Landstar System Inc (LSTR) 2020 Q2 法說會逐字稿

Good morning, and welcome to Landstar System, Inc. Second Quarter 2020 Earnings Release Conference Call. (Operator Instructions) Today's call is being recorded. (Operator Instructions)

Joining us today from Landstar are Jim Gattoni, President and CEO; Kevin Stout, Vice President and CFO; Rob Brasher, Vice President and Chief Commercial Officer; Joe Beacom, Vice President and Chief Safety and Operations Officer.

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

Thank you, Missy. 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 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 2019 fiscal year described in the section Risk Factors and other SC 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.

Through the end of Landstar's first quarter, the COVID-19 pandemic began to have a significant adverse impact on the U.S. economy. The rapid decline in industrial output that began in mid-March accelerated into April and carried through most of the second quarter. Although conditions in the industrial markets Landstar serves improved somewhat in June, the 2020 second quarter experienced the most significant and rapid reduction of U.S. industrial output in decades.

The company's truckload volume began to experience the adverse economic impact caused by the pandemic in late March, when state and local governments began to issue shelter-in-place mandates and manufacturing facilities started to close. Several weeks later, as truck capacity began to loosen due to the severe reduction in demand, revenue per load on loads hauled via truck began to rapidly deteriorate. These conditions persisted through April and most of May, followed by relative volume and pricing improvement in June that has continued into the first few weeks of July.

At the beginning of the crisis, the response to the pandemic generated high demand for perishable consumer goods and much-needed medical supplies, while the U.S. manufacturing sector began closing facilities and furloughing workers.

The speed at which the freight environment deteriorated at the end of the first quarter was like nothing experienced in the history of the company.

In the second week of April, Landstar's dispatch truckload volume reached a peak decrease of almost 27% below the same week of 2019. Yet only 4 weeks prior, it was actually 1% above the comparable prior-year week.

A few weeks later, the downturn in revenue per load on loads hauled via truck peaked at almost 13% below the same week of 2019. The peak decrease in volume in the second week of April reflected the extensive closure of automotive plants and suppliers throughout the United States.

To provide some additional context, automotive sector loadings, which typically contribute approximately 8% of total Landstar revenue, experienced a decrease in dispatch volume of over 83% in the second week of April compared to the same week of the prior year. Other large declines in load volume during that week were seen in our other top commodity sectors, with building products, machinery, metals and consumer durables down 28%, 36%, 40% and 20%, respectively. Those 5 commodity groups in general contributed 56% of loadings in the 2020 week compared to 63% of the company's loadings from 2019 week.

Since the peak decrease in truckload volume in the second week of April, both the number of loads and revenue per load on loads hauled via truck have shown significant improvement. In June, the number of loads hauled via truck was 9% below June 2019, and revenue per load on loads hauled via truck was 6% below prior-year June.

Thankfully, Landstar's variable-cost business model is highly resilient to rapid expansion and contractions in demand for freight transportation services.

In the 2020 first-quarter earnings release, we described the impact on earnings under a scenario where revenue was assumed to do -- decrease from 20% to 30% compared to the 2019 second quarter. Under that hypothetical scenario, we said we would anticipate diluted earnings per share to be in the range of $0.70 to $0.85. That diluted earnings per share estimate did not reflect several expenses that took place in the second quarter.

First and foremost, we implemented a pandemic relief incentive program for Landstar BCOs and agents. As we discussed during our first quarter earnings conference call on April 23, 2020, under this program, for every load delivered by a BCO in April, Landstar would pay $50 to the BCO hauling the load and $50 to the agent dispatching the load. The program was implemented in an effort to reduce the financial burden imposed by the impact of the pandemic on our BCOs and agents, and to supplement what we expected to be an increase in empty miles for BCOs as they looked to drive further to access freight opportunities.

As the impact of the pandemic on freight markets became increasingly difficult in April, we received tremendous positive feedback on the importance of this program in fortifying our network and ultimately extended this relief effort through the month of May.

Overall, the cost of this program was $12.6 million or $0.25 per diluted share in the 2020 second quarter.

Second, the scenario we described did not account for asset-impairment charges related to the company's Mexico operation of $2.6 million or $0.05 per diluted share. This impairment charge primarily related to intangible assets associated with our intra-Mexico business that were acquired as part of a small acquisition we did in Mexico several years ago.

Third, we did not anticipate insurance premiums would increase beginning in May at a rate of approximately $1.1 million per month or $0.05 per diluted share in the 2020 second quarter. As you may be aware, recent annual premium increases to ensure commercial auto liabilities for trucking companies have exceeded 200% in some cases. Landstar renews its insurance policies each year on May 1.

For the policy period May 1, 2020, to April 30, 2021, Landstar aggregate premium expense payable to third-party insurance companies for commercial auto liability coverage increased over 175% compared to the premiums we paid for the May 1, 2019 to April 30, 2020 policy period. This increase in our premiums will continue to be an additional headwind to us throughout the rest of the year.

Overall, after taking into account these 3 items, 2020 second-quarter earnings align with what we anticipated under a scenario that involved the 20% to 30% reduction in revenue.

