Landstar System, inc (LSTR) Q2 2021 Earnings Call Transcript

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Landstar System, inc (LSTR 0.41%)
Q2 2021 Earnings Call
Jul 22, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to Landstar System Incorporated Second Quarter 2021 Earnings Release Conference Call. [Operator Instructions] 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.

Jim B. Gattoni -- President and Chief Executive Officer

Thank you, Kirby[Phonetic]. 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, including 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 it's 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 US economy in general relating to the COVID-19 pandemic and various initiatives taken by Landstar in response to the pandemic to support this network of agents and BCOs.

During our first quarter 2021 Earnings Conference Call, we provided 2021 second quarter revenue guidance to be in a range of $1.400 billion to $1.450 million and I diluted earnings per share to be in a 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 assume 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 expectations of revenue per truckload would stabilized 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 Form 8-K filed with the SEC. The updated guidance reflected truckload volume at the time trending above the 2021 first quarter in a low double-digit percentage range and revenue per load on loads to 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 28th 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 last are covering the same time periods, we compare the 2021 trends with our performance from 2016 through 2019. We are not including results from the fiscal year 2020 given the significant adverse impact of 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 to 9%[Phonetic] to 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 2021 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 US in late February.

The growth in a 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 2021 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 2018 average.

Growth remain at 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, the 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 US manufacturing sector beginning in March.

As it relates to the new agent pipeline, we continue to attract qualified agent candidates for the month. 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 a number of BCO cancellations in the 2021 second quarter is 3% below the 2020 second quarter. Overall, the net increase in number of BCOs, BCO trucks in the 2020 second quarter speaks [Indecipherable] our ability to attract qualified capacity and 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 cap 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 and network. While the 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?

Fred Pensotti -- Vice President and Chief Financial Officer

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 $3.1 million in 2020. Gross profit margin was 14.1% of revenue in the second quarter of 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 dollars 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 claims 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 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 in 2020 second quarter effective tax rate as well as a higher provision for non-deductible 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 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 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.

Jim B. Gattoni -- President and Chief Executive Officer

Thanks, Fred, and welcome to this superior management team.

Freight demand began to significantly improve in August 2020 as the US economy began to improve from increased consumer spending. The strength in the freight environment that began in August continued to 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, with the supply of trucks and freight demand remained stable, the company's third quarter truck revenue per load typically slightly exceeds the second quarter while a number of loads hauled via truck typically track slightly below the second quarter. When we experienced those trends, third quarter revenue often approximates revenue of the second quarter while gross profit tends to decreased 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 the first two 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 a season -- 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 would be similar to the 2021 second quarter revenue in a range of $1.550 billion to $1.600 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 the 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 cost tend to track more in line with historical trends that we have experienced thus far in 2021. Based on that range of revenue and assuming insurance and claim costs at approximately 4.6% of [Phonetic] BCO revenue, I anticipate 2021 third quarter diluted earnings per share to be in a 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'm 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 two decades, and Landstar is positioned for a year of tremendous success. We continue to increase our growth 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 annual revenue for the first time in our history.

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

Questions and Answers:

Operator

Thank you very much, sir. At this time we will begin the question-and-answer session. [Operator Instructions] Our first question would come from the line of Jack Atkins of Stephens. Your line is open. Please go ahead.

Jim B. Gattoni -- President and Chief Executive Officer

Hey, Jack. How are you?

Jack Atkins -- Stephens

Hey, great. Jim, good morning. Good morning, Rob and Joe. And Fred, congratulations on your role with the company.

Fred Pensotti -- Vice President and Chief Financial Officer

Thank you. Good morning.

Rob Brasher -- Vice President and Chief Commercial Officer

Good morning, Jack.

Jack Atkins -- Stephens

So I guess, maybe to start, Jim, kind of going back and picking up off of the comments 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 in the 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 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 -- do you think that's realistic? A lot of -- I get a lot of questions just around the sustainability of trends and if folks can grow earnings in 2022, and I would just be curious to get your thoughts on that subject.

Jim B. Gattoni -- President and Chief Executive Officer

Yeah. Jack, one of the things we've taken into consideration as you know are the management team and employees here that we have the incentive compensation plan is 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 plans could 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 on -- 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 in equity comp probably another $25 million this year for that. So you're looking at about a combined $45 million to $50 million in comp [Phonetic] in this year. And in a normal year, it would be about 20 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 that 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 come from that kind of margin perspective when you have a little softening into the -- into a year and I would think and I haven't run numbers, but we could probably have a decent size pullback in gross profit and still stay above 50% or around 50% because of that tailwind on the SG&A line.

