Landstar System Inc (LSTR) 2021 Q2 法說會逐字稿

Good morning, and welcome to Landstar System, Inc. Second Quarter 2021 Earnings Release Conference Call. (Operator Instructions) 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; Fred Pensotti, Vice President and CFO; Rob Brasher, Vice President and Chief Commercial Officer; Joe Beacom, Vice President and Chief Safety and Operations Officer.

I would like to turn the call over to Mr. Jim Gattoni. Sir, you may begin.

Thank you, Kirby. Good morning, and welcome to Landstar's 2021 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 2020 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 2021 second quarter financial performance was by far the best quarterly performance in Landstar history. Second quarter revenue, gross profit, operating income, operating margin and earnings per share were all each all-time quarterly records. To put this performance in perspective, prior to 2021 second quarter, Landstar achieved its all-time quarterly record for revenue in the 2020 fourth quarter and its all-time quarterly records for gross profit, operating income and earnings per share in the 2021 first quarter.

Landstar's financial performance in its 2021 second quarter exceeded the company's existing all-time quarterly records for revenue, gross profit, operating income and earnings per share by 21%, 17%, 18% and 19%, respectively. In reviewing the company's 2021 second quarter performance, quarter over prior year quarter financial comparisons to the 2020 second quarter are not meaningful. This is due to the significant downturn in the 2020 second quarter in demand for freight services and the U.S. economy in general, relating to the COVID-19 panic and various initiatives taken by Landstar in response to the pandemic to support its network of agents and BCOs.

During our first quarter 2021 earnings conference call, we provided 2021 second quarter revenue guidance to be in the range of $1.40 billion to $1.45 billion and diluted earnings per share to be in the range of $2.20 to $2.30. Revenue in the 2021 second quarter was $1.571 billion and diluted earnings per share was $2.40. Our guidance for the 2021 second quarter was at that time entirely based on the most recent sequential month-to-month trends and short-term expectations relating to those trends. Our initial guidance assumed truckload count would increase in a mid-single-digit percentage range over the 2021 first quarter.

As it related to truck revenue per load, first quarter truck revenue per load typically is lower than that of the second, third and fourth quarters. However, revenue per load on loads hauled via truck in March 2021 was an all-time monthly record. Our initial guidance for the 2021 second quarter anticipated the truck revenue per load would continue at the record March 2021 level throughout the second quarter, implying a softer month-to-month seasonal trend and an overall increase in the 2021 second quarter above the 2021 first quarter in a mid-single-digit percentage range.

Our expectation is that revenue per truckload would stabilize at March's record level held true in April, as April revenue per truckload was about the same as in March. However, truck revenue per load further increased in May from April at a higher rate than we anticipated based on historical seasonal trends, while June truck revenue per load compared to May was slightly below typical seasonal trends. However, June truck revenue per load was at an all-time record level for any month.

In anticipation of an upcoming investor conference call, we updated our initial 2021 second quarter guidance on May 28 via a Form 8-K filed with the SEC. The updated guidance reflects the truckload volume at the time trending above the 2021 first quarter in the low double-digit percentage range and revenue per load on loads hauled via truck trending above the 2021 first quarter in a high single-digit percentage range. Based on those trends, the updated guidance called for 2021 second quarter revenue and diluted earnings per share to both slightly exceed the high ends of the initial guidance.

Actual second quarter truckload revenue was generally in line with our May 28 guidance, while total revenue came in a little better than we expected compared to the updated guidance, mostly due to strong performance in our non-truckload transportation services.

To help give a sense of actual 2021 month-to-month trends compared to recent seasonal trends experienced at Landstar covering the same time periods, we compare the 2021 trends with our performance from 2016 through 2019. We're not including results from the fiscal year 2020, given the significant adverse impact the COVID-19 pandemic had on the freight industry.

On average from 2016 to 2019, the number of loads and revenue per load on loads hauled via truck increased from the first to second quarters by an average of 6.8% and 2%, respectively. The number of loads hauled via truck in the 2021 second quarter increased 12% compared to the 2021 first quarter, while revenue per load on loads hauled via truck increased 7.5% over the 2021 first quarter. Clearly, both growth rates are much stronger than recent first to second quarter trends.

As it relates to the number of loads hauled via truck, the change from March to April 2021 trended consistently with the seasonal trends based on our 2016 and 2019 history. Although the sequential performance in April 2021 was most likely better than the historical trend as we believe March 2021 load volume was elevated due to freight moving from fiscal February to fiscal March due to the storms that hit the U.S. in late February. The growth in the number of loads hauled via truck from April to May was 140 basis points better than the average increase from 2016 to 2019, while growth from May to June was in line with historical trends.

As it relates to revenue per load, March through April 2021 was 140 basis points below the 2016 to 2019 average, but growth from April to May was 200 basis points above the 2016 to 2019 average.

