Landstar System, Inc.

Good morning and welcome to Landstar System, Inc.'s third 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, Fred Pensati, 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. You may now begin.

Thank you, Missy. Good morning, and welcome to Lesser's 2021 Third 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 are forward-looking statements. During this conference call, we may make statements that contain forward-looking information that relates to Lannister'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 Lannister's Form 10-K for the 2020 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 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. Landstar's 2021 third quarter performance was exceptional, extending the record-setting pace that began in the midsummer of 2020. with three more months to go in 2021. Year-to-date 2021 revenue is about equal to revenue from all of physical year 2018, and operating income exceeds the 2018 full physical year amount, which were both record annual financial results. I expect the company's strong performance to continue through the remainder of the year with annual revenue exceeding $6 billion and diluting earnings per share in excess of $9.55. To put the strength of the 2021 performance in perspective, Assuming we achieve our 2021 fourth quarter guidance, full-year 2021 revenue and dilution earnings per share would exceed revenue and dilution earnings per share of our existing physical year records set in 2018 by over 35% and 55%, respectively. As it pertains to the 2021 third quarter, revenue, gross profit, variable contribution, operating income, and dilution earnings per share were all-time quarterly records. Additionally, we ended the third quarter with a record number of trucks provided by BCOs and a record number of active truck brokerage carriers representing third-party carriers who have hauled a load of freight for Landstar in the past 180 days. Also, new agents, defined as agents who contracted with Landstar within the last 15 months, contributed $36 million of revenue to the third quarter, the highest quarterly new agent revenue in over 10 years. and considering our financial results and ability to attract agents and truck capacity providers. Revenue in the 2021 third quarter increased 60% over the 2020 third quarter, which at the time was the second highest third quarter revenue in Landstar history. Landstar's record 2021 third quarter revenue was driven by strong demand for transportation of consumer doorables, machinery, metals, hazardous materials, building products and automotive parts and supplies and e-commerce services where we provide truckload transportation services between hubs of parcel carriers. Overall revenue hauled via truck in the 2021 third quarter over the 2020 third quarter increased 57%. Truckload revenue hauled via van and unsighted platform increased 54% over the 2020 third quarter. Revenue per load on truckload services increased 29% and the number of truckloads hauled increased 19% over the 2020 period. While Landstar's revenue per load is highly influenced by market conditions, the increased truckload volume of 19% against a relatively strong 2020 third quarter speaks to the ability of the network to flex when demand spikes. Truckload revenue hauled via van equipment led the increase at 59% over the 2020 third quarter, while revenue hauled via unsighted platform equipment exceeded prior year by 44%. Other truck transportation revenue, consisting mostly of revenue generated through power only, expedited cargo van, straight truck, and other services almost doubled over the 2020 third quarter. The primary driver of growth in other transportation services was from power-only demand, which contributed 75% of the category in the 2020 third quarter and 63% in the 2020 third quarter. And finally, lessened truckload revenue in the 2021 third quarter, which was 2% of truck transportation revenue, increased 23% over the 2020 third quarter. The number of lows hauled via truck in the 2021 third quarter increased 3.5% compared to the 2021 second quarter, while revenue per load on lows hauled via truck increased 5.8% over the 2021 second quarter. Both growth rates are stronger than normal seasonal trends when comparing the recent second quarter to third quarter results. From an end market standpoint, consumer demand for building products, consumer doorables, and small package via e-commerce continue to drive record volume in the 2021 third quarter. The number lowest hauled via unsighted platform equipment also exhibited strong growth in the 2021 third quarter over the 2020 third quarter, mostly due to continuing improvement in the U.S. manufacturing sector that began in March 2020. Revenue per load on trucks hauled via van and unsighted platform equipment increased 29% over 2020 third quarter and 7% over the 2021 second quarter above normal seasonal trends as capacity continues to be constrained across all markets and equipment types. As it relates to the new agent pipeline, we continue to attract qualified agent candidates to the model. As mentioned earlier, revenue from new agents in the 2021 third quarter was the highest quarterly revenue from new agents in over 10 years. As to truck capacity, we ended the quarter with 11,746 trucks provided by business capacity owners, 755 more trucks compared to our year-end 2020 count. The increase in our truck count thus far in 2021 is being driven by improved retention, as the number of BCO cancellations through the first three quarters of 2021 was 19% below the number we experienced through the first three quarters of 2020. Year-to-date September, we have recruited almost the same number of BCOs as during the 2020 39-week period. Lows hauled via BCOs increased approximately 5% in the 2021 third quarter over the 2020 third quarter on a 12% increase in average truck count, partially offset by a 6% decrease in BCO truck utilization defined as loads hauled per BCO truck per quarter. We ended the third quarter with a record number of approved 30-party carriers in our network, while the number of active third-party carriers, which we define as carriers who have hauled the load in preceding 180 days, increased 42% in the 2021 third 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 third-quarter financial statement items.

