Good morning, and welcome to Landstar System, Inc.'s 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. Joining us today from Landstar are Jim Gattoni, President and CEO; Jim Todd, Vice President and CFO; Joe Beacom, Vice President and Chief Safety and Operations Officer. Now I would like to turn the call over to Mr. Jim Gattoni. Sir, you may begin.

Thank you. Good morning, and welcome to Landstar's 2023 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, including, but not limited to, the operational, financial, and legal risks detailed in Landstar's Form 10-K for the 2022 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 unless or undertakes no obligation to publicly update or revise any forward-looking information. Given the current freight environment with soft demand and readily available truck capacity, Landstar performed relatively well in the 2023 second quarter. Before beginning my discussion of our 2023 second quarter financial performance, I want to briefly discuss two big picture items, freight cycles and seasonal trends that provide context to this year's results. Landstar's revenue performance through the freight cycles that occurred over the past three years ultimately set the stage for where we are today. Generally, in the ordinary course of our business, we experienced spot market down-cycles that drive revenue from peak to trough as well as up-cycles that drive revenue from trough to peak. In both cases, the typical spot market freight cycle from peak to trough or trough to peak occurs over a period of six to eight quarters, and these cycles are typically driven by three main factors: the level of industry demand for freight services; the level of truck capacity in the industry; and the differential between industry-wide contract and spot pricing at any given point in time during the cycle. Looking back over the last three years, Landstar's trough quarterly revenue occurred in the 2020 second quarter at the beginning of the pandemic. Landstar's peak quarterly revenue occurred eight quarters later in the 2022 second quarter. From the 2020 second quarter revenue trough to the 2022 second quarter peak, revenue grew by over $1 billion or 140%. Since hitting peak quarterly revenue in the 2022 second quarter, Landstar has experienced a down cycle during which quarterly revenue has thus far decreased each quarter over the past four quarters. Current conditions make it difficult to predict exactly when the current down-cycle will end and revenue will again begin to cycle upwards. Two of the three key factors that drive these up cycles are trending normally given the period of the cycle we are in. One, regarding truck availability, truck orders have recently slowed, and industry-wide DOT truck revocations have exceeded DOT truck authorizations in seven of the last eight months through May. And two, contract freight rates remain well above spot freight rates. However, the third key factor driving cycles, demand continues to be soft, which makes the timing of the end of the down cycle less predictable. Throughout my remarks, I'll also make mention of the concept of normal seasonal patterns. For purposes of my remarks today, normal seasonal patterns refer to revenue load count and/or pricing trends from 2015 to 2019 and excludes 2020, 2021, and 2022 due to the highly unusual dynamics reflected in those quarterly metrics during the pandemic-driven freight cycle. Now to the 2023 second quarter. Including our April 26 first-quarter earnings release, we provided revenue guidance of $1.4 billion to $1.45 billion. We updated the second quarter guidance via an 8-K filed with the SEC on May '23 in anticipation of an upcoming investor conference. In that 8-K, we lowered revenue and earnings guidance due mostly to both revenue per truck load and the number of loads hauled via truck through mid-May trending below the estimates for those metrics used in our initial guidance. That update reduced the revenue guidance to $1.325 billion to $1.375 billion. Our initial second quarter earnings per share guidance was $1.90 to $2. Our updated earnings per share guidance based on the lower revenue guidance was $1.75 to $1.85. 2023 second quarter revenue and earnings per share both came in at the high end of the revised guidance. As we enter 2023, it was clear we were facing very difficult year-over-year financial comparisons coming out of back-to-back record years in '21 and 2022 driven by strong consumer demand and tight truck capacity. In fact, beginning in the 2020 second quarter and through the 2022 first quarter, both truckload volume and revenue per load consistently outperformed sequential quarter-to-quarter normal seasonal patterns. This outperformance came to an end in the 2022 second quarter. From the 2022 third quarter through the 2023 second quarter, our truckload volumes and revenue per truck load underperformed normal seasonal trends. Overall, total truck revenue was $1.247 billion in the 2023 second quarter, 29% below the 2022 second quarter on a 16% decrease in load volume and a 15% decrease in revenue per load. Our rail, air, and ocean services in the 2023 second quarter were 50% or $102 million below the 2022 second quarter. The significant