Growth from May to June was slightly below the seasonal trend reflected in the average change we experienced in 2016 to 2019. From an end market standpoint, consumer demand for building products, consumer durables and small package via e-commerce continue to drive record van volume in the 2021 second quarter. The number of loads hauled via unsided/platform equipment grew 35% over the 2020 second quarter, mostly due to improvements in U.S. manufacturing sector beginning in March.

As it relates to the new agent pipeline, we continue to attract qualified agent candidates for the model. Revenue from new agents was $24.3 million in the 2021 second quarter, the highest revenue from new agents in over 12 quarters. As to truck capacity, we ended the quarter with a record 11,557 trucks provided by business capacity owners, over 560 more trucks compared to our year-end 2020 count. During the 2021 second quarter, we recruited 10% more BCOs than during the 2020 second quarter. Our BCO retention rate also improved as compared to the 2020 second quarter as the number of BCO cancellations in the 2021 second quarter is 3% below the 2020 second quarter. Overall, the net increase in the number of BCOs -- BCO trucks in the 2020 second quarter speaks to Landstar's ability to attract qualified capacity in a tight truck capacity market.

Loads hauled via BCOs increased approximately 26% in the 2021 second quarter over the 2020 second quarter on a 12% increase in average truck count, plus a 12% increase in BCO truck utilization, defined as loads per BCO truck per quarter. It is worth noting that both BCO truck count and utilization in the 2020 second quarter were adversely impacted by the pandemic.

We ended the second quarter with a record number of approved third-party carriers in our network, while number of active third-party carriers, which we define as carriers who have hauled the load in the preceding 180 days, increased 43% in the 2021 second quarter over the 2020 second quarter. Our network is strong and continues to attract third-party truck capacity.

I will now pass it to Fred to comment on additional P&L metrics and a few other second quarter financial statement items. Fred?

Thanks, Jim. Good morning, everyone, and thanks again for joining us. Jim covered our revenue performance, so I'll make some additional comments about our P&L, specifically our gross profit, operating costs, operating income and taxes as well as the balance sheet and cash flow.

Gross profit in the second quarter increased 95% to $220.8 million compared to $113.1 million in 2020. Gross profit margin was 14.1% of revenue in the second quarter this year compared to 13.7% in the same period last year. The increase in gross profit margin was mostly attributable to the impact of $12.6 million of pandemic relief incentive payments made to the company's BCOs and agents in April and May of 2020, partially offset by mix as a percent of revenue contributed from our fixed margin business, which has higher gross profit margin, decreased from 51% of total revenue last year to 46% this year.

Due to the impact of the COVID pandemic on our 2020 second quarter, a more relevant comparison is to look at our sequential growth in the 2021 second quarter compared to the first quarter of this year. Even by this measure, we performed extremely well with gross profit increasing $31.5 million or 17% to the highest gross profit in the company's history. The sequential decrease in gross profit margin from 4.7% in the 2021 first quarter to 14.1% in the second quarter was mostly due to mix as truck brokerage revenue became a larger share of our revenue in the 2021 second quarter and agent commission incentives tied to achievement of specific revenue thresholds on loads hauled by BCOs also grew as a percentage of revenue compared to the first quarter.

Moving on to our indirect costs and expenses. Our other operating costs were $8.9 million in the second quarter of this year compared to $7.4 million in 2020. This increase was primarily the result of higher trailing equipment maintenance and tire costs due to a higher trailer count and improved utilization, more recruiting and qualification costs related to our BCOs and fewer gains on trailer disposal during the 2021 period compared to last year. Insurance and claim costs were $24.1 million in the second quarter this year compared to $19.8 million in 2020. Total insurance and claim costs represented 3.7% of BCO revenue this year compared to 5.2% of BCO revenue last year. The decrease as a percentage of BCO revenue was mostly the effect of a 37% increase in BCO revenue per load.

In absolute dollar terms, the increase in insurance and claims expense was primarily due to the increased severity of current year claims during the 2021 period, additional miles driven by our BCOs and a $1.8 million increase in insurance premiums. Partially offsetting these increases was a $1.5 million benefit from the decrease in net unfavorable development of prior year claims in the 2021 second quarter compared to 2020 second quarter.

Selling, general and administrative costs were $54.1 million in the 2021 second quarter compared to $40.6 million in 2020. The increase in SG&A costs was almost entirely driven by the estimated cost of the company's variable cash incentive compensation plan and equity incentive plan increasing by $12.6 million over the 2020 second quarter due to the expectations of a record-setting financial forecast for fiscal year 2021. Partially offsetting those cost increases was a lower provision for customer bad debt. In addition, depreciation and amortization expense was $12.1 million in the 2021 second quarter compared to $11.5 million in 2020.