Thanks, Jim. Good morning, everyone, and thanks again for joining us. Jim covered our revenue performance in detail and alluded to our gross profit and variable contribution. I'll make some additional comments about these metrics, as well as other profitability metrics and expenses, and discuss briefly our balance sheet and cash flow performance. I'll start with gross profit. As we disclosed in our earnings release yesterday, effective in the 2021 third quarter, we revised our definition of the term gross profit, which we're now defining as revenue less cost of revenue. Cost of revenue has two categories, variable cost of revenue and other cost of revenue. Variable cost of revenue includes purchase transportation and agent commissions, and other cost of revenue includes numerous costs that vary in different degrees with revenue, including trailer depreciation and maintenance expenses, BCO recruiting, training and qualification costs, insurance-related expenses such as premiums paid and the cost of claims for various freight transportation-related insurance policies, and other costs included in selling, general and administrative in the company's consolidated statements of income such as brokerage commissions and other fees incurred to administer the insurance programs available to BCO independent contractors that are reinsured by the company as well as costs related to our internally developed technology that directly support our revenue as detailed in the reconciliation of gross profit to variable contribution table included in our earnings release. In addition, we now define gross profit margin as gross profit divided by revenue. In the 2021 third quarter, gross profit was $189.2 million, an increase of roughly 58% compared to $119.8 million in the 2020 third quarter. Gross profit margin was 10.9% of revenue in the 2021 third quarter, only slightly below 11% gross profit margin in the same period of 2020. In conjunction with the new definition of gross profit, Thank you very much. as variable contribution divided by revenue. This measure has always been and continues to be an important one for us since purchase transportation and agent commissions are the primary expenses that are 100% variable with revenue and give us a view into spot market trends in the freight transportation industry on a shipment-by-shipment basis. In the 2021 third quarter, variable contribution increased roughly 51% to $242.3 million compared to $160.9 million in the 2020 third quarter, driven by strong revenue growth. Our variable contribution margin was 14% of revenue this year compared to 14.8% in the same period last year. The decrease in variable contribution margin compared to the 2020 third quarter is mostly attributable to the mix between our BCO independent contractor capacity, the majority of which is fixed margin, and our brokerage capacity, the majority of which has a variable margin. As our brokerage business increased from 44% of total revenue in the 2020 third quarter to 51% of total revenue in the 2021 third quarter. The year-over-year growth rate and margin performance of gross profit exceeded that of variable contribution due to the ability of the Landstar model to leverage the mostly semi-variable costs I described earlier that are included in gross profit. Operating income in the 2021 third quarter was $131.4 million, or 69.4% of gross profit compared to $82.4 million, or 68.7% of gross profit in the same period last year. Operating income represented 54.2% of variable contribution in the 2021 third quarter compared to 51.2% in the same period last year. The 300 basis point improvement in operating income as a percent of variable contribution compared to prior year is primarily attributable to the significant growth in variable contribution that drove down insurance and claims expense and depreciation and amortization expense as a percent of variable contribution compared to prior year. Getting to a bit more detail on the expenses noted in our consolidated statements of income, purchased transportation grew at a faster pace than our overall revenue growth, which I mentioned earlier was driven by the change and mix of revenue generated by our BCO and brokerage capacity. Other operating costs were $10.6 million in the third quarter this year compared to $7.4 million in the same period last year. This increase came from higher trailing equipment maintenance and tire costs due to a higher trailer count, contractor bad debt, and increased recruiting, qualification, and training costs related to our BCOs compared to last year. Insurance claims costs were $29.6 million in the third quarter this year compared to $21.9 million in the same period last year. Total insurance and claims costs represented 4.3% of BCO revenue in the third quarter this Thank you very much. Thank you very much. And lastly, depreciation and amortization was $12.3 million in the 2021 third quarter compared to $11.2 million in the same period last year, primarily due to technology investments and enhancements put into service since last year. Our effective income tax rate was 24.4% in the 2021 third quarter compared to 23.9% in the same period last year. Increase in the effective income tax rate was primarily attributable to a higher provision for non-deductible executive compensation during the 2021 period and the impact of excess tax benefits on stock compensation in the 2020 period. Our net income for the 2021 third quarter was $98.7 million, up 59%, $61.9 million in the same period last year. Our diluted earnings per share in the 2021 third quarter was $2.58, up 60%, Thank you for joining us. Business performance has significantly exceeded the expectations I had when I started towards the end of the second quarter. Now, we recognize we're riding an industry wave, but we're also very pleased with how Landstar is performing within the industry, continuing to be a leader with a unique business model with scale and technology that enables entrepreneurial success, and in turn, the company's success. I've now had the opportunity to meet some of these entrepreneurs, namely our agents and our BCO independent capacity providers, and the enthusiasm for working with the Landstar Network is very evident, as is the passion our employees put into continuing to make the Landstar Network stronger every day. I've also had the opportunity to meet some of you who are probably on this call today and look forward to getting to know more of you in the future. We look forward to keeping you updated on the business as we make our way through the home stretch of 2021 and start looking ahead to 2022. And I'll turn it back to Jim to discuss our outlook for the fourth quarter and wrap up our prepared remarks.