Beyond its financial impact, the COVID-19 pandemic has had tremendous operational impact on our business. The health and well-being of our -- the members of our network, the company's over 1,200 employees, 10,000 BCOs, 1,200 agents and their staffs, and over 25,000 customers and 54,000 other third-party capacity providers have always been part of our safety-first culture and will remain priority during these complex times.

During March, it became clear that Landstar needed to address potentially unprecedented operational challenges that could result from the pandemic. As an essential business, we took actions to ensure our freight continued to be delivered safely and on time while we maintained appropriate measures and protocols, consistent with applicable guidelines provided by health authorities and various government agencies as well as customers.

As it relates to the health and safety of our employees and business continuity, we successfully transitioned almost 1,000 of our more than 1,200 to work at home. We continue to operate with over 80% of our employees working remotely. The transition to remote work was and continues to be highly successful even though remote work was the new to almost the entire Landstar employee base.

As it pertains to the company's transportation network, we expected that the sudden decrease in demand in late March caused by industry closures and shelter-at-home orders would result in the disruption in the daily routines of many of our company's BCOs and agents. We implemented the pandemic relief incentive program I already spoke about to help our BCOs and agents.

We also emphasized open and ongoing communication with our BCOs and agents to keep everyone informed and working together throughout the downturn. We believe our support efforts through the crisis greatly contributed to the maintaining the health of the Landstar network.

In the midst of the pandemic, BCO utilization in April and May or loads per BCO per week were at the lowest April and May utilization rates in over 10 years. Even during that challenging operating environment, BCO turnover during April and May was slightly better than historical trends. In June, continuing into July, BCO utilization significantly improved but remained somewhat below historical levels.

Nevertheless, BCO truck count grew by 187 trucks during the second quarter from 10,112 at the end of March to 10,299 at the end of June.

On the agent front, the majority of the agents within our network also operate variable cost business models that help protect them from the sudden significant shifts in market conditions. Agent turnover within our existing agent base continues to be very low.

Recruiting and production -- productive agents, however, has become increasingly difficult in this environment due to the inability to personally interact with prospects and the sharp down in freight demand.

During the 2020 second quarter, we did not purchase any shares of the company's common stock. Consistent with what I said during our 2020 first-quarter earnings conference call, we believe it is prudent to conserve cash on the -- until the duration and depth of the crisis becomes clear.

Although the level of industrial output has stabilized in the back half of June and the first weeks of July, any adverse government or industry action to the increased spread of coronavirus could disrupt the recent market improvements. Until we have sustained stability in freight demand and economic performance, we will continue to be prudent in our uses of cash.

You will note, though, that we announced in our earnings release that our Board have increased Landstar's regularly quarterly dividend by $0.025 per share or 13.5% over the amount of the company's regular quarterly dividend declared following each of the prior 4 quarters.

There is no question that we remain in a highly uncertain environment due to the coronavirus pandemic and the possibility that economic conditions could again rapidly deteriorate due to the spiking number of cases, government actions and business closures and bankruptcies. Nevertheless, based on the current trends, our 2020 third-quarter revenue guidance assume that the industrial output will remain stable and truck capacity tightening on a sequential basis, but more readily available throughout the quarter as compared to the prior-year quarter.

Consistent with the recent trends in truck rate and volume, we expect the number of loads hauled and revenue per load on loads hauled via truck, to each be below the 2019 third quarter in a mid single-digit percentage range. As such, we expect revenue in the 2020 third quarter to be in the range of $885 million to $935 million.

Our earnings guidance also assumes third-quarter gross profit margin will be in a range of 15.2% to 15.4%, similar to the gross profit margin of the 2020 second quarter, prior to giving effect to the $12.6 million pandemic incentive we paid in the aggregate in April and May.

Our third-quarter guidance reflects as well insurance and claim cost at 4.8% of estimated BCO revenue for the quarter.

Over the past several quarters, we have seen the cost of insurance and claims increase as a percent of BCO revenue due to the increased cost of settling individual claims.

As I previously discussed, Landstar experienced an increase over 175% in its annual commercial auto liability premiums beginning in May. This increase to the fixed-cost component of our insurance and claims cost on an annual basis added approximately 80 basis points to the 4% historical average we previously used to estimate insurance and claims cost as a percent of BCO revenue.

Based on these assumptions, our estimate of 2020 third-quarter diluted earnings per share would be in the range of $1.11 to $1.17.

When we take a longer-term view of the possible impact of Landstar on the economic downturn associated with COVID-19 pandemic, we believe the resilience of our light asset-based variable-cost business model will continue to generate outstanding returns over time relative to the overall environment.

The significant percentage of our costs tied directly to revenue somewhat insulates the Landstar business model from significant downturns in freight, and typically generates positive cash flow throughout most business cycles. We continue to believe Landstar is well positioned with a strong balance sheet and expect positive cash-flow generation throughout this cycle. In the past 20 years, the Landstar model has generated positive free cash flow every year but one and positive earnings in every year.

In the first half of 2020, Landstar generated $178 million of free cash flow, including $84.6 million of which was generated in the 2020 second quarter. Although 2020 has become a challenging year, we remain confident in our model, not only to endure through tough times like these, but also to come charging back as business conditions improves.

And here is Kevin to provide additional commentary on the 2020 second-quarter financials.

Thanks, Jim. Jim has covered certain information on our 2020 second quarter, so I will cover various other second-quarter financial information included in the press release.