Operating income was $122.2 million or 55.4% of gross profit in the 2021 quarter versus $32.2 million or 28.4% of gross profit in 2020. Operating income represented a new all-time quarterly record for Landstar. Our effective income tax rate was 23.9% in the 2021 second quarter compared to 22.3% in 2020. The increase in the effective income tax rate was primarily attributable to a higher-than-anticipated state tax refund last year that reduced the 2020 second quarter effective tax rate, as well as a higher provision for nondeductible executive compensation during the 2021 period, partially offset by the recognition of increased excess tax benefits during the 2021 second quarter compared to the same period last year related to the vesting of share-based compensation.

Our net income for the 2021 second quarter was $92.3 million, which was up from $31.2 million in the same period last year and up from $77.2 million or 19.5% compared to the 2021 first quarter. Our diluted EPS in the 2021 second quarter was $2.40, up from $2.01 in the 2021 first quarter.

Looking at our balance sheet. We ended the quarter with cash and short-term investments of $239 million. Cash flow from operations year-to-date in 2021 was $137 million compared to $198 million during the 2020 period. The decrease in cash flow from operations was mostly due to changes in working capital, with a 63% increase in revenue year-over-year driving up net receivables defined as accounts receivable less accounts payable compared to a decline in working capital in the same period last year, which generated cash from working capital in the year-to-date 2020 period.

Before I wrap up, I'd like to just say that I'm very pleased to be at Landstar and look forward to talking with and meeting many of you, hopefully, even in person, as schedules and events permit. Jim and I and the rest of the Landstar team are really pleased by the company's performance this past quarter, and we look forward to keeping you updated on the business as we make our way throughout the remainder of 2021.

And now, I'll turn it back to Jim to discuss our outlook for the third quarter.

Thanks, Fred, and welcome to this superior management team. Freight demand began to significantly improve in August 2020 as the U.S. economy began to improve from increased consumer spending. The strength in the freight environment that began in August continued through the end of 2020. As such, year-over-year financial comparisons should begin to normalize as we move through the 2021 third quarter.

As it relates to our 2021 third quarter expectations, I anticipate the strong freight environment to continue from the 2021 second quarter. In a normal freight environment, where the supply of trucks and freight demand remains stable, the company's third quarter truck revenue per load typically slightly exceeds the second quarter, while the number of loads hauled via truck typically tracks slightly below the second quarter.

When we experience those trends, third quarter revenue often approximates revenue of the second quarter, while gross profit tends to decrease slightly from the second quarter due to a lower gross profit margin. Currently, revenue per load and the number of loads hauled via truck are at historical high levels. And in the first few weeks of July, truck revenue per load and the number of loads hauled via truck are tracking in line with typical June to July trends. Based on this performance, we believe there is seasonal stability at these elevated price and volume levels. Based on the current environment, I expect 2021 third quarter truck revenue per load to exceed the 2021 third quarter in the low 20s percentage range and the number of loads hauled via truck to exceed the prior year third quarter in a mid-teen percentage range.

As such, I expect third quarter revenue to be similar to the 2021 second quarter revenue in the range of $1.55 billion to $1.60 billion. I also anticipate insurance and claim costs in the 2021 third quarter to be approximately 4.6% of BCO revenue, above the 3.8% of BCO revenue experienced in the 2021 first half. This increased estimate of insurance and claims cost is based on increased premiums relating to auto liability coverage that we are paying to third-party insurance companies, increased severity we have already experienced during the first several weeks of July as compared to the 2021 first half mostly due to a small number of specific incidents, and our experience that over longer periods of time claim costs tend to track more in line with historical trends than we have experienced thus far in 2021.

Based on that range of revenue and assuming insurance and claim costs at approximately 4.6% of BCO revenue, I anticipate 2021 third quarter diluted earnings per share to be in the range of $2.20 to $2.30. The projected increase in insurance and claims costs reflected in our third quarter earnings per share guidance as compared to actual insurance and claim costs in the 2021 second quarter would adversely impact 2021 third quarter earnings per share by approximately $0.12.

Overall, I am extremely pleased with Landstar's first half 2021 performance. 2021 first half revenue is by far the highest first half revenue in the company's history and increased approximately $628 million or 28% compared to the previous record set in the 2018 first half, while gross profit increased approximately $83 million or 25% compared to the 2018 period.

2021 first half gross profit, operating income, net income and diluted earnings per share were by far the highest ever achieved in any first half in the company's history. In our view, the overall environment for Landstar continues to be as strong as it has been in any point over the last 2 decades, and Landstar is positioned for a year of tremendous success. We continue to increase our available capacity and remain focused on providing and enhancing technology-based tools for the thousands of small business owners in both the agent capacity sides of our network. I expect 2021 to continue at its record-setting pace as we look to easily surpass $5 billion in annual revenue for the first time in our history.