decrease in non-truck transportation revenue was in line with our expectations of lower volumes across all non-truck modes and the expectation of a significant decrease in ocean revenue per shipment. Although revenue in the 2023 first half was below the 2022 first half by 29%, one needs to put the impact of the pandemic-driven growth in perspective. Even given the significant softness in demand compared to the fiscal 2022, the 2023 first half revenue exceeded 2019 first half revenue by more than 35%. As it relates to truckload volume, Landstar's normal seasonal patterns exhibited average growth of approximately 8% from the first quarter to the second quarter. Given the softness in freight demand, actual second quarter truckload volume was 1% below the 2023 first quarter, in line with our updated guidance, but well below normal seasonal patterns. Even with the decrease we experienced in truckload volume from the first quarter to the second quarter, truckload volume in the 2023 second quarter was still Landstar's third best all-time second quarter truckload comp, behind only the consecutive second quarter record set in 2021 and 2022. The inconsistency in pricing month-to-month has been very atypical from a seasonal perspective, making it difficult to project spot pricing even in the near term. Late in the 2023 first quarter, truck revenue per load stabilized, and the stabilization continued into early April prior to our release of the second quarter guidance. As April came to an end, rates took a sharp downturn and settled almost 5% below March. Over the past 16 months since reaching its peak in February 2022, the month-to-month sequential change in truck revenue per load has trended worse than normal seasonal patterns in all but four months. Most recently, in a positive development, May to June revenue per truckload increased modestly; however, performance was still below normal seasonal patterns. After breaking down truck transportation revenue by equipment type, unsided platform equipment held up better than revenue from van equipment and other truck transportation services. The quarter-over-prior year quarter revenue comparisons for van are much more challenging than for revenue from unsided platform equipment, especially as it pertains to revenue per load. The pandemic-driven spike in consumer demand drove van revenue per load from its trough in May 2020 to its peak in February 2022, up 76%, while revenue per load on unsided equipment increased 54% from its low point in May 2020 to its peak in July 2022. I believe that the rates in the spot market will stay relatively higher than pre-pandemic levels given the significant amount of additional cost to operate a truck today. Based on industry data from ATRI, the cost to operate a truck, excluding fuel costs in fiscal year 2022 was approximately 20% greater than in 2019, during which we also experienced a relatively soft rate environment. BCO revenue per mile on van equipment and unsided equipment were 20% and 30%, respectively, above June 2019. I believe that due to these cost pressures, particularly on smaller carriers, there is relatively little room for further spot market rate decreases. Total loads in the 2023 second quarter were 17% below the 2022 second quarter. Truckload volume is somewhat influenced by Landstar's customer type. For example, Landstar provides truck capacity to other trucking companies, 3PLs, and Truck Brokers, where volumes tend to vary more widely period-to-period with changes in the levels of freight demand. Revenue hauled on behalf of other truck transportation companies was 16% and 20% of transportation revenue in the 2023 and 2022 second quarters, respectively. During periods of tight truck capacity, other trucking companies, 3PLs, and Truck Brokers reach out to Landstar to provide truck capacity more often than during times of more readily available truck capacity. The freight haul by Landstar on behalf of other truck transportation companies includes almost all of our commodity groups, including our substitute line haul service offering. Overall, the number of loads hauled on behalf of other truck transportation companies in the 2023 second quarter was 28% below the 2022 second quarter, contributing significantly to the overall decrease in quarter-over-prior year quarter volume. During the quarter, BCO truck count decreased by 261 trucks, a relative improvement compared to the 472 truck decrease we experienced in the 2023 first quarter. Overall BCO truck count has decreased approximately 11% since the end of the 2022 second quarter. It is typical to incur increased turnover in BCO truck capacity when truck rates decrease. Over the past 12 months, truck rates have decreased at a rapid pace, especially on loads hauled by van equipment with primary equipment type BCOs. There do not seem to be any unusual factors driving the recent reduction in BCO truck count. The 12-month rolling average turnover is currently about 37%, which is very similar to the 36% turnover rate Landstar experienced in 2019 during the most recent relatively comparable soft rate environment. I will now pass to Jim Todd to comment on other additional P&L metrics regarding the 2023 second quarter performance.

