Landstar System, Inc. (NASDAQ:LSTR) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Good morning, and welcome to Landstar System Incorporated 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 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.

Jim Gattoni: Thank you, Bill. Good morning, and welcome to Landstar's 2022 Fourth Quarter Earnings Conference Call. Before we begin, let me read the following statement. The following the 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 2021 fiscal year described in the section Risk Factors and other SEC filings from time-to-time.

These risks 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 unless our 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. Our record performance in 2022 followed another record year for Landstar in 2021. Among many new annual financial records, we established in 2022, Landstar achieved record annual revenue of $7.4 billion, $900 million higher than the previous annual record set in 2021.

Diluted 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 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 for the company's 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 best domestic freight environment.

Beginning in the 2022 second quarter, Landstar experienced a deceleration in quarter over prior year quarter growth rates for both truck revenue per load and the number of truckloads 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 22, 2022 third quarter earnings conference call, we provided 2022 fourth quarter revenue guidance of $1.775 billion to $1.825 billion, 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 truckload was 7% below the 2021 fourth quarter. Note that, the number of truckloads hauled by Landstar reached an all-time record level in the 2021 fourth quarter and remain 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% and when excluding the estimated truck revenue of $60 million contributed by the extra week in 2022 fourth quarter.

And revenue haul 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 and 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 expect that 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 will 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 was still 68% higher than that of the pre-pandemic 2019 fourth quarter. Revenue hauled via van equipment in 2022 fourth quarter was $154 million lower than the 2021 fourth quarter, but $373 million above the 2019 fourth quarter. Revenue hauled via on-site and flatbed equipment in the 24th quarter was only $13 million below the 2021 fourth quarter, about a $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 a $116 million above the 2019 fourth quarter.

Clearly the van market was more favorably impacted by the pandemic-driven consumer demand than the unsided flatbed market throughout the past two years. Van loadings in the 2022 fourth quarter were 5% lower than the 2021 fourth quarter. Unsided 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 for consumer durables, building products and food stuffs 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 and last our history. Turnover for $1 million agents is typically very low. During 2022, $1 million 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 and on-site equipment hold by BCOs decreased only 2%. In each case, revenue per mile excludes the impact of fuel surcharge built to shippers, as 100% of few servers built to customers are excluded from Landstar's revenue and paid a 100% to the hauling BCO.

In fiscal year 2022, total fuel surcharges billed to customers paid 100% of BCOs were $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?

Jim Todd: 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 costs 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 cost 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 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 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 and 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 $0.05 of the $0.39 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.

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Jim Gattoni: Thanks Jim. As it relates to our 2023 first quarter guidance, recent trends in truck revenue per load and load volume indicate the continuation of a softer freight environment consistent with cyclical trends we believe we have seen return to the marketplace over the last three quarters. As to truckload count, we generally experienced a 2% to 3% sequential decrease in volume from the fourth quarter to the first quarter. Excluding the extra week from the 2022 fourth quarter, a truckload volume assumption has volume decreasing at a slightly more rapid rate than the historical typical range as demand softening has continued into the beginning of the 2023 first quarter. Revenue per truckload trends from the fourth quarter to the first quarter have been inconsistent over the past several years.

Over the past several weeks, revenue per truckload has drifted down, which is often the case in January. We finished 2022 with revenue per load approximately 10% below where we were as of the beginning of 2022. And our expectation is we could experience an additional 5% to 7% decrease in revenue per load during the 2023 first quarter. Note that revenue per truckload reached its all-time high at Landstar in February 2022 and experienced levels without historical precedent throughout much of the 2022 first quarter. As a result, the revenue per truckload comparisons for the 2023 first quarter compared to the record revenue per truckload established from the 2022 first quarter makes for an extremely difficult year-over-year comparison. Overall, we expect revenue in the 2023 first quarter to be in the range of $1.400 billion to $1.445 billion and diluted per share to be in a range of $2.05 to $2.15.

This earnings estimate anticipates variable contribution margin ranging 142% to 14.5%. Although, we do not plan on providing full year earnings guidance due to the unpredictable nature of the spot market, Jim will cover our estimates of cost and expenses for fiscal year 2022, as they are more predictable and fixed in nature. Jim?

Jim Todd: Thanks Jim. With respect to my expectations for Landstar's full year other operating costs, assuming a normalized provision for contractor bad debt, I estimate 2023 other operating costs would increase by $1 million to $3 million, as increased trailing equipment maintenance costs and increased transaction costs associated with the software rollout are partially offset by increased gains on sales of used trailing equipment. With respect to anticipated insurance and claims costs I continue to believe 4.5% of BCO revenue is the appropriate measure to utilize but we will continue to reevaluate each quarter. My base case assumption on selling, general and administrative costs is a $3 million to $6 million increase year-over-year, assuming a normalized provision for customer bad debt.

Included in that base case assumption, is approximately $12 million of tailwinds from potential decreases in the company's variable compensation programs. In a hypothetical 20% revenue decline scenario those tailwinds could grow closer to $18 million to $20 million which will result in a slight decrease in selling general and administrative costs year-over-year. I expect depreciation and amortization costs to increase $4 million to $6 million year-over-year depending on the timing and ultimate acquisition cost of new trailing equipment. I also expect that the information technology headwinds we have experienced on this line in recent periods will begin to recede in 2023, as a greater portion of our IT spend is expected to shift from initial development work to maintenance and enhancements of existing in-service digital tools and products.

Back to you, Jim.

Jim Gattoni: In closing, and as previously mentioned, the macro freight environment gathered strength from late-summer 2020 through 2021 and drove Landstar's truck revenue to historic highs. 2021 fourth quarter truck revenue was 91% above the pre-pandemic 2019 fourth quarter. The prior upmarket cycle reaches peak in the 2021 fourth quarter and 2022 first quarter and was followed by decelerating year-over-year growth rates in truck revenue per load and volume beginning in the 2022 second quarter. Regardless of challenging year-over-year comparisons a less robust freight environment and the inflationary pressures of labor, equipment and insurance costs the resiliency of the Landstar variable cost business model continues to generate significant free cash flow and financial returns.

For example, if we were to experience a 20% revenue decrease from the $7.4 billion of revenue reported in fiscal year 2022 we believe Landstar could still generate an operating margin, representing operating income over a variable contribution of 50% or more. We also expect free cash flow to exceed $350 million under that scenario. 2021 and 2022 were historic years at Landstar, during which the company achieved new levels of record financial performance that resulted in Landstar's historically strong business and balance sheet becoming even stronger than before. 2023 has its work cut out for it, due to the tough comps to the prior year and a less robust freight environment to start the year. Nevertheless, we have been through many business cycles before and we still expect nothing less than 2023 being a terrific year by historical standards with anticipated annual revenue well above pre-pandemic levels.

And with that, Bill, we will open to questions.

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