Landstar System, Inc.

Good morning and welcome to Landstar System Incorporated's second quarter 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, Jim Todd, 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 begin.

Thank you, Missy. Good morning and welcome to Landstar's 2022 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 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 2021 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 that differ materially from historical results for 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. Our 2022 second quarter financial performance was the best ever second quarter financial performance in Landstar's history. Although revenue and earnings per share came in below our second quarter guidance provided on April 20th, second quarter revenue and earnings per share exceeded the 2021 second quarter by 26% and 27% respectively. Truck revenue is 21% over the 2021 second quarter, on 10% increases in both volume and truck revenue per load. Revenue hauled via other modes of transportation increased 93% over the 2021 second quarter, mostly attributable to higher ocean and air revenue per load. Earnings per share fell short of the low end of our April 20th guidance by 17 cents or 5%. Insurance and claims costs exceeded guidance by approximately 10 cents, And variable contribution was below the low end of the variable contribution included in the guidance by approximately 7 cents. The shortfall in variable contribution was due to revenue that was slightly below the low end of the guidance and a lower variable contribution margin as compared to guidance mostly due to mix as BCO revenue, which has a higher variable contribution margin than most other forms of Landstar revenue, came in lower than expected. As it relates to price on loads hauled via truck, revenue per load can be influenced by many factors, including length of haul, delivery time, equipment requirements, and fuel costs. Also, Landstar's revenue per load on loads hauled via BCO capacity excludes fuel surcharges billed to customers, which are passed 100% to the BCO hauling the load. During the 2022 second quarter, fuel surcharges excluded from both revenue and the cost of purchased transportation were $127 million. One of many metrics we follow is revenue per mile on loads hauled via BCOs. Given the recent spike in diesel fuel costs, this metric may provide a better gauge of market conditions as compared to revenue per load, which is influenced by many other factors mentioned previously. During the 2022 second quarter, revenue per mile on van equipment hauled by BCO capacity in April, May, and June was 23%, 13%, and 7% over April, May, and June of 2021, respectively. Revenue per mile on van equipment hauled by BCOs sequentially decreased 6% from March to April, and another 6% from April to May, yet held steady from May to June. By the end of the quarter, revenue per mile on van equipment hauled by BCOs was 13% below the peak reached in February of 2022. As it relates to revenue per mile on loads hauled by BCOs via unsighted equipment, This metric is partly influenced by mix as heavy oversized loads tend to have a higher revenue per mile. Heavy haul loads were 13% and 11% of unsighted platform loadings in the 2021 and 2022 second quarters respectively. Overall revenue per mile on loads hauled by BCOs via unsighted equipment in April, May, and June increased 22%, 14%, and 11% over April, May, and June 2021 respectively. And unlike revenue per mile on van equipment, Revenue per mile on on-site equipment hauled VPO sequentially increased from the end of the first quarter to the end of the second quarter and achieved an all-time last-hour high in June of 2022. We attribute this to steadily increasing demand from a strengthening manufacturer sector, as the sector's recovery from the impact of COVID has significantly lagged the recovery and expansion of consumer-based demand that has driven strength in the van market since the fall of 2020. Total second quarter truck load volume increased what would be considered a strong 10% over the 2021 second quarter had it not been for the growth rates Landstar experienced over the past six quarters. The rate of load volume growth slowed in the 2022 second quarter as compared to the last six quarters, mostly due to more difficult year-over-year comparisons, along with pockets of slowing demand for our service in certain industries we serve. During the 2022 second quarter, the number of loads hauled via van equipment in April, May, and June increased 11%, 12%, and 4% compared to April, May, and June of 2021. Month-over-prior-month growth in the number of loads sold via unsighted platform equipment was more consistent in the 2022 second quarter, with April, May, and June increasing 11%, 9%, and 10% compared to April, May, and June 2021. Consumer doorables, building products, automotive parts, hazardous materials, machinery, metals, and substitute line haul generally combined to be over 70% of our loadings. As compared to the 2022 first quarter, where load volume grew 20% over the 2021 first quarter, the rate of growth and load count for consumer goods, building products, hazardous materials, machinery, and metals were all relatively strong in the second quarter, but below the first quarter growth rates. The rate of growth in automotive products is about equal to the 2022 first quarter growth rate, while substitute line haul volume decreased 19% compared to the 2021 second quarter. I attribute the decrease in substitute line haul loadings to softer consumer demand, and the large parcel carriers better optimizing their restabilized networks. We continue to track qualified agent candidates to the model. Revenue from new agents was over $22 million in the second quarter. We ended the quarter with 11,887 trucks provided by business capacity owners, 23 trucks above our year-end 2021 count. The number of BCO trucks at the end of the 2022 second quarter was 48 trucks below the end of the 2022 first quarter. As typical in an environment with increasing fuel costs and a lower revenue per mile month to month, it's not unusual to experience an increase in BCO turnover. Lows hauled via BCOs in the 2022 second quarter were relatively equal to the 2021 second quarter on higher truck count, almost entirely offset by lower utilization. BCO utilization devises loads defined as loads per BCO per quarter, decreased 4% in the 2022 second quarter compared to the 2021 second quarter. We ended the second quarter with a record number of approved third-party carriers in our network. The number of third-party carriers hauling freight in the 2022 second quarter increased 31% over the 2021 second quarter. Our network is strong and continues to attract third-party truck capacity. I'll now pass it to Jim for his comments on a few specific line items within the company's second quarter financials.

