Landstar System, Inc.

Good morning and welcome to Landstar System Incorporated's third 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. Sir, you may begin.

Thank you, Eunice. Good morning and welcome to Landstar's 2022 Third 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 Lancer'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 risk detailed in Lancer'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 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. Our 2022 third quarter financial performance was the best ever third quarter financial performance in Landstar's history. Revenue was approximately 5% above the 2021 third quarter on a difficult year-over-year comparison, and within the range of our third quarter guidance provided on July 20th. Earnings per diluted share was 7% above the 2021 third quarter, towards the low end of our third quarter guidance. Truck revenue was 1% over the 2021 third quarter, mostly due to a 1% increase in truckload volume. Revenue hauled via other modes of transportation increased 49% over the 2021 third quarter, mostly attributed to higher ocean and air revenue per load. Overall, truck revenue per load in the 2022 third quarter was essentially equal to truck revenue per load in the 2021 third quarter, with revenue per load up 1% on truckloads hauled via unsighted platform equipment, down 2% on truckloads hauled via van equipment, and down 1% on truckloads hauled by other truck transportation services. Landstar's flat revenue per truckload results for the 2022 third quarter versus the 2021 third quarter may seem at odds with the various industry sources that have reported significant decreases since early 2022 in year-over-year truckload spot market pricing when excluding the impact of fuel costs. Historically, Landstar spot market pricing trends month over prior year month often are less pronounced than the industry trends during both growth and contraction cycles. We believe that has to do with the specialized non-routine nature of much of the freight we haul, along with our drop and hook business that tends to act somewhat more like contracted rated freight as we commit trailing capacity as part of that service. One of many metrics we follow is revenue per mile on loads called by BCOs. This metric is much less influenced by changes in fuel costs, as fuel surcharges billed to customers on loads hauled by BCOs are past 100% of the BCO hauling the load and excluded from Landstar revenue. Accordingly, given the increase in diesel fuel costs in the 2022 third quarter compared to the 2021 third quarter, I believe this metric provides a better gauge of current market conditions as compared to Landstar's overall revenue per truckload, which is influenced by many factors including length of haul, delivery time, equipment requirements, and fuel costs. While we have seen revenue per mile on van equipment hauled via BCOs decrease sequentially since it peaked in February 2022, Lensar's year-over-year change in rates has not been near the magnitude reported in various industry reports. During the 2022 third quarter, revenue per mile on van equipment hauled via BCO capacity in July was 2% over July 2021, and in August was one penny below August 2021. In fact, August 2022, was a first month since June 2020, where year-over-year revenue per mile on van equipment hauled by BCOs was below the corresponding month in the prior year. In September 2022, revenue per mile on van equipment hauled via BCO capacity was only 4% below September 2021, even though on a sequential basis, revenue per mile on van equipment hauled by BCOs as of the end of the 2022 third quarter was 17% below the all-time high reached in February. As it relates to revenue per mile on loads hauled via BCOs, hauled by BCOs via unsighted equipment, this metric is somewhat influenced by the amount of heavy oversized loads hauled by BCOs as heavy oversized loads tend to have a higher revenue per mile. Overall revenue per mile on loads hauled by BCOs via unsighted equipment in July, August, and September increased approximately 9%, 6%, and 2% over July, August, and September 2021 respectively. And unlike revenue per mile on van equipment, Revenue per mile on onsite equipment hauled via BCOs was at a record high in the 2022 third quarter, 5% higher than the 2021 third quarter. We attribute the strength in flatbed pricing to stable demand at an elevated level from the manufacturing sector, as that sector's recovery from the impact of COVID significantly lagged the recovery and expansion of consumer-based demand that took place in the van market beginning in late summer of 2020. As to load count, Total truckload volume in July was 5% over prior year July. August was approximately equal to prior year August. And September 2022 was 1% below September 2021. The decelering growth rate in truckload volume was primarily due to slowing of the strong consumer-driven freight environment we experienced since late summer 2020. Consumer doorables, building products, automotive parts, hazardous materials, machinery and metals, and substitute line haul combined to represent approximately 75% of our loadings. The rate of growth and load count for each of these industry verticals, other than hazmat shipments, slowed in the 2022 third quarter over the 2021 third quarter as compared to the 2022 second quarter over the 2021 second quarter. In particular, substitute line haul volume continued its downward trend from the 2022 second quarter and decreased 27% compared to the 2021 third quarter. I attribute the decrease in substitute line haul loadings to softer consumer demand throughout the economy in general and restabilization in the networks of large parcel and LTL carriers. We continue to track qualified agent candidates for the model. Revenue from new agents was over $38 million in the 2022 third quarter. We ended the quarter with 11,644 trucks provided by business capacity owners, 220 trucks lower than our year-end 2021 count. The number of BCO trucks at the end of the 2023 quarter was 242. three trucks below the end of the 2022 second quarter. As typical in an environment with a lower revenue per mile month to month, it's not unusual to experience an increase in BCO turnover. Loads hauled via BCOs in the 2022 third quarter were approximately 5% below the 2021 third quarter on lower utilization, partly offset by slightly higher average truck count. BCO utilization divides loads per BCO per quarter decreased 6% in the 2022 third quarter compared to the 2021 third quarter. We ended the quarter with a record number of approved third-party carriers on our network. The number of third-party carriers hauling freight in the 2022 third quarter increased 21% over the 2021 third quarter. I'll now pass to Jim for his comments on a few specific line items within the company's third quarter financial statements.

