention to that for 20 years. It's -- we saw those digital guys. I think there's -- they have a business model that can succeed. I don't know what happened at that one, Convoy basically, all of a sudden said they weren't going to have loads. But we've been following digital guys. We're digital. I mean, I just pulled up on my phone. Any of you guys want to load a haul and load a freight from Chicago to Houston, I can call it in here and in a minute, I can give you all the loads that are here. I mean -- so what we saw is the very intelligent, what I consider to be a very, very intelligent investor community get hung up in these digital tools that already existed. It's like no one ever came to Landstar and said, hey -- actually, they did come to Landstar, and I had a guy at an Investor telling me that I was kind of full of c**p that the Uber tools are so much better than ours. And I said, you know we've been doing this since 1999, right? And we always stay up on the latest tech. And I'll show you the app right here that is no different than Uber, so I have no idea what you're talking about. We have algorithms doing pricing tools, we have clarity to attractive freight. This is all -- it existed, right? So you see all that happening. But it still didn't shy us away from -- and I used to run around saying [indiscernible] companies want to make money and companies want to raise money. We're not out there talking to invest about our tools because we -- they're actually a business tool. I'm not trying to sell investors on our tools. I'm trying to grow our business with the tools we have and the tools we upgrade all the time, where their whole pitch wasn't necessarily to the shippers and carriers as to the investment community and like, yes, you better build them for the shippers. Did you ever ask a shipper what they wanted? Did you ever ask a trucker what they wanted in their truck? Can't do they -- do they want to talk to a human? And I don't want to downplay the value. There's value in those tools, there's no question. But you got to put people around them. And it's a way we've always thought it's -- you're still going to have a problem with a load, you got to call a guy or call a person. So we haven't changed our plan at all because we just do what we do. Back in the late '90s when the Internet first came out, we were pushing loads to load boards on the Internet and the spouses of the drivers would be sitting at home looking for loads for their either wife or husband who's on the road. That's where it started. So he would be heading -- here, she's heading to Kansas City in a truck, he would tell his wife, hey, see if you can get me loads out of Kansas City, she's on the board, they're calling back and forth. That's how it started. But we -- and then they come in and they say they got the stuff, that cutting edge, we're going to disintermediate the broker, well, that went well. And -- but we have everything that -- we have all the stuff they talk about. We just don't sell it to the investors. That's not my job.

And if anybody in the audience has questions also, feel free to jump in at any point. That and there's 2 more Jims up here. If you have questions for the 2 more Jims. This is 3 Jims, just so you know. Just pay attention to that. This is the smartest 3 Jims in the world.

[Technical Difficulty] used to be you got some pretty early cycle in a quarter or 2, maybe. Do you still think that's the case or do you think that's [Technical Difficulty]?

Well, I think because we're a spot market business, when things start -- what has to happen for us to stay in that early cycle is before you know what trucks are out of the market, but nothing's happened yet. And all of a sudden, the freight starting to come through. We're the resource, right? We're the -- the routine guys are hauling their freight. And so when that freight starts coming through, our guys will go get freight wherever you have it. They may drop off the loads they have because the other is going to pay more money. But yes, we do end up being the only cycle on volume. We're not necessarily the earliest on pricing. Our agents tend to take lag on the pricing side a little bit. They hesitate to mark up. If the shipper doesn't know prices should go up yet, the agent doesn't want to tell the shipper the prices have come up, they want to see it in the marketplace. So there's some hesitation there. So we probably have more of a 30- to 45-day lag on pricing, but I think the volumes come on the early cycle. And then the same thing happens on the downside, too. We tend to start lose on the spot world, as those extra loads that -- someone's hauling 10 loads a day out of a plant, but they have a #11 and 12 load, we get our guys in there. And as things start to slow down, that 11, 12 loads go away. So we're an early cycle on both sides.

Do you see another [Technical Difficulty]

Where would we see it? I think it would happen in volumes first as we would see the volumes. And actually, the rates are a little more choppy right now we thought after having choppy rates for the year. They haven't firmed up. They're firmed up decent, but they're still trickling below seasonal. So volumes look a little more stable. So we saw that drop off. A little hard to measure the rates because they're bouncing around, a little easier to see if there was a drop off in volume where that might be another leg down.

Maybe one for Jim Todd, down there. So coming into 2023, you talked about if gross revenues were down 20%, you'd still be able to maintain a 50% net operating margin. Obviously, the net -- the revenue environment has played out to be a little more challenging. But could you kind of walk us through the key areas that allow you to control your cost base? And if we see another leg down, do you have continued ability to flex that cost base and maintain solid profitability?

