Landstar System, Inc.

Good morning and welcome to Landstar System Incorporated's first quarter 2021 earnings release conference call. All lines will be in a 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, 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 Lansar's 2021 First Quarter Earnings Conference Call. Before we begin, let me read the following statement. The following is a safe harbor statement under the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts are forward-looking statements. During this conference call, we may make statements that contain forward-looking information that relates to Landstar's business objectives, plans, strategies, and expectations. Such information is by nature subject to uncertainties and risks, included but not limited to the operational, financial, and legal risks detailed in Landstar's Form 10-K for the 2020 fiscal year, describing in the 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 Landstar takes no obligation to publicly update or revise any forward-looking information. Our 2021 first quarter financial performance was by far the best first quarter performance in Landstar history. First quarter revenue was a first quarter record, while gross profit, operating income, and earnings per share were all-time quarterly records. During our year-end 2020 earnings conference call, we provided 2021 first quarter revenue guidance to be in a range of $1,100,000,000 to $1,150,000,000, and diluted earnings per share to be in a range of $1.55 to $1.65. Our initial guidance anticipated the number of loads hauled via truck in the 2020 first quarter to exceed the 2020 first quarter in an upper single-digit percentage range, and revenue per load on loads hauled via truck to exceed prior year in a mid-teen percentage range. Actual first quarter results were significantly higher than anticipated as both the number of loads hauled and revenue per load on loads hauled via truck exceeded the high end of our guidance. Revenue in the 2021 first quarter was $1,288,000,000 and dilution earnings per share was $2.01, both significantly above the high end of the range of our earlier guidance. Loads hauled via truck in the 2020 first quarter increased 13% over the 2020 first quarter while revenue per load on loads toll via truck increased 24% over the 2020 first quarter. Truck load volume by month in the quarter increased over the prior year month by 12%, 8%, and 17% in January, February, and March, respectively. February and March truck load volume were impacted by the severe storms that hit the central U.S. in Landstar's last week of fiscal February. We estimate the storms decreased truck load volume by approximately 7,000 to 8,000 loads in February, We also believe, though, that Lancer hauled most of those loads in fiscal March. Under that assumption, the percentage growth in load volume each month in the quarter compared to the prior year month was rather consistent and within a range of 12 to 14%. Consumer demand for building products, consumer durables, and small package via e-commerce continued to drive 2021 first quarter record van volume, which grew 17% over the 2020 first quarter. The number of loads hauled via unsighted platform equipment grew 5% over the 2020 first quarter, mostly due to improvements in the U.S. manufacturing sector in March. Typically, truck revenue per load in the first quarter is seasonally lower than the second quarter, third quarter, and fourth quarter. Revenue per load on loads hauled via truck in the 2020 first quarter was an all-time quarterly record. Revenue per load on loads sold via truck increased over the prior year month by 18%, 19%, and 31% in January, February, and March, respectively. Although we believe part of the significant increase in truck revenue per load in March was a result of the disruption caused by the late February storms, strong demand and tight truck capacity continued into late March and early April, with revenue per load continuing at elevated levels. Overall truck revenue per load on Lowe's tall van and unsighted platform equipment in the 2021 first quarter increased 30% and 14% respectively over the 2020 first quarter. We continue to attract qualified agent candidates to the model. Revenue from new agents was $20.3 million in the 2021 first quarter, the best new agent quarterly revenue in eight quarters. The agent pipeline remains full. We typically experience a net decrease in the number of trucks provided by BCOs during the first quarter of any year. We ended the quarter with a record 11,268 trucks provided by business capacity owners, 277 trucks above our year-end 2020 count. During the 2021 first quarter, we recruited a slightly higher number of BCOs compared to the 2020 first quarter, while BCO retention was significantly better than during the 2020 first quarter. The number of BCO cancellations in the 2021 first quarter was 38% below the 2020 first quarter. Overall, the net increase in the number of BCO trucks in the 2021 first quarter speaks to Landstar's ability to attract quality capacity in a tight truck capacity market. Lows tall via BCOs increased 5% in the 2021 first quarter over the 2020 first quarter on higher truck count, partly offset by a 4% decrease in BCO truck utilization defined as loads per BCO truck per quarter. I believe the decrease in BCO utilization was mostly due to the storms that disrupted freight transportation in late February. We ended the quarter with a record number of approved third-party carriers in our network, while the number of third-party carriers hauling freight in the 2021 first quarter increased 23% over the 2020 first quarter. I'll now comment on a few specific line-ons with the company's first quarter financial statements. Gross profit increased 32 percent to $189.2 million compared to $142.9 million in 2020. Gross profit margin was 14.7 percent of revenue in the 2021 first quarter and 15.4 percent in the 2020 first quarter. The 70 basis point decrease in gross profit margin was attributable to mix, mostly attributable to mix as the percent of revenue contributed from the higher margin fixed margin business decreased and the cost of purchase transportation paid to third-party carriers under variable cost arrangements as a percent of revenue increased 89 basis points. The decreased gross profit margin from those items was partly offset by a 36 basis point decrease in the rate of commission paid to agents on total revenue, which is partly attributable to a reduction in agent commissions in the 2021 period resulting from the termination of certain BCO domicile