Thanks, Jim. Jim has covered certain information on our 2023 second quarter, so I will cover various other second quarter financial information included in the press release. In the 2023 second quarter, gross profit was $139.7 million compared to gross profit of $208.1 million in the 2022 second quarter. Gross profit margin was 10.2% of revenue in the 2023 second quarter as compared to gross profit margin of 10.5% in the corresponding period of 2022. In the 2023 second quarter, variable contribution was $198.2 million compared to $267.5 million in the 2022 second quarter. Variable contribution margin was 14.4% of revenue in the 2023 second quarter compared to 13.5% in the same period last year. The increase in variable contribution margin compared to the 2022 second quarter was primarily attributable to: one, an increased variable contribution margin on revenue generated by truck brokerage carriers as the rate paid to truck brokerage carriers in the 2023 second quarter was 170 basis points lower than the rate paid in the 2022 second quarter; and two, mix as an increased percentage of revenue was generated by BCO independent contractors, which typically have a higher variable contribution margin than revenue generated by other modes of transportation. Other operating costs were $13.5 million in the 2023 second quarter compared to $10.4 million in 2022. This increase was primarily due to an increased provision for contractor bad debt and increased general equipment maintenance costs, partially offset by increased gains on sales of used Australian equipment. Insurance and claims costs were $29.8 million in the 2023 second quarter compared to $34.1 million in 2022. The decrease in insurance and claims cost as compared to 2022 was primarily attributable to a decreased severity of accidents during the 2023 period. However, total insurance and claims costs were 5.8% of BCO revenue in the 2023 period and 4.9% of BCO revenue in the 2022 period. The 90 basis point increase in insurance and claims cost as compared to BCO revenue was almost entirely attributable to the 14% decrease in BCO revenue per load. The sequential increase in insurance and claims cost as compared to the 2023 first fiscal quarter was primarily attributable to increased cargo claim expense. Selling, general, and administrative costs were $54.5 million in the 2023 second quarter compared to $59 million in 2022. The decrease in selling, general, and administrative costs was primarily attributable to a decreased provision for compensation under the company's variable programs and a decreased provision for customer bad debt, partially offset by increased information technology costs and increased wages. In the 2023 second quarter, the provision for compensation under variable programs was $200,000 compared to $8.3 million in the 2022 second quarter. Depreciation and amortization was $14.9 million in the 2023 second quarter compared to $14.3 million in 2022. This increase was due to increased depreciation on software applications resulting from continued investment in new and upgraded tools for use by agency capacity, partially offset by decreased depreciation on the company's trailer fleet. The effective income tax rate was 24.6% in both the 2023 and 2022 second quarters. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $419 million. Cash flow from operations for the first half of 2023 was $192 million and cash capital expenditures were $13 million. Back to you, Jim.

Thanks, Jim. The 2022 second quarter made for a very difficult year-over-year comparison to the 2023 second quarter. Following the 2022 second quarter, 2022 third quarter truckload pricing and truckload volume both experienced below-normal seasonal average sequential growth rates. One would expect us to make the 2023 third quarter to the 2022 third quarter comparison slightly less challenging than what we have faced during the two most recent quarters. However, to date, through the first few weeks of the 2023 third quarter, we have not seen significant consistency in truck revenue per load on a day-to-day basis. Accordingly, volatility in revenue per load and to a lesser degree, truckload volume make predicting near-term performance very challenging. Yesterday's earnings release noted that early July truckload comp was trending below historical sequential monthly patterns. Given the low start in truckload volume in the quarter, we have forecast sequential month-to-month patterns in truckload count to trend below normal seasonal patterns throughout the third quarter. Assuming we remain at below-normal month-to-month seasonal trends, we expect truckload comp in the 2023 third quarter to be 16% to 18% below the 2022 third quarter. We expect 2023 third quarter truckload pricing to be 10% to 12% below the 2022 third quarter. Given those estimates, the number of loads hauled via truck is expected to be approximately 6% below the 2023 second quarter compared to a normal seasonal pattern of minus 1%, and revenue per truckload to be approximately 1.5% above the 2023 second quarter, slightly below normal seasonal patterns. We also expect revenue from our non-truck modes to be similar to that of the 2023 second quarter. Based on the assumptions mentioned, we expect revenue in the 2023 third quarter to be in the range of $1.275 billion to $1.325 billion and earnings per share to be in the range of $1.65 to $1.75. The 2023 third quarter guidance incorporates a variable contribution margin range of 14.4% to 14.6% and insurance and claims costs somewhat similar to the 2023 first half as a percent of BCO revenue. We don't expect much change to the overall freight economy in the 2023 third quarter compared to what we experienced in the 2023 first half. Overall, though, demand for freight transportation is expected to remain relatively soft in the 2023 third quarter, continuing to drive truckload volumes significantly lower compared to 2021 and 2022. Directionally, it is difficult to forecast truckload volume levels beyond the next few months as future economic conditions are very unpredictable. Regardless of the economic environment, Landstar's challenging year-over-year comparisons, the resiliency of Landstar's business model continues to generate significant free cash flow. Through the first half of 2023, Landstar generated free cash flow of $179 million. Additionally, at the beginning of my remarks, I discussed the significant unprecedented favorable impact of pandemic-driven consumer demand and supply chain disruption on the company's revenue in fiscal years '21 and '22. Although we're in a freight cycle that varies significantly from 2021 to 2022, where revenue increased over those two years by 80%, assuming we achieve the revenue provided in the third quarter guidance plus a similar amount of revenue during the fourth quarter, fiscal year 2023 revenue will exceed pre-pandemic 2019 by 30% to 35%. And with that, Bill, we'll open to questions.

