Landstar System, Inc. (NASDAQ:LSTR) Q1 2024 Earnings Call Transcript

Landstar System, Inc. (NASDAQ:LSTR) Q1 2024 Earnings Call Transcript April 25, 2024

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Operator: Good morning, and welcome to Landstar System’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 Frank Lonegro, 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 Jim Todd. Sir, you may begin.

James Todd: Thank you, Bill. Good morning, and welcome to Landstar’s 2024 first 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 2023 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. With me this morning are Frank Lonegro, Landstar’s President and Chief Executive Officer; and Joe Beacom, Landstar’s Chief Safety and Operations Officer. It’s my privilege to pass to Landstar’s CEO, Frank Lonegro, for his opening remarks.

Frank Lonegro: Thanks, JT, and good morning, everyone. First, I want to express my sincere gratitude and excitement to lead this great company. I’ve had the pleasure of meeting so many of our network constituents for these past several months. At our annual agent convention in early April, I had the opportunity to interact with hundreds of agents with the entrepreneurial spirit that helps make Landstar successful. While they are all unique, these agents take great pride in what they do every day, helping move the freight that drives the American economy. They are a talented group of business owners, and I’m proud to be working alongside them to help Landstar grow. I’ve also been out on the road, meeting with many of our BCO owner operators in Florida, Georgia and Kentucky at our monthly safety meetings, field operations, center visits in the Mid-America Trucking Show.

I look forward to seeing our Million Mile Safe Driver and road star BCOs at the annual All-Star event in July, and know we share a common passion to safely deliver freight for our customers every day. I’m incredibly energized to work with our agents, BCOs and carriers through our proven business model to continue Landstar’s track record of success. I’ve also inherited a strong executive team at Landstar, and we’ve been actively working together to drive Landstar forward. I’m excited by the recent changes we made in our sales leadership, with Jim Applegate and Matt Dannegger. This combination of strategy and execution will serve Landstar and its agents well as we align for growth. While JT, Joe and I will handle the call today, we’ll be sure to showcase Jim and Matt on some of our future earnings calls.

We are laser-focused on executing on our strategic initiatives. Cross-border Mexico and heavy haul are two areas we have identified where we already have scale, and believe we have significant opportunities for growth. We also remain committed to continuously improving the level of service and support we provide to our customers, agents, BCOs and carriers each and every day. Turning to Slide 5. Landstar performed well in the 2024 first quarter, considering that the freight environment was characterized by soft demand and readily available truck capacity. I believe our results speak to the strength and resiliency of the Landstar business model. I am fully committed to fostering and safeguarding this unique model moving forward. Our balance sheet continues to be very strong.

We remain committed to investing in leading technology solutions for our network of small business owners, and we’ll be refreshing a significant portion of our trailing equipment fleet this year. Our capital allocation priorities remain unchanged. I’m a believer in the company’s stock buyback program, and I’m committed to opportunistically executing on our existing authority to benefit our long-term stockholders. In the 2024 first quarter, the freight environment continued to be soft. Manufacturing levels trended below the level of the corresponding prior year period and inflation continued to have an impact on consumer spending on goods. We remain in a loose truck capacity environment when measured by historical standards and market conditions continue to favor the shipper.

Even with that backdrop, Landstar’s 2024 first quarter top line results were better than expected, and our earnings performance was generally in line with what we expected. I was pleased to see heavy haul loadings, which as mentioned above as one of our strategic growth priorities, grew 2% year-over-year. On the other side, our substitute line haul service offering declined more than the company average and continue to be soft, after an incredibly strong run during the capacity constraint period coming out of the pandemic. Our first quarter guidance set forth in our 2023 fourth quarter earnings release call for the number of loads hauled via truck to be 14% to 16% below the 2023 first quarter and overall revenue per truckload to be 8% to 10% below the 2023 1st quarter.

The actual number of loads hauled via truck in the 2024 first quarter was 13% below the 2023 1st quarter, slightly better than the high end of our truckload volume guidance. Actual revenue per truckload in the 2024 first quarter was 7% below the prior year quarter, again, slightly better than the high end of our guidance. The slightly favorable variance on revenue compared to guidance was mostly driven by a stronger fiscal February as fiscal January results were in line, and fiscal March came in slightly above our expectations. Turning to Slide 6 and looking at our network, the scale, systems and support we provide that drive the operating results generated during the 2024 first quarter. JT will get into the details on revenue, loadings and rate for load, but I wanted to take a moment to touch on our agent community.

