Landstar System Inc Q2 FY2022 Earnings Call

Good morning, and welcome to Landstar System Incorporated Second Quarter Earnings Release Conference Call. All lines will be in a listen-only mode until the formal question-and-answer session. Today's call is being recorded. If you have any objections, you may disconnect at this time. Joining us today from Landstar are: Jim Gattoni, President and CEO; Jim Todd, Vice President and CFO; Rob Brasher, Vice President and Chief Commercial Officer; Joe Beacom, Vice President and Chief Safety and Operations Officer. Now, I would like to turn the call over to Mr. Jim Gattoni. You may begin.

Thank you, Missy. Good morning and welcome to Landstar's 2022 second quarter earnings conference call. Before we begin, let me read the following statement. The following is a Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts are forward-looking statements. During this conference call, we may make statements that contain forward-looking information that relates to Landstar's business objectives, plans, strategies and expectations. Such information is by nature subject to uncertainties and risks, included, but not limited to, the operational, financial and legal risks detailed in Landstar's Form 10-K for the 2021 fiscal year described in the section Risk Factors and other SEC filings from time-to-time. These risks and uncertainties could cause actual results or events to differ materially from historical results, or those anticipated. Investors should not place undue reliance on such forward-looking information and Landstar undertakes no obligation to publicly update or revise any forward-looking information. Our 2022 second quarter financial performance was the best ever second quarter financial performance in Landstar's history. Although revenue and earnings per share came in below our second quarter guidance provided on April 20th, second quarter revenue and earnings per share exceeded the 2021 second quarter by 26% and 27% respectively. Truck revenue was 21% over the 2021 second quarter, on 10% increases in both volume and truck revenue per load. Revenue held via other modes of transportation increased 93% over the 2021 second quarter, mostly attributable to higher ocean and air revenue per load. Earnings per share fell short of a low-end of our April 20th guidance by $0.17 or 5%. Insurance and claims cost exceeded guidance by approximately $0.10. And variable contribution was below the low-end of the variable contribution included in the guidance by approximately $0.07. The shortfall in variable contribution was due to revenue that was slightly below the low-end of the guidance and a lower variable contribution margin as compared to guidance mostly due to mix, as BCO revenue, which has a higher variable contribution margin than most other forms of Landstar revenue came in lower than expected. As it relates to price on loads hauled via truck, revenue per load can be influenced by many factors including, length of haul, delivery time, equipment requirements and fuel costs. Also, Landstar's revenue per load on loads hauled via BCO capacity excludes fuel surcharges billed to customers which are passed 100% to the BCO hauling on load. During the 2022 second quarter, fuel surcharges excluded from both revenue and the cost of purchase transportation were $127 million. One of many metrics we follow is revenue per mile on loads hauled via BCOs. Given the recent spike in diesel fuel cost, this metric may provide a better gauge of market conditions as compared to revenue per load, which is influenced by many other factors as mentioned previously. During the 2022 second quarter, revenue per mile on van equipment hauled by BCO capacity in April, May and June was 23%, 13% and 7% over April, May and June of 2021 respectively. Revenue per mile on van equipment hauled by BCOs sequentially decreased 6% from March to April, and another 6% from April to May, yet held steady from May to June. By the end of the quarter revenue per mile on van equipment hauled by BCOs was 13% below the peak reached in February of 2022. As it relates to revenue per mile on loads hauled by BCOs via unsided equipment, this metric is partly influenced by mix as heavy oversize loads tend to have a higher revenue per mile. Heavy haul loads were 13% and 11% of unsided/platform loadings in the 2021 and 2022 second quarters respectively. Overall, revenue per mile on loads hauled by BCOs via unsided equipment in April, May and June increased 22%, 14% and 11% over April, May and June 2021, respectively. And unlike revenue per mile on van equipment, revenue per mile on unsided equipment hauled BCOs sequentially increased from the end of the first quarter to the end of the second quarter and achieved an all-time Landstar high in June of 2022. We attribute this to steadily increasing demand from a strengthening manufacturing sector. As the sector's recovery from the impact of COVID has significantly led the recovery and expansion of consumer base demand that has driven strength in the van market since the fall of 2020. Total second quarter truckload volume increased what would be considered a strong 10% over the 2021 second quarter, had it not been for the growth rates Landstar experienced over the past six quarters. The rate of load volume growth slowed in the 2022 second quarter as compared to the last six quarters, mostly due to more difficult year-over-year comparisons along with pockets of slowing demand for our services in certain industries we serve. During the 2022 second quarter the number of loads hauled via van equipment in April, May and June increased 11%, 12% and 4% compared to April, May and June of 2021. Month-over prior month growth in the number of loads held via unsided/platform equipment was more consistent in the 2022 second quarter, with April, May and June increasing 11%, 9% and 10% compared to April, May and June 2021. Consumer durables, building products, automotive parts, hazardous materials, machinery metals and substitute line haul generally combined to be over 70% of our loadings. As compared to the 2022 first quarter, where load volume grew 20% over the 2021 first quarter, the rate of growth and load count for consumer goods, building products, hazards materials, machinery and metals were all relatively strong in the second quarter, but below the first quarter growth rates. The rate of growth in automotive process is about equal to the 2022 first quarter growth rate, while substitute line haul volume decreased 19% compared to the 2021 second quarter. I attribute the decrease in substitute line haul loadings to softer consumer demand and the large parcel carriers better optimizing their restabilized networks. We continue to attract qualified agent candidates to the model. Revenue from new agents was over $20 million in the second quarter. We ended the quarter with 11,887 trucks provided by business capacity owners, 23 trucks above our year-end 2021 count. The number of BCO trucks at the end of the 2022 second quarter was 48 trucks below the end of the 2022 first quarter. As typical, in an environment with increasing fuel costs and a lower revenue per mile month-to-month, it's not unusual to experience an increase in BCO turnover. Loads hauled via BCOs in 2022 second quarter were relatively equal to the 2021 second quarter, on higher truck count, almost entirely offset by lower utilization. BCO utilization defined as loads per BCO per quarter decreased 4% in the 2022 second quarter compared to the 2021 second quarter. We ended the second quarter with a record number of approved third-party carriers in our network. The number of third-party carriers hauling freight in the 2022 second quarter increased 31% over the 2021 second quarter. Our network is strong and continues to attract third-party truck capacity.