Gross profit, defined as revenue less the cost of purchase transportation and commissions to agents was $113.1 million and represented 13.7% of revenue in the 2020 second quarter, compared to $158 million or 15.1% of revenue in 2019.

Included in the 2020 second quarter is the impact of approximately $12.6 million paid to BCOs and agents in April and May under the company's previously disclosed pandemic-relief incentive program. Excluding the effect of these payments, gross profit in the 2020 second quarter was approximately $125.7 million or 15.3% of revenue.

The cost of purchased transportation was 77.1% of revenue in the 2020 second quarter versus 76.5% in 2019. Excluding the cost of these payments under the pandemic-relief incentive program to BCOs, the cost of purchased transportation was 76.4% of revenue in the 2020 quarter.

The PT rate paid to truck brokerage carriers in the 2020 second quarter was 37 basis points lower than the rate paid in the 2019 second quarter.

Commissions to agents as a percentage of revenue were 9.1% in the 2020 second quarter compared to 8.4% in the 2019 second quarter.

Excluding the cost of payments under the pandemic-relief incentive program to agents, commissions to agents as a percentage of revenue was also 8.4% in the 2020 second quarter. Other operating costs were $7.4 million in the 2020 second quarter compared to $9.9 million in 2019. This decrease was primarily due to decreased trailing equipment rental costs, decreased BCO recruiting costs, decreased contractor bad debt and increased gains on sales of trailing equipment.

Insurance and claims costs were $19.8 million in the 2020 second quarter, compared to $16.3 million in 2019. Total insurance and claims costs for the 2020 quarter were 5.2% of BCO revenue compared to 3.4% in 2019. The increase in insurance and claims expense compared to the prior year was primarily due to increased insurance premiums incurred in 2020 for commercial trucking liability coverage following the company's May 1, 2020, insurance renewal, increased net unfavorable development of prior year's claims and increased severity of current year claims in the 2020 period, partially offset by reduced frequency and BCO miles in the 2020 period.

The impact of the May 1 insurance renewal will add approximately $3.4 million to the fixed portion of insurance expense in both the company's third and fourth quarters.

Selling, general and administrative costs were $40.6 million in the 2020 second quarter compared to $41.3 million in 2019. The decrease in selling, general and administrative costs compared to prior year was attributable to decreased agent convention costs and decreased stock-based compensation expense, partially offset by an increased provision for incentive compensation and increased provision for customer bad debt, and increased costs related to the company's technology initiatives.

Stock compensation expense was $570,000 and $1.4 million in the 2020 and 2019 second quarters, respectively.

The provision for incentive compensation was $2 million in the 2020 second quarter compared to $873,000 in the 2019 second quarter. Quarterly SG&A expense as a percent of gross profit increased from 26.1% in the prior year to 35.9% in 2020.

Depreciation and amortization was $11.5 million in the 2020 second quarter compared to $11 million in 2019. This increase was primarily due to increased IT-related depreciation.

The impairment of intangible and other assets charge of $2.582 million during the 2020 period was due to the impact of negative macroeconomic trends in Mexico on customer-related intangible assets acquired in September of 2017, resulting in current financial projections relating to these intangible assets to be substantially below those originally anticipated at the acquisition date.

Operating income was $32.2 million or 28.4% of gross profit in the 2020 quarter versus 20 -- versus $80.9 million or 51.2% of gross profit in 2019. Operating income decreased 60% year-over-year.

Excluding the impact of the pandemic-relief incentive payments to BCOs and agents, operating income was $44.8 million, approximately 45% below the 2019 second-quarter operating income.

The effective income tax rate was 22.3% in the 2020 second quarter compared to 23.8% in 2019. The effective income tax rate was impacted by excess tax benefits relating to vesting of equity awards to employees in both periods and by higher-than-anticipated state tax refunds in the 2020 period.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $282 million. Year-to-date cash flow from operations for the 2020 second quarter was $198 million, and cash capital expenditures were $20 million.

There are currently 1,821,000 shares available for purchase under the company's stock-purchase program.

Back to you, Jim.

Thanks, Kevin. With that, Missy, we will open to questions.

(Operator Instructions)

Our first question is from Scott Group of Wolfe Research.

So Jim, I wanted to ask about some of the yield trends. So we're seeing -- obviously, spot rates have turned nicely positive and even some of the TLs are talking about their yields turning positive in the third quarter.

Why do you think you're still down mid-single digits? Do you think that you have visibility to that getting better as the quarter plays out or maybe looking out into next quarter? Just from -- just some perspective there.

Sequentially, Scott, if you look at the historical trends, when you move through April, May and June and into July, sequentially we are improving better if you looked over the last 5 years. So pricing is getting better from a trend standpoint when you move month-to-month. So the pressure over prior years, I think, as you know, our agents tend to be a little bit slower in reacting to market conditions as opposed to what happens in different type of companies who run more company-store operations and have the centralized power to move rates within that organization, where our agents kind of out there, kind of making their own decisions, running their own business.

So they tend to be a little slower. So I think that's where you see where our -- when you look at our pricing drop off, it was lagged, our pricing drop-off when we were at the end of April talking about the first quarter and what we were seeing. Our pricing hadn't really been that affected yet.