Jack Atkins -- Stephens

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 under appreciate 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 a sort of windfall from a profit perspective?

Jim B. Gattoni -- President and Chief Executive Officer

No, Joe -- I would say, Jack. Back in 2015 when I stepped in the role, I told everybody there is an open checkbook to make our tools better and we are spending what we can to get it done. We have so many projects in the air right now. There are -- there is nothing that stands -- there is nothing that stands out right now that we would add or to the project list. What we're focused on, on the front end that this is user experience, right? Agents and trucks, making them more efficient, making things more effective on the tools that already existed but making it 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 is no reason to jam that end. It will helps -- 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 -- we should spend another $50 million on tech today by we trickle in other projects that will be maybe move forward a little bit. But I wouldn't say there's anything more I would be telling the world that all of a sudden, we got -- 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 were probably $20 million to $30 million over where we were four 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 million to $30 million to $50 million to $60 million.

Jack Atkins -- Stephens

Okay. Okay, that makes total sense. Thanks again for the time, guys, and congrats on a great quarter.

Operator

Thank you. Our next question would come from the line of Todd Fowler of KeyBanc Capital Markets. Your line is open, sir. Please go ahead.

Jim B. Gattoni -- President and Chief Executive Officer

Hey, Todd.

Todd Fowler -- KeyBanc Capital Markets

Hey, good morning, Jim. Fred, welcome to the self-proclaimed superior management team. [Speech Overlap]

Fred Pensotti -- Vice President and Chief Financial Officer

Thank you. Good to be here.

Todd Fowler -- KeyBanc Capital Markets

Jim, so on the guidance, and I understand it makes sense to set up the guidance based on what you've seen from historical season -- seasonal patterns. I know that the year-over-year comps are starting to normalize. In the last couple of quarters, you've run ahead of seasonal patterns. Are there things that you're seeing right now either an underlying demand or things on the supply side that suggests that we're going to shift to more in line with seasonal trends or 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?

Jim B. Gattoni -- President and Chief Executive Officer

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 have 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, talk in '16 to '18 -- '19 trends.

I think on the rate, it's really because of May spike, right? So the the softer June -- May to June spike because May spiked. So -- and in the first couple of weeks here, we're sitting in July, the first three weeks into July and I'm seeing the normal June to July trend. So I'm basing this on about a six or seven-week stability, right? I think we're seeing -- I got six weeks of stability right now. I'm seeing things that are tracking normal as we would have seen in those three years of '16 or four years from '16 to '19.

So there is nothing pushing us either higher or lower than that at this point. So that's how we get to the trend and now 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 look -- we're looking at a more normal second and third quarter trend.

Todd Fowler -- KeyBanc Capital Markets

Okay. Yeah, I know that makes sense and that's helpful. So it sounds like more you are rooted in what we've seen in the last six 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 band 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.

Jim B. Gattoni -- President and Chief Executive Officer

Yeah. I -- the strength really is still on the band side. It's whether the building products, consumer durables or substitute line-haul is 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 band with flatbed being better. And it's still most of those customers and shippers that we're hearing from that are -- there is still concern about the back-quarter right in 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, yeah, there is nothing specific that changed in either of those dynamics that I'm aware of.

One thing, we've talked 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 two commodity -- 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 is nothing really unusual in the trend -- that we're looking in the trends for the rest of the year.

Todd Fowler -- KeyBanc Capital Markets

Okay. Yeah, all of that makes sense. Okay, thanks so much for the time this morning.

Operator

Thank you. Our next question would come from the line of Bascome Majors of Susquehanna. Your line is open. Please go ahead.

Bascome Majors -- Susquehanna

Yeah. Thanks for taking my questions here. Jim, your stock is certainly a lot higher in absolute terms than what 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 are 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 when that time comes?

Jim B. Gattoni -- President and Chief Executive Officer

As you noticed, we bought about 150,000 shares back in the quarter. That's kind of a light quarter for us. We had seen a pullback in the stock about 10%, and we didn't really see anything in the change in the business dynamics. You also -- clearly, when you look at what the Street say at 85 [Phonetic] for the year or 83 [Phonetic] for the year, yeah, our PE is now a lot more reasonable than it was six month, seven months ago.

So, yeah, I think we're in a buying opportunity situation now. 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 on out special at the end of the year and 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, yeah, 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.

Bascome Majors -- Susquehanna

Thanks for sharing that. 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.

Jim B. Gattoni -- President and Chief Executive Officer

We didn't say it because we're keeping it as a secret. No, actually, 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 41[Phonetic]. I think we're using like maybe 39 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.