Thank you very much, sir. At this time, we will begin the question-and-answer session. We have the first question coming from Jon Chappell from Evercore. Your line is now open.

Good morning, thank you. Jim, I appreciate the detailed information. I know you don't break it down by line item, but given that Landstar is a significant factor, I'm trying to understand if we're seeing a bottoming out in terms of load volume. It seems that the third quarter might be the lowest point for load volume, while revenue per load could have already reached its lowest in the second quarter. Is that a correct way to view this in relation to your broader guidance for the quarter?

I would like to confirm that. However, as mentioned earlier, we are expecting some ongoing seasonal weakness in both the van and flat segments. We have not seen any indications that we are starting to see a bottom, which we hope we have reached, or any acceleration in growth from our current position. I would say that both types of equipment are generally moving in the same direction. There isn’t a significant increase; typically, rates might rise by 1% entering the third quarter, but we are seeing a potential decrease of about 0.5% to 1%. While it’s not a major change, it is still trending seasonally softer for both equipment types compared to our historical data.

Okay. That's helpful. And then secondly, there's a lot of disruption in the market right now, probably more so than any time since the Spring of 2020. Have you seen any changes in the sentiment around your customers? And again, this kind of relates to any segment. We had companies potentially going out of business, potential strikes. I think free flow shift from one side of the country to the other. Any kind of view from your customers that they're in a bit more of a rush for capacity than maybe over the last 12 months? And two, any direct benefit to Landstar specifically from some of these moving chess pieces?

Yes, I would say two significant disruptors recently discussed involve LTL parcel type businesses that don't have a direct impact on us. However, if something were to change with one of those businesses and we needed to transport freight between distribution centers for a different carrier, that could affect us. Overall, I wouldn’t classify that as very significant. Regarding the shift in geographic regions, items have been moving to the East Coast from the West Coast over the past few years, so I don’t think there’s any new impact for us. In terms of items occurring in the market, such as carrier bankruptcies or carriers exiting the market and the number of available trucks, we are seeing some trucks pushing rates up slightly in very isolated areas, particularly on the West Coast where there are regulatory issues affecting the number of trucks available in independent contractor status. Besides that, things have remained consistent for the past six to eight months, so there’s nothing particular prompting us to consider an upward trend at this point.

We will move to the next person coming from the line of Scott Group of Wolfe Research. Your line is now open.

Hey, thanks. Good morning. I just want to clarify a couple of things first. So volumes starting July are underperforming seasonality. Jim, you're assuming that they continue to underperform seasonality in August and September. Is that right?

Yes. That is absolutely right.

And the thought process on that is...

To be honest, we missed the second quarter when we released in April. I think what we projected when we put the second quarter guidance together with sequential improvement in normal seasonal patterns. And since we haven't seen that in six or seven months, we just played a little conservative on trending seasonally. Kind of where it's been is missing the seasonal trends by 1% or 2%. So that was the logic. Do I see patterns? Can I guess, August? No, there's nothing indicating other than trends, to be honest with you, Scott.