Thanks, Jim. Jim G has covered certain information on our 2022 second quarter so I will cover various other second quarter financial information included in the press release. In 2022 second quarter, gross profit was $208.1 million, an increase of 19% compared to gross profit of $174.8 million in 2021 second quarter. Gross profit margin was 10.5% of revenue in 2022 second quarter as compared to gross profit margin of 11.1% in the corresponding period of 2021. In the 2022 second quarter, variable contribution increased 21% to $267.5 million compared to $220.8 million in 2021 second quarter driven by strong revenue growth. Variable contribution margin was 13.5% of revenue in 2022 second quarter compared to 14.1% in the same period last year. The decrease in variable contribution margin compared to the 2021 second quarter was primarily attributable to mix, as an increased percentage of revenue was generated in the 2022 period by one, truck brokerage carriers, which typically has a higher rate of purchase transportation than revenue generated by BCO independent contractors; and two, multimode capacity providers which typically has a higher rate of purchase transportation and revenue generated by third-party truck capacity providers. The unfavorable mix impact was partially offset by an increased variable contribution margin on revenue generated by truck brokerage carriers, as the rate paid to truck brokerage carriers in the 2022 second quarter was 183 basis points lower than the rate paid in the 2021 second quarter. Other operating costs were $10.4 million in the 2022 second quarter compared to $8.9 million in 2021. This increase was primarily due to increased trailing equipment maintenance costs and an increased provision for contractor bad debt, partially offset by increased gains on disposal of operating property. Insurance and claims costs were $34.1 million in the 2022 second quarter compared to $24.1 million in 2021. Total insurance and claims costs were 4.9% of BCO revenue in the 2022 period and 3.7% of BCO revenue in the 2021 period. The increase in insurance and claims costs as compared to 2021 was primarily attributable to increased severity of current year claims during the 2022 period, primarily due to the impact of two tragic vehicular accidents that occurred during the 2022 period. Selling, general and administrative costs were $59 million in the 2022 second quarter, compared to $54.1 million in 2021. The increase in selling, general and administrative costs was primarily attributable to increased wages and benefits and increased provision for customer bad debt at approximately $2 million related to the return of the company's annual agent convention held in April of 2022, partially offset by a decreased provision for incentive and equity compensation under our variable compensation programs. In the 2022 second quarter, the provision for compensation under variable programs was $8.3 million compared to $15.2 million in the 2021 second quarter. Depreciation and amortization was $14.3 million in the 2022 second quarter compared to $12.1 million in 2021. This increase was primarily due to increased depreciation on technology tools resulting from continued investment in new and upgraded applications used by agents in capacity with approximately $400,000 of the increase attributable to increased trailing equipment depreciation. The effective income tax rate was 24.6% in the 2022 second quarter compared to 23.9% in 2021. The effective income tax rate during the 2021 period was favorably impacted by excess tax benefits resulting from equity compensation arrangements, whereas the 2022 period had an insignificant amount of shortfalls from equity compensation arrangements unfavorably impacting the effective income tax rate. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $120 million. Cash flow from operations for the first six months of 2022 was $210 million and cash capital expenditures were $7 million. There are currently 1,603,000 shares available for purchase under the company stock purchase programs. Back to you, Jim.