And with that, Kirby, we will open to questions.

(Operator Instructions) Our first question would come from the line of Jack Atkins of Stephens.

Fred, congratulations on your role with the company.

Thank you.

So I guess, maybe to start, Jim, kind of going back and picking up off of a comment you made on the last conference call. You were talking about net operating margins and sort of how they could trend once we begin to see, the cycle maybe begin to normalize into 2022. And I know that it's very, very difficult to anticipate and predict sort of how things are going to trend from here. No one would have anticipated we would be where we are today. But I know that there are a lot of costs that sort of flex up and flex down in your business depending on sort of what's happening with the top line and what's happening with gross profit. And I was just curious if you had a chance to maybe think about net operating margins being above 50% next year, even if we were to see a slower spot market from a freight perspective. Do you think that's realistic? I get a lot of questions just around the sustainability trends and if folks can grow earnings in 2022. I would just be curious to get your thoughts on that subject.

Yes. Jack, one of the things to take into consideration. As you know, our -- the management team and employees here that we have the incentive compensation plan that's highly variable to our results. And you look back at 2019, second best year ever, and we didn't necessarily hit our bonus targets and, therefore, there wasn't one. So -- but then on the flip side, on a great year like we're having, that variable comp plan is going to be elevated. And I'll tell you right now that our projection for this year is probably in the $20 million to $25 million range for that. And typically, it's $8 million. And then the equity comp actually works in a similar fashion because it's tied to our equity awards vest based on growth in earnings, and therefore, we have a similar variability there. And you're probably looking at about an equity comp probably another $25 million this year for that. So you're looking about a combined $45 million to $50 million in comp that's in this year.

And in a normal year, it will be about $20 million combined. So you've got that supporting that 50% operating margin. Like there's a lot of pressure on the margin this year, and we're putting 55% up, right? So you can -- we can have a decent decrease in gross profit and still support a 50% margin just because of the tailwinds of the -- the way our variable comp programs, which benefits everybody.

The theory here is that if the BCOs and the agents aren't doing that well and the market is kind of soft, that the executive team shouldn't get awarded. And if we're having a great year, it's the same thing. Agents and BCOs are doing great, and then we do great. So the model kind of protects itself when it comes from that kind of margin perspective, when you have a little softening into a year. And I would think -- and I haven't run numbers, but we could probably have a decent-sized pullback in gross profit and still stay above 50% or around 50% because of that tailwind on the SG&A line.

Okay. That makes a lot of sense, and I appreciate that additional color on that, Jim. And I guess for my follow-up question, you guys have been accelerating your investments in technology over the last several years. And I think people underappreciate just how much technology you guys have and have pushed forward to the agents and to your BCOs over the past few years. But given how strong this year is from a top line and a gross profit perspective, are there any thoughts to maybe accelerating some of those technology investments just because you have the sort of windfall from a profit perspective?

No, Joe (sic) [Jack]. I would say, Jack, that back in 2015, when I stepped in the role, I told everybody there's an open checkbook to make our tools better. And we're spending what we can to get it done. We have so many projects in the air right now. There aren't -- there's nothing that stands out right now that we would add or -- to the project list. What we're focused on, on the front end of this is user experience, right, agents and trucks, making them more efficient, making things more effective on the tools that already existed, but making them more effective, and we have a lot of stuff in the pipeline there.

On the back end, that we don't have to rush into as an ERP and billing system because our stuff is pretty much from the '80s. And it works today administratively, but sooner or later, we'll jump on that, but there's no reason to jam that in. It will help build efficiencies within the building, but it's -- we're really focused on user experience. So I don't think there's anything that I would say, hey, we should spend another $50 million on tech today. Maybe trickle in other projects that will be -- maybe moved forward a little bit. But I wouldn't say there's anything we're on be telling the world that all of a sudden we're going to accelerate this project into a year, and it's going to cost $50 million.

I think we're still going to do what we do and spend an extra $20 million or $30 million incrementally. And actually, that incremental is no longer incremental because that's probably the spend rate where we are right now where we used to be. We're probably $20 million to $30 million over where we were 4 years ago. And that level of spending is probably going to stay where it is. Unless like you say, we're not aware of anything we're going to pull forward. But if there was something, I wouldn't say it's going to jump from 25% to 30% to 50% to 60%.

Our next question would come from the line of Todd Fowler of KeyBanc Capital Markets.

Fred, welcome to the self-proclaimed superior management team. Nice to have everybody on the floor.

Thank you. Good to be here.