Bascome Majors -- Susquehanna

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, is that feel reasonable based on your July 2021 crystal ball to be thoughts on how we bridge from this year to next.

Jim B. Gattoni -- President and Chief Executive Officer

I think it's very difficult in this environment project 12 months out because of the unpredictability of the pandemic, stimulus stops, people coming back to work, people maybe 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 where the variable comp sit in SG&A this year that if we hit targets next year, you'd have that 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.

Operator

Thank you. Our next question would come from the line of Scott Group of Wolfe Research. Your line is open. Please go ahead.

Scott Group -- Wolfe Research

Hey, thanks. Good morning, guys. Jim, this uptick in insurance costs should we -- should we think about this is a one quarter event or is this in your mind, sort of the new normal range on insurance costs?

Jim B. Gattoni -- President and Chief Executive Officer

Part of it -- 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 three weeks of July. Yeah, 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 happen in the first quarter. So there is a little bit of excess in there. I would -- if I would have guessed now without those in there, your prior 4.2%, 4.3% not 4.6% but we're hoping that we were very conservative on that number and things on the incidence we know about are the fact pattern and stuffs 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.

Scott Group -- Wolfe Research

Right, right, right. Okay. Your point about the last six 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 -- do we have a shot to get back to better than normal or is this typically or historically the beginning of the transition to underperforming normal? What's your crystal ball here?

Jim B. Gattoni -- President and Chief Executive Officer

My crystal ball, it's very hard to decipher what we think is going to happen at peak, right? October, November, December capacity is still tight. There is no question there and if demand creeps up, I think you're going to see 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 are still anticipating a pretty strong fourth quarter. So we might see stability coming in here through August, September. But if we get peak as strong as it was last year, you might be seeing an 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 looked like the second quarter and we'll just finish out the year at this more seasonal trend.

Scott Group -- Wolfe Research

Okay. And then if I could 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?

Fred Pensotti -- Vice President and Chief Financial Officer

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

Scott Group -- Wolfe Research

Look, Landstar is pretty much been debt averse our whole lives, right? And then, unless we see an opportunity to [Indecipherable] 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 one-time 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.

Jim B. Gattoni -- President and Chief Executive Officer

Okay. All right, thank you for the time, guys.

Operator

Thank you. The next question would come from the line of Bruce Chan of Stifel. Your line is open. Please go ahead.

Bruce Chan -- Stifel

Yes. Thank you, operator, and good morning, team. 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?

Rob Brasher -- Vice President and Chief Commercial Officer

Hey, 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 how things 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 that operate in a true peak is they don't know. And we've been having these conversations at least for the first quarter as to aligning with them, making sure they've got capacity, making sure that they're taken cared of.

So I think it's a big unknown. All the indications that we have right now that, again, is 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, remodel, things like that. So there would be great -- they are concerned about how strong peak is going to be moving into, we'll call it now late third and early -- and through the fourth quarter.

Bruce Chan -- Stifel

No, 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 other 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 freight cycle. Do those comments still hold true?

Jim B. Gattoni -- President and Chief Executive Officer

No. Look, I was -- 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 put it in perspective, significant majority of stuff is spot rates and the normal cycle is 12 to 18 months.

Now, yeah, I think we're going to see a cycle. I think it's just extended and that's where we're kind of look at it next year. Things sooner or later going to stabilize. We're in a cyclical business. So the -- if we're -- there is that the theory of people starting to travel and get entertainment 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 we're not traveling as much. They're going to hesitate a little bit the 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 moving over to contract. Now, we will 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.

Bruce Chan -- Stifel

Perfect. Thank you. Thank you. Next question would come from Jason Seidl of Cowen. Your line is open. Please go ahead.

Jason Seidl -- Cowen

Thank you, operator. Hey, good morning, gentlemen. And Fred, welcome to the team here. 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 remove 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 impacting Landstar?

Joe Beacom -- Vice President and Chief Safety & Operations Officer

Yeah. Jason, this is Joe. I would tell you thee are, as Jim made some comments on in his remarks, recruiting volume is up. I mean, I think we -- 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 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 kinds 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.

Jason Seidl -- Cowen

Okay. In regards to a potential infrastructure bill and so the impact [Speech Overlap].

Joe Beacom -- Vice President and Chief Safety & Operations Officer

Yeah. 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 rates climb and of course when when rates are high, that opportunity at Landstar maintains very -- 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.

Jason Seidl -- Cowen

Okay. I appreciate the time. As always, gentlemen, congrats on good quarter.

Operator

Thank you. At this time, we have two more questions on queue.The next question would come from Scott Schneeberger of Oppenheimer. Please go ahead.