Thanks, Jim T. As it relates to our 2022 third quarter expectations, I assume the stable freight environment that we experienced from May to June and into the first several weeks of July will continue through the 2022 third quarter. Given that assumption, I expect year-over-year growth and revenue to decelerate as compared to the previous eight quarters. In June, revenue per load for all our truckload revenue was approximately equal to that of May. Through the first several weeks of July truck revenue per load has remained consistent with June. Given that start to July and assuming that truck revenue per load throughout the remainder of the third quarter trends consistent with normal seasonal patterns and few costs remain relatively steady throughout the remainder of the quarter, I would anticipate truck revenue per load to be about equal to the 2021 third quarter. The second quarter of 2022 was a record second quarter of truckload count, typically a normal seasonal pattern results in third quarter truckload count to be slightly below the second quarter truckload count. I expect the 2022 third quarter truckload count to experience normal seasonal trends. Given that assumption, I expect truckload count to increase over the 2021 third quarter in a 3% to 5% range. Based on these expectations, the truck revenue per load and the number of loads hauled via truck, I currently anticipate 2022 third quarter revenue to be in a range of $1.800 billion to $1.850 billion. Based on that range of revenue and assuming insurance and claim costs are approximately 4.2% of BCO revenue, I anticipate 2022 third quarter diluted earnings per share to be in a range of $2.75 to $2.85. Overall, I am pleased with Landstar's performance in the first half of 2022. 2022 first half revenue was the highest first half revenue in the company's history and increased approximately 38% compared to the 2021 record first half. Perhaps even more impressive than the top-line growth was the fact that 2022 first half gross profit, variable contribution, operating income, net income, and diluted earnings per share was the highest ever achieved by Landstar in any first half of the company's history. In fact, earnings per share in the first half of 2022 exceeded the first half of 2021 by 45%. During the 2022 first half we also purchased over $212 million of Landstar stock and paid dividends totaling $94 million. Since early 2022, industry data regarding spot market pricing has been showing a significant increase in year-over-year spot market rates when excluding the impact of fuel costs. While we have seen revenue per mile on van equipment hauled via BCOs decrease since it peaked in February 2022, Landstar's year-over-year change in rates hasn't been near the magnitude reported in various industry reports. In fact, as earlier mentioned revenue per mile in June continued to be above June 2021 revenue per mile, although at a decelerated rate of growth as compared to the past 12 months. Landstar's spot market pricing trends month-over prior month tend to lag and often are below published industry trends both during growth and contraction cycles. We believe that has to do with the special non-routine nature of much of the freight we haul along with our drop in hook business that tends to act somewhat more like contract rated freight as we commit trailing capacity as part of that service. Looking forward, the current environment with high inflation and slowing consumer demand makes our freight environment unpredictable. Regardless of the freight environment, our highly variable cost business model generates significant free cash flow. We intend to continue to return capital to shareholders. In our view, the current environment for Landstar continues to remain strong. We continue to focus on profitable low volume growth and increasing our build capacity to hold those loads. I'd like to add my prepared remarks by noting that we were proud to be recently announced as a member of the Fortune 500 for the first time. Although this achievement is based on our 2020 fiscal year revenue, it is also a testament to the company's unique entrepreneurial business model that has proven successful for decades. On behalf of Landstar's leadership team, we thank all of our independent agencies, owner/operators, approved third-party carriers, customers, and employees who helped us to accomplish this milestone in our history. With that, Missy, we will open up to questions.

