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, 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 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 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 Landstar'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 Landstar undertakes no obligation to publicly update or revise any forward-looking information. Throughout my remarks, I will make mention of the concept of normal seasonal patterns or normal trends. For purposes of my remarks today, normal seasonal patterns and normal trends refer to Landstar's sequential revenue, load count, pricing, or other trends for monthly or quarterly periods from 2015 to 2019, and excludes our historical results from 2020, 2021, and 2022 due to the highly unusual dynamics reflected in those metrics during the pandemic-driven freight cycle. Given the current freight environment with soft demand and readily available truck capacity, Lastar performed relatively well in the 2023 third quarter. Actual revenue and earnings per share both arrived within the ranges of the guidance we issued in our July 26 second quarter earnings release. We provided revenue guidance of $1,275,000,000 to $1,325,000,000 and earnings per share guidance of $1.65 to $1.75. 2023 third quarter revenue was approximately $1,290,000,000, and earnings per share was $1.71. Considering the narrative that the U.S. has been in a freight recession for several quarters, it is worth noting, again, that 2023 performance continues to significantly outpace pre-pandemic levels, as 2023 third quarter revenue and earnings per share each exceeded the 2019 third quarter by over 25%. Overall truck revenue was $1,174,000,000 in the 2023 third quarter, 27% below the 2022 third quarter on a 16% decrease in load volume and a 12% decrease in revenue per load. As we entered the 2023 third quarter, we were facing difficult year-over-year financial comparisons, while truck revenue per load and the number of loads hauled via truck from the end of the 2023 second quarter to early July were both trending below normal seasonal patterns. Those trends continued through July with actual physical July truckload volume and revenue per load on loads hauled via truck below what would be expected based on normal seasonal patterns. The below normal trend in the number of loads hauled via truck from June to July followed the pattern that started at the beginning of 2023 as almost every sequential month-to-month change in truckload count during 2023 has been below normal seasonal patterns due to the softening consumer demand and the slowing U.S. manufacturing sector. In contrast, sequential month-to-month revenue per truckload trends during 2023 have been very inconsistent. Through September, sequential month-to-month trends have been below normal seasonal patterns four times, equal once, and better than normal seasonal patterns four times, including recently in July to August and August to September. NSR's normal seasonal patterns for truckload volumes have reflected an average sequential decrease of approximately 1 percent from the second quarter to the third quarter. Given the softness of freight demand, actual third quarter truckload volume for the 2023 third quarter was almost 6% below the 2023 second quarter, in line with our guidance, but well below normal seasonal patterns. Moreover, the changes in truckload volume from June to July, July to August, and August to September were each below normal seasonal trends. From a longer-term historical perspective, however, truckload volume in the 2023 third quarter was still Landstar's third-best all-time third quarter truckload count. behind only the consecutive third quarter record set in the pandemic impacted years of 2021 and 2022. The inconsistency in truckload pricing month-to-month has been very atypical from a seasonal perspective, making it difficult to project spot pricing even in the near term. As it relates to month-to-month revenue per truckload trends during the quarter, from June to July, the change in revenue per truckload was below normal seasonal patterns. Yet, as I mentioned earlier, the change in revenue per truckload from July to August and August to September were both better than normal trends. After the breakdown of truck transportation by equipment type, unsighted platform equipment held up comparatively better than revenue generated 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 hauled on unsighted platform equipment, especially as it pertains to revenue per load. The pandemic-driven spike in consumer demand drove van revenue per load from its trough in May of 2020 to its peak in February 2022, up 76%, while revenue per load on unsighted equipment increased 54% from its low point in May of 2020 to its peak in July 2022. Based on industry data from ATRI, the cost to operate a truck excluding fuel costs in fiscal year 2022 is approximately 20% greater than in 2019. during which we also experience a relatively soft rate environment. BCO revenue per mile, which excludes few surcharges on van equipment and on side equipment in September 2023, were 23% and 22%, respectively, above September 2019. As I mentioned during our second quarter earnings conference call held on July 27th, looking forward, I expect little room for spot