commission arrangements at year-end 2020. Other operating costs were $7.6 million in the 2021 first quarter compared to $8.3 million in 2020. This decrease is primarily due to decreased provision for contractor bed debt and decreased trailing equipment maintenance costs, partly offset by decreased gains on sale of used trailing equipment during the first quarter of 2021. Insurance and claim costs were $21.5 million in the 2020 first quarter compared to $25 million in 2020. Total insurance and claim costs were 3.8% of BCO revenue in the 2021 period, and 5.8% of BCO revenue in the 2020 period. The decrease in total insurance and claim costs compared to 2020 was primarily due to a provision for severe accident that took place in the 2020 period, as well as the impact of a $2.2 million of net unfavorable development of prior claims impacting the 2020 period, partly offset by a $3.3 million increase in insurance premiums, primarily for commercial trucking liability coverage renewed in May 2020 at a significantly increased cost. Selling general administrative costs were $45.4 million in the 2020 and first quarter, compared to $45.3 million in 2020. The slight increase in SG&A costs was attributed to a few items of significant increase and a few items of significant decrease year over year. For one, the estimated cost of the company's variable cost cash incentive compensation plan and equity incentive plan increased $5.7 million over the 2020 first quarter, due to the expectations of a record-setting financial forecast in 2021. Additionally, technology costs, including maintenance contracts, professional fees, and software license costs, exceeded prior year by $800,000. Offsetting those cost increases were decreases in employee medical benefits, customer bad debt, and travel entertainment costs. Depreciation and amortization was $12.1 million in the 2021 first quarter compared to $11.5 million in 2020. Operating income was $103.3 million, or 54.6% of gross profit in the 2021 quarter, versus $54 million, or 37.8% of gross profit in 2020. Operating income increased 91% year over year, and along with operating margin, represent new all-time quarterly records for last term. The effective income tax rate was 24.4% in the 2021 first quarter, compared to 22.9% in 2020. The increase in the effective income tax rate was primarily due to lower excess tax benefits on share-based compensation arrangements in the 2021 period and an increased provision of estimated non-deductible executive compensation during the 2021 period. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $261 million. The cash flow from operations in the 2021 first quarter was $70 million compared to $99 million during the 2020 period. The decrease in cash flow from operations was mostly due to the significant increase in March revenue, which drove up net receivables, defined as accounts receivable less accounts payable. As it relates to the company's second quarter projection, quarter over prior year quarter financial comparisons are not meaningful due to the significant downturn in the U.S. economy and demand for freight services due to the COVID-19 pandemic. along with the cost of various initiatives Landstar took in 2020 second quarter to support its network of agent BCOs in response to the pandemic. As it relates to our 2021 second quarter expectations, I anticipate the strong freight environment to continue from the 2021 first quarter. Through the first several weeks of April, truck revenue per load remains consistent with the truck revenue per load generated in March. Given that March recorded the highest monthly truck revenue per load in the history of the company, And assuming we maintain the March and early April level of truck revenue per load through the entire second quarter, truck revenue per load would be above the 2021 first quarter in a mid-single-digit percentage range, or 34% to 37% above the 2020 second quarter. The first quarter of 2021 was a record truckload count, lest our second highest first quarter truckload count was in 2019, and at the time was a first quarter record. Following the record 2019 first quarter truckload count, the 2019 second quarter truckload count increased 3.5%. Considering the record number of truckloadings in the 2021 first quarter, I expect the 2021 second quarter truckload count to trend similarly to slightly ahead of the 2019 first to second quarter percentages, and therefore expect truckload count to increase over the 2021 first quarter in the mid-single-digit percentage range. As such, I expect the number of loads hauled via truck in the 2021 second quarter to increase 28 to 31% over the 2020 second quarter. Based on the expectations of truck revenue per load and the number of loads hauled via truck previously mentioned, I currently anticipate 2021 second quarter revenue to be in a range of $1,400,000,000 to $1,450,000,000. Based on that range of revenue, assuming insurance and claim costs are approximately 4.3% of BCO revenue, I anticipate 2021 second quarter dilution earnings per share to be in a range of $2.20 to $2.30. Overall, I'm extremely pleased with the start to 2021. 2021 first quarter revenue was the highest first quarter revenue in the company's history and increased approximately 39% compared to the 2020 first quarter. More impressive was the fact that the 2021 first quarter gross profit, operating income, net income, and dilution earnings per share were the highest ever achieved by Lanster in any quarter in the company's history. In our view, the overall environment for Landstar is as strong as it's ever been at any point over the last two decades, and Landstar is well positioned for a tremendous year of success. We continue to focus on profitable load volume growth and increase our available capacity to haul those loads. We also remain focused on our strategic priority to continually provide and enhance technology-based tools for the thousands of small business owners in our network. 2021 is setting up to be a record-setting year for Lancer as we look to surpass $5 billion in annual revenue for this first time in our history. And with that, Missy, we will open to questions.

Thank you so much. We will now begin our question and answer session. To ask a question, please press star followed by the number one on your touchtone phone. Please record your name once prompted. Once again, that is star one to ask a question and to cancel your request, please press star two. Speakers, we have multiple questions on queue and the first one is from Baskin Majors of Susquehanna. Your line is now open.