I was very excited to meet many of our 524 Million Dollar Agents in Orlando earlier this month at the annual agent convention. This group of Million Dollar Agents collectively generated approximately 95% of Landstar’s consolidated revenue during the 2023 fiscal year. Their relentless drive for results in any business environment is impressive. I’ve been in the transportation sector for most of my career, and realize how important Landstar’s safety-first culture is to our continued success. Our safety performance is a direct result of the professionalism of the thousands of Landstar BCOs operating safely every day. Our continued investment in safety technology and trailing equipment and our recruiting, qualification and maintenance practices.

I’m proud to report a 0.52 DOT accident frequency per million miles in the first quarter, which decreased approximately 12% as compared to the 2023 1st quarter. This is an impressive operating metric that speaks to the strength, skill, talent and dedication of our BCOs and provide a point of differentiation, our agents are able to highlight in discussions with our freight customers. Turning to Slide 7 and the capacity side. BCO truck count decreased by 399 trucks in the first quarter on a sequential basis and has decreased approximately 13% since the end of 2023 1st quarter, consistent with the year-over-year decline in truckload volumes. It is typical to incur turnover in BCO truck count when truck rates decrease. BCO turnover continues to be influenced by the significant increase in the cost of repairs in the extended period of time trucks are out of service awaiting repairs.

We would expect the BCO count to continue to decline in the coming months given the rate environment, but at a slower pace than we saw in the first quarter. I will now pass the call back to JT to walk you through the 2024 first quarter financials in more detail. JT?

James Todd: Thanks, Frank. Frank has covered certain information on our 2024 first quarter, so I will cover various other first quarter financial information included in the press release and slide presentation. Turning to Slide 9. As Frank mentioned earlier, both the number of loads hauled by truck and truck revenue per load each slightly exceeded the high end of our previously issued guidance. Non-truck transportation service revenue in the 2024 first quarter was 12% or $10 million below the 2023 first quarter. The decrease in non-truck transportation revenue was mostly due to a 58% decrease in air revenue per shipment. As to the breakdown in Truck Transportation, revenue per load on loads hauled via unsided platform equipment held up considerably better in revenue per load on loads hauled via van equipment and other truck transportation services.

We consider revenue per mile on loads hauled by BCO trucks a relatively pure pricing number, as it excludes fuel surcharges billed to customers that are paid 100% to the BCO. Revenue per mile on van equipment hauled by BCOs in the 2024 first quarter was 7% below the 2023 first quarter. Revenue per mile and unsided platform equipment hauled by BCOs in the 2024 first quarter was 5% below the 2023 first quarter. It should be noted that although the market has softened significantly from a year ago, Landstar’s revenue per mile on BCO van and unsided platform equipment both remain above the pre-pandemic 2020 first quarter by approximately 21% and 23%, respectively. We believe that rates will stay relatively higher than pre-pandemic levels given the significant amount of incremental cost to operate a truck today as compared to 5 years ago.

Revenue per mile on van equipment hauled by BCOs remained sequentially flat from December to January and from January to February before decreasing 2% in February to March. These December to January and January to February month-to-month changes are stronger than pre-pandemic typical patterns, with the exception of the beginning of 2018 when rates were favorably impacted by the mid-December 2017 ELD mandate. However, the sequential change in BCO revenue per mile on van equipment from February to March underperformed these pre-pandemic historical patterns. As to revenue per mile and unsided platform equipment hauled by BCOs, revenue per mile decreased 2% from December to January, increased 1% from January to February and increased 2% from February to March.

The month-to-month sequential trends on unsided platform equipment are generally more unpredictable compared to that of van equipment. This relative volatility is often due to the mix between heavy specialized loads and standard flatbed volume. The 2024 unsided platform volume trends are somewhat favorable as compared to typical pre-pandemic trends when excluding 2018 for the reasons mentioned above. Heavy haul revenue, one of our areas of increased strategic focus was up approximately 1% year-over-year in the first quarter. Heavy haul loadings were up approximately 2%, partially offset by a 1% decrease in revenue per load. This represented a mixed tailwind to our unsided platform revenue per load, as heavy haul revenue as a percentage of the category increased from approximately 25% during the 2023 first quarter to approximately 28% in the 2024 quarter.

