Landstar System, Inc.

Good morning and welcome to Landstar System Incorporated's year-end 2020 earnings release conference call. All lines will be in a listen-only mode until the formal question and answer session. Today's conference 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, 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 last year's 2020 Fourth 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, they're 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, plans, strategies, and expectations. Such information is by nature subject to uncertainties and risks included but not limited to the operational, financial, and legal risk detail LandSTAR's Form 10-K for the 2019 fiscal year described in Section Risk Factors and other SEC filings from time to time. These risks and uncertainties could cause actual results or events that differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking information, and Lanthar undertakes no obligation to publicly update or revise any forward-looking information. I believe it is safe to say 2020 was a year like no other. The economic and social disruption caused by the COVID-19 pandemic had unprecedented impacts on many sectors of the U.S. economy. Consumer spending on travel and entertainment, along with other service-related expenditures, shifted to spending on goods while U.S. manufacturing was adversely impacted by the pandemic and still has not fully recovered. To conclude this rollercoaster of a year, Landstar achieved numerous all-time quarterly financial records in the 2020 fourth quarter. This remarkable turnaround from the adverse financial impact that COVID-19 had on our 2020 second quarter financial results was mostly due to significant consumer demand driving our van truckload business. 2020 fourth quarter performance was also favorably impacted by an improvement in U.S. manufacturing compared to the 2020 third quarter. In fact, the fourth quarter was the only quarter of 2020 where revenue from transportation services hauled via unsighted platform equipment exceeded the corresponding prior year quarter. At Landstar, the swings in financial performance caused by the pandemic were more dramatic than during any other time in the company's history. 2020 second quarter gross profit decreased from the 2020 first quarter by almost 21% due to the sudden adverse impact COVID-19 had on the U.S. economy, an action taken by Lanster to provide additional financial support to the company's network of agents and VCOs. This was the first time in the company's history that gross profit decreased sequentially from the seasonally softer first quarter to the second quarter. Our second quarter performance was followed by substantial sequential quarterly growth in gross profit. which increased 42% from the 2020 second quarter to the third quarter and 13% from the third quarter to the fourth quarter. This gross profit growth was led by significant sequential increases beginning in June in month-to-month truck revenue per load and above normal month-to-month increases in the number of loads hauled via truck. These sequential increases in revenue per load and the number of loads hauled via truck that began in June and continued through fiscal year end drove our record quarterly financial performance in the 2020 fourth quarter. Also, as described in Landstar's 2020 fourth quarter earnings press release that we put out yesterday, these sequential trends drove our fourth quarter financial results to far exceed both the fourth quarter financial guidance we first presented in our 2020 third quarter earnings release on October 21st and the updated financial guidance provided on November 17th via Form 8K filed with the SEC. Our updated guidance issued on November 17th indicated our expectation that revenue and diluted earnings per share in the fourth quarter would be slightly above the high end of our initial guidance issued on October 21st of $1.2 billion and the $1.42 respectively. Actual revenue in the 2024 quarter was $1,296,000,000 and diluterings per share was $1.70. Revenue exceeded the high end of our guidance by $96 million as growth in the month-to-month trends in revenue per load and the number of loads hauled via truck exceeded our already high expectations. The increase The increased revenue drove gross profit growth that contributed approximately 17 cents to the increase in diluted earnings per share over the high end of the guidance. The additional increase in diluted earnings per share compared to guidance were due to lower net costs, primarily insurance and claims, during the quarter than expected, plus a 5 cent payroll impact from a lower than expected effective income tax rate. As it pertains to monthly trends, October closed with truck revenue below 15% above the October 2019. And the number of loads hauled via truck, 10% above that of October 2019. As we move through the fourth quarter, as previously mentioned, truck rates and volume continue to strengthen compared to the corresponding prior year period. November-December revenue per load on loads hauled via truck increased 17% and 