Certainly. At this time, we will begin the question-and-answer session. We have several questions in line, and the first one is from Jon Chappell of Evercore ISI. Your line is now open.

Hey, Jon.

Thank you, Missy. Good morning, Jim. Hey, Jim. Jim Gattoni, first question for you. I was going through my notes from April and you had said you were seeing little signs of softness but seeing recovery in auto and easy comps; e-commerce lines are strong. I mean clearly this was still a great quarter by any historical context, but you were caught by surprise by a few things in May and June. Can you maybe just explain a little bit of where the surprises came from and where that may recur in the third quarter, maybe in the fourth quarter as you look out?

I wouldn't describe the results as surprises. When we miss, it's usually just by a small margin on both volume and rates. Looking at the bigger picture for truck rates and volumes, our revenue per load in March was flat compared to the first couple of weeks in April, reflecting a slight 1% decline. By the end of April, revenue per load had decreased around 2% sequentially, specifically 1.8%. Then, in May, we saw a further drop of about 3% or 4%. This decline mainly occurred after our April call, but things stabilized going into June, matching our expectations for the quarter. The main drop in rates happened in May. I had underestimated how quickly substitute line-haul volume would decline; I expected optimization to happen faster and consumer demand to pull back sooner. Back in April 2021, I had predicted a decrease in substitute line-haul but didn’t adjust our guidance in the second quarter, which ultimately impacted us more than expected. There was a slight decline in foodstuffs, though it’s not a significant category for us. Overall, we noted some minor pockets of softness that we did not foresee, but nothing major, aside from the more pronounced volume drop in substitute line-haul. Other than that, we experienced a May hit on rates and a gradual decline in sub line-haul throughout the quarter along with a few other smaller commodities.

Okay. I hope that helps. And just for a follow-up, I hate to ask a super big picture question, especially one where not many people may know the answer, but for Landstar specifically, we're getting a lot of questions about the impact or lack thereof, of these AB5 in California. Can you just speak to us a little bit for how you're prepared for that? How you think it may impact your business or not? And, you know, kind of, how you see the implementation of that?

Hey, Jon. Joe Beacom. Yes, we prepared extensively for this back in 2019 when it was initially discussed, and we're using the same strategy now. We have around 360 to 365 BCOs who might be impacted. We're informing them about the legislation and the fact that the Supreme Court chose not to intervene. They have options: they can either stay with Landstar by relocating out of California or not haul California loads, or they can obtain their own authorities and continue carrying Landstar loads. It's a relatively small group, and we're assisting them through this process. We are currently having discussions to determine what direction they want to pursue.