Yes. No, absolutely. So some of those are just the defensive posture of model. So the first one being when rev does pull back, we typically get a variable contribution margin expansion. And it's usually because of -- well, 2 things. The biggest one is usually mix. There are owner-operators that stay with us and haul anywhere from 87 to 92 loads a year. So the stuff that falls off is broker and so you get a little bit of a mixed tailwind. And then to Jim's point, spreads widened out a bunch fourth quarter of '22, and they have stayed pretty wide. So you get an expansion on your net rev on brokerage. Landstar will not enjoy the same expansion in a pure broker because we share in that expansion, typically 50-50 with the agents. So that's the first one. And we've seen that margin expansion play through. The revenue decline was a little steeper than when we put out that hypothetical 20, I think, in August of last year. Your next big lever is the compensation programs -- the variable compensation programs for cash plan and equity compensation, all tied to our variable cost business model. When the agents and capacity do better, management does better. When things pull back, we're all on the same boat. So clearly, that's a tailwind there and when things reset hypothetically next year at one time, that's looking like potentially $12 million headwind or $0.25. And then you start getting to Jim's point, we've got 1,300 employees here in the U.S. Whether we do 2.2 million loadings or 2.6 million loadings, you need folks, right? You need folks to answer the phone, to collect the receivables, handle the claims, et cetera, et cetera. So there's not that many levers from a headcount. You could sell used trailers and bring in some gains, and you can be spotty on backfills, but that's grant really -- and then clearly, you've got the countercyclical cash generation, right? So cash lags earnings. So when earnings slow down, you're starting to collect those higher dollar receivables from the opening balance sheet and paying those capacity payments off a lower top line, right?

If you ran, I think we did a back of the envelope real quick, if revenue was down 20% this year and you keep the -- everything else stays the same, but clearly, the gross profit goes down the same. But if you keep all our costs, whether it's operating costs, SG&A, insurance and depreciation, we would have been on a 50%. So I think we would have hit the 50%, and we've been down -- it might be a little lucky on insurance or unlucky on insurance. But looking at it that way, we would have hit it.

And then maybe -- and in a more constructive environment as the market turns and things start to inflect more positively, how do you think about the incremental margins on your business and kind of [indiscernible] volume as the price starts to come back and maybe the puts and takes there as you have your increased costs from incentive [indiscernible] and things like that?

Yes. So really, I break it down. I look at the 40% of our business that's fixed margin BCO and kind of contractor, right? If you play out kind of a thesis of a mid-single-digit rate increase -- spot rate increase '24 over '23, that drop -- that should drop right down, right? We haul volumes and not rate. On the brokerage side, our net revenue margins right now on revenue hauled by truck brokerage carriers is about 260 basis points wider than the trailing 10-year average. So even with the spot rev per load good guy in '24, there could be some compression on that variable contribution per load on brokerage. Again, we won't get compressed early cycle as some of our peers because the agent will share in that compression just like they did with the expansion. Ex the incentive comp reset, other than that, so long as we can stay safe, there'll be some P&L trading dollars. Our trailer fleet is a lot older today than it was a couple of years ago. So we got to bring in some new equipment. That will be depreciation and interest bad guy, but we should get some gains on sale and some M&T good guy on the other operating cost line.

That 260 basis points spread he's talking about is a big indication now, it's off the market.

Absolutely.

Right? I mean, because your trucks are just taking freight. Shippers are still trying to drive down rates, but the trucks keep chasing the rate down further.

Got it. Jim Todd, you mentioned the investment in trailers, you talked about it at the open, Jim Gattoni that you guys only let the BCOs pull the trailers. Is that something like you hear other companies talk about power only, things like that? Have you all looked into truck brokerage carriers, also pulling the trailers? Would that require more investment in your trailer pool on top of the refreshment that you mentioned and just kind of longer term, how does the asset over the trailer kind of play into your business model?