market decreases due to these cost pressures. That expectation has held true as revenue per mile on BCOVent and unsighted platform equipment held relatively stable over the summer and through the end of September. I believe that rates in the spot market will stay relatively higher than the pre-pandemic levels, given the significant amount of additional cost to operate a truck today. Our rail, air, and ocean services in the 2023 third quarter were 54%, or $103 million below the 2022 third 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. Total loadings in the 2023 third quarter were 17% below the 2022 third quarter, the same percentage decrease we experienced when comparing the 2023 second quarter to the 2022 second quarter, although on an easier year-over-year comparison. Total load volume is somewhat influenced by customer mix. 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 changes in the levels of freight demand. Revenue hauled on behalf of other truck transportation companies was 15% and 18% of transportation revenue in the 2023 and 2022 third 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. Overall, the number of loads hauled on behalf of other truck transportation companies in the 2023 third quarter was 28% below the 2022 third quarter, contributing significantly to the 17% decrease in quarter over prior year quarter network volume. During the quarter, BCO truck count decreased by 295 trucks. Overall, BCO truck count has decreased approximately 12% since the end of the 2020 third quarter. There does not seem to be any unusual factors driving the recent reduction in BCO truck count. 12-month rolling average turnover at the end of the 2020 third quarter was 39%, which is slightly higher than the 36% turnover rate LANDSTAR experienced in 2019 during the most recent relatively comparable soft rate environment. I believe the increase in turnover rate compared to the comparable 2019 period was due to the significance of the decrease in rates and the increased cost to operate a truck today as compared to pre-pandemic periods. I will now pass it to Jim Todd to comment on other additional P&L metrics regarding the 2023 third quarter performance.

Thanks, Jim. Jim G. has covered certain information on our 2023 third quarter, so I will cover various other third quarter financial information included in the press release. In the 2023 third quarter, gross profit was 128.1 million compared to gross profit of 185.7 million in the 2022 third quarter. Gross profit was 9.9% of revenue in the 2023 third quarter as compared to gross profit margin of 10.2% in the corresponding period of 2022. In the 2023 third quarter, variable contribution was 187.4 million compared to 245.7 million in the 2022 third quarter. Variable contribution margin was 14.5% of revenue in the 2023 third quarter compared to 13.5% in the same period last year. The increase in variable contribution margin compared to the 2022 third quarter was primarily attributable to one, mix, 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, and two, an increased variable contribution margin on revenue generated by truck brokerage carriers as the rate paid to truck brokerage carriers in the 2023 third quarter was 95 basis points lower than the rate paid in the 2022 third quarter. Other operating costs were $15.2 million in the 2023 third quarter compared to $13.4 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 sale of used trailing equipment. Insurance and claims costs were $29.5 million in the 2023 third quarter compared to $31.4 million in 2022. The decrease in insurance and claim costs as compared to 2022 was primarily attributable to a decreased severity of accidents during the 2023 period and a decrease in VCO miles traveled in the 2023 period, partially offset by increased cargo claim costs. However, total insurance and claims costs were 5.8% of BCO revenue in the 2023 period and 5% of BCO revenue in the 2022 period. The 80 basis point increase in insurance and claims costs as a percentage of BCO revenue was almost entirely attributable to the 10% decrease in BCO revenue per load. Selling, general, and administrative costs were $51 million in the 2023 third quarter compared to $53.5 million in 2022. The decrease in selling general and administrative costs was primarily attributable to a decreased provision for compensation under the company's equity and cash incentive programs, partially offset by increased information technology costs and increased employee benefit costs. In the 2023 third quarter, the provision for compensation under variable programs was $1.3 million compared to $8.1 million in the 2022 third quarter. Depreciation and amortization was $14.4 million in the 2023 third quarter, compared to 14.6 million in 2022. This decrease was due to decreased depreciation on the company's trailer fleet, partially offset by increased depreciation on software applications resulting from continued investment in new and upgraded tools for use by agents and capacity. The effective income tax rate was 24.3% in both the 2023 and 2022 third quarters. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $497 million, Cash flow from operations for the first nine months of 2023 was $304 million, and cash capital expenditures were $15 million. Back to you, Jim.