Jim, so on the guidance, and I understand it makes sense to set up the guidance based on what you've seen from historical seasonal patterns. I know that the year-over-year comps are starting to normalize. The last couple of quarters, you've run ahead of seasonal patterns. Are there things that you're seeing right now either in underlying demand or things on the supply side that suggests that we're going to shift to more in line with seasonal trends? Is there anything that you're seeing that would bias you one way or another versus seasonality as we move through the back half of the year?

Well, Todd, in the first quarter, I got a little skeptical and I was -- I flattened out the second quarter because March was so great. But this time, I think it's a little bit different. June was good, and we're sitting at all-time high revenue per load. But what we've seen through June, if you -- when I went through my comments, you heard that May to June was more seasonally in line when it comes to loadings. And then May to June revenue per load was slightly below the seasonal trend, again talking '16 to '18 -- '19 trends. I think on the rate, it's really because of May spike, right? So the softer June -- May to June was probably because May spiked.

So -- and in the first couple of weeks here, we're sitting in July, the first 3 weeks into July, and I'm seeing the normal June to July trend. So I'm basing this on about a 6- or 7-week stability, right? I think we're seeing -- I got 6 weeks of stability right now of seeing things that are tracking normal as we would have seen in those 3 years of '16 to -- or 4 years from '16 to '19. So there's nothing pushing us either higher or lower than that at this point. So that's how we get to the trend and that we think it's going to continue. And we always -- clearly, we're meeting with -- Rob meets with his team and Joe talks to his team about what they're seeing in the market. And it's supported by the commentary coming out of the field and talking to the agents and the customers is how we come up with that. We're looking at a more normal second to third quarter trend.

Okay. Yes, that makes sense, and that's helpful. So it sounds like more rooted in what we've seen in the last 6 weeks or so, kind of more consistency and more stability. And so maybe just along those lines, can you speak to anything specific or different between what you're seeing on the van side and what you're seeing on the unsided/platform side from a seasonal standpoint and what your expectations would be for both of those for the rest of the year? And I'll turn it over after that.

Yes. The strength really is still on the van side. It's whether the building products, consumer durables or substitute line hauls really -- I mean, it's really where the market stands, where flatbed has gotten a little bit better. It's not gangbusters, but most of the performance is still coming out of van with flatbed being better. And it's still most of those customers and shippers that we're hearing from that are -- they're still concerned about the back quarter, right, and the peak and stuff like that. So it just feels like a normal seasonal trend on the van side. And then the flatbed side is maybe a little improvement as we go through the quarter.

But yes, there's nothing specific that's changed in either of those dynamics that I'm aware of. The one thing we talk about sectors, right? And everybody is talking about the automotive sector and the lack of chips. One of the -- we've only had -- we only had 2 commodities that -- or sectors that dropped in load volume from the first quarter to second quarter. And one was automotive, right? And I think we expected that coming into the quarter. And I expect that one is going to continue. But other than that, there's nothing really unusual in the trend -- that we're looking at trends for the rest of the year.

Our next question would come from the line of Bascome Majors of Susquehanna.

Jim, your stock is certainly a lot higher in absolute terms than when it was when you were buying more aggressively in past years, but the multiple has come down as your earnings have come up. Do you feel that we're approaching the point where that normal return on capital could be more attractive? Or do you think we're still in the special dividend mode if and when that time comes?

As you noticed, we bought about 150,000 shares back in the quarter. That's kind of a light quarter for us. We have seen a pullback in the stock, about 10%, and we didn't really see anything in the change in the business dynamics. So clearly, when you look at what The Street is saying at 8.85 for the year or 8.83 for the year, yes, our P/E is now a lot more reasonable than it was 6, 7 months ago. So yes, I think we're in a buying opportunity situation now. And I would expect that we're going to be opportunistic. And if it stabilizes where it is, it's -- I think it's opportunistic.

We're in an opportunistic position right now. It doesn't count out as special at the end of the year. I mean we will still always discuss that in December by looking at cash on the balance sheet and any opportunities we have in the market. But right now, I'd expect something similar to what we did in the second quarter as long as the price stabilizes within a certain range. And again, if it starts -- we don't compete against investors if we start seeing a climb up, but we like the stability of where it was, and we didn't see any change in the business dynamics.

One housekeeping question. I don't know if I heard thoughts on where the gross margin should trend. Can you give us an update on that? And I apologize if I missed it.

We didn't say it because we're keeping it as a secret. No, actually, it's similar, but maybe a little less than the second quarter. You typically see a little bit of a downturn. And I think the first quarter is 14.1%. I think we're using like maybe 13.9% to 14% at this point. And it really is -- I mean, we just end up seeing a little more brokerage come across. I mean it's nothing to do with any pressure from the tightness of capacity. It's really just the way we typically trend.