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

Hey, great. Thanks and good morning. So, Jim Gattoni, I think you covered some of this at the end of your prepared comments, but, I'm curious on your expectations for revenue per load to stabilize into the third quarter, and maybe just some thoughts on why it dropped down in 2Q and then you're seeing the stabilization now is that the, kind of, the gyrations between the shift from spot to contract and some of that balancing out? And then when I think about your model, historically, I think you've talked about a little bit of a lag between the agents adjusting rates versus where the spot market is. And so I'm curious, is that caught up, and you think that, kind of, your revenue puller is more reflective of the market or is there the potential that there could be some lag in what you're seeing relative to broader industry trends?

I'll start by saying that we still experience a lag when comparing our year-over-year percentage changes to industry data. While we trend in a similar direction, there is likely a 30-day delay, possibly a bit more. This was evident when we saw a decline in May while others had already experienced drops in March and April, indicating that we do lag in relation to our revenue per load compared to industry trends. The current market is very unpredictable due to consumer demand and inflation, although manufacturing, particularly in flatbed, remains strong. It's tough to forecast the next six months, but we're confident for the immediate future as we are halfway through July. Looking back, we unexpectedly lost 4% in revenue per load from April to May. While I don't anticipate a 2% increase, it's possible that we could see a 2% decrease while remaining stable. We have maintained our revenue per load numbers for about six weeks, and there's no specific reason for fluctuations driven by sectors like automotive; it’s more of a general sentiment about rates at the moment. We're comfortable where we stand today, though the market remains unpredictable. Conversations with our field team reveal diverse opinions regarding the next six months, with some shippers believing the peak will be weaker, while others feel it could be strong. This inconsistency among feedback from field staff and shipper surveys highlights the uncertainty in the market and shippers' desire to secure capacity if demand increases. Thus, we find ourselves in a stable yet unpredictable environment for the coming months.

Yes. No, Jim, I mean, all of that's helpful, and we understand, kind of, the lack of visibility, so just it's helpful to kind of hear your thought process behind it. Yes, we look at one of those industry reports and we've seen a little bit of stabilization recently as well. So we won't comment on the quality of that data, but, hey, just a follow-up, I'm kind of curious about your comments around the mix and what's happening with higher third-party brokerage revenue versus the BCOs. And so, I guess, can you just unpack that a little bit? And is there anything to read into why the mix is shifting more away from BCOs and to third-parties, right now?

That is definitely related to the number of BCOs we have. We are successfully managing our load volumes, which has been our focus for years. Since we don't set prices, we concentrate on increasing profitable load volume. The growth in volume is more significant than any intentional actions on our part. One aspect that affected our variable contribution margin was the reduced utilization of BCOs. In the current environment, rising fuel costs cause fuel surcharges to lag behind. When fuel prices spike as they did in March and April, it takes time for us to adjust and recover those costs through surcharges, which may influence BCO cutbacks. Furthermore, as rates decrease, some may choose to wait for rate increases, contributing to lower utilization. The situation involves two elements: the volume must shift to third-party trucks if we lack BCOs to transport, and there was a slight decline in BCO utilization this quarter, which increased the percentage of revenue from third-party trucks instead of BCOs.

Okay. Got it. Thanks for the time. And Jim Todd, welcome to the call.

Thanks so much.

Thank you so much. Our next question is from Allison Poliniak of Wells Fargo. Your line is now open.

Hi, good morning. I'm not sure if I missed this, but other truck revenue is sequentially declining. Could you give a little color on what's really on there? And there's a couple of pieces in that business as well.

Yes, there is a segment of the substitute line haul business related to power-only services, which has seen significant pricing drops. As I mentioned, it appears that the load volume for that substitute line haul business declined sequentially by about 18% or so.

Okay. So power-only though was still fairly positive for you on that side?

Yes. Well, I would say stable. I wouldn't necessarily see, there high or low.

Got it. And then on the trends within the truck transportation and van versus the unsided/platform, that revenue per load, did those trends, I know, you talked about overall stabilization, but the revenue per load on the unsided/platform, are you still seeing that trend continue on the upward curve or is it flattening out at this point?

