Landstar System, Inc.

Good morning and welcome to Landstar System, Inc.'s first quarter 2020 earnings release conference call. All lines will be in listen-only mode until the formal question-and-answer session. Today's call is being recorded. If you have any objections, you may disconnect at this time. Joining us today from Landstar are Jim Gattoni, President and CEO, 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. Jim Gattoni. Sir, you may begin.

Thank you, Missy. Good morning and welcome to Landstar's 2020 First Quarter Earnings Commerce 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 or forward-looking statements. During this conference call, we may make statements that contain forward-looking information that relates to Landstar's business objectives, plan 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 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. Through the first 12 weeks of the 13-week 2020 first quarter, Landstar's results were in line with our expectations. During that period, the freight environment was somewhat more balanced than during the back half of 2019, with truck rates and volume trends following normal seasonal patterns. In late March, however, impact from the COVID-19 pandemic resulted in accelerated softening of truckload demand throughout the United States. This deterioration late in the quarter did not have a significant adverse impact on the first quarter overall, but will negatively impact volume in April and likely the remainder of the second quarter. Thankfully, Landstar's variable cost business model is highly resilient to rapid expansion and contractions in demand for freight transportation services. Demand for Landstar services is mostly correlated to the output of the North American manufacturing sector. As response to the pandemic generated high demand for perishable consumer goods and much needed medical supplies in March, the U.S. industrial manufacturing sector began closing facilities and furloughing workers. The speed with which the freight environment deteriorated into the beginning of the second quarter was like nothing experienced in the history of the company. The actions taken by government authorities and private industry to slow the speed of the coronavirus significantly impacted Landstar's loading opportunities at the end of March. It is safe to say that nobody knows the depth of the impact the pandemic will have on the freight transportation industry or how long this current crisis will last. Over the past 20 years, including 9-11 and the Great Recession of 2018, 2008 and 2009, the Lannister model has endured periods of tremendous challenge. We expect no different in 2020. Getting back to the first quarter, Lannister's 2020 first quarter revenue and earnings were in the range of the first quarter guidance provided as part of our year-end 2019 earnings release distributed on January 29, 2020. In that earnings release, we provided first quarter 2020 revenue guidance in a range of $915 million to $965 million. Actual 2020 first quarter revenue is $928 million. We also provided diluted earnings per share guidance of $1.10 to $1.20. The range of earnings per share guidance did not include an estimate for the financial impact on insurance and claims costs of a known severe vehicular accident that took place in January of 2020. At the time of the release of earnings per share guidance, the financial impact of the severe accident on insurance and claim costs in the quarter was not estimable. as the company continued to gather facts regarding the accident. Actual dollar earnings per share for the 2020 first quarter would have been at the upper end of the earnings per share guidance before giving effect to the financial impact of the severe accident on first quarter insurance and claim costs. Inclusive of the estimated financial impact of the severe accident, actual earnings per share were $1.04 in the 2020 first quarter. Our first quarter revenue guidance anticipated that the number of loads and revenue per load on loads hauled via truck would both be lower than the 2019 first quarter in the mid-single digit percentage range. First quarter 2020 loads hauled via truck were 6% below prior year's record first quarter truckload volume. Revenue per load on loads hauled via truck in the 2020 first quarter was 5% below the 2019 first quarter. Load volume and revenue per load on loads hauled via truck trended fairly consistent with the normal seasonal patterns on a month-to-month basis through the quarter. First quarter insurance and claim costs were estimated at 4% of BCO revenue in the first quarter guidance. This estimate did not include any financial impact from the severe accident I previously referred to. Actual insurance and claim costs in the 2020 first quarter were 5.8% of BCO revenue. During March, it became clear that Landstar needed to address potential unprecedented operational challenges that could result from the pandemic. As a safety first company, Last Hour has always placed safety at the forefront of all we do. The health and well-being of the members of our network, the company's 1,200 employees, 10,000 BCOs, 1,200 agents and their staffs, and over 25,000 customers and 59,000 other third-party capacity providers has always been a part of our Safety First culture. As an essential business, we have taken actions to ensure that freight is delivered safely while maintaining all of the social distancing recommendations and other guidelines provided by U.S. health authorities and various government agencies. As the pandemic grew, Landstar took major steps to prioritize the health and well-being of all Landstar employees and their families and limit the risk of community spread of the virus within our main offices, while we also sought to limit possible business disruption that could be caused by the potential impact of reduced staff in the event of an outbreak within our offices or from a government mandated shutdown. As it relates to business continuity, our focus was to ensure trucks and agents