Thanks, Jim. Jim G. has covered certain information on our 2022 third quarter, so I will cover various other third quarter financial information included in the press release. In the 2022 third quarter, gross profit was $185.7 million compared to gross profit of $189.2 million in the 2021 third quarter. Gross profit margin was 10.2% of revenue in the 2022 third quarter as compared to gross profit margin of 10.9% in the corresponding period of 2021. In the 2022 third quarter, variable contribution increased 1% to $245.7 million compared to $242.3 million in the 2021 third quarter. Variable contribution margin was 13.5% of revenue in the 2022 third quarter compared to 14% in the same period last year. The decrease in variable contribution margin compared to the 2021 third 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, multi-mode 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 third quarter was 224 basis points lower than the rate paid in the 2021 third quarter. Other operating costs were $13.4 million in the 2022 third quarter, compared to 10.6 million in 2021. This increase was primarily due to increased trailing equipment maintenance costs, the impact of the resumption of a large in-person event for the company's BCO-independent contractors, and decreased gains on disposal of operating property, partially offset by decreased provision for contractor bad debt. Insurance and claims costs were $31.4 million in the 2022 third quarter, compared to 29.6 million in 2021. Total insurance and claims costs were 5% of VCO revenue in the 2022 period and 4.3% of VCO 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, as well as increased premiums for commercial auto and excess liability coverage, partially offset by decreased net unfavorable development of prior year claim estimates. During the 2022 and 2021 third quarters, Insurance and claims costs included $2.1 million and $3.5 million, respectively, of net unfavorable adjustments to prior year claim estimates. Selling, general, and administrative costs were $53.5 million in the 2022 third quarter compared to $59.2 million in 2021. The decrease in selling, general, and administrative costs was primarily attributable to a decreased provision for incentive and equity compensation under our variable compensation programs and decreased employee benefit costs partially offset by increased wages and increased information technology professional fees and subscription costs from continued investment in new and upgraded applications for use by agents in capacity. In the 2022 third quarter, the provision for compensation under variable programs was $8.1 million compared to $16.6 million in the 2021 third quarter. Depreciation and amortization was $14.6 million in the 2022 third quarter compared to $12.3 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 $800,000 of the increase attributable to increased trailing equipment depreciation. The effective income tax rate of 24.3% in the 2022 third quarter was essentially equal to the effective income tax rate in the 2021 third quarter. The effective income tax rate during the 2022 period was approximately 20 basis points below the 24.5% estimated annual effective income tax rate for fiscal year 2022 due to higher than anticipated state income tax refunds and excess tax benefits realized on stock-based compensation arrangements. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $228 million. Cash flow from operations for the first nine months of 2022 was $436 million, and cash capital expenditures were $21 million. The operating cash flow generation of $436 million during the first nine months of fiscal year 2022 exceeds any full fiscal year operating cash flow in the company's history. Back to you, Jim.