Okay. Fair enough. And regarding the question about yellow, are you noticing any increase in your substitute line haul business? Do you believe that you might start to see this as some carriers gaining share may require additional line haul capacity?

I would expect that we might see some changes, but it's clear that they won't be significant for the third or fourth quarter. By the end of the third quarter, if we do see something, it likely won't even be noteworthy enough to discuss. So, it won't have a material impact.

Okay. Taking a step back, you've made accurate assessments about where we are in the cycle. Are we at the bottom? Are you confident enough to say that? What is your perspective?

I want to express my thoughts, but I'm not sure if I can confidently say we're at the bottom. Our seasonal trends are still below normal, which suggests we're not there yet. While the decline in these abnormal seasonal trends has slowed a bit, we remain slightly below those trends. Therefore, I wouldn't declare that we've hit the bottom. I'm someone who believes in cycles, and it's not just about demand and the number of trucks; it also involves contract and spot pricing. Right now, there's a notable gap between spot prices and contracts. We're experiencing some ongoing pressure on the contract side, and spot prices haven't increased yet. When I discuss trends over the next six to eight quarters, I still believe we'll see improvements by late 2023 or early 2024. However, the key question is whether demand will continue to decline or if it will start to improve from our current position. That's why I'm cautious about stating whether we're at the bottom.

So hopeful, but visibility is well. Okay.

We will move now to the next question coming from the line of Jack Atkins of Stephens. Your line is now open.

Good morning, everyone. Thank you for taking my questions. I'd like to revisit the discussion about the cycle from a capacity standpoint. Joe, could you provide some insights on the decrease you’re observing on the BCO side and among active third-party broker carriers? What do you think is causing this? Is it due to retirements, or is it related to capacity attrition?

Yes, Jack, I believe that the factors driving this situation are quite diverse. The primary influences appear to be the demand and rate environments. As Jim mentioned, when rates decrease, we typically observe an increase in terminations. We tend to respond swiftly to shifts in demand and pricing on the BCO front. Looking back, I have some numbers dating back to 2017 when the economy began to improve. We added 257 trucks that year. The strength continued into 2018 with an addition of 903 trucks. In 2019, there was a slight downturn, and we lost 356 trucks. We all remember what occurred in 2020, where we added 748 trucks in the last three quarters of that year. In 2021, we added 873 trucks due to favorable conditions. However, we lost 583 trucks primarily in the latter half of last year, and we are down 733 in the first two quarters of this year. Our BCOs tend to react strongly to changes in rates and pricing. Some have retired, while others seized the opportunity to sell their equipment at premium prices, choosing to either retire, take a different path, or drive for another company. Additionally, repair costs have significantly impacted us over the past few quarters, although that is starting to alleviate somewhat. Overall, it's a mixture of various factors influencing the situation from a BCO standpoint. On the carrier side, we are seeing net revocations shift to negative territory. The number of carriers expected to exit the industry seems to be lower than anticipated, and I share that view. However, I question whether the data we receive is as precise and timely as the BCO data we have. There are still new carriers entering the market at a rate slightly higher than might be expected. I can't determine if this reflects optimism or if regulations in places like California, where owner-operators must operate under their own authority, play a role. Overall, indicators such as the trucking conditions index from FTR and the ATRI data highlight that it's a challenging time in the industry. This contributes to the turnover rate and the hesitance of small carriers or owner-operators considering opportunities with Landstar.

Okay. That's super helpful. Thank you for that. And then I guess, maybe Jim, for you. Any sort of indication from your customers around peak season? I know it may be still early, but are you hearing anything around commentary from them on what they might need from you? How to prepare for that? Or is it just kind of still TBD?

I think it's still to be determined. From the customer's perspective, they seem to be about as confident as we are as we approach the peak season. One small note is that during peak season, we usually receive requests for trailing equipment towards the end of the year. However, those requests have significantly decreased over the past two or three quarters. We did notice a slight uptick in returns going into the fourth quarter, but that's all the information I have. Overall, it looks like we're just going to have to push through to the year's end. Yes.

We will move now to the next question coming from the line of Bascome Majors of Susquehanna. Your line is now open.