18% over November and December 2019 respectively. And the number of loads hauled via truck in November-December increased 13% and 15% respectively compared to the same month of 2019. Overall revenue per load on loads hauled via truck in the 2020 fourth quarter exceeded the 2019 fourth quarter by 17%, and the number of loads hauled via truck exceeded the 2019 fourth quarter by 13%. The strength of demand for Landstar services provided via van equipment during the 2020 fourth quarter further strengthened from the already strong demand we experienced during the 2020 third quarter. In the 2020 fourth quarter, demand for services provided by unsighted equipment also improved as compared to the third quarter, with load volume and revenue per load on loads hauled via unsighted equipment each exceeding the 2019 fourth quarter. As noted previously, the fourth quarter was the only quarter of 2020 where the number of loads hauled and revenue per load on loads hauled via unsighted platform equipment each exceeded the corresponding prior year quarter. Even as demand for unsighted platform service improved in the fourth quarter, overall demand for transportation services provided via van equipment continued to significantly outpace demand for services provided unsighted equipment. More specifically, the number of loads hauled via van equipment in October, November, and December were 13%, 16%, and 17% above October, November, and December 2019. Revenue per load on loads hauled via van equipment in October increased 23% over October 2019 and increased 25% in both November and December over November and December 2019. The number of loads hauled via van equipment The number of loads hauled via unsighted equipment in October was about equal to October 2019, and November, December 2020 were 8% and 12% above November and December 2019. Revenue per load on loads hauled via unsighted equipment in October, November, and December exceeded prior year by 6%, 4%, and 5%, respectively. In comparing the 2020 fourth quarter to the 2019 fourth quarter, demand for our services fluctuated significantly by industry sector. The sectors behind the revenue growth in the 2020 fourth quarter were the same sectors that drove revenue growth in the company's third quarter over the 2019 third quarter. The growth in revenue was driven by strength in consumer doorables, automotive parts, building products, and substitute line haul services, where Landstar provides truckload transportation services to LTL and parcel carriers between their hubs. The boom in home improvement and renovations helped growth in the building product sector, while new business awards outside the big three automotive manufacturers partly contributed to the automotive parts performance. Growth in new and existing accounts resulted in increased revenue in the consumer doorables sector. Consumer demand for e-commerce drove the growth in substitute line haul services. Revenues from the machinery and metal sector, both of which are typically serviced using unsighted equipment, improved compared to what we experienced in the 2020 third quarter. Revenue from the machinery sector in the 2020 fourth quarter was about equal to the 2019 fourth quarter, a significant improvement from the 12% decrease in the 2020 third quarter compared to the 2019 third quarter. Likewise, revenue from the metal sector was 3% above the 2019 fourth quarter, a significant improvement from a decrease of 12% in the 2020 third quarter compared to the 2019 third quarter. While certain sectors of the U.S. economy appeared strong and others lagged, The efforts of our agents to expand their business with new and existing customers across a broad array of sectors was critical in driving the company's strong fourth quarter performance. As to truck capacity, we continue to attract qualified owner-operators to the model. We ended the year with a record 10,991 trucks, 420 more than at the end of the 2020 third quarter, and 748 more than December 2019. BCO utilization, or loads per BCO per week, was slightly above seasonal norms. BCO utilization in the 2020 fourth quarter increased approximately 4% compared to the 2019 fourth quarter. Record BCO truck cap and the increased BCO utilization led to a record number of quarterly loadings hauled by BCO capacity in the 2020 fourth quarter. Also, as demand increased, we saw increased number of third-party carriers haul loads for Landstar. Active truck broker carrier count defined as carriers who have hauled the Landstar load in the past 180 days increased from approximately 41,000 in the 2020 third quarter to an all-time record of 46,000 in the 2020 fourth quarter. Approved and active third-party carrier count continues at an all-time high. As it relates to third-party carriers, the inflection in demand that began in August resulted in a sudden tightening of truck capacity that drove an increase in the rate of purchase transportation paid to third-party truck carriers. In the 2020 fourth quarter, revenue per load increased approximately 18%, while gross profit per load increased approximately 5% on truck loads hauled