It's funny that -- so back -- if you go back and that was 2016 or '17, drop and hook for us became pretty popular because guys were trying to figure out a way to keep the trucks moving. Now that they're going to go on to ELDs. You think about it now where ELD is going to measure every minute you're sitting in your truck working. And if you're sitting in a yard and you have to bring a trailer in, it's attached, unload that trailer and bring that same trailer out. Well, that uses up a lot of your drive time. So drop and hook became a very popular option for shippers where the way we do it is we drop empty trailers at our customers for free. And our BCOs go in and pick them up and the customer loads them up, customer calls in and says, hey, it's loaded. Our BCO brings them and draws away the full one. So that actually saves time for the drivers to have more drive time, right? That's not easy to do in a brokerage market, right? When you're thinking about third-party trucks trying to manage your own equipment, several things happen. One, they don't really care about the quality of your equipment, right? They're just going to -- it's going to get banged up, you're not going to know who did it, after -- 6 months later, it's all banged up, you don't know who did it. In our world, BCOs, they're kind of our police when it comes to trailers. So when they see problems, they call us right away with a trail department manager. The other thing is you got to get utilization, right? So we try and turn our trailers almost one time a week or 0.9 is kind of -- would like to get to 1, but it's not really working out, but that's fine, 0.9 a week. So that -- you got to get utilization, a trailer cost $6,000 or $7,000 a year when you add in maintenance and depreciation, that kind of thing. So you've got to get it. If you're making $100 a load, that's a lot of loads you've got that trailer. We constantly think about a way to do it on third-party trucks. And you just -- it's hard to get our hands around how you control the trailing equipment, how you keep it safe and how to maintain, right? You get inspections all the time and if they're not safe, we get dinged. So there are considerations to do that, but I'll tell you those considerations to let third-party trucks haul our trails has been around for 10 years, and we just haven't pulled the trigger on it yet. We hear about the other companies do it. One of them just went under, it was Convoy and did -- was that part of the reason they did because maybe they didn't understand that it's not that easy. When you have 4,000 trailers or whatever it is, you got to keep them moving. A broker carrier doesn't really care much about it. A third-party carrier doesn't really care much about your trailer. If they get to pick it up in a drop and hook, drop it somewhere, they're gone. That's really -- they don't need to see that trailer again. So it's one thing we've always watched and we knew other companies are coming out and talking about it. But there's one example right there that basically, didn't work out. They're talking about trailer pools. But then there's -- power only is a different thing. So a lot of the asset-based guys are starting to talk about power-only, and they started talking about it a couple of years ago. Power-only to me is a little bit different, is where you just -- the shippers providing you trailers and you're going in and picking up -- you're just sending that power unit to pick up that trailer and haul that. Now that's a pretty big part of the business now too because it's the same situation. You're trying not to have the truck burn-up hours sitting and waiting to load and unload. Now power-only for us, which was that scenario grew huge during the pandemic, and I think it was a lot of our substitute line haul stuff, there just weren't enough trailers in the country. So shippers were getting their hands on trailers, loading them up and having tractors come in. But as to managing the trailers, I think our model works very well for managing a trailer fleet. And like I said, the shipper doesn't pay for our drop trailers, the capacity does basically, because in our example, if an owner-operator is going to be in a drop trailer pool and he's using our trailer, his percentage pay is less, right? If he provides a trailer, he gets an extra 8%. If he uses our trailer, he just doesn't get the extra 8%. So the model kind of makes it easy to manage.

Got it. Maybe one for Jim Applegate. Landstar Blue, so there are growth opportunity for you guys. Could you maybe just take a step back and kind of explain the opportunity there just to the Landstar Blue, kind of the idea behind that issue?

Sure. And I think Jim kind of talked about the spot contract market. And traditionally, Landstar has played in the spot market. Our agents are very kind of positioned well to succeed in that type of a market. When it gets to contract freight opportunities, just really kind of based on the nature of agencies, they're not fully equipped to jump after those like some of our larger competitors are. So basically, what we did is we created something called Landstar Blue. It originally was kind of our tech incubator, as Jim had talked about a lot of our tech tools, so we can get that customer carrier direct relationship going. So we can kind of see firsthand how our tech is interacting. But we also opened up an opportunity over on the contract freight world is using it as an incubator to really help our agents go after that contract freight that they haven't been successful with in the past. We went out and we purchased an agency. We went out and we actually purchased a technology company. We're in the kind of final stages of building out the technology, and it's been pretty well so far, well received within the agents. It's just another kind of lever that they could use with their customers to gain access to markets that they typically haven't participated in the past. So we see this as being not only something that's going to help us with our technology, but also another growth area for Landstar going forward where we can really open up a lot of these doors by utilizing kind of an in-house incubator for our agents to go after that type of freight.

Yes. So maybe another growth opportunity. You guys have -- you kind of leaned into more over the past several years as cross-border. You guys are one of the largest cross-border franchises out there. And when you hear the headlines about near-shoring and things like that, it must make you guys feel pretty confident in the growth that you could realize there looking forward. But just from your customers and what you see in your business, could you talk a bit about the nearshoring trends and the impact of that on your business and kind of how you're positioned going forward?

I'll take that. So we'll go back with our experience. The cross-border Mexico is what we're -- we do some cross-border Canada, but that's kind of a lot of automotive freight, very consistent year-over-year, very stable. Cross-border Mexico has kind of been a big deal for us since 2017. If you saw the picture of our cross dock pre-2017, it was a concrete block that you can only fit one forklift up on it. To put stuff in, you have to actually turn around, come back down and pick up. It was just really not made for volume. We started building our building in Laredo before the -- before everybody got excited about it back in 2016, opened it up in early January of 2017, and that little $300 million cross-border is now $750 million. And it's all -- most of it. We have several cross-border locations, but Laredo is kind of the primary one. So we have 30 door cross-dock. We have [indiscernible] which is the heavy-duty cranes, so heavy haul loads where we can lift and drop from one trailer to the other. We have -- what do you, like 1,200 -- how many, 700 shuttle trailers?