And then a couple of weeks later, it started to drop off. And I think what you're doing is seeing on the similar side, you'll see us climb a little bit slower. And we didn't project any acceleration of growth into our forecast for the third quarter. We just kind of trended along the path that was taken through June and July, which generally is a bit slower to react than the most -- than the other brokerage companies.

And then in July, are you seeing any difference in van versus flat pricing?

That's hard -- we don't have -- over the last couple of weeks, it's hard for us to take 1 week carve-out of information like that. So it's really hard to talk about individual, whether it's van or flat, better-customer type information, where it's really just general trends combined, van and flat.

Okay. And then how are you thinking about net operating margins as we go forward in the cycle? We haven't seen them this low in a while. Can we -- do you think at the -- if we get another cycle here that those can get back towards those mid- to high-40 levels?

Yes, absolutely. I think one -- clearly, one headwind is going to be the 175% increase in our fixed cost in insurance. And we have some thoughts about, not in the short term but probably sometime 2021, we're going to look at some things that we might be able to make a move on to offset some of that increased cost.

But if we get the growth back to where you had 2017, 2018, I -- yes, I think we can get back to that high 40s. Our goal is to get back to the high 40% to possibly 50% operating margins -- clearly, not this year and depending on what happens with economic conditions at '21. But in a longer-term view, yes, absolutely, our goal is to get back there.

Okay. And then last one for me. The BCO count ticked up a little bit sequentially. Do you think that continues again in the third quarter?

Yes. Scott, this is Joe. I do think we'll see some growth in the third quarter. I think conditions are again, improving. And I think our growth to this point has been very retention-oriented. So -- and we see a lot of things that are working pretty well there. So yes. So I think some modest growth in the third quarter would be what we would expect.

Our next question is from Ravi Shanker of Morgan Stanley.

This is Christyne on for Ravi. Maybe circling back to some of the earlier comments on end markets, I know you called out auto as sort of being a headwind in 2Q in some of the other commodity end markets. But how has that trended as you guys have moved into July? Is autos pretty much entirely come back? Or how are those moving as we head into 3Q?

Christine, this is Rob. Especially in the flatbed markets, it kind of looked -- we've had some struggles, I guess you'd say, with government that had kind of a stop order in March and wasn't lifted until late May, so we look to come back on that. We all kind of know what's going on with aerospace and automotive. In automotive, both direct automotive and indirect, we serve a lot of industries that service the automotive that doesn't necessarily go down as automotive.

Steel, I think, is kind of at an all-time low since 2008. We've seen plant shutdowns and import shutdowns, heavy equipment, oil and gas machinery. So kind of those first 3 government, aerospace, automotive, steel, we look for those to start coming back. So we look to start getting gains and have already seen gains, especially in automotive in the third quarter.

Got it. Okay, that makes sense and it's helpful. Maybe switching gears to some of the technology initiatives, I believe on the last conference call, you had indicated that the rollout was maybe even better than expected, given some of the productivity gains from working from home.

Just wondering if we could get an update on sort of the current tech program in terms of rollout? And then looking down the line further out, what's sort of the next-gen of technology initiatives for Landstar?

Yes, when we talk about initiatives, it's really when you think about an automation, automation of the entire cycle from order to cash. So there's components in there whether it's tracking visibility, pricing tools, simplifying our credit process, trailer management, all those things pulled together as we talk about our technology, basically transformation, we've been working on for 3 to 4 years.

And when -- the productivity of our IT guys is up based on what our projection was for to have them do for the quarter as compared to once they went home and what they've accomplished as far ahead of where we thought it would be. We have recently just rolled out our -- we're beginning to roll out our new track and visibility tool, which is a lot more sophisticated than our older tool. It started rolling out 2 weeks ago.

Pricing, we're working on Phase 2 of that, on a pricing tool that is used by the agents to be able to do quick quotes and direct quotes into the -- out into the -- to shippers. So it's a -- we're going to continue to spend it -- probably 2 or 3 years ago, we were probably increased $8 million to $10 million annual. We're still spending that run rate on new technologies and building out our modular system instead of being in the old legacy single platform. So when we talk about technology, it's all-encompassing of everything we're doing. So when we talk about productivity, the productivity acceleration and visibility we got out over the last few weeks. So it's the individual items that are coming in faster and rolling out quicker.

On the TMS side, which is the application we started 3 or 4 years ago, we're running about 7% of our volumes through our agent network right now on the new TMS that's rolling out.

Our next question is from Bascome Majors of Susquehanna.

I was hoping that you could help a little bit on some of the SG&A and other cost items, particularly with some of the noise around the agent convention, typically would be in 2Q, but being canceled this year.

Any thoughts on maybe where the annual accrual for incentive comp is right now along with stock comp expense versus what would be in a more typical year, and thoughts on how the pacing of some of these operating-cost items will go in the second half?

Yes, Bascome, this is Kevin. As far as the MICP accrual goes, we're accruing to a onetime payout. So as you all know, that's $8 million annually, so $2 million a quarter. So we're about halfway accrued for 2020. The SG&A going forward, I would expect the amount in Q3 to be very similar to the amount in Q1 -- or Q2, sorry. And obviously, there's -- we're spending a little bit more on the technology initiatives. That amount annually on an incremental basis is $8 million to $12 million, probably closer to the higher end of that this year.

