Landstar System, Inc.

Good morning and welcome to Landstar System Incorporated's year-end 2022 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, and Joe Beecum, 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, Bill. Good morning and welcome to last year's 2022 Fourth 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 LNSTAR'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 LNSTAR'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 to differ materially from historical results or those unanticipated. 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. Note throughout these remarks that the 2022 fourth quarter included 14 weeks of operations and the 2021 fourth quarter included 13 weeks of operations. Once again, Landstar delivered record financial results in fiscal year 2022. A record performance in 2022 followed another record year for Landstar in 2021. Among many new annual financial records we established in 2022, Lester achieved record annual revenue of $7.4 billion, $900 million higher than the previous annual record set in 2021. Dilute earnings per share in fiscal year 2022 was an annual record of $11.76, an increase of $1.78, or 18% above our prior fiscal year record of $9.98 set in 2021. During fiscal 2022, Landstar generated a record free cash flow of $597 million. Additionally, during fiscal year 2022, Landstar paid dividends of $116 million and purchased $286 million worth of company stock. In December, the board declared an additional dividend totaling $72 million to be paid in January 2023. Within our record financial performance in 2022, The 2022 first quarter proved to be a peak following six consecutive quarters of strengthening in the macroeconomic freight environment. As we move further into the year, supply chain congestion began to ease and the macroeconomic freight environment, although still relatively strong by historical standards, began to weaken, not unlike typical cyclical patterns historically experienced in the domestic freight environment. Beginning in the 2022 second quarter, last our experience of deceleration in quarter over prior year quarter growth rates for both truck revenue per load and the number of truck loads that ultimately led to truck revenue per load and the number of loads hauled via truck in the 2022 fourth quarter to both be below the 2021 fourth quarter. Heading into the 2022 fourth quarter, it was clear these cyclical conditions were continuing. As such, during our October 22nd, 2022 third quarter earnings commerce call, we provided 2022 fourth quarter revenue guidance of $1,775,000,000 to $1,825,000,000 below the 2021 fourth quarter revenue by 6% to 9%. The guidance anticipated truck volume to decrease from the 2021 fourth quarter in a range of 2% to 4%, even given the extra week in the 2022 fourth quarter, and revenue per truckload to be 5% to 7% below the 2021 fourth quarter. 2022 fourth quarter loads hauled by truck were 6% below the 2021 fourth quarter, and revenue per truck load was 7% below the 2021 fourth quarter. Note that the number of truck loads hauled by Landstar reached an all-time record level in the 2021 fourth quarter and remained relatively strong by historical standards throughout 2022. Although revenue came in below the low end of the earnings guidance, earnings per share came in at the low end of the guidance. This can be attributed to a higher variable contribution margin than projected, along with lower SG&A and other operating costs in the 2022 fourth quarter as compared to the estimated amount reflected in the guidance. As compared to the 2021 fourth quarter, revenue hauled via truck was $211 million, or 12% below the 2020 fourth quarter, approximately 16% when excluding the estimated truck revenue of $60 million contributed by the extra week in 2022 fourth quarter. And revenue hauled via other modes was almost $60 million below the 2021 fourth quarter, While we experienced a 12% decrease in truck revenue from the 2020 and fourth quarter, to be fair, one needs to put the impact of the pandemic-driven demand and supply chain congestion in perspective. Since the end of the summer of 2020, strong consumer demand along with supply chain congestion drove truck rates and volume to historic highs. Landstar's two-year growth in truck volume from the pre-pandemic fourth quarter of 2019 to the record 2021 fourth quarter was 37%. Truck revenue per load grew 39% during that same time period. We expected that growth was going to subside as supply chain disruptions eased and economic cyclicality returned to the freight industry. And when that happened, year over year comparisons would become very challenging. Leaving aside the tough quarter over prior year quarter comparisons, we experienced in the 2022 fourth quarter Truck revenue in the 2022 fourth quarter was still 68% higher than that of the pre-pandemic 2019 fourth quarter. Revenue hauled via van equipment in the 2022 fourth quarter was $154 million lower than the 2021 fourth quarter, but $373 million above the 2019 fourth quarter. Revenue hauled via unsighted flatbed equipment in the 2022 fourth quarter was only $13 million below the 2021 fourth quarter, but $121 million over the 2019 fourth quarter. and revenue generated via other truck transportation services, mostly power-only services, was $48 million lower than the 2021 fourth quarter, yet $116 million above the 2019 fourth quarter. Clearly, the van market was more favorably impacted by the pandemic-driven consumer demand than the unsighted flatbed market throughout the past two years. Van loadings in the 2022 fourth quarter were 5% lower than the 2021 fourth quarter. Unsighted flatbed loadings were 2% below the 2021 fourth quarter, and other truck transportation loadings were 16% below the 2021 fourth quarter. After the decrease in van and other truck transportation loadings, the number of loads hauled via our substitute line haul service offering, primarily on