Yes, we're still observing a high revenue per load, exceeding 2021 levels. While we don't believe rates are dropping to 2019 levels, we are starting to align more closely with 2021 as the year progresses. We're noticing improvements in manufacturing and some building projects returning. The influx of steel and metals has played a significant role in this. For now, I would describe it as stabilizing, but it's uncertain how future projects will impact this.

Thank you so much, Allison. Our next question is from Bascome Majors at Susquehanna. Your line is now open.

Thanks for taking my questions. You talked a lot about the changes in incentive comp year-over-year and the quarter. Can you lay out where you're accrued for the full year with the new outlook here, the incentive comp and stock compensation for kind of a total variable costs?

Yes. So for total variable cost some of the comp plans full year 2021, we have $57 million. In total for 2022, I'm anticipating right now $32 million on a full year basis, so down about $25 million.

Okay. And if we roll the 2023, and you had an earnings decline of anywhere close to the 20-ish percent, the Street is modeling, what would that number look like in 2023?

Bear case from total variable, I would say probably somewhere in between 8% to 10% in total.

Thank you for that. There was quite a bit of fluctuation in the second quarter regarding the general and administrative expenses, especially with the aging convention returning. Can you provide insight into the underlying inflation rate reflected in those figures, or at least an approximate estimate?

Sure. Specific to the G&A line in total or just all the indirect?

I mean, yes, all of the above would be fine. Thank you.

Yes. Years ago, inflationary pressures were mainly seen in the insurance and claims sector, as well as in technology. However, if you look at the current indirect costs, there's inflation in equipment costs, trailer maintenance, wages, and benefits. We finance all our trailers through capital leases, and our weighted average borrowing cost was 240 basis points in the first quarter, which has since increased to 4.4% or 4.5%. It seems to be widespread. In comparing SG&A from the first to the second quarter, the first quarter benefited by about $2 million due to forfeitures related to former executives, along with another $2 million from the agent convention in the second quarter, totaling around $4 million. Additionally, we encountered some pressure on the customer bad debt line in the second quarter of 2022 due to a small bankruptcy that resulted in about a $0.01 bad debt, with the remainder attributed to general aging. We also saw some pressure on the benefits line for medical claims.

Yes, Bascome. From an inflationary standpoint, Jim is right on the trailing equipment. You're talking about maintenance and labor costs on getting the trailers repaired, quantifying that might be a little difficult, but it's out there, it's driving our other operating costs higher. And we have 1,300 or 1,400 employees who support this network. And we clearly have had to increase wages just to keep the salaries in line and the pay in line with what's going on with inflation. So there's inflation there too. Benefits cost is up. So it's hard to quantify exactly how much inflation is within these numbers. But clearly costs are going up due to the current conditions going on in the U.S. economy and the inflationary conditions we're dealing with.

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

Hey, great. Good morning, everybody. And Jim Todd, congratulations on your promotion to CFO.

Thanks so much, Jack.

So I guess maybe if we could just drill down for a moment for my first question into the substitute line-hall. Can you maybe help us a little bit? Is that largely parcel or is there also some like LTL carrier capacity in there as well? Just what type of customers are you kind of servicing with that business line?

A lot of it is that we hauling full truckloads between the DCs of the large parcel carriers.

Okay. Okay.

And there is some little bit of LTL scattered around there, but the bigger pieces are just that.

Yes. There is some line-haul substitution for LTL carriers. But when Jim talks about the decline and some of that, that's mostly from the, I would say the majority from the parcel carriers.

Okay. All right. I just wanted to make sure that was understood. And then I guess maybe kind of going back to the AB5 question for a moment that Jon asked, that was a great question. We've been getting questions on that as well. But I guess Joe, as you sort of think about the potential for AB5-like legislation to spread to other states, there's been talk about in New Jersey and Michigan and maybe other places. I guess how do you think about kind of getting in front of that? Are there some changes that maybe need to take place with a model to maybe account for that type of legislation in other parts of the country? And I'm thinking in particular about how you leverage your trailer pools, which if I understand right now is principally tied to BCOs or maybe it's BCO only can utilize your trailer pools.

