Landstar System, Inc.

Good morning and welcome to Landstar System Inc. second quarter earnings release conference call. All lines will be on 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 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. Good morning and welcome to Landstar's 2023 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, including but not limited to the operational, financial, and legal risks detailed in Lannister'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 that differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking information unless or undertakes no obligation to publicly update or revise any forward-looking information. Given the current freight environment with soft demand and readily available truck capacity, Lansar performed relatively well in the 2023 second quarter. Before beginning my discussion of our 2023 second quarter financial performance, I want to briefly discuss two big picture items, freight cycles and seasonal trends that provide context to this year's results. Lansar's revenue performance through the freight cycles that occurred over the past three years ultimately set the stage for where we are today. Generally, in the ordinary course of our business, we experience spot market down cycles that drive revenue from peak to trough, as well as up cycles that drive revenue from trough to peak. In both cases, the typical spot market freight cycle from peak to trough or trough to peak occurs over a period of six to eight quarters. And these cycles are typically driven by three main factors. The level of industry demand for freight services, the level of available truck capacity industry, in the industry and the differential between industry-wide contract and spot pricing at any given point in time during the cycle. Looking back over the last three years, Landstar's trough quarterly revenue occurred in the 2020 second quarter at the beginning of the pandemic. Landstar peak quarterly revenue occurred eight quarters later in the 2022 second quarter. From 2020 second quarter revenue trough to the 2022 second quarter peak, Revenue grew by over $1 billion, or 140%. Since hitting peak quarterly revenue in the 2022 second quarter, Landstar has experienced a down cycle during which quarterly revenue has thus far decreased each quarter over the past four quarters. Current conditions make it difficult to predict exactly when the current down cycle will end, and revenue will again begin to cycle upwards. Two of the three key factors that drive the spike cycles are trending normally given the period of the cycle we are in, One, as to truck availability, truck orders have recently slowed, and industry-wide DOT truck revocations have exceeded DOT truck authorizations in seven of the last eight months through May. And two, contract freight rates remain well above spot freight rates. However, the third key factor driving cycles, demand continues to be soft, which makes the timing of the end of the down cycle less predictable. Throughout my remarks, I'll also make mention of the concept of normal seasonal patterns. For purposes of my remarks today, normal seasonal patterns refers to revenue, load count, and or pricing trends from 2015 to 2019 and excludes 2020, 2021, and 2022 due to the highly unusual dynamics reflected in those quarterly metrics during the pandemic-driven freight cycle. Now to the 2023 second quarter. Included on our April 26 first quarter earnings release, we provided revenue guidance of $1.4 billion to $1.45 billion. We updated the second quarter guidance via an 8K filed the SEC on May 23rd in anticipation of an upcoming investor conference. In that 8K, we lowered revenue and earnings guidance due mostly to both revenue per truck load and the number of loads hauled via truck through mid-May trending below the estimates for those metrics used in our initial guidance. That update reduced the revenue guidance to $1.325 billion to $1.375 billion. Our initial second quarter earnings per share guidance was $1.90 to $2.00. Our updated earnings per share guidance based on the lower revenue guidance was $1.75 to $1.85. 2023 second quarter revenue and earnings per share both came in at the high end of the revised guidance. As we entered 2023, it was clear we were facing very difficult year-over-year financial comparisons coming off back-to-back record years in 21 and 2022, driven by the strong consumer demand and tight truck capacity. In fact, beginning in the 2020 second quarter and through the 2022 first quarter, Both truckload volume and revenue per load consistently outperform sequential quarter-to-quarter normal seasonal patterns. This outperformance came to an end in the 2022 second quarter. From the 2022 third quarter through the 2023 second quarter, Landstar's truckload volumes and revenue per truckload underperformed normal seasonal trends. Overall total truck revenue was $1.247 billion in the 2023 second quarter, 29% below the 2022 second quarter on a 16% decrease in load volume and a 15% decrease in revenue per load. Our rail, air, and ocean services in the 2023 second quarter were 50% or $102 million below the 2022 second quarter. The significant decrease in non-truck transportation revenue was in line with our expectations of lower volumes across all non-truck modes and the expectation of a significant decrease in ocean revenue per shipment. Although revenue in the 2023 first half was below the 2022 first half by 29%, one needs to put the impact of the pandemic-driven growth in perspective. Even given the significant softness in demand compared to the fiscal 2022, 2023 first half revenue exceeded 2019 first half revenue by more than 35%. As it relates to truckload volume, Landstar's normal seasonal patterns exhibited average growth of approximately 8% from the first quarter to the second quarter. Given the softness and freight demand, Asheville's second quarter truckload volume was 1% below the 2023 first quarter, in line with our updated guidance, but well below normal seasonal patterns. Even with the decrease we experienced in truckload volume from the first quarter to the second quarter, truckload volume in the 2023 second quarter was still Lansar's third best all-time second quarter truckload count, behind only the consecutive second quarter records set in 2021 and 2022. The inconsistency in pricing month to month has been very atypical from a seasonal perspective, making it difficult to project spot pricing even in the near term. Late in the 2023 first quarter, truck revenue per load stabilized, and the stabilization continued into early April prior to our release of the second quarter guidance. As April came to an end, rates took a sharp downturn and settled almost 5% below March. Over the past 16 months since reaching its peak in February 2022, Month-to-month sequential change in truck revenue per load have