Landstar System, Inc.

Good morning and welcome to the Landstar System, Inc.' 's year-end 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 Pensari, 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. And 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, 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 S&P Filings Come 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 this forward-looking information, and Landstar undertakes no obligation to publicly update or revise any forward-looking information. Last fiscal year 2021 performance exceeded even our highest expectations. 2021 revenue was $6.5 billion, $2.4 billion, or 58% above the 2020 fiscal year. Variable contribution exceeded prior year by 53%, and operating income was doubled out of 2020. During the year, 80% of the growth in variable contribution was passed to operating income, resulting in earnings per share more than doubling from 498 in fiscal 2020 to $9.98 in fiscal 2021. It would be an understatement to say 2021 was an outstanding year for Landstar. The year started with record first quarter financial results, and each quarter grew from there. In fact, each quarter of 2021 set a new all-time Landstar record for revenue and earnings per share for that quarterly period. Actual second and third quarter revenue and earnings per share exceeded both our initial and updated revenue and EPS guidance provided during those quarters. The 2021 fourth quarter was more of the same. Initial guidance updated mid-quarter to increase revenue and earnings estimates for the quarter, followed by actual fourth quarter results exceeding the updated guidance. The 2021 fourth quarter earnings per share beat up six cents to our updated guidance was largely due to a favorable tax rate that added four cents to our results. Early in 2021, there was a lot of speculation by many in the industry trying to predict a peak to truck pricing at some point during 2021. However, that peak never materialized during the year, and in fact, December's revenue per load hauled via truck was the highest monthly revenue per load in the company's history. Overall, the company set many financial records in the 2021 fourth quarter, ended the year with a record 11,864 trucks provided by BCOs, and had a record 90,000-plus third-party carriers approved to hold Landstar freight, of which over 64,000 had hauled the Landstar load in the 180 days preceding year end. Agents generating at least $1 million of Landstar revenue during the fiscal year climbed to 593, a 17% increase over the number of million-dollar agents in 2020. New agent revenue in fiscal year 2021 was an annual record $181 million. As it pertains to the 2021 fourth quarter, revenue, variable contribution, operating income, and earnings per share were all-time quarterly records. Revenue in the 2021 fourth quarter was a record $1,945,000, 50% above the previous fourth quarter record set last year. The 2021 increase in revenue over the 2020 fourth quarter was driven by an increase in revenue hauled via van and unsighted platform equipment of 45% and 40%, respectively, which combined made up 75% of revenue in the 2021 fourth quarter. Other truck transportation that includes primarily power-only, expedited cargo van and straight truck increased $95 million, or 61% over the 2020 fourth quarter. Additionally, ocean cargo, although a small percent of all of our revenue, increased over the 2020 fourth quarter by $88 million on a 61% increase in loadings and an average rate increase of 127%. Landstar operates primarily in the spot market for U.S. truck transportation, where truck rates are generally a condition of the balance in market demand and available truck capacity. Revenue per load hauled via van and unsighted platform equipment in the 2020 fourth quarter each exceeded the 2020 fourth quarter by 20%, as market dynamics strongly favored the truck provider. As it relates to the number of loads hauled via truck, the diversity in depth and expertise among members of the company's agent family and Landstar employees enables the network to handle the needs of most shippers, whether it be drop and hook, unsighted platform, heavy haul, expedited hazmat, power only, cargo van services, or straight truck. Through the efforts of our unique capacity network, the total number of loads hauled via truck exceeded the record 2020 fourth quarter by 22%. That increase in the 2021 fourth quarter over the 2020 fourth quarter was driven by impressive increase in the number of loads sold via van, unsighted platform equipment, less in truck load, and other truck transportation services by 21%, 17%, 13%, and 43% respectively. In the 2021 fourth quarter, each of these lines of business within our truck service offering set a new all-time quarterly record for the number of loads hauled. The number of loads hauled via truck increased 7% over the 2021 third quarter, one of the highest 13-week period increases from Q3 to Q4 in Landstar history. The increase in loadings was mostly due to consumer doorables, automotive and substitute line hauled loads, while metals and machinery loadings were approximately flat to the 21% third quarter. However, the number of loads hauled via truck and the machinery and metals commodities in the 2021 fourth quarter compared to the 2020 fourth quarter increased 14% and 25% respectively, contributing to the 70% increase in loads hauled via unsighted platform equipment. That growth is a positive sign for flatbed business heading into 2022. Loads hauled via BCO capacity increased 6% over the 2020 fourth quarter on a 10% increase in the average number of BCO trucks during the 2020 fourth quarter, offset by lower truck BCO utilization of 3%. During the 2021 fourth quarter, approximately 78% of loads hauled via BCO truck utilized a Landstar trailer, primarily in drop and hook operations. Truck loads hauled by third-party truck brokerage carriers increased 36% over the 2020 fourth quarter to a new quarterly record of over 400,000 loads. Ocean revenue increased 266% above the 2020 fourth quarter. Rates, which are somewhat influenced by mix, increased 127% over the 2020 fourth quarter, while ocean volume increased 61%. The growth in loadings was attributed to a few new agents in 2021, plus growth within the existing agent network. Landstar's customer base continues to be highly diversified. During the 2021 fourth quarter, revenue contributed by Landstar's top 100 customers by 2020 fourth quarter revenue contributed 44% of the 2020 fourth quarter revenue. Revenue from those top 100 accounts in the 2020 fourth quarter increased 33% over the 2020 fourth quarter. Revenue of customers beyond those top 100 accounts increased 66% over the 2020 fourth quarter. To quote Landstar's lack of customer concentration and perspective, Revenue from the 100th customer by revenue was only $2.8 million in the 2020 fourth quarter. I will now pass it to Fred to comment on additional P&L metrics and a few other fourth quarter financial statement items.

