Landstar System, Inc.

Good morning and welcome to Landstar System Incorporated's first 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, Joe Becum, 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.

Well, thank you both. Good morning and welcome to Landstar's 2023 First Go-To-Earnings Congress 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 Congress Call that are not based on historical facts are forward-looking statements. During this Congress 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 risk detailed in LASDR's Form 10-K for the 2022 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 anticipated. Investors should not place undue reliance on such forward-looking information, and LASDR takes no obligation to publicly update or revise any forward-looking information. Given the current freight environment with soft demand and readily available truck capacity, Landstar performed relatively well in the 2023 first quarter. Heading into the 2023 first quarter, demand for truck transportation services was somewhat soft. In addition, Landstar was faced with probably the most challenging quarterly financial comparison in its history. Landstar's 2022 first quarter was not only our best ever first quarter performance, but the best quarterly financial performance for any quarter in the company's history. Prior to 2022, the 2021 first quarter established a new all-time record for first quarter revenue at Landstar. 2022 first quarter revenue exceeded the 21 first quarter by 53%, growing by over $683 million. In fact, net income and diluted earnings per share each established new all-time Landstar quarterly records in the 2022 first quarter that remain unbroken today. In contrast, the freight environment was dramatically different in the 2023 first quarter. Looking back at the 2022 first quarter, consumer demand was very strong and supply chain disruption was at its peak. Those conditions resulted in a lack of available truck capacity, driving truck transportation pricing to all-time highs. Following the 2022 first quarter, demand began to soften and supply chain bottlenecks began to clear. Beginning the summer of 22 and carrying through today, we are clearly in a different freight environment. Truck capacity is more readily available, with market conditions currently favoring the shipper. As a relief to Landstar's 2023 first quarter performance, our results were generally in line with what we expected. Our first quarter guidance called for the number of truckloads hauled via truck to be below the 2022 first quarter in a 10 to 12% range and overall revenue per truckload to be below the 2022 first quarter in a range of 15 to 17%. The actual number of loads hauled via truck in the 2023 first quarter was 12% below the 2022 first quarter at the low end of the truckload volume guidance. Actual revenue per truckload in the 2023 first quarter was 14% below the 2022 first quarter, slightly better than the high end of the truck revenue per load guidance. The slightly favorable variance on revenue per truckload compared to guidance was mostly driven by a higher than anticipated revenue per truckload in January, offset by a lower than anticipated revenue per truckload in February. March came in near our expectations. In the first several weeks of April, truck revenue per load is trending slightly below normal sequential month-to-month trends. As for our air, ocean, and rail intermodal transportation services, 2023 first quarter revenue was $108 million, or 55% below the 2022 first quarter. The significant decrease in this non-truck transportation revenue was in line with our expectations of lower volumes across all the other modes and the expectation of a significant decrease in ocean revenue per shipment. The decrease in revenue of our non-truck transportation services was mostly due to a 48% decrease in ocean revenue per shipment and lower volume of 39%, 32%, and 9% in rail, ocean, and air services, respectively. With respect to conditions in different parts of the truckload market, as mentioned in the earnings release, revenue on unsighted platform equipment held up considerably better than revenue hauled via van equipment and other truck transportation services. The quarter over prior year quarter revenue comparison for VAN were much more challenging than those for revenue on unsighted platform equipment. Revenue on VAN equipment in the 2022 first quarter crushed all-time first quarter records for VAN loadings and revenue per load. Revenue hauled via unsighted platform equipment, although also still strong in the 2022 first quarter by historical standards, was less impacted by peak supply chain disruption and heightened consumer demand. One metric we follow is revenue per mile on loads hauled by BCO trucks, which tends to be a more pure indicator of pricing, as this data excludes fuel surcharges billed to customers that are paid 100% to the BCO. Revenue per mile on van equipment hauled by BCOs in the 2023 first quarter was 26% below the 2022 first quarter. In contrast, revenue per mile on unsighted platform equipment hauled by BCOs in the 2023 first quarter was only 6% below the 2022 first quarter. It should also be noted that although the market has softened significantly from a year ago, landfill revenue per mile on BCO van and unsighted platform equipment both remain above the pre-pandemic 2020 first quarter by approximately 30%. I believe that rates will remain higher than pre-pandemic levels given the significant amount of additional cost pressure to operate a truck today as compared to three years ago. Turning to volume, total loadings on all modes in the 2023 first quarter were almost 13% below the 2023 first quarter. Loading is in our top 25 commodity categories, which make up about 70% of our load volume. We're down a combined 10% compared to the 2022 first quarter. From the 2022 first quarter to the 2023 first quarter, total loadings of consumer doorables decreased 11%. Automotive equipment and parts decreased 15%. Hazardous materials decreased 4%. And building products decreased 16%, while machinery increased 2%. Landstar is known throughout our industry as a key truck capacity provider to other trucking companies, 3PLs, and truck brokers. During periods of tight truck capacity, those entities reach out to Landstar to provide truck capacity more often than during times of more readily available truck capacity. The freight hauled by Landstar on behalf of other truck transportation companies includes almost all our commodity groupings, including our substitute line haul service offering. Substitute line haul loadings was one of our strongest commodity performers throughout the pandemic. However, load volume for this service offering varies significantly based on domestic consumer demand and decreased 60% in the 2023 first quarter from the 2022 first quarter. Overall, revenue hauled on behalf of other truck transportation companies in the 2023 first quarter was 47% below the 2022 first quarter, a clear indicator in our model that capacity is more readily accessible. Revenue hauled on behalf of other truck transportation companies was 18% and 24% of revenue in the 2023 and 2022 first quarters, respectively. Our business remains highly diversified with over 25,000 customers, none of which contributed over 4% of our revenue in the 2022 first quarter. The decrease in truckload volume we experienced quarter over prior year quarter was primarily driven by changes in the overall freight environment rather than the loss of any major accounts. During the 2023 first quarter, BCO truck count decreased by 472 trucks and has decreased approximately 9% since this time last year. Historically, Landstar has experienced increased turnover in BCO truck count when truck rates decreased. Over the past 12 months, truck load rates decreased at the most rapid pace in recent years. The largest truck load rate decrease was with respect to services provided on van equipment, which is a primary equipment type hauled by BCOs. BCO turn-up has also been influenced by a significant increase in the cost of repairs and extended period of time trucks are out of service awaiting parts. The ability to get back on the road is also impacted by the high cost of used trucks, which impacts the potential for a BCO to trade their existing used truck for a newer used truck that may be less subject to unscheduled maintenance issues and enforced downtime. I will now pass to Jim Todd to comment on other additional P&L metrics regarding the 2023 first quarter performance.