We have several questions on queue. And our next question is from Jack Atkins of Stephens.

Okay. Great. So just going back to the capacity side of things for a moment, the BCO count ticked up sequentially but your third-party broker carrier count actually ticked down. So just curious what you guys are seeing out there from a capacity perspective. I mean, do you feel like capacity has come out of the truckload market? Maybe it's temporary, maybe it's more permanent. Any sort of comments you could maybe provide around that?

Yes. Jack, this is Joe. I think a couple of comments. I think more specifically, if you -- I think it's somewhat of a utilization issue. So if you're a BCO at Landstar and your utilization is down because you're maybe sitting on the sidelines or you're a high-risk BCO, you don't necessarily come out of the count because you're still active. If you're a carrier and our loads that we're putting to the third-party boards declines because demand is off and the economy is a little slow, and you're not in a position to haul load for us and your insurance expires, you come out of the count, right? So it's just -- it's kind of how we do the counting.

If you're not active as a carrier, you can come out of the count. If you're not immediately active as the BCO, you can stay in the count. I think that's just the different way in which we account for the 2 capacity types. And I think more broadly, I kind of always look at Landstar's BCO population as a good guide as to what's going on in the greater industry. And I think as our results demonstrate we're growing the capacity count, but utilization is off, right, for obvious reasons.

I think the carriers out there, many of the small ones are probably not as active. Maybe they've got high-risk drivers or what have you, outside of the already pretty obvious bankruptcies and so forth. I think it's really difficult to read whether they're leaving the market permanently. Obviously, they've got the same insurance headwinds of a different type than we do, but the same sentiment. And it's really hard to say until things tighten up a little bit more, but certainly, no indication that we've seen any major decline in that 10-trucks-and-less population that we tend to deal with mostly.

Okay. Okay. That's helpful, Joe. And I guess just back to the insurance comment, Jim, that you made earlier. Are there some things that you guys can do to incentivize BCOs to maybe install safety equipment that can help sort of lower your potential insurance cost? I'm just curious if maybe you could expand on that for a moment, because we have seen some fairly steady inflation in that line over the last couple of years. And maybe if you could just expand on sort of some of the initiatives that maybe be rolling out next year, I think that would be helpful for folks.

Yes, Jack, this is Joe. I'll kind of give you our thoughts on the technology because there has been a lot of conversation and generally about truck technology and where it's going. You really have to look at the BCO fleet itself. And most of the truck technology that's out there, the collision-avoidance technology, assisted-brake technology is really only applicable in trucks that are 2017 and newer. And the majority of our BCO fleet have trucks that are older than 2017.

So really not a candidate for much of that technology that you hear about, unlike some of the company iron, large publicly-traded companies who rotate their fleet every 3 years or so. So we're -- most of our BCO fleet, not a candidate for much of that, but there are some other technologies, whether it be alerts and those kind of things that we're looking at that can be more of an aftermarket application. And so that's kind of where our -- we're headed and kind of focused to see what we can do to implement something like that in '21.

Okay. That's great. One last question, if I could, just on peak season expectations. Obviously, it's been an extremely volatile market here over the last 6 months, 7 months. But what are your customers telling you about their expectations around peak season? I know in the past, you guys have had a little more e-commerce exposure. And obviously, e-commerce has been growing very rapidly here over the last several quarters. But is there a thought that maybe the increased adoption of e-commerce, combined with peak season could be a good guide for Landstar in the fourth quarter? How are you guys thinking about that? And what are you hearing from your customers?

Jack, this is Rob. Yes, a lot of the customers that we deal with that handle e-commerce, they're expecting big years. Their business has obviously improved through this pandemic in some degree or another. And we're seeing direct effect of that.

That being said, a lot of the customers we talk to, also, they feel that as business comes back, things are improving, and things look good moving into the future, but they don't know what the future of the pandemic is. They don't know what the future of their plant closures or openings are. Everybody is kind of in flux right now. So the sentiment right this second is, things look good and improving into the third and fourth, but there's still that unknown that's kind of sitting above everyone.

Our next question is from Todd Fowler of KeyBanc Capital Markets.

Jim, on the gross profit margin expectations for 3Q to be pretty consistent with 2Q, if you ex out the agent and BCO bonus, yes I would think with revenue per load going up a little bit, that that would help gross profit margins. Is the offset there that you're expecting a little bit more compression on the brokered loads? Or is there something else going on where gross profit percent is going to be relatively flat sequentially 3Q versus 2Q?

Yes. It's pretty much exactly what you described is I think we're going to see it a little bit tighter capacity coming out of the weakness of April and May. So you're going to get a little more compression on the broker side, but I think utilization of BCO will go up. So it will be a improved BCO utilization and then driving the gross profit margin up a little bit while we're getting pressure on the third-party truck side. It's the net of the 2.

Got it. Okay. That makes sense. And then to your comment about the challenges right now in recruiting agents, can you remind us, I think that every year, new agent recruitment contributes, I think it's a couple of hundred basis points to top line growth. Can you talk a little bit about that?

And then what would your expectation be? Is this something that as long as we're in this environment, it's going to be a challenge? Or do you have things in place where maybe there's a pause right now, and you could see this start to pick up and get back to more of a normalized level later this year?