van equipment and some power-only moves, was 35% below the 2021 fourth quarter, even with the extra week in 2022. Additionally, load count from consumer doorables, building products, and foodstuffs were down 8%, 6%, and 31%, respectively, from the 2021 fourth quarter. One of the few volume growth areas was in automotive parts and materials, which grew 13% over the 2021 fourth quarter. New agents, as of the end of 2022, which we define as agents who contracted with the company on or after the beginning of 2021, contributed 144 million of revenue in fiscal 2022. This followed new agent revenue of 181 million in 2021. Our agent base is strong, and these new agent additions will continue to drive new customers and truck volume into the network. During 2022, there were 625 agents who generated over $1 million of Landstar revenue. This is the highest annual number of million-dollar agents in Landstar history. Turnover of million-dollar agents is typically very low. During 2022, million-dollar agent turnover was only 2%, in line with historical million-dollar agent turnover rates. We ended 2022 with 11,281 trucks provided by BCOs. The number of trucks provided by BCOs decreased 583 trucks, or 5% from the beginning of 2022. Overall, BCO truck turnover was 29% in 2022 compared to 21% in fiscal year 2021. A decrease in the number of trucks provided by BCOs is typical during a cycle of decreasing revenue per mile. In December 2022 compared to December 2021, revenue per mile on van equipment hauled by BCOs decreased 16%. In December 2022, compared to December 2021, revenue per mile on unsighted equipment hauled by BCOs decreased only 2%. In each case, revenue per mile excludes the impact of fuel surcharges billed to shippers, as 100% of fuel surcharges billed to customers are excluded from Landstar's revenue and paid 100% to the hauling BCO. In fiscal year 2022, total fuel surcharges billed to customers paid 100% to BCOs, worth $445 million, compared to $260 million in fiscal year 2021. I'll now pass it to Jim Todd to comment on additional P&L metrics and a few other fourth quarter financial statement items.

Jim? Thanks, Jim. Jim G. has covered certain information on our 2022 fourth quarter, so I will cover various other fourth quarter financial information included in the press release. In the 2022 14-week fourth quarter, gross profit was $180 million compared to gross profit of $209.8 million in the 2021 13-week fourth quarter. Gross profit margin was 10.7% of revenue in the 2022 fourth quarter as compared to gross profit margin of 10.8% in the corresponding period of 2021. In the 2022 fourth quarter, variable contribution was $234 million compared to $263.3 million in the 2021 fourth quarter. Variable contribution margin was 14% of revenue in the 2022 fourth quarter compared to 13.5% in the same period last year. The increase in variable contribution margin compared to the 2021 fourth quarter was primarily attributable to an increased variable contribution margin on revenue generated by truck brokerage carriers, as the rate paid to truck brokerage carriers in the 2022 fourth quarter was 294 basis points lower than the rate paid in the 2021 fourth quarter. Other operating costs were $10.3 million in the 2022 fourth quarter compared to $9.4 million in 2021. This increase was primarily due to increased trailing equipment maintenance costs partially offset by increased gains on sale of operating property. Insurance and claims costs were $29.6 million in the 2022 fourth quarter compared to $30.3 million in 2021. Total insurance and claims costs were 5% of BCO revenue in the 2022 period and 4.2% of BCO revenue in the 2021 period. The decrease in insurance and claims cost as compared to 2021 was primarily attributable to decreased net unfavorable development of prior year claim estimates, partially offset by an increased severity of accidents during the 2022 period. During the 2022 and 2021 fourth quarters, insurance and claim costs included $3.8 million and $5.2 million, respectively, of net unfavorable adjustments to prior year claim estimates. Selling general and administrative costs were $56.1 million in the 2022 fourth quarter, compared to $62.6 million in 2021. The decrease in selling general 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 an increased provision for customer bad debt. In the 2022 fourth quarter, the provision for compensation under variable programs was $5.3 million compared to $16.8 million in the 2021 fourth quarter. Depreciation and amortization was $14.8 million in the 2022 fourth quarter compared to $13.1 million in 2021. This increase was almost entirely due to increased depreciation on software applications resulting from continued investment in new and upgraded tools for use by agents in capacity. The effective income tax rate of 24.7% in the 2022 fourth quarter was 140 basis points higher than the effective income tax rate of 23.3% in the 2021 fourth quarter, as the effective income tax rate in the 2021 fourth quarter was favorably impacted by the resolution of certain state tax matters. In addition, the effective income tax rates in the 2022 and 2021 fourth quarter were each unfavorably impacted by the impairment of deferred tax assets related to employee equity compensation arrangements as a result of performance conditions being attained as of year end. The increase in the effective income tax rate in the 2022 fourth quarter as compared to the 2021 fourth quarter drove approximately five cents of the 39 cent quarter over prior year quarter earnings decline. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $394 million. Cash flow from operations for 2022 was $623 million, and cash capital expenditures were $26 million. The operating cash flow generation of $623 million during fiscal year 2022 was more than double the previous annual record operating cash flow of $308 million in fiscal year 2019. Back to you, Jim. Thanks, Jim.