Thanks, Jim. Jim Gee has covered certain information on our 2023 first quarter, so I will cover various other first quarter financial information included in the press release. In the 2023 first quarter, gross profit was $152.9 million compared to gross profit of $214.6 million in the 2022 first quarter. Gross profit margin was 10.7% of revenue in the 2023 first quarter as compared to gross profit margin of 10.9% in the corresponding period of 2022. In the 2023 first quarter, variable contribution was $208.7 million compared to $270.5 million in the 2022 first quarter. Variable contribution margin was 14.5% of revenue in the 2023 first quarter compared to 13.7% in the same period last year. The increase in variable contribution margin compared to the 2022 first 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 2023 first quarter was 330 basis points lower than the rate paid in the 2022 first quarter. As a result, variable contribution per truck brokerage load increased 9% in the 2023 first quarter compared to the 2022 first quarter, despite a 10% decrease in truck brokerage revenue per load. Other operating costs were $12.4 million in the 2023 first quarter compared to $11.1 million in 2022. 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 sales of used trailing equipment. Insurance and claims costs were $27.6 million in the 2023 first quarter compared to $30.8 million in 2022. The decrease in insurance and claims costs as compared to 2022 was primarily attributable to decreased net unfavorable development of prior year claim estimates and decreased severity of accidents during the 2023 period. During the 2023 and 2022 first quarters, insurance and claims costs included $1.9 million and $4.3 million, respectively, of net unfavorable adjustments to prior year claim estimates. However, total insurance and claims costs were 5.3% of BCO revenue in the 2023 period and 4.2% of BCO revenue in the 2022 period. The 110 basis point increase in insurance and claims costs as a percentage of BCO revenue was almost entirely attributable to the 19% decrease in BCO revenue per load. Selling general and administrative costs were $53.6 million in the 2023 first quarter compared to $52.7 million in 2022. The slight increase in selling general administrative costs was primarily attributable to increased information technology costs and increased wages, almost entirely offset by a decreased provision for compensation under the company's variable programs and decreased employee benefit costs as a result of favorable medical and pharmacy loss experience. In the 2023 first quarter, the provision for compensation under variable programs was $3.3 million compared to $7.2 million in the 2022 first quarter. Depreciation and amortization was $15.2 million in the 2023 first quarter compared to $13.8 million in 2022. 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 23.3% in the 2023 first quarter was 50 basis points higher than the effective income tax rate of 22.8% in the 2022 first quarter, primarily attributable to larger net excess tax benefits from stock-based compensation arrangements during the 2022 first quarter. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $388 million. Cash flow from operations for the 2023 first quarter was $139 million, and cash capital expenditures were $6 million. Back to you, Jim.