Yes. Todd, what we used to talk about, if you go back a couple of years, that new agent revenue would accrue to about 3% of our revenue, but that's when we were a $2 billion to $3 billion company. When we got to $4 billion, a lot of the growth is coming from our existing agents. And our focus really is to help those existing agents grow while we recruit new agents.

But our goal every year on new agent revenue, and it has been for quite a while, is to add about $100 million of new agent revenue annually. This year, based on what just recently going through the pandemic and our recruiting efforts, we don't anticipate that we're going to be near that $100 million. But Rob's probably got some good commentary about recruiting and the effects of the pandemic.

Yes. Todd, recruiting continues to remain at the forefront of what we do. And I will tell you from an actual ad and leads and interest standpoint, we're kind of running at -- the good news is we're running at the same rate that we ran in 2019. The not-as-good news is 2019 wasn't a great year either. I think -- I think the reason that is coming off in 2018 coming off the way that that year was handled by a lot of people in the industry, making a transition. They were comfortable, they were happy. They had a lot of money in their pocket, right?

So by the end of 2019, when that starts to run out, they kind of looked at the industry and making a change and then all of a sudden, the pandemic hit. So while our numbers are there, transitioning those customers over, transitioning that business over, taking a look as a whole, we've got the numbers coming in. The revenue just hasn't made it yet. It will start to come as things loosen up and the economy gets better.

Okay. That makes sense. And I guess that just shows I go back a little bit too far on the percentage piece. So the last one, Jim, I wanted to ask is on the balance sheets, I understand the uncertainty in the environments right now, but obviously, the cash balance has grown.

I guess, what are you looking for as far as capital deployment? And how do you think about the cash balance relative to the uncertainty? And maybe you can just put a few parameters around some of the metrics that you're looking at before you'd either considering buying back stock, and I know you took up the dividend, but, yes, something along the lines of how you're thinking about the balance sheet in this environment?

Yes. Todd, if you go back to where we were sitting in mid-March to -- through our first-quarter release in April, clearly, I don't think anybody knew where this pandemic was going to end up, so it was clearly prudent to sit and sit on the sidelines and just watch our cash balances, watch our customer receivables. That was kind of a concern there for -- we deal with a lot of small customers and probably we're at higher risk than some of the larger customers we deal with. So quantifying or trying to determine what kind of risks we would have on our balance sheet from a receivable standpoint was a little bit unpredictable at that point.

And clearly, today, if we remain with a stable output in industrial production, assuming that continues, that we're beyond any of those thoughts that we had in March and April. So the level of prudency has probably dropped off a little bit. But I will say that we're only in about the fifth or sixth week of a more consistent pattern of freight flows and industrial production, and with the talk of some governments already talking about shutting things back down I don't anticipate manufacturing to be shut down, but you're still concerned about the consumer confidence going on out there, the unemployment levels and how that can impact the next 3 to 6 months out. Clearly, not near where we were at the end of April. I'm concerned about maintaining a cash balance but we're still keeping an eye on the stability of the loadings.

The other thing is we do, internally here, do forecasts and things like that and do pay attention to market conditions and what we think is going on out there and that's another factor we look at. So we basically look at confidence levels of businesses, business and consumer confidence. We watch our internal trends. What's going to happen with automotive? Are the consumer going to come back and drive automotive purchases back up to the normal run rate of about $17 million? Those are the things we look at internally before we deploy cash. And I think you're talking about our buyback program mostly. So that's what we're watching. I -- but we are clearly going to continue to be more prudent until we get further out of this economic cycle that we're in.

Our next question is from Jason Seidl of Cowen & Company.

This is Adam on for Jason. I wanted to ask a little bit about capacity, but in light of the PPP loans, I think there are kind of 2 schools of thought here. One is that as these loans come up that carriers will, particularly smaller carriers who have received these loans, will kind of run into financial trouble and may exit the market.

But I think the other school of thought is that kind of the government stimulus in general is maybe keeping people at home maybe a little bit less motivated to go out there and kind of get back to work. And so I want to ask about your thoughts in regards to the stimulus, with regards to the PPP loans and how you think that may affect capacity in the coming months and quarters.

Yes, Adam, this is Joe. We don't really have a great deal of insight as to the BCOs or small carriers in how much they're tapping into the PPP loans. I do think it has been a -- in general, for those that have participated, I think it's been a nice way to bridge a very difficult time. I think that as things improve, hopefully it's been enough or they've had enough to draw from to sustain themselves. But I think that's one of the big questions. We just don't have a great deal of visibility, either into our BCO population or the carrier population as to know whether or not that occurred. And hopefully, the bounceback that we're starting to see continues and moves to the point where we won't need it going forward. But even that, I think it's uncertain.

Okay. Got that. And then I also wanted to ask a little bit about some of the end markets. I know we've talked about some of the end markets that really struggled during the pandemic, like autos. I wanted to ask a little bit about some of the end markets that actually saw more strength during the pandemic, I mean, the kind of the food, consumer products types of categories. How have those levels for those categories trended kind of since coming off the trough and kind of what do you think will happen to kind of in terms of those categories in the coming months?