And if I could get one more in there. I mean you did make some comments to an earlier question about being able to maintain a pretty good operating margin even if net revenue dollars turn against you next year. It looks like at least the sell side is settling out at somewhere with a mid- to high single-digit EPS decline next year. I mean does that feel reasonable based on your July 2021 crystal ball? Any thoughts on how we bridge from this year to next?

I think it's very difficult in this environment to project 12 months out because of the unpredictability of the pandemic, stimulus stops, people coming back to work, people may be traveling. I think it's difficult to answer of where that EPS. Now I know what The Street has. Is it reasonable? It's a better question toward the end of this year than it is right now.

But I think as a management team here, we do think we're going to see some softness sometime in the first half. And I still think that softness is not going to -- I don't think it's got to the point where it's going to get us below that 50% margin, especially when we have about -- that tailwind of about $30 million worth of variable comp sitting in SG&A this year. That if we hit targets next year, you'd have that tailwind. So I'm sitting here, I'm comfortable that we'll maintain a 50% margin next year with a little softness in gross profit. I hope I answered that question.

Our next question would come from the line of Scott Group of Wolfe Research.

Jim, this uptick in insurance costs, should we think about this as a 1 quarter event? Or is this in your mind sort of the new normal range on insurance costs?

Part of it is probably just special to the quarter because we are aware of a little bit of increased severity coming into the first 3 weeks of July. And when you have an incident, you hear about it. Getting the facts takes a lot longer than it used to and sometimes facts change. So we don't know exactly the outcome of a couple of these things that happened in the first quarter. So there's a little bit of excess in there. I would -- if I were to guess now, without those [into], you're probably 4.2%, 4.3%, not 4.6%. But we're hoping that we were very conservative on that number. And things on the incidents we know about are -- the back patterns and stuff support maybe a lesser severity than what we think they have -- that they sound like. So I think it's a little hefty the 4.6% to be honest with you. I think it's conservative, but it's so hard to predict what's going to happen in insurance and claims. Based on history, it's probably a little heavy.

Right, right, right. Okay. Your point about the last 6 or so weeks have been seasonally normal after such a long period of outperforming seasonality. What's your history? Do we typically -- after we have this period of in line with normal, do we have a shot to get back to better than normal? Or is this typically or historically the beginning of a transition to underperforming normal? What's your crystal ball here?

My crystal ball is it's very hard to decipher what we think is going to happen at peak, right, October, November, December. Capacity is still tight. There's no question there. And if demand creeps up, I think you're getting seasonal or better than seasonal. I just -- demand for trailing equipment is still very strong. I'm not sure there's going to be enough trailing equipment in the market to satisfy all the demand coming across. And we're still anticipating a pretty strong fourth quarter. So we might see a stability coming in here through August, September. But if we get peak as strong as it was last year, you might be seeing acceleration above seasonal. Now I'm a pessimist and do I believe that? No, but that is a scenario that could play out.

Right now, as I sit here, I would tell you that I think our fourth quarter is going to look like the third quarter, which looks like the second quarter, and we'll just finish out the year at this more seasonal trend.

Okay. And then if I can just ask Fred one. The model generates such tremendous cash flow. And I don't know that there are amazing acquisition opportunities in your model. Is there an argument that you guys can just run with some more debt on the balance sheet and sort of dramatically increase the pace of shareholder returns?

That's a tough one. I mean the company can support more debt. There's no doubt. The question is what do you do, right, if you raise debt with that cash? Something we'll consider over time, but right now, no plans to change the capital structure.

Look, Landstar has pretty much been debt averse our whole lives, right? And then unless we see an opportunity to throw a debt on the balance sheet, we kind of like the way the model is. We have flexibility in when we buy and when we pay dividends. Loading up the balance sheet with a lot of debt to me feels like just a onetime hit, what's your next move? We're not totally averse to putting debt on the books, but there's got to be an opportunity and a reason to do it.

Next question would come from the line of Bruce Chan of Stifel.

Jim, you talked about some of the shipper concerns about peak in the end of the year. And I know you don't have tons of visibility here, but just based on some of the conversations that you've been having, what do you make of where their inventory levels are right now and how long it will take for them to normalize?

Bruce, this is Rob. Good question. Inventory levels -- I mean, I think again, especially when you look at e-commerce and consumer spending as it is, inventory levels, everything is disrupted. I mean you take into consideration kind of things that are going on in the rail, things that are going on at the ports, from overseas, we haven't seen a whole lot of stabilization yet. So the conversation that we're having with our customers is that operate in a true peak is they don't know. And we've been having these conversations since late first quarter as to aligning with them, making sure that they've got capacity, making sure that they're taken care of.

So I think it's a big unknown. All indications that we have right now that, again, there's all kinds of variables that could happen based on a new uptick of the pandemic. But consumer spending still seems to be high. Home sales seem to be high, remodels, things like that. So they're looking for a -- they're concerned about how strong peak is going to be moving into, we'll call it, now late third, early and through the fourth quarter.