Scott Schneeberger -- Oppenheimer

Thanks very much. Good morning and welcome, Fred. Jim, I guess I have a few questions on really end market. 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? Thanks.

Jim B. Gattoni -- President and Chief Executive Officer

Yeah. On the substitute line haul, I think we talked about it before is I anticipated. Well, it's two or three large customers, right, shippers for us, not even shippers, parcel carriers, right? We anticipate that they kind of realign, they decide to either put assets in there, they they improve their networks and their carrier base and stuff like that. But what we are hearing right now is that, and I anticipate 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 the 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 this, 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. I think that was your question on that e-commerce side of the business and what the 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 on a normal seasonal trend would be and especially for the substitute line haul. It's pretty elevated right now.

Scott Schneeberger -- Oppenheimer

Thanks. I appreciate that. And then I think I heard in -- I think it was in Todd's question, you're talking about the chip dynamic and automotive and you said that, and please correct me if I'm wrong, there were two 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 -- auto parts movement. I'm curious about that dynamic versus new car and how you're handling that going forward. Thanks.

Jim B. Gattoni -- President and Chief Executive Officer

Yeah, So the -- so, yes, you're right on. I mean, you got it, automotive. And this is a volume -- sequential volume comment of what it was from Q1 to Q2. We saw two sectors that actually had negative volume growth and one was automotive, which is 78% 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 are playing in that area of the business. We may move a little bit of that, but the significant piece over by 97% of this part is going in and out of plants. We're not doing new car moves.

Scott Schneeberger -- Oppenheimer

Great, thanks. And just a follow-on there, and thanks for that -- thanks for the detail. Your other category in the quarter of overall. I know it's a catch all but one of the -- 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 in the minutiae [Phonetic] that's worth known effects.

Jim B. Gattoni -- President and Chief Executive Officer

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

Scott Schneeberger -- Oppenheimer

Got it. Thanks for that.

Operator

Thank you. [Operator Instructions] Next on queue would come from the line of Stephanie Moore of Truist. Your line is open. Please go ahead.

Stephanie Moore -- Truist

Hi, good morning.

Jim B. Gattoni -- President and Chief Executive Officer

Morning.

Stephanie Moore -- Truist

I wanted to touch on a 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 toward actually kind of exposure to contractual freight. So I would love to get any kind of update there not only Landstar Blue, but also maybe an update on just some of the technology initiatives. I know it's a multi-year rollout across the organization, but as well as with Landstar Blue. So, any color there would be helpful. Thanks.

Jim B. Gattoni -- President and Chief Executive Officer

Landstar Blue on the technology side is kind of twofold. One is our systems here are -- the core systems here are really designed for the spot world and they've been built out over 20 year or 30 years and they are very good and 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 assigned capacity, dedicated capacity with contract rates, right? So that's a little bit different. The stuff that we're using over there that is similar is like Landstar Clarity, which is our visibility tool, right? Landstar Blue also has access to our pricing tool and all 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 it -- how effective it is with third-party trucks. As you know, getting data from the third-party trucks is kind of an industry challenge. 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, we operate agents through their tune [Phonetic] to show what we're doing. They help us, we help them kind of on how to run that kind of dedicated business they ever want to get into it. It's running probably $20 million to $30 million of rate right now and it will 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 write-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 called on the Book It Now product that we have, right, where the carrier just can push a button and accept the load. 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? In Landstar Blue, it is where we'll get traction on the Book it Now concept, right, because when they -- when the freight is owned and the capacity knows that's their freight, all they can 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 the capa -- of getting that technology up and running. I was told the other day that in a few weeks, we will have the TMS running. We will start running loads through it. So its progress and it's a good way to test some of the existing tools with the agents very easily [Phonetic].

Stephanie Moore -- Truist

Great. Well, thank you so much for the color.

Operator

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

Jim B. Gattoni -- President and Chief Executive Officer

Yeah. 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 21st. Have a good rest of your week. Goodbye.

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Jim B. Gattoni -- President and Chief Executive Officer

Fred Pensotti -- Vice President and Chief Financial Officer

Rob Brasher -- Vice President and Chief Commercial Officer

Joe Beacom -- Vice President and Chief Safety & Operations Officer

Jack Atkins -- Stephens

Todd Fowler -- KeyBanc Capital Markets

Bascome Majors -- Susquehanna

Scott Group -- Wolfe Research

Bruce Chan -- Stifel

Jason Seidl -- Cowen

Scott Schneeberger -- Oppenheimer

Stephanie Moore -- Truist

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