Well, the -- one of our more stable categories is hazmat, because every one of our BCOs is certified to haul hazmat. So it was down, but not as significant. And I think you're going to see -- you're seeing that trend similar to where we did throughout the quarter. It never dropped off as big as the other commodity groupings, and we're seeing some pretty level play in the Hazmat side.

The other one is food stuff, which isn't a big component of our overall revenue base. But that was throughout April and -- early April and part of May, it was actually flat to up. It was probably the only commodity grouping that we had the flat to up. And it's still trending relatively where it was, where it's slightly up compared to where it was from prior year.

Other than that, most of our commodities were -- if we were up, say, 25%, 23% of revenue in April, the big ones that were hired in that, like we said -- automotive, machinery, metals -- they were above that 23% run rate where consumer durables, food stuffs and a little bit of energy -- because we did a little bit of wind -- we're above that, better than that 23% drop off. So if you break it down by commodities, most of our big ones were driving that 23% drop-off in revenue -- in loadings in the month of April.

Our next question is from the line of Ben Hartford of Baird.

Wanted to just kind of come back to the BCO concept. And obviously, the program in April and May looked like it was successful. What we can't see from our standpoint, obviously, is the, like, utilization of that -- the BCOs within that number. So as you made the decision to end the program in late May, interested in kind of how that utilization of the BCO count within the network trended in June.

And I think you had made the comment, maybe it was Jim that talked about the focus is going to be on that utilization improving. Any way to incentivize that? Is there something that you can do above and beyond just what you did in April and May, obviously, to make sure that that takes place? Interested in kind of how that utilization trend may play out above and beyond the count that we can see.

Well, normal view, we track it on a loads per BCO per week, right? And on a normal trend, it tracks between 1.7 loads per week, 1.8, 1.6. April was 1.4. And it's the lowest April we've seen in, I think, actually, I went back 10 years and it was never that low before. So if you start off in April, well, if you think about our BCO network, some of those guys do run routine, right? They kind of build the routine, they build relationship with agents so they -- and they go through a weekly routine.

And when the -- our thought was when the revenue was -- when we saw loadings drop off in the 20% range, those guys who had routines now all of a sudden are going to have to go back to the -- looking for spot -- looking for business off our load boards and kind of more -- driving more empty miles. Joe also commented on the impact to utilization. It could be some guys who were at risk of maybe higher risk for COVID and maybe park their truck for a couple of weeks. Our -- and there's other things that would drive that utilization down.

Now it went from 1.4 in April, improved to about 1.5, I think we -- where we were in May, still way below historical levels. And it jumped back up to about 1.7 in June, so it's 1.7 loads. So we're seeing that attrition, that come back to normal trend, but it's slightly below. So I'm not sure there's anything to help -- I don't think a program, that relaunch of programs such as pandemic relief is -- was really the intent. The intent of the pandemic-relief program is to try and financially help them through a tough time, keep them on board with us. And then we knew they were going to probably drive in less miles and longer empty miles, just to help them out financially through the real significant downturn.

But I think we're going to get utilization coming back. There's more automotive. Look, automotive was a big impact. A lot of our BCOs participate in the automotive business. With that dropping off 85%, that's clearly going to drive those guys doing automotive out into our spot market trying to find freight. So it's all those things combined. Automotive is coming back. We're seeing a lot of the industrial manufacturing facilities are back now for 6 weeks. And utilization is climbing. We expect it to continue to climb as we go through the quarter.

So from an incentive standpoint, I think the fact that you're seeing rates come back and there's plenty of loads out there is plenty incentive for the BCO to come back out. We'll still have some of the guys probably sitting on the sideline with the risk of the COVID and being a little bit concerned about their health. The average age of our guys is probably 53, 54, 52 -- Joe says 52. So yes, there are guys out there.

And that -- sitting on the sideline, we keep them -- they stay in our count, but not necessarily haul. So those are all things contribute, but we expect -- we clearly have seen a better trend in utilization go -- coming into -- through June and into July.

Ben, maybe the year-over-year by month percentage changes on that utilization would help. April, negative 18%; May, negative 16%; and then June, negative 4%.

Okay. Yes, that is helpful. What is that historical load level? Is there a 10-year average as a point of reference?

I would say that you're looking at somewhere between 90 to 95 loads annually is what they haul.

Okay. That's great. And then the sequential improvement in that count. Do you attribute that to the program in April? I mean, obviously, it's a little bit counter to what happens when we're in "recessionary" periods with that count falling. What do you attribute that sequential improvement to? I don't know if you touched on that earlier.

Yes, Ben. This is Joe. It's really been a retention-driven growth in the BCO count. And I think -- I do attribute part of it to the incentive. And I think that the gesture as much as the dollars. And I think also the realization that they want to stay in the industry, they want to run their own business, but they want to have a home and somebody who takes care of them in certain respects, that's Landstar. I think that's, that's part of it.

I think you've got owner operators either on their own authority who see some significant challenges as a result of just the general environment, the COVID and in insurance. That might come our way. And I think with the slowdown you've seen owner operators who are attached to other company-owned fleets as kind of a flex capacity and they're -- they weren't seeing any business. And so they see Landstar as an environment where they have an equal opportunity to run their business. So I think all 3 of those really help us in any environment, but I think it helped us particularly well in the second quarter.

That's great. Kevin, what are you assuming for a tax rate in the back half of the year?

24.2% is our best guess on that.