would be paid timely, customers would be billed Collections of receivables would continue to flow, the IT systems powering our network would continue to function, and BCO's agents would continue to have the uninterrupted access to trailing equipment and customer service. Over the course of several weeks in mid-March, the company transitioned over 800 of its 1,200 US-based employees from its two main corporate facilities to work at home. The transition helped to secure business continuity and maintain a healthy work environment for Landstar's employees. We now have over 1,000 Landstar employees working remotely. From an administration and operations standpoint, the transition of so much of our employee base to work at home has been a great success and currently it is business as usual at Landstar. From a freight standpoint, however, it is far from business as usual. We expect a very difficult freight environment during the second quarter with idle manufacturing plants and shrinking industrial and consumer demand. The speed of change in demand for freight transportation services caused by the pandemic has resulted in significant inconsistencies in the level of demand amongst various sectors. Beginning in early to mid-March, industry demand for transportation of consumer goods and medical supplies skyrocketed, while demand for transportation in the industrial manufacturing and oil and gas sectors experienced severe decreases. These industry trends became clear in Landstar's truckloadings toward the back half of March. During the first 12 weeks of the 13-week first quarter, Landstar's dispatch truckload volume was 5% below the comparable weeks of 2019. In the last week of fiscal March, dispatch load volume was 14% below the number of truckloads dispatched during the same week of March 2019. This was one of the swiftest and most dramatic reductions in week-to-week load volumes in the history of the company. The drastic slowdown in loadings experienced in the last week of March was a result of states beginning to implement stay-at-home orders shutting nonessential businesses, along with a wide number of auto plants announcing temporary closures. Overall, in the last week of fiscal March, We experienced increased dispatch truckload volume in foodstuffs and packaged commodities, yet those increases were more than offset by significant decreases in output of automotive parts and supplies, building products, and machinery. Due to the unpredictable nature of the current environment and the necessary role of the federal, state, and local governments in lifting stay-at-home orders and taking other measures that will be needed to help the economy transition back to a more normal operating condition, we will not be providing earnings guidance for the 2020 second quarter. In the long term, growth and earnings is highly important to Landstar. Currently, though, our near-term approach is focused on alleviating some of the business disruption and financial challenges caused by the pandemic that are facing the small and large business owners who have helped make Landstar one of the most successful freight transportation companies in the country. We are fortunate that the Landstar model provides the flexibility and resiliency to provide financial relief to agent BCOs in these unprecedented times. Part of Landstar's pandemic relief effort provides an additional $100 per load, $50 to the agent dispatching the BCO, and $50 to the BCO delivering load for all loads delivered by a BCO from April 1st to April 30th. Based on our anticipated BCO load volume, we forecast that portion of our pandemic relief effort will pay up between $6 and $7 million in the second quarter. We also are providing $1,000 per week for a two-week period to any BCO who contracts COVID-19 or has been mandatorily quarantined by a public health authority. As we move through the quarter, we may add to or expand our pandemic relief efforts and commit additional funds to support our network. During the 2020 first quarter, Landstar purchased over 1.2 million shares of stock at a total cost of approximately $116 million. We ended the first quarter with approximately $211 million in cash and short-term investments and $366 million available for borrowing under Landstar's Revolving Credit Facility. Although we do not envision any liquidity concerns over the next few months or in the long term, we believe it prudent to conserve cash until the duration and depth of the crisis becomes clear. Until then, we will be prudent in our approach to share purchases. Although we are not providing guidance for the 2020 second quarter, for the sake of providing an example of how our model may respond under certain adverse business assumptions, if one were to assume a revenue decrease in the 2020 second quarter of 20 to 30 percent as compared to the 2019 second quarter, Revenue would be in the range of $730 million to $835 million. Under that scenario, we believe the model would likely produce earnings per share in the range of 70 to 85 cents, which would be net of an estimated 13 cents per share related to LANDSTAR April pandemic relief effort currently in place, which, as I stated above, could be expanded as we move through the quarter. The resiliency of Landstar's light asset-based variable cost business model will continue to generate outstanding returns over time relative to the overall environment. For every $1 decrease in revenue, direct freight-related costs decrease by approximately 85 cents. The significant percentage of costs tied directly to revenue somewhat insulates the Landstar model from significant downturns in freight and typically generates positive free 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 down 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. Although 2020 has become a challenging year, we remain confident in our model not only to endure through times like these but also to come charging back as business conditions improve. And here's Kevin to provide additional commentary on the 2020 first quarter financials.