Jim, you're a self-described cycle guy here. If I look at how you've operated through cycles historically, usually, when you have down years, Landstar's top line and bottom line recover pretty quickly in the year after, if we look at and say 2014 or second half of '20 or even some earlier periods. But there is one analog around the peak of the mid-2000 cycle where things kind of flat lined for a few years and really didn't go anywhere. I'm curious as you look at the cycle that we're coming out of today. Is there any rhyme or reason to some of these historical analogs? What does it feel like compared to downturns you've seen in your history? And are you cautious or concerned that we might have an extended downturn that really doesn't have a snapback that you typically see after a down year?

Well, it's a very unusual down year this year, right, because the peak to trough is bigger than it's ever been. So it's really hard to gauge where the next peak is. I mean, I think that's what we're trying to figure out, and we're trying to figure that internally. You look at truck rates right now and where they are over the next 12 to 18 months, I could see employment back 10%, which is pretty beneficial. The peak to trough over the last six probably years has been much more significant than it was prior to that. And I'm not sure if that's due to access to pricing information coming from the DATs or oral stuff like that. Because if I go back in 2010, '11, we're getting bids from 12 shippers, and we're putting our pricing in their use. Now they can see all the pricing data, and that may be driving this higher or lower. So my expectation is we're not going to see near the spike, the 2021 to 2022 peak, spike when it grew when van pricing grew 76%. But I would expect you're going to see better than those flat years. Just based on the performance here and the things we've done with whether it's technology and the driving agent sales and recruiting more agents into the system. Other than that, it's really hard to project that. We really need demand to pick up from the consumer side. But I think we're well prepared with the new tools. We rolled out pricing tools. We're building efficiencies within the agent's office, so they can do more with the same number of people they have. That's really our goal, to make sure when this thing turns, we can attack volume better than we have in the past.

Thank you for that. I'm not sure which Jim wants to answer this, but can we discuss when we might see a return, perhaps not as quickly as the 2020 or 2021 recovery, but still a recovery? When that happens, can you explain how the financial model can be adjusted on the upside? What needs to return in terms of incentive compensation or other costs that are currently not in play during the downturn? How should we view the leverage we can gain when the revenue begins to rise again? Thank you.

One thing we've consistently discussed is the incremental growth of our variable contribution. While I can't refer to it as gross profit, I do mean variable contribution. We emphasize the leverage we gain from growth and variable contribution, and we believe that 2023 will be our lowest point. Our goal is to achieve a 70% pass-through of incremental growth in variable contribution to our operating income. However, we need to consider that after a year like 2023, where our incentive compensation and variable programs are significantly reduced or sometimes nearly nonexistent, we will face challenges in 2024. As we approach 2025 and start to see growth again, we are optimistic about returning to that 70% pass-through rate. The organization has strong leverage due to its established infrastructure, and since a substantial portion of our SG&A is related to headcount, we don't anticipate needing significant headcount increases as we add more volume. While I wouldn't forecast 2024 to achieve that 70% pass-through due to the variable compensation tied to our earnings, I believe our aim for 2025 will be to push towards that goal of 70% growth in variable contribution. Jim can elaborate on the incentive compensation and the specifics of the headwind we may face.

Yes, Bascome. So if you recall, back in February, I gave an 18 to 20 tailwind in a bear case scenario. And in the first quarter, I updated that to 16 to 18. Well, now second quarter, I can say $20 million is the best case now on tailwinds, '23 versus '22. And as such, flipping to '24 to Jim's point, at kind of a one-time, if we hit our numbers, I would anticipate about an $11 million headwind on those programs, '24 versus '23.

Thank you both. It's very helpful.

That's the biggest variable for our cost. Well, that and the unpredictability of the insurance line, everything else is pretty constant other than a little bit of inflation. You've got inflation on the maintenance on trailers. We had a little bit of inflation on wages and other than that. But typically, the infrastructure is set, except for the unpredictability of the insurance line and the variable compensation program.

We will move to the next coming from the line of Stephanie Moore of Jefferies. Your line is now open.

Hi, good morning. Thank you for the detailed information you've provided. I think it would be useful to discuss how Landstar tends to lag behind the market for various reasons, such as agent response times or dropping off trailers. Can you share when we might start to see a shift in the cycle from an industry perspective?