Yes.

So this is another operation. You really got to know how to run it, right? So we have -- we don't want branded trailers going south, right, South of Mexico, into Mexico. So we have shuttle trailers down there. A lot of it is our used equipment. We -- so the Mexican carriers will come up, grab our trailer, bring it down there, get freight, bring it back. And then everything -- the Mexican carriers don't drive into the U.S. So everything swaps out at that transload facility. Then there's the imbalance. I think today, there's one southbound load for every 3 northbound loads. And how do you commit -- how do you get the trucks to drive down the Laredo to -- so there's a lot of experience we have there, and I think we're very good at it. But we're going to continue to focus if there's other opportunities, like maybe there's other cross-border locations that we can grow. But as it relates to customers, we hear about everything that's going on, about south of the border, with new manufacturing facilities being built just not far from where we are. And I think we sell well into that with the capability and experience we have and the facility we have. We actually just paved for another 700 trailers. We owned a big area, and we didn't pave a whole lot, but we just had to pave out another area for 700 more trailers to be stored there because the volume has just been very good.

Can I just go back to capacity. [Technical Difficulty]

I'm a big believer in demand as opposed to the supply side. I mean, it's not a 50-50 to me. It's not like supply and demand, how many drivers and how much demand is there. It always tends to lead with demand, right? I mean, demand either goes up and down and then people come in and out. But if we had 50,000 tractors to the market, you really think it makes a difference? To me, I don't feel that doing it. There's 3 things. There's supply and demand, I think there's the herd mentality, right, where people start to panic where trucks are getting concerned, they're not going to get a load, so they start dropping price because it's the rumor or it's actually happening to some degree. One of my best examples is years ago, there was an ice storm that hit Houston, yes. Rate per mile went up like $0.25 all around the country. It's like -- it's kind of shippers panic on one side and all of a sudden, they're paying more for trucks or the carriers are panicking because they're scared. They want to lock up the longer term. They feel like there's going to be a downturn coming in supply or demand is going to get [indiscernible] lock up the longer-term contract rates at lower. And if you follow the cycles, hard to believe that's 100% either economic-driven or supply-driven. So I think there's a combination of the 3 things. But I have more on the 70% of its demand or 80% of it is demand. I am not sitting here counting how many trucks are in the market.

One thing I definitely want to touch on here before we wrap things up in a few minutes. Just capital allocation and you guys -- your ability to generate free cash flow, returns on invested capital, things like that. And M&A is not something that's really been in the card historically for you guys, just hasn't really fit in. But between your buybacks, dividends, things like that, kind of how are you weighing your different options there as you look forward?

Yes, my buddy, Jack, would probably call the cash balance in the third quarter pudgy, if he were here, right? So now clearly, to your point on M&A, it's got a complement. It can't conflict with our agents and 25,000-plus active [build-tools] in the system. Gattoni put it best several years back when he said our 2 favorite things to do here, work hard and buyback stock, that has not changed. We've been out of the market here a couple of quarters. We endeavored to utilize the buyback program to benefit continuing shareholders, not exiting shareholders. We've been back in the fourth quarter, bought back so far about 230,000 shares at a total cost of $30.5 million.

We still like large bonuses, too.

What is it?

[indiscernible] trying to convince the Board every year if we have a lot of cash that we should pay more to the bigger bonuses. That doesn't work. Don't worry. This is not a good year. But like Jim said before, one thing about the way we handle our conversation is we're -- Landstar has some businesses, small businesses and that's what we do, and we're very good at it. We are here to support the agents who eat what they kill. They build relationship with customers. We provide -- they use our capacity, they use our technology, we float the receivables for them. We pay the carriers. We want them to sell and move freight. And if they don't have a good year, the executives don't have a good year. And we've lived that way forever when it comes to the compensation, and that's what drives -- and it actually makes the model look good too, because in a down year, there's not the big bonus payout and in the good year, there's a bigger bonus payout. So we live the life to support small business owners, and we show our support by even building our compensation programs in a way that they would see fit. Even the driver, same thing. Even the 10,000 guys driving their own trucks out there and their small business, it's the same thing. We're here to support them. We are here to build technology, it should make them more efficient and make sure they're successful. It's our primary goal.

Any final questions out there before we wrap things up? Man, we were thorough.

It's always like this. We are so complete.

Good stuff, Jim. We appreciate you guys coming up today, and thank you, everybody, for joining us.