Fred? All right. Thanks, Jim, and good morning, everybody. Jim covered certain information on our 2021 fourth quarter and full year performance. I'll cover some of the other key fourth quarter financial information included in the press release. Starting with the gross profit and variable contribution, Just as a reminder of what we discussed last quarter, 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, while other cost of revenue includes numerous costs that fluctuate to differing degrees with revenue, including trailer depreciation and maintenance costs, VCO recruiting, training and qualification costs, insurance-related expenses such as premiums paid and cost of claims for various freight transportation-related insurance policies and other costs included in SG&A in the company's consolidated statements of income. For example, insurance brokerage commission and other fees incurred to administer the insurance programs available to BCO independent contractors that are reissued by the company, reinsured, excuse me, by the company, as well as costs related to our internally developed technology that directly support our revenue, as detailed in the table in our earnings release reconciling gross profit to variable contribution. In the 2021 fourth quarter, gross profit was $209.8 million, an increase of roughly 48%, compared to $141.7 million in the 2020 fourth quarter. Gross profit margin was 10.8% of revenue in the 2021 fourth quarter, only slightly below 10.9% gross profit margin in the same period of 2020. Also as a reminder, in conjunction with the definition of gross profit, we initiated the use of the term variable contribution last quarter. This is a non-GAAP financial measure to refer to the amount represented by revenue less or variable cost of revenue, which again includes purchase transportation and agent commissions, as detailed in the table I just alluded to in our earnings release. In addition, we defined variable contribution margin, also a non-GAAP financial measure, as variable contribution divided by revenue. This measure has always been and continues to be an important one for us. 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 fourth quarter, variable contribution increased roughly 44% to $263.3 million, compared to 182.4 million in the 2020 fourth quarter driven by strong revenue. Our variable contribution margin was 13.5% of revenue in the 2021 fourth quarter compared to 14.1% in the same period last year. The decrease in variable contribution margin compared to the 2020 fourth quarter was entirely attributable to the mix between our BCO independent contractor capacity as our brokerage business increased from 53% of total revenue in 2020 in the 2024 quarter to 59% of total revenue in the 2021 fourth quarter. It's important to note that while our gross profit and variable contribution margin might feel some compression in times of significant growth, where excess volumes are handled disproportionately by brokerage capacity, we still benefit significantly in terms of additional accretive earnings growth and cash flow. So in my view, that's a good tradeoff. Last point I'll make on these margins is that 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 most of the semi-variable costs I described earlier that are included in gross profit. Moving on to our costs, other operating costs were $9.4 million in the 2021 fourth quarter compared to $7.4 million in 2020. This increase was primarily due to increased trailing equipment costs increased BCO recruiting and qualification costs, and an increased provision for contractor bad debts. Insurance and claims costs were $30.3 million in the 2021 fourth quarter compared to $21.2 million in 2020. Total insurance and claims costs was 4.2% of BCO revenue in the 2021 period and 3.8% of BCO revenue in the 2020 period. The increase in insurance and claims as compared to 2020 was primarily due to increased severity of current year claims during the 2021 period and increased unfavorable development of prior year claims. Selling, general, and administrative costs were $62.6 million in the 2021 fourth quarter compared to $42.9 million in 2020. As we discussed last quarter, the majority of the increase is related to our variable cost cash incentive compensation plan and stock-based compensation arrangements. driven by a record-setting financial performance this year. Wage and benefit pressure also contributed to the increase, partially offset by a decreased provision for customer bed debt. In the 2021 fourth quarter, stock compensation expense was $8.8 million, and the provision for incentive compensation was $8 million. In the 2020 fourth quarter, stock compensation expense was $1.9 million, and the provision for incentive compensation was $1.7 million. Appreciation and amortization was $13.1 million in the 2021 fourth quarter compared to $11.6 million in 2020. This increase was primarily due to increased depreciation on technology tools resulting from the recent deployment of new and upgraded applications for use by agents and capacity. Our effective income tax rate was 23.3% in the 2021 fourth quarter compared to 22% in 2020. The effective income tax rate was favorably impacted in both periods by resolution 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 $251 million. Cash flow from operations for 2021 was $277 million, and cash capital expenditures were $23 million. In 2021, we returned $235 million to shareholders through a combination of regular dividends of $35 million, share repurchases of $123 million, and a special dividend of $77 million paid in January of 2021. After an increase in our authorization by our board of directors in December of 2021, we now have 3 million shares available for purchase under the company's stock purchase programs. And since we're on the topic of returning capital shareholders, I want to be clear that returning capital is important, but investing in our business is just as, if not more important, for the long-term health of our company. These investments relate to our people, our agents, and our capacity, which we refer to collectively as our network, as well as our technology ecosystem. And they will continue to grow as we support a business that is much larger today than it has ever been, and that is operating in an increasingly competitive environment requiring continuous improvements to our systems and processes. With that, I'd like to thank you all for joining us today, and we'll now turn it back over to Jim. Thanks, Fred.