Sure. Yes. Jack, all good questions and all things that we've been thinking about for quite a while. And if it does migrate to other states, clearly we think we've got a good process to mitigate that from a what I just already described. But to your point about if you look into the network and each state is different, but if you look into the network, we've got a tremendous growth in brokerage capacity. So we don't think we're going to have a capacity-related issue with meeting customer demand. It would fall around some of that trailer-related, if it's a trailer-related an account or something like that. And we're prepared to work through that. And I think made mention on other calls that we have instances where we'll put Landstar trailers in the hands of carriers on certain businesses. And then certainly, we need to look at that a little bit more closely if that were to come to be.

Okay. Makes sense. Maybe one last question, I guess Jim Gattoni or Rob would love to get your thoughts on peak season. I heard you a moment ago talking about it being kind of volatile in terms of what the shippers are telling you, what's your gut telling me about peak season this year? Just would love to get your thoughts there.

Hey, Jack, I'm glad you asked that question, because my gut is upside down because no one can tell me what's going to happen. We base our peak really off of two parcel carriers and one big box retailer. And I will tell you, those three are about as far apart on what's going to happen when you talk to them. One of them absolutely says that peak is going to fall in line with last year. One of them says that their inventories are a little bit, we'll say at a high level now, but they are gearing us up for August and they think it's going to be consistent, but they're unsure. And one of them says that they're absolutely going to have a tremendous peak and it's going to be bigger than last year. So I guess to answer your question, no one knows. And it's kind of like Jim alluded to earlier, they're keeping us really close because they don't want to get into a situation where they don't have capacity going into the third and fourth quarters. So I know I didn't answer your question, but I haven't been able to get a straight answer out of them either. There's just uncertainty around what peak looks like.

Glad we could help Jack. Like I said, it's very difficult to get a read from the business community right now. Like Rob said, there are some that think it's going to be like. Some think it's going to be gangbusters. Some thinks it's going to be the same as last year. It's really tough to get your hands around.

Okay. All right. Well, thank you for the time. Really appreciate it.

Thank you so much. Our next question is from Scott Group of Wolfe Research. Your line is now open.

Hey, thanks. Good morning, guys. I don't know if you gave this already, so I apologize if I missed it, but can you just share the monthly trend in revenue per load on a year-over-year basis throughout Q2 and then July?

I don't have specific measurements, but we have data for July. We're on an upward trend. I receive a daily report that provides one key figure indicating stability. July has been a bit challenging. However, Scott, I'll share the numbers, and Jim Todd can confirm that I'm providing the accurate information. Let me know when you're ready to review it, and I'll verify.

Yes. Plus 15, plus 8 and plus 7s got April, May, June compared to the prior period.

Okay. That's helpful. While you don't have a final number for July yet, how does it compare to your guidance of being flat? Is it improving or are you already at that flat level? How is July looking overall?

July usually sees an increase in revenue per load compared to June. However, this growth is slightly lower than the typical seasonal pattern. We anticipate a slight drop in August, so we adjusted the growth from June to July and projected it seasonally into August and September, resulting in a consistent quarterly figure compared to June.

Okay. Okay. And then just want to get your thoughts on just broader capacity, right? BCO count came down a little bit. Do you think that trend continues just in a softer market? Are you seeing any signs of the third-party carriers exit the market? Any signs of capacity pressure?

Sure. Yes, Scott, this is Joe. To your point, and Jim touched on some of it earlier, when rates decline and costs rise, we face challenges. When utilization decreases, we also tend to see a reduction in truck count, which we are experiencing. Part of this is due to difficulties in fixing trucks; our BCOs usually operate older used equipment, and delays in obtaining parts can affect turnover. All these factors contribute to the situation. Additionally, we've struggled this year with acquiring used trucks, leading to a lighter influx of additions to the system than we typically observe, which is also a factor. I believe there is potential for a downward trend in the BCO account because of this. I've noticed that net authority revocations are increasing. Overall, on the carrier capacity front, they are experiencing the same rising costs, whether in operations or insurance. If pricing stabilizes or continues to decline, I expect to see some capacity leave the larger network due to these factors.

