Landstar System, Inc.

Good morning and welcome to Lansar System Incorporated's second 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 Lansar are Jim Gattoni, President and CEO, Fred Pensati, Vice President and CFO, Rob Brasher, Vice President and Chief Commercial Officer, Joe Beacon, Vice President and Chief State and Operations Officer. I would like to turn the call over to Mr. Jim Gattoni. Sir, you may begin.

Thank you, Kirby. 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 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, 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 LASTA 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 LASTA history. Second quarter revenue, gross profit, operating income, operating margin, and earnings per share were 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 its 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 U.S. economy in general relating to the COVID-19 pandemic and various initiatives taken by Landstar in response to the pandemic to support its 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 $1,400,000 to $1,450,000 and dilute earnings per share to be in a range of $2.20 to $2.30. Revenue in the 2021 second quarter was $1,571,000 and dilute 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 assumed 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 Lowe's Talvia truck in March 2021 was an all-time monthly record. Our initial guidance for the 2021 second quarter anticipated that 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 the mid-single-digit percentage range. Our expectations that revenue per truckload would stabilize 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 28th via a Form 8K file 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 haul 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 dialogue 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 at 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 at Landstar covering the same time periods, we compare the 2021 trends with our performance from 2016 through 2019. We're not including results from the fiscal year 2020 given the significant adverse impact 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 an average of 6.8% and 2%, respectively. The number of loads hauled via truck in the 2021 second quarter increased 12% compared to the 2020 on 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 to April 2021 trended consistently with the seasonal trends based on our 2016 to 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 U.S. in late February. The growth in the number of loads sold 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 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 2019 average. Growth from May to 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 via e-commerce continue to drive record van volume in the 2021 second quarter. The number of loads hauled via the unsighted 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 to the model. 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 donors, 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 the number of BCO cancellations in the 2021 second quarter is 3% below the 2020 second quarter. Overall, the net increase in the number of BCO trucks in the 2020 second quarter speaks to our ability to attract qualified capacity in 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 in our network, while a 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?

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 percent to $220.8 million compared to $113.1 million in 2020. Gross profit margin was 14.1 percent of revenue in the second quarter this year compared to 13.7 percent in the same period last year. The increase in gross profit margin was mostly attributable to the impact of $12.6 million 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 claim 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 of the 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 the 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 due 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 Lansar. 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 the 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 the 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 a 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.