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

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.

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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Q&A Session

Operator: Thank you very much sir. And we have the first question coming from the line of Todd Fowler of KeyBanc Capital Market. Your line is now open.

Todd Fowler: Hey. Hi. Great. Good morning everybody. Jim, I guess to start on the revenue per load commentary for the first quarter, it sounds like that the down 5% to 7% is in line with what you see from a typical seasonal standpoint. But you’ve got a little bit of easier comparisons coming off of the fourth quarter. And I think that on a year-over-year basis it kind of implies like a mid-teen decrease. Can you just comment on do you feel that that’s reflecting where the market is or a little bit of a lag in kind of, how your pricing flows through on the revenue per load side and then, just some expectations maybe as we move through 2023 for revenue per load during the year?

Jim Gattoni: Yeah. I would say that, generally, we do lag a little bit in the market climb by three, four weeks or so, based on the reaction time of the shippers and agents kind of coordinating pricing. But I wouldn’t say it’s substantial. I would say that the market trends that we’re seeing today are probably a little more true at the market than we typically see in our business. We did trend down into December, but I’m not sure with the dynamics we’re seeing in the marketplace right now that we wouldn’t continue to trend down the way we have in January. We did go through the fact that December was a little lower than we anticipated and would that drive a less drop into January, but we’re not experiencing that. So, I think we’re still pretty comfortable.

We’re going to see that normal drop from being 10% in the fourth quarter below the first quarter with plus another 5% to 7% drop. We’ll be that mid-teen drop off in the first quarter. We’re not seeing — I would say we’re seeing a little bit of I don’t want to call it stable, but it’s a little more stable I guess than it has been over the last three or four weeks. But again still pretty unpredictable because things have been flipping back and forth pretty quick over the last several months. As it relates to the year, we would — if you go back to the last two years, I would always say that I believe in cycles regardless of the pandemic, I still think we’re going to — the spot versus contract cycle is going to happen. And capacity tightens and you need business and spot markets climb and then it loosens and people go to contract and spot market drops.

I was saying that for the last two years that we’re going to cycle down. And if you believe in cycles our peak was in February, right? We went from August of 2020 to February of 2022. It was about 18 months from what I would say was like trough-to-peak. And if you think another 18 months of peak-to-trough that puts you back somewhere in the summer. And being a believer in cycles, I would project that things will start to improve and we’ll get a little bit more rate seasonality as it climbs into the third and fourth quarter. So, that would be my guess is where we’re headed. It’s kind of what we’ve talked about here and what we expect to happen in the back half actually is that we see the spot market to drive rates up a little bit. Again I’m not talking like tremendous, I’m talking seasonally normal increases in rates from Q1 maybe not the Q2, but into Q3 and Q4.

Todd Fowler: Yes. No, all of that makes sense. And I would say that it’s been surprising that it does turn out that it feels like a cycle even sometimes when it doesn’t. So, just a quick follow-up — and I know you went through the detail on the end markets, but are you seeing any difference now? It feels like going through a lot of last year was more on kind of the consumer durable side slowing. It looks like some of your industrial end markets are still holding in relatively well. But just kind of any general comments between end markets where you’re seeing some strength and softness? Thanks.

Rob Brasher: Hey Todd, this is Rob. Specifically, on the output equipment plan, we’re seeing a lot of positive trending on heavy-haul projects. We’re seeing a lot of heavy equipment really pick up for us from the manufacturers direct. Now, that could be the fact that again due to supply chain constraints that they’re now filling orders that they couldn’t over the past year and a half. But to that point exactly to the cycling up and cycling down, more so in the metals and some of that more specialized open equipment freight, we’re seeing that come down, which is a typical cycle because it’s winter time, right? There’s not a lot when the ground freezes up north, there’s not a lot of those projects that are going on. But we do anticipate as the season warms up and the year moves on that will continue on an upward basis.

Automotive continues to be where it’s been both from a van and a flatbed perspective for us. When you look at the automotive suppliers and you talk about the business that we’re doing, I don’t know if they’re going to be caught up any time this year. That’s really hard to predict, but it doesn’t look like they are. So, that will continue in that trend.

Todd Fowler: Got it. Thanks for the time this morning. I’ll pass it along.

Operator: Thank you. We have the next question coming from the line of Scott Group of Wolfe Research. Your line is now open.