Thank you so much. Our next question is from Scott Schneeberger of Oppenheimer. Your line is now open.

Thank you very much. I appreciate it. In the press release, the average length of haul was mentioned. Jim Gattoni, could you discuss what you expect for the third quarter and the second half of the year and how that might be significant?

Yes. Regarding the length of haul, we have consistently been off by about 6% year-over-year for shorter hauls, which applies to both van and flatbed in Q2 and even before that. You can expect this trend to remain steady. If we analyze our van revenue per mile, we handle various loads: some are 250 miles, some 500 miles, and others range from 500 to 700 miles, with a portion exceeding 750 miles. Overall, this averages out to about 700 miles, showing a 6% decline. However, it's more about the mix of loads rather than a specific business factor causing this change. We manage a significant volume of van loads, making it difficult to predict the direction of this trend. We could potentially secure contracts involving longer hauls, which would increase our mileage. So, the situation is more about our load mix than a broader industry trend suggesting a shift of longer hauls to rail. Essentially, our agents are connecting more with loads that are in the 250 to 500-mile range rather than those over 750 miles. Unfortunately, this situation seems somewhat unpredictable and varies widely within our van load population.

Thanks, appreciate that. Couple more if I could, a quick one here. Could you provide a status on the Ukraine operations, just, production relative to prior year and how that's stabilizing things?

Yes. The Ukraine operation, as we've said in the first quarter had a little bit of a blip for a couple of weeks. They have responded tremendously. We see the same production pretty much that we've seen out of them the past year as the past month, and that business continues, will continue in the same manner that it has. So we have no issues there.

Excellent. And then, lastly, just how should we think about the variable contribution margin trend in third quarter and beyond? What's the trajectory there? And any inflection points or thoughts on that context?

If the mix remains consistent, which we expect it will closely mirror the first and second quarters, we anticipate a margin around 13.4% to 13.5%. The mix plays a significant role for us, particularly the proportion of loads handled by BCOs compared to brokers. The margin variation in the quarter was largely due to an increase in brokerage activity, which I believe is the reason for your inquiry. If our projections for the third quarter align with the margins seen in the second quarter, we expect to maintain a margin in the 13.3% to 13.5% range, assuming the mix stays the same.

Thank you so much. Our next question is from Bruce Chan of Stifel. Your line is now open.

Hey, thanks, operator and good morning, everyone. Just Jim and Jim want to get a little bit more color here on that decline in the substitute line haul. You're really just wondering if that decline is stabilized at this point, or are you still expecting a little bit of a sequential deceleration there?

Bruce, it's Rob. The substitute line haul has stabilized, and we are preparing for peak season and what that entails. We've noticed that partial companies have ramped up their operations by adding more teams and capacity to their networks. One of these companies shifted some operations to rail during this time to capitalize on cost savings. As for the LTL community we work with, the feedback indicates that it remains a strong market that has stabilized and is actually improving. In response to your question, I believe we have definitely stabilized, and the peak will guide our direction moving forward.

Absolutely. Landstar Blue, to remind everyone, is not a significant part of our operations. It is a small company that we have doubled in size. This is a contractually committed business, and we continue to demonstrate what we can achieve there. It continues to grow, with a doubling in both revenue and volumes. We will keep moving forward with it and are still working on the technology aspect, but it remains a very small part of our overall business.

Thank you so much. At this time, I'm showing no further questions. I would like to turn the call back over to you Mr. Gattoni for closing remarks.

Yes, sure. Thank you, Missy. And thank you, and I look forward to speaking with you again on our 2022 third quarter earnings conference call currently scheduled for October 20. Enjoy the rest of your day.

Thank you so much. And that concludes today's conference. Thank you for joining the conference call today. Have a good morning. Please disconnect your lines at this time.