I appreciate the time, guys; good work.

We have 3 more questions on queue. And the next one is from Stephanie Benjamin of SunTrust.

I wanted to touch a little bit on the revenue guidance that you gave. Maybe if you could just speak to what you would expect to see in the market, either from a capacity standpoint or maybe some improvement on -- from -- with some end markets to kind of reach the lower high end of that guidance. Just any color you can provide on what's baked in there would be helpful.

Yes. I -- we touched on it a little bit as we expect the -- from a margin extent, top line and gross profit, we'll talk about -- we did expect the capacity to tighten a little bit as industrial -- the industrial economy started picking up about 6, 4 -- 4, 5, 6 weeks ago. So from that standpoint, we expect a margin squeeze on the third-party trucks, but we expect the trucks to drive more.

From the top-line standpoint, we really just -- it's -- we discussed whether we were going to put guidance out at all based on what's going on, a little bit of uncertainty about the virus shooting back through the communities and whether they'll shut down the industrial community, which I -- we don't believe is going to happen. We expect a stable economy.

But what we did do is we just took the trends that we saw in July and did not elevate them for any pickup in industrial production or advancement. So when you're talking about when we use mid-single digits, we really just took the last 4 or 5 weeks' trend and used those and flow them through the quarter as they would trend in a normal year.

If in -- clearly, if the industrial economy is better than it was, if we see improvement in the industrial economy coming out of the -- better than it was in the last 4 or 5 weeks, we will see the high end of that range. If something turns and the government gets a little more strict on the shelter-at-home orders again, our industrial economy starts to shut down again, we'll probably be more at the low end. So it's really more based on what we were seeing in the current environment for the last 6 weeks trended out.

Our next question is from Scott Schneeberger of Oppenheimer.

I just wanted to go back to the end markets and talk a bit to the bottom of the slide. In Other, that's creeping up towards a quarter of the business slowly, and I'm guessing it's kind of more by default. But could you speak to a little bit about the puts and takes in there?

And then the follow-up on that is, you mentioned wind farms in the second quarter. Just curious what that can do in the energy vertical in the second half.

Yes. I think that the other is primarily FAK, right? It's freight-all-kinds where the agent is just putting in a catch-all or where it's miscellaneous, freight-all-kinds, other. There's not a specific category that's greater than like 3% of that category. So it's really general environment because there's a lot of small customers, a lot of different type of commodities within there. So that one is really driven by general economic-mostly conditions and the industrial components. It could be imports, exports, but it's a catch-all of various commodity groupings.

And the wind, anything interesting in the second half there?

Kevin has that.

Yes. Last year was our best year on the wind, and it was about, let's say, $87 million, $88 million. Year-to-date this year, it's about $40 million. So we're close to our best year ever on the wind.

And then just I'm curious on, in CapEx size and cadence over the balance of the year, you talked earlier about the IP initiatives coming along nicely. Just curious where spending will be there in a very good position with cash. So just kind of curious what the next steps will be there.

Yes. The CapEx year-to-date is $20 million. We've got elevated IT spend in there. Typically, we run $8 million to $12 million -- or $8 million to $10 million annually on cash CapEx. But again, this year, all of the increase is due to increased technology spend.

Our last question on queue is from Bruce Chan of Stifel.

I appreciate the time. Just a couple left here on my list. Kevin, on the dividend, it's nice to see the increase there. And obviously, it seems like that rotation and shareholder return vehicle is a little bit more of a tactical decision, but is there anything more to read from that as far as the Board's appetite for maybe climbing towards a certain yield bogey?

No. In July each year, we typically increase the dividend, and it's usually in the 10% range, I guess, on average. So slightly higher this year. We went from $0.185 to $0.21 quarterly. But no, there's nothing to read into that.

I would still -- I would say that we are still more on the -- we more favor the buyback program than dividends and locking up, too. We like the flexibility of buybacks as opposed to being locked into a large dividend. But like Kevin said, we -- if you go back to 2004 or '05 when we first started doing dividends, our first -- we've been increasing it at -- in the third quarter every year since then.

And that the increase -- it was actually a little bit larger from a dollar percentage. And I think it was the largest we've ever made is $0.025, but it's just consistent with what we've done in the past, and we still like to focus on the buyback program and the flexibility of that.

Okay. Great. Fair enough. And then just the last one here. Circling back to Mexico, I mean, I know that that's a pretty small portion of your revenue. But I just want to see, given some of the changes going on, if you have any visibility on whether there's been increased capacity needs as a result of some of the nearshoring efforts?

I think there hasn't -- I've not -- we've not seen any really increasing capacity due to nearshoring. I think that's something that people are talking about as potential should that exist because of the trade talks and the climate with China. But I think whether that is something that is probably out in front of us a little bit.

So really nothing that attributed business -- new business or otherwise, has been specifically attributed to nearshoring. But I think that cross-border business has been impacted like everything else with the virus. And -- but again, starting to reopen back up and hopefully be strong going throughout the balance of the year.

Thank you so much. At this point, we do not have any more questions on queue. You may continue.

Thank you, as always, for your attention. We wish you -- we wish for you and your families to stay healthy and safe, and I look forward to speaking with you again on our 2020 third-quarter earnings conference call currently scheduled for October 22. Have a good day.

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