That's great color. And maybe just one more follow-up, if I could. We've been sort of chipping around the edges of the question. Jim, I know you said that you were expecting maybe some potential softness in the earlier part of next year. But as you think about your comments around peak, as you think about where inventory levels are right now, earlier this year you said that you were expecting a kind of normal 12- to 18-month rate cycle. Do those comments still hold true?

No. Look, I was -- I'm a pessimist, right? Back in January at our year-end release, I was talking about the back half of this year because we're heading into that 12- to 16-month cycle where the contract rates are climbing and spot rates come through now. And putting it in perspective, a significant majority of stuff is spot rates in the normal cycle of 12 to 18 months. Now -- yes, I think we're going to see a cycle. I think it's just extended. And that's where we're kind of looking at next year. Things sooner or later are going to stabilize. We're in a cyclical business.

So the -- we're -- there's that theory of people starting to travel and get entertainment and not buy goods and stuff anymore. Maybe that's been pushed out a little bit, especially with the new variant coming in and maybe people are going to be home again or not traveling as much. They're going to hesitate a little bit to travel. And maybe more -- maybe that buying of goods will continue throughout the rest of the year. But sooner or later, we do still anticipate a slowdown in demand. And contract rates coming up and some of the freight that we haul move it over to contract. Now we'll keep some of that, but some of it runs from the spot rate into the contract market. And that -- I don't think that cycle changes. I think it's just extended.

Next question will come from Jason Seidl of Cowen.

Fred, welcome to the team here. I wanted to touch on the BCOs and how difficult it has been, if at all, to keep attracting them. And if you've seen any difference in some of the states that maybe removed some of the stimulus payments. And then maybe some thoughts next year if we ever get Washington to agree on an infrastructure bill, how we should think if that hits that impacting Landstar?

Yes, Jason, this is Joe. I would tell you that our -- as Jim made some comments on in his remarks, recruiting volume is up. I think I would be remiss to say we don't have to work pretty hard to get the BCOs in the door. But I think the environment and where things are and the network effect that we provide them makes it -- we're a pretty attractive location for them. So that's why you see our in-the-door numbers up. And as long as the environment stays the way it is, I think we provide a lot of transparency into the opportunity at Landstar. And I think we get increasingly good at that over time. So if you're out on your own authority or if you're in another system, we show you what you can do at Landstar.

And I think it helps people make the decision to come our way. And I think we continue to be good at that. I don't -- can't give you any detail as to what states they're coming from or those kind of things. I don't know that we've seen anything that steps out to say they're coming from states that are with or without the enhanced unemployment benefits. But I just think the overall environment for somebody who owns a truck and wants to get paid on percentage and who wants to really chart their own financial future, that's what we provide. And I think that's an incredibly attractive picture and we're trying to capitalize on that. And for the last several quarters, we've been able to do so.

Okay. In regards to a potential infrastructure bill and so the impact how that...

Yes. I think if that happens and you see a lot of industrial activity going on, I don't think it directly impacts Landstar. We might haul a little bit of it. But I think what it does is it further tightens the flatbed market and the market in general for those that may participate in that, which helps the rates climb. And of course, when rates are high, that opportunity at Landstar maintains very rosy and I think we continue to add equipment. But directly, I don't see any really direct effect from the infrastructure bill, Jason.

At this time, we have 2 more questions on queue. The next question would come from Scott Schneeberger of Oppenheimer.

Welcome, Fred. Jim, I guess I have a few questions on really end markets. I'm curious with regard to the substitute line haul business, that's really been growing. What do you see with capacity for parcel carriers going forward, not just the back half of this year, but looking out a few years? What happens for your business there? And how you view capacity in the industry playing out in the bigger picture?

Yes. On the substitute line haul, I think we talked about it before is, I anticipate it's 2 or 3 large customers, right? Shippers for us, not even shippers, parcel carriers, right? You anticipate that they kind of realign. They decide to either put assets in there. They improve their networks and their carrier base and stuff like that. But what we're hearing right now is that -- and I anticipated that happening after the first quarter, where they would bring more of that in-house. But right now, we're hearing is just that's not the plan, right? I think that on that substitute line haul business, I think we stay elevated throughout the rest of the year.

And even into next year, it would stay as elevated as high as it is, but I think we'll always be participating at a little bit elevated level compared to where we have historically because the inconsistency in the freight flow patterns and not wanting to put assets into the system or at least a significant number of assets. So I think that holds true for -- this condition, I think will hold true for a while. And I think that was your question on that e-commerce side of the business and what it trends. Because it's -- right now, I can tell you in the -- from the first to second quarter, I mean, the load volume in that increased 25%. So it continues to outperform what a normal seasonal trend would be. And especially for the substitute line haul, it's pretty elevated right now.