by third-party carriers as compared to the 2019 fourth quarter. The exceptional finish to fiscal year 2020 was partly due to very strong demand during the holiday peak season. Beginning in early November, overwhelming demand for e-commerce tightened truck capacity, driving rates and volumes higher to end the year. Although I expect strong demand to continue through the 2021 first quarter, the impact of the year-end spike in e-commerce on truck rates and volume is expected to subside. Therefore, I expect quarter over prior year quarter growth in truck rates and volume in the 2021 first quarter compared to the 2020 first quarter to be somewhat below the exceptional growth rates of the 2024 quarter, although similar to the strong growth experience in October 2020 over October 2019 prior to the spike in e-commerce. As a result, we expect truck revenue per load in the 2021 first quarter to exceed the 2020 first quarter in a mid-teen percentage range. We also currently expect the number of loads hauled via truck in the 2021 first quarter to exceed the 2020 first quarter in a high single-digit percentage range. As such, I expect first quarter revenue to be in a range of $1,100,000,000 to $1,150,000,000. Based on that range of revenue, I anticipate dilute earnings per share to be in the range of $1.55 to $1.65. We'll ask our business model with access to substantial number of truck capacity providers, including both our BC owner operators and third party carriers, combined with the expertise and experience of the agent family and the geographic distribution of our over 1200 agents throughout the US and Canada, drives exceptional performance in most environments. The 2024 quarter was no different. I just want to just touch on a couple of line items within the P&L. Gross profit increased 23% to $182.4 million compared to $148.7 million in 2019. Gross profit margin was 14.1% of revenue in the 2020 fourth quarter and 14.9% in the 2019 fourth quarter. The 80 basis point decrease in gross profit margin was mostly attributable to a 220 basis point increase in the rate of transportation paid to third-party truck brokerage carriers partly offset by 140 basis point decrease in the rate of commissions paid to agents on that revenue. Gross profit margin in the 2024 quarter was also lower than the 2019 fourth quarter due to mix, as a percent of revenue from fixed margin business decreased compared to prior year. Other operating costs were $7.4 million in the 2024 quarter compared to $8.7 million in 2019. This decrease was primarily due to a decreased provision for contractor bad debt, Insurance and claim costs were $21.2 million in the 2020 fourth quarter compared to $25.1 million in 2019. Total insurance and claim costs were 3.8% of BCO revenue in the 2020 period and 5.7% of BCO revenue in the 2019 period. The decrease in insurance and claims as compared to 2019 was primarily due to decreased net unfavorable development of prior year claims, decreased severity of current year claims during 2020, as well as decreased frequency during the 2020 period, partly offset by an increase in insurance premiums, primarily for commercial trucking liability coverage. Selling general and administrative costs were $42.9 million in the 2020 fourth quarter, compared to $38.2 million in 2019. The increase in SG&A was mostly attributable to increased stock-based compensation expense, an increase in a provision for bonuses under the company's incentive compensation plans, and increased wages. partly offset by decreased travel and entertainment costs and decreased event costs. In the 2020 fourth quarter, stock compensation and the provision for incentive compensation was $3.6 million. Stock compensation and the provision for incentive compensation were both insignificant in the 2019 fourth quarter. Depreciation of amortization was $11.6 million in the 2020 fourth quarter, compared to $11.4 million in 2019. Operating income was $84.4 million, or 46.3% of gross profit in the 2024 quarter, versus $66.5 million, or 44.7% of gross profit in 2019. Operating income increased 27% year-over-year, excluding the $15.5 million one-time cost to buy out certain incentive commission arrangements with several agents. Operating margin in the 2024 quarter would have achieved all-time quarterly records. The effective income tax rate was 22% in the 2024 quarter compared to 23.8% in 2019. The effective income tax rate was favorably impacted in both periods by resolutions of certain tax items and tax benefits resulting from equity compensation arrangements. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $291 million. Cash flow from operations for 2020 was $211 million compared to $308 million in fiscal year end 2019. The decrease in cash flow from operations is mostly due to the spike in revenue to end 2020, driving year-end net receivables, accounts receivable, less accounts payable, up. As it relates to full year 2021, the company does not provide revenue and earnings guidance beyond the upcoming quarter due to the unpredictable nature over extended periods of time in the U.S. spot market in which it primarily operates. However, as it relates to full year 2021, certain costs and cost savings that took place in 2020, mostly due to the COVID-19 pandemic, are not expected to recur. During 2020, the company paid $50 per load as pandemic relief to BCOs and independent agents for all loads hauled via BCO during April and May, which resulted in a total one-time cost of $12.6 million. Additionally, the company recorded a $2.6 million charge at Landstar Metro related to the impairment of customer intangibles and a $15.5 million charge for the buyout of certain legacy agent incentive commission arrangements. The termination of those commission arrangements should result in a tailwind in commissions to agents in 2021 as compared to 2020 of approximately $10 million. The company also estimates that it had cost savings due to cancellation of events, travel and entertainment, BCO training and recruiting costs, and various other savings totaled about $7 million in 2020. Overall, we estimate the aggregate impact of all these one-time items equal to a net $13.7 million, providing a nice tailwind heading into the 2021 season. into 2021. As most of you know, several years ago, we began the process of transforming our technology infrastructure. That plan includes an overhaul of Landstar's technology systems and involves changes to our network architecture, hardware, software, and how data is stored and accessed to provide a more flexible, agile platform. Most of all, the transformation involves the delivery of new and upgraded tools that we make available to the company's network of small and large business owners. The new platform allows us to move to a plug-and-play environment where we can build or buy tools that make sense to the business. Over the past few years, we have delivered a pricing tool to the agent family, automated the customer credit and trailer request process, provided a data analytics tool to the agents to help them better manage their business, delivered a freight visibility application, consolidated our applications used by the BCO network to a single mobile app called Landstar One, and improved our load and truck search features. We also continue to move forward on replacing our legacy operating system with a new transportation management system. During 2020, we established Landstar Blue, a company owned and operated transportation company that will allow us to further design and develop tools that ultimately benefit the company's network of agents and capacity providers. During 2021, our recent investments in the company's technology ecosystem will add approximately $5 million to depreciation in 2021 over 2020. Additionally, as we continue to invest in new enhanced tools, I expect to incur approximately $5 million in costs related to continuation of our technology plan, along with $2 million in IT wage increases as we transform the IT team with new skill sets. Overall, the incremental cost for the continuation of the company's technology transformation in 2021 is expected to be about $12 million. 2021 is setting up well for Landstar's operating conditions that contributed to our record quarterly performance in the 2024 quarter, but appear to be carrying through to January. We begin 2021 with a record number of BCO trucks and approved third-party carriers. Demand remains strong for van service. I believe demand for unsighted platform service has turned the corner. Overall strong demand and easy year-over-year comparisons through the first half of 2021 should result in first-half revenue and earnings well above the first half of 2020. As we move to the back half of the year, we anticipate year-over-year comparisons may become a bit challenging due to our record finish to 2020 and the expectation of a normal spot market cycle, which would suggest softening truckload pricing in mid to late summer 2021. Nevertheless, from a longer-term perspective, Lesser expects to grow gross profit in a mid-single-digit percentage range, pass 70% of that growth to operating income, and increase dilution earnings per share in a high single to low double-digit percentage range. Ultimately, Those expectations should result in an annual operating margin of 50% or more within a period of three to four years. Regardless of the environment, Landstar's network of small and large business owners provide the expertise to satisfy shipper demand in almost every sector and every geographic region in North America, sourcing capacity of varying equipment types, while Landstar provides the tools and financial support to empower their success. The strength and resiliency of Landstar's light asset-based, variable cost business model proves itself over and over 2020 is shaping up to be another great year. And with that, Missy, we are ready to take questions.

Thank you very much. At this time, we will begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your touchtone phone. Once again, that is star one to ask a question. To cancel your request, please press star followed by the number two. Our first question is from Jack Atkins of Stevens. Your line is now open.