Jim? Thanks, Jim. Jim G. has covered certain information on our 2022 second quarter, so I will cover various other second quarter financial information included in the press release. In the 2022 second quarter, gross profit was $208.1 million, an increase of 19% compared to gross profit of $174.8 million in the 2021 second quarter. Gross profit margin was 10.5% of revenue in the 2022 second quarter, as compared to gross profit margin of 11.1% in the corresponding period of 2021. In the 2022 second quarter, variable contribution increased 21% to $267.5 million, compared to $220.8 million in the 2021 second quarter, driven by strong revenue growth. Variable contribution margin was 13.5% of revenue in the 2022 second quarter, compared to 14.1% in the same period last year. The decrease in variable contribution margin compared to the 2021 second quarter was primarily attributable to mix. as an increased percentage of revenue was generated in the 2022 period by, one, truck brokerage carriers, which typically has a higher rate of purchase transportation than revenue generated by BCO independent contractors, and two, multimode capacity providers, which typically has a higher rate of purchase transportation than revenue generated by third-party truck capacity providers. The unfavorable mixed impact was partially offset by an increased variable contribution margin on revenue generated by truck brokerage carriers. as the rate paid to truck brokerage carriers in the 2022 second quarter was 183 basis points lower than the rate paid in the 2021 second quarter. Other operating costs were $10.4 million in the 2022 second quarter compared to $8.9 million in 2021. This increase was primarily due to increased trailing equipment maintenance costs and an increased provision for contractor bad debt, partially offset by increased gains on disposal of operating property. Insurance and claims costs were $34.1 million in the 2022 second quarter compared to $24.1 million in 2021. Total insurance and claims costs were 4.9% of BCO revenue in the 2022 period and 3.7% of BCO revenue in the 2021 period. The increase in insurance and claims costs as compared to 2021 was primarily attributable to increased severity of current year claims during the 2022 period, primarily due to the impact of two tragic vehicular accidents that occurred during the 2022 period. Selling general and administrative costs were $59 million in the 2022 second quarter, compared to $54.1 million in 2021. The increase in selling general and administrative costs was primarily attributable to increased wages and benefits, an increased provision for customer bad debt, and approximately $2 million related to the return of the company's annual agent convention held in April of 2022, partially offset by a decreased provision for incentive and equity compensation under our variable compensation programs. In the 2022 second quarter, the provision for compensation under variable programs was $8.3 million compared to $15.2 million in the 2021 second quarter. Depreciation and amortization was $14.3 million in the 2022 second quarter compared to $12.1 million in 2021. This increase was primarily due to increased depreciation on technology tools resulting from continued investment in new and upgraded applications for use by agents in capacity with approximately $400,000 of the increase attributable to increased trailing equipment depreciation. The effective income tax rate was 24.6% in the 2022 second quarter, compared to 23.9% in 2021. The effective income tax rate during the 2021 period was favorably impacted by excess tax benefits resulting from equity compensation arrangements, whereas the 2022 period had an insignificant amount of shortfalls from equity compensation arrangements unfavorably impacting the effective income tax rate. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $120 million. Cash flow from operations for the first six months of 2022 was $210 million, and cash capital expenditures were $7 million. There are currently 1,603,000 shares available for purchase under the company's stock purchase programs. Back to you, Jim.