Thanks, Jim. Jim has covered certain information on our 2020 first quarter, so I will cover various other first quarter financial information included in the press release. Gross profit, defined as revenue less the cost of purchased transportation and commissions to agents, was $142.9 million and represented 15.4% of revenue in the 2020 first quarter, compared to $155.6 million, or 15.1% of revenue in 2019. The cost of purchased transportation was 76.5% of revenue in the 2020 quarter versus 76.6% in 2019. The rate paid to truck brokerage carriers in the 2020 first quarter was 39 basis points higher than the rate paid in the 2019 first quarter. Commissions to agents as a percentage of revenue were 16 basis points lower in the 2020 quarter as compared to 2019. due to a decreased net revenue margin on loads hauled by truck brokerage carriers. Other operating costs were $8.3 million in the 2020 first quarter, compared to $8.2 million in 2019. This increase was primarily due to increased trailing equipment costs and increased contractor bad debt, partially offset by decreased trailer rental expense. Insurance and claims costs were $25 million in the 2020 first quarter compared to $15 million in 2019. Total insurance and claims costs for the 2020 quarter were 5.8% of BCO revenue compared to 3.3% in 2019. The increase in insurance and claims compared to 2019 was attributable to the impact of a single claim related to an accident in early January 2020 and increased unfavorable development of prior year claims. Selling general and administrative costs were $45.3 million in the 2020 first quarter, compared to $41.3 million in 2019. The increase in SG&A costs was mostly attributable to increased customer bad debt, an increase in the provision for bonuses under the company's incentive compensation plans, and increased employee wages and benefits, partially offset by a decrease in stock compensation expense. In addition, the 2020 first quarter SG&A costs include approximately $800,000 related to the cancellation of the company's annual convention. Customer bad debt expense was $2.9 million in the 2020 first quarter compared to $1.3 million in the 2019 first quarter. Compensation expense was $631,000 and $1.9 million in the 2020 and 2019 first quarters respectively. The provision for incentive compensation was $2 million in the 2020 first quarter compared to $1 million in the 2019 first quarter. Quarterly SG&A expense as a percent of gross profit increased from 26.5% in the prior year to 31.7% in 2020. Depreciation and amortization was $11.5 million in the 2020 first quarter compared to $11.3 million in 2019. This increase was primarily due to increased IT-related depreciation. Operating income was $54 million, or 37.8% of gross profit, in the 2020 quarter versus $80.9 million, or 52% of gross profit, in 2019. The decrease in operating margin was driven by increased SG&A expense, increased insurance and claims costs, and the effect of decreased gross profit. operating income decreased 33% year-over-year. The effective income tax rate was 22.9% in the 2020 first quarter compared to 21% in 2019. The effective income tax rate was impacted in both periods by excess tax benefits related to vesting of equity awards to employees. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $211 million. Cash flow from operations for the 2020 first quarter was $99 million and cash capital expenditures were $6 million. There are currently 1,821,000 shares available for purchase under the company's stock purchase program. The unpredictable nature of the current freight environment makes it very difficult to forecast revenue and resulting gross profit even in the near term. However, we are more comfortable with forecasting the indirect costs for the second quarter. In yesterday's earnings release, we provided a revenue and earnings scenario to show how the model reacts under certain unfavorable assumptions. The assumption we used was a reduction in revenue from the 2019 second quarter to the 2020 second quarter of 20 to 30 percent. Under that assumption, we said revenue in the 2020 second quarter would be in a range of $730 and $835 million, and earnings per share would range between 70 cents and 85 cents. Our calculation assumed that the combined total of the indirect costs consisting of other operating costs, selling general and administrative costs, and depreciation in the aggregate to be similar to the $65 million reported in the company's 2020 first quarter. We estimated insurance and claims costs at 4% of a projection of BCO revenue for the core. Back to you, Jim.