Scott Group: Hey thanks. Morning guys. So, yes, I just wanted to get more of your perspective Jim on just the cycle. It sounds like you’re hopeful that rates bottoming Q1, Q2. So, if you look we have this from trough-to-peak a 60% plus increase in rates and we’re getting close to the trough a 20% or so drop from peak-to-trough. Does that sort of — you got a long history or does that sort of drive with what you’ve seen in prior cycles that we can hold on to most of these pricing increases?

Jim Gattoni: I would say that the time line of the peak-to-cycle kind of 18 to 24 months kind of make sense. But we’ve never had a trough-to-peak of 60% growth. So, I think one of the discussion is then what’s your peak-to-trough. And seeing a little bit of where the rate is sitting today is the trough down 20% or 25%. I don’t — you’re not going to go down 60%, clearly. I don’t believe, we’re going to go back to 2019 levels. You just can’t, because — so much more cost in the system move with inflation and insurance costs, I don’t see how the industry can bring rates back to that level. I’m kind of comfortable with what we’re seeing in the first three or four weeks of January, has got us heading slowly down and not driving down into a 60% drop off.

So, I’m pretty comfortable that with kind of the commentary is. I’m not sure, we continue to drop into the second quarter. I would say, that maybe we get a little improvement in the second quarter. And then from there we get better improvement for spot markets more seasonal.

Scott Group: Okay. So, do you have a …

Jim Gattoni: The high lows over the last two years have been crazy, right? Before that, it moved 10% or 15% from peak to trough. And not just pandemic drove it to new highs. And like I said, I just don’t think it pulls back that far, as far as it grew because of the cost structures.

Scott Group: Right. Do you have a view on where we are contract for spot? And then, maybe just to your point about, how much costs are up, right? We saw some big drop in the BCO count and the approved broker carriers just — what you’re seeing in terms of capacity? Any update on how that’s trending in Q1?

Rob Brasher: Yes. This is Rob. From a pricing perspective, there are still real pressures on rates right now. And those pressures are because of the huge drop in spot market rates. I don’t know, where we are. To Jim’s point, I think, they’re starting to stabilize a bit. Assets have been pushing back for a long time because of their increased operating costs and the increases they put into their system we are starting to see those carriers and those contract rates, a little bit relaxed and start to succumb to some of the pricing pressures. I don’t know — so I think it’s weakening. I don’t know that we’re at the bottom. But from our perspective, I do think there’s some stabilization from a rate standpoint spot to a contract.

Joe Beacom: Yes. Scott, this is Joe. I’ll take the BCO and capacity question. So it — we’ve seen we’re going to we’re predicting that the first quarter will look a little bit a lot like the fourth quarter as far as a net decline. And really what’s driving that really doesn’t change. It’s — if you think about our model, on the ad side we’re really — if guys can’t get used trucks then it kind of makes it hard for them to come out of other systems and come here. The interest in Landstar is still strong, but a lot of that interest is predicated on identifying and finding a truck. So as you see, more broadly as newer trucks get put into different systems and those come into the market, then that feeds to the used truck market.

And as that availability and that price begins to be rational, I think you’ll see the ad thing kind of fix itself. And on the retention side, it’s really about the parts and labor to keep the existing equipment running. As you probably know on the BCO side, they’re running used equipment. And you’ve seen the inability. We’ve seen the inability to get trucks prepared and repaired timely and really affect our utilization throughout all of 2022 and that continues into 2023. So as that used truck market improves, as the ability to get parts and get tax into shops and get equipment back on the road, we think that helps a great deal because it’s really been pretty disruptive for the last few quarters. And then, you can — stabilization of demand, I think also is a big factor on the BCO side.

Once that price levels off, as we’ve just discussed, I think you’ll see a greater interest in coming back into the fleet, which I think a lot of these guys are currently sidelined. And you really don’t see a dramatic difference in my view from where the BCOs are challenged with carriers about over 60% of our brokerage business, is on carriers of less than 10 trucks and they’re seeing, a lot of those same supply-related, cost-related inflation and access to equipment-related challenges that everybody else is. And so I think they’re — a lot of them are just trying to fight through it. It’s really I think a very tough condition, for a lot of truckers in the marketplace today. And as some of these things that are out of their control come back in their control, I think we’ll bounce back.

But I think, that’s going to be a couple of quarters.

Scott Group: Okay. Thank you for the time, guys. Appreciate it.