We closely monitor various industry data points that are commonly tracked, such as DAT and FDR data. When we compare our revenue per mile to this industry data, we tend to haul premium freight on the BCO side, which results in slightly higher figures, though we generally follow similar trends with a slight delay. If there is a lag of around 30 days, we might see industry pricing begin to rise while our figures remain relatively stable. We don't respond quickly enough to changes, whether they are increases or decreases. So if we notice upward trends in the industry data, we typically see that lagged by a month or two. Currently, there isn't much movement. However, we did observe a positive sign recently: for the first time in 15 months, BCO revenue per mile, excluding fuel, increased from May to June. This could suggest we might be nearing the end of the downturn, but we hesitate to make that assertion based on just one month of data. We recognize some positive trends in van revenue per mile on the BCO side, but again, it's too soon to determine if this will be a sustained trend. We pay close attention to this, primarily focusing on rates. Volume, on the other hand, relies on our efforts to drive it, and while demand can influence our volumes, we actively work on sales initiatives.

Got it. I appreciate it. And then just my follow-up, I wanted to touch a little bit on capital allocation and maybe if there has been any kind of change in the strategy, just given that there appear to be kind of a void of share repurchases in the second quarter, which seems a little unlike you guys. So just maybe an updated thought on share repurchases and normal capital allocation?

Hey, Stephanie, no change, same approach, as when we are price sensitive and we don't chase run-ups. We'll be patient, and the cost of being patient is a lot less today than it was 12, 18, or 24 months ago.

We will move now to the next person, who is Amit Mehrotra of Deutsche Bank. Your line is now open.

This is Ben Moore calling in for Amit. I wanted to ask a little further about your BCO count down to the 97 to 100 handle. It looks like in 4Q '19, it lagged down further at the time of 95 handle. And then 1Q '20 COVID led down further to a 94 handle. What would you say the current 97 handle that's signaling to you? What could it point to with respect to where we are in the cycle? Could it lag down further? Do you sense that that might be the bottom?

Yes, Ben, in July, we are seeing a slight further decline, but overall in Q2, the net decline has slowed down. I hope to see something similar in Q3, and depending on demand and pricing, we might be able to stabilize in Q4. Currently, Q2 is showing a reduction in that decline. Our additions of new equipment are improving both sequentially and year-over-year, and while our terminations are also improving sequentially, they are still significantly behind last year. Utilization is getting better, with BCO utilization at minus 5% in Q1, minus 3% in Q2, and flat in June compared to the previous year. Hopefully, this positive trend continues based on the macro environment and future demand. I believe we could be approaching the bottom by the end of the year.

Great. Thanks. And kind of piggybacking on a question earlier on the rest of the industry, just focusing on the yellow situation. Would you say it might be benefiting you in terms of outsourced line haul for truckload and the rails portion that you have, not just the LTL freight? And if so, what would you expect the cadence of this freight in terms of finding new carriers? Could it be a few months to settle?

We don't anticipate any significant volume coming to us from any kind of yellow bankruptcy or anything like that. There might be something, but like I said, I can't imagine something we'd be talking about moving the needle in the third quarter, or for the year, actually. Our relationship in that arena isn't like it is with other than some of the other parcel and small package carriers or LTL.

We will move now to the next person, who is Bruce Chan of Stifel. Your line is now open.

Everyone, thanks for the question. Jim, maybe getting away from the cycle a little bit where call it, five years and a couple of cycles past the haul of a little digital brokerage. And we're seeing maybe a new kind of tech disruption detour in AI. So I wanted to ask you, I guess, number one, do you see much potential for disruption from AI in either your business or in the brokerage industry? And are there any early investments or exploratory investments that you can make here on behalf of your agents?

Yes, you are compensated for transporting freight from one location to another. The key lies in how effectively you share data between the truck and the shipper regarding pricing. To me, AI technology primarily enhances communication and efficiency in how carriers and customers interact to meet their needs. However, it’s important to note that our core task remains the same: picking up freight at one point and delivering it to another, and AI doesn't alter that unless we're discussing autonomous vehicles. We have a dedicated team focused on improving our operational efficiency, whether that involves handling call volumes, developing pricing tools, or speeding up credit issuance to carriers and communication with customers. We are definitely focused on these improvements. I don’t see AI as a threat from companies like Uber claiming they will disrupt the industry and bypass brokers. I believe everyone is trying to keep pace with emerging technologies, and if you recall, there was a significant focus on blockchain for a time. AI certainly holds more usefulness than blockchain did, and we’re staying engaged with that. It's pertinent to mention that predicting spot market prices using historical data can be misleading, especially in such a rapidly changing environment. There has been past competition that claimed they could provide spot market pricing for six months out, but such projections are not reliable given daily data fluctuations. I feel similarly about AI, as it often takes historical data and attempts to project it in a volatile spot market. Nonetheless, AI will prove beneficial for communication via chats, speeding up quotes to customers, and providing information more promptly. In essence, AI is about enhanced communication and improved algorithms for optimizing freight routes.