Appreciate that. And then I think I heard in -- I think it was in Todd's question. You were talking about the chip dynamic in automotive and you said that -- and please correct me if I'm wrong. There were 2 sectors that were down first quarter to second quarter, automotive being one. Curious about the other, please correct if I heard that right, overall. And then just curious. You guys have done a lot of auto parts movement. I'm curious about that dynamic versus new car and how you're handling that going forward.

Yes. So yes, you're right on. I mean, you got it. Automotive -- and this is a volume -- sequential volume comment what it was from Q1 to Q2. We saw 2 sectors that had actually had negative volume growth. And one was automotive, which is 7%, 8% of our revenue volume -- of our volume. And the other one was electrical, which is less than 3%. It was down 2%. So nothing -- it wasn't one of our major categories. But every other sector that we had was positive volume growth Q1 to Q2.

As it relates to new cars, we still aren't playing in that area of the business. We may move a little bit to that. But the significant piece, over probably 97% of it's parts going in and out of plants. We're not doing new car moves.

Great. And just a follow-on there, and thanks for the detail. Your other category is 1/4 of overall. I know it's a catch-all, but one of the lesser growing year-over-year. Just curious, anything you'd call out in that category that -- since it's so broad, just anything of an issue that's worth noting.

Part of the broad is called freight-all-kinds and it's like probably 10% of that -- of our total loadings for the quarter. So when the agent puts it on there, he just puts FAK. So some of it -- we know the customers don't necessarily know what the commodity is. It's generally just a typical non-toxic, non-HAZMAT type commodity. But there's nothing within there that's any -- that's the biggest category within that other. There's some other stuff in there. Government's relatively small, foodstuff is small. But nothing that moved dramatically within there. Some are up 7%, some are up 23% volume, but nothing really moved the needle as much as the consumer durables, building products or your substitute line haul.

(Operator Instructions) Next on queue would come from the line of Stephanie Moore of Truist.

I wanted to touch on topic of Landstar Blue, and just any update there in terms of how some of the tech initiatives that you've been rolling out with them. I know it's a small portion of your business, but it is a little bit of a shift towards actually kind of exposure to contractual freight. So I would love to get any kind of update there on Landstar Blue, but also maybe an update on just some of the technology initiatives, I know that a multiyear rollout across the organization as well as with Landstar Blue. So any color there would be helpful.

Landstar Blue on the technology side is kind of twofold. One is our systems here or the core systems here are really designed for the spot world, and they've been built out over 20 or 30 years, and they're very good. They're very good for what we do in that arena. And as you mentioned, we're getting into that maybe dedicated, more contractual business, which needs a kind of a different TMS. So there is that component of Blue that is a little bit different than our core business from a TMS standpoint to run dedicated business, assign capacity, dedicated capacity with contract rates, right? So that's a little bit different.

The stuff that we're using over there that's similar is like Landstar Clarity, which is our visibility tool, right? Landstar Blue also has access to our pricing tool and all the EDI connectivity and stuff like that. So there's similarities. Clarity is -- one of the best examples is to give the ability for us to use that to see how effective it is with third-party trucks. As you know, getting data from the third-party trucks is kind of an industry challenge. If the trucks don't want to share their information with you or they don't want to load your app, you got to figure out ways to do it. So you go through aggregators. And it gives us the opportunity there to actually get dedicated capacity to work directly with us on specific lanes and work through that communication piece on the Clarity side on the visibility to the freight.

The other thing, too, as you know, we parade agents through there too, to show them what we're doing. They help us, we help them kind of on how to run that kind of dedicated business if they ever want to get into it. It's running probably $20 million to $30 million of freight right now, and it will -- we'll continue to grow out the technology there as we progress down the road with -- we're not in that dedicated capacity world. So that tool is going to be able to handle pushing freight or the dedicated capacity, just picking the freight right off where we're pushing the freight to them and it's automated.

The one thing it does that we don't have a lot of traction here is we call on the Book-it-Now product that we have, right, where the carrier just can push a button and accept the load. The -- our world -- a lot of our agents want to take a phone call and a lot of trucks want to talk to the agents, right? And Landstar Blue is where we'll get traction on the Book-it-Now concept, right? Because when the freight is owned and the capacity knows that's their freight, all they got to do is push a button and let us know that they took it. So there's -- those are the variations between Blue and the core. And we're in the early stages of getting that technology up and running. I was told the other day that in a few weeks, we will have the TMS running and we'll start running loads through it. So it's progress, and it's a good way to test some of the existing tools that the agents are using.

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

Yes. Thank you, Kirby. And thank you, and I look forward to speaking with you again on our 2021 third quarter earnings conference call currently scheduled for October 21. Have a good rest of your week. Goodbye.

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