trended worse than normal seasonal patterns in all but four months. Most recently, in a positive development, May to June revenue per truck load increased modestly. However, performance was still below normal seasonal patterns. After the breakdown of trucks' transportation revenue by equipment type, unsighted platform equipment held up better than revenue hauled via van equipment and other truck transportation services. The quarter over prior year quarter revenue comparisons for van are much more challenging than that for revenue hold on unsighted platform equipment, especially as it pertains to revenue per load. The pandemic-driven spike in consumer demand drove then revenue per load from its trough in May 2020 to its peak in February 2022, up 76%, while revenue per load on unsighted equipment increased 54% from its low point in May 2020 to its peak in July 2022. I believe that rates in the spot market will stay relatively higher than pre-pandemic levels, given the significant amount of additional cost to operate a truck today. Based on industry data from ATRI, the cost to operate a truck excluding fuel costs in fiscal year 2022 was approximately 20% greater than in 2019, during which also experienced a relatively soft rate environment. VCO revenue per mile on van equipment and onsite equipment were 20% and 30% respectively above June 2019. I believe that due to these cost pressures, particularly on smaller carriers, there is relatively little room for further spot market rate decreases. Total lows in the 2023 second quarter were 17% below the 2022 second quarter. Truck load volume is somewhat influenced by Landstar's customer type. For example, Landstar provides truck capacity to other trucking companies, 3PLs, and truck brokers, where volumes tend to vary more widely period to period with change in the levels of freight demand. Revenue hauled on behalf of other truck transportation companies was 16% and 20% of transportation revenue in the 2023 and 2022 second quarters respectively. During periods of tight truck capacity, other trucking companies, 3PLs, and truck brokers 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 of our commodity groupings, including our substitute line haul service offer. Overall, the number of loads hauled on behalf of other truck transportation companies in the 2023 second quarter was 28% below the 2022 second quarter, contributing significantly to the overall decrease in quarter over prior year quarter volume. During the quarter, BCO truck count decreased by 261 trucks, a relative improvement compared to the 472 truck decrease we experienced in the 2023 first quarter. Overall, BCO truck count has decreased approximately 11% since the end of the 2022 second quarter. It is typical to incur increased turnover in BCO truck count when truck rates decrease. Over the past 12 months, truck rates have decreased at a rapid pace, especially on loads hauled by van equipment, the primary equipment type hauled by BCOs. There does not seem to be any unusual factors driving the recent reduction in BCO truck count. Twelve-month rolling average turnover is currently about 37%. which is very similar to the 36% term rate land start experience in 2019 during the most recent relatively comparable soft rate environment. I will now pass to Jim Todd to comment on other additional P&L metrics regarding the 2023 second quarter performance.

Thanks, Jim. Jim G. has covered certain information on our 2023 second quarter, so I will cover various other second quarter financial information included in the press release. In the 2023 second quarter, gross profit was $139.7 million compared to gross profit of $208.1 million in the 2022 second quarter. Gross profit margin was 10.2% of revenue in the 2023 second quarter as compared to gross profit margin of 10.5% in the corresponding period of 2022. In the 2023 second quarter, variable contribution was $198.2 million compared to $267.5 million in the 2022 second quarter. Variable contribution margin was 14.4% of revenue in the 2023 second quarter compared to 13.5% in the same period last year. The increase in variable contribution margin compared to the 2022 second quarter was primarily attributable to one, an increased variable contribution margin on revenue generated by truck brokerage carriers as the rate paid to truck brokerage carriers in the 2023 second quarter was 170 basis points lower than the rate paid in the 2022 second quarter, and two, mixed, as an increased percentage of revenue was generated by BCO-independent contractors, which typically has a higher variable contribution margin than revenue generated by other modes of transportation. Other operating costs were $13.5 million in the 2023 second quarter, compared to $10.4 million in 2022. This increase was primarily due to an increased provision for contractor bad debt and increased trailing equipment maintenance costs, partially offset by increased gains on sales of used trailing equipment. Insurance and claims costs were $29.8 million in the 2023 second quarter compared to $34.1 million in 2022. The decrease in insurance and claims costs as compared to 2022 was primarily attributable to a decreased severity of accidents during the 2023 period. However, total insurance and claims costs were 5.8% of BCO revenue in the 2023 period and 4.9% of BCO revenue in the 2022 period. The 90 basis point increase in insurance and claims costs as compared to BCO revenue was almost entirely attributable to the 14% decrease in BCO revenue per load. The sequential increase in insurance and claims costs as compared to the 2023 first fiscal quarter was primarily attributable to increased cargo claim expense. Selling general and administrative costs were $54.5 million in the 2023 second quarter compared to $59 million in 2022. The decrease in selling general and administrative costs was primarily attributable to a decreased provision for compensation under the company's variable programs and a decreased provision for customer bad debt, partially offset by increased information technology costs and increased wages. In the 2023 second quarter, the provision for compensation under variable programs was $200,000 compared to $8.3 million in the 2022 second quarter. Depreciation and amortization was $14.9 million in the 2023 second quarter compared to $14.3 million in 2022. This increase was due to increased depreciation on software applications resulting from continued investment in new and upgraded tools for use by agents of capacity, partially offset by decreased depreciation on the company's trailer fleet. The effective income tax rate was 24.6% in both the 2023 and 2022 second quarters. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $419 million. Cash flow from operations for the first half of 2023 was $192 million, and cash capital expenditures were $13 million. Back to you, Jim.