Yes, that's great. Thanks for the insight.

Yes.

We have our last person to ask the question coming from the line of Scott Schneeberger of Oppenheimer. Your line is now open.

Thanks very much. Good morning all. I wanted to focus a little bit on the industrial end markets. It looks like machinery, building products, I'd say, doing a little bit better than consumer and other categories. Jim, could you speak to the kind of the trends that you're seeing? I think in one of the first questions you mentioned you didn't want to call a bottom on volume or rate on van or on-site. I was just curious, honing in more on unsided, how has it trended this year? Do you see a lot of opportunity for the back half? Is that just conservatism or maybe some green shoots of more opportunity to come?

Yes, I mentioned the only signs of improvement I have, which is that BCO van revenue increased from May to June, and perhaps carriers are seeking higher rates in certain regions, although this is limited. When I assess the situation with machinery and building products in terms of growth and volume, their declines are less significant because they didn't rise as much as consumer durables. Therefore, we're more focused on year-over-year comparisons rather than seeing significant differences between flatbed and van performance at this stage. The expectation was that flatbed would improve with manufacturing, while van might slow down a bit, leading to a flatbed recovery. However, we aren't experiencing the anticipated changes from six months ago. I don't see any early signs that would suggest a shift is coming. Again, building products have shown better year-over-year comparisons, but that may be due to their lack of involvement in the pandemic-driven growth seen in consumer durables. So this is our perspective. I can only hope we're at a low point, but I’m not ready to make that call yet.

All right. Thanks. Appreciate that color. And then kind of following up on Bruce's question, he was asking more about AI competitive threats in the industry. Curious if you can ask about what you're doing with your tech spend this year? It seems like you're shifting the pattern given the market environment or given shifts in your spend a little bit this year. Just an update there and any comments you may have on digital tools and how that progress is going in your system? Thanks.

Yes. When I became CEO and President in 2015, I made a significant effort to enhance our technology and create digital tools, moving away from our outdated IBM mainframe system. Over the past six years, we've made considerable progress, but we're still refining our systems. Our spending has increased significantly from 2014 to 2017, and now it's more stable year-over-year, amounting to approximately $25 million to $30 million focused on developing AI and digital tools compared to six years ago. We continue to invest in AI and digital technologies, but we are more strategic in our approach now. Our team is limited in expertise and IT resources, so we can't tackle too many projects simultaneously. We are carefully selecting areas, such as AI, that will be beneficial. We have had digital tools since 1999, which we refer to as Landstar 1 today, allowing BCOs and carriers to manage their loads, view pricing, and locate fuel stops entirely digitally. We continuously seek to innovate and stay ahead in technology. Our team is actively monitoring AI development and collaborating with external experts to enhance efficiency. Our approach to digital tools is tailored specifically for BCOs, setting us apart from typical broker freight services, as we have experience providing dedicated digital solutions since the mid-'90s. We understand the needs of our trucks and effectively communicate that to third-party carriers.

At this time, I show no further questions. I would like to turn the call back over to you, sir, for closing remarks.

Thank you. We knew we headed into this year that 2023 would be likely to be a very tough year coming off our record performance in '21 and '22. Nevertheless, on the U.S. recession, I expect the normal cyclical patterns common to the spot market freight industry to continue. As I said earlier, although it's difficult to say precisely when the current down cycle will turn into the next up cycle, history suggests we could see an inflection point in late '23 or early '24. And when that time comes, Landstar's network of agents and third-party capacity employees will be ready. Thank you, and I look forward to speaking with you again on our 2023 third quarter earnings conference call currently scheduled for October 26. Have a good day.

Thank you for joining the conference call today. Have a good morning. Please disconnect your lines at this time.