Turning to Slide 10. We provided revenue share by commodity and year-over-year change in revenue by commodity. Transportation & Logistics segment revenue was down 19% year-over-year on a 13% decrease in loadings and a 7% decrease in revenue per load as compared to the 2023 first quarter. Within our largest commodity category, consumer durables, revenue declined 20% year-over-year on a 15% decline in volumes and a 6% decline in revenue per load. Revenue in our top 5 commodity categories, which collectively make up about 70% of our transportation revenue, were down a combined 17% compared to the 2023 first quarter. Shifting gears from revenue to loadings within the remaining top 5 commodity groupings, from the 2023 first quarter to the 2024 first quarter, total loadings of machinery decreased 15%.

Automotive equipment and parts were relatively flat. Building Products decreased 2% and hazardous materials decreased 14%. Additionally, substitute line haul loadings, one of the strongest performers for us through the pandemic and one which varies significantly based on consumer demand decreased 36% from the 2023 first quarter. Also, Landstar is a truck capacity provided to other trucking companies, 3PLs and truck brokers. During periods of tight truck capacity, those freight transportation providers 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 include almost all our commodity groupings, including our substitute line haul service offering.

Overall, revenue hauled on behalf of other truck transportation companies in the 2024 first quarter was 36% below the 2023 quarter, a clear indicator in our model that capacity is more readily accessible. Revenue hauled on behalf of other truck transportation companies was 14% and 18% of transportation revenue in the 2024 and 2023 first quarters, respectively. Even with the ups and downs in various customer categories, our business remains highly diversified, with over 25,000 customers, none of which contributed over 6% of our revenue in the 2024 first quarter. Turning to Slide 11. In the 2024 first quarter gross profit was $113.9 million compared to gross profit of $152.9 million in the 2023 first quarter. Gross profit margin was 9.7% of revenue in the 2024 first quarter as compared to gross profit margin of 10.7% in the corresponding period of 2023.

In the 2024 first quarter, variable contribution was $168.2 million compared to $208.7 million in the 2023 first quarter. Variable contribution margin was 14.4% of revenue in the 2024 first quarter compared to 14.5% in the same period last year. The decrease in variable contribution margin compared to 2023 first quarter was primarily attributable to a decreased variable contribution margin on revenue generated by truck brokerage carriers. As the rate paid to truck brokerage carriers in the 2024 first quarter was 149 basis points higher than the rate paid in the 2023 first quarter, partially offset by 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.

Turning to Slide 12. Operating income declined as a percentage of both gross profit and variable contribution, primarily due to the impact of the company’s fixed cost infrastructure, principally certain components of selling, general and administrative costs in comparison to smaller gross profit and variable contribution basis. Other operating costs were $14.9 million in the 2024 first quarter compared to $12.4 million in 2023. This increase was primarily due to an increased provision for contractor bad debt and decreased gains on sale of used trailing equipment. Insurance and claims costs were $26.3 million in the 2024 first quarter compared to $27.6 million in 2023. Total insurance and claims costs were 5.8% of BCO revenue in the 2024 period and 5.3% of BCO revenue in the 2023 period.

The decrease in insurance and claims costs as compared to 2023 was primarily attributable to decreased net unfavorable development of prior year claim estimates and a decreased accident frequency, partially offset by increased severity of accidents during the 2024 period. During the 2024 and 2023 first quarter, insurance and claims cost included $1.1 million and $1.9 million, respectively, of net unfavorable adjustment to prior year claim estimates. Selling, general and administrative costs were $56.4 million in the 2024 first quarter compared to $53.6 million in the 2023 first quarter. The increase in selling, general and administrative costs was primarily attributable to increased employee benefit costs and increased provision for incentive and equity compensation under our variable compensation programs and the impact of $1.2 million of CEO transition costs, partially offset by decreased project consulting costs.

In the 2024 first quarter, the provision for compensation under variable programs was $4.6 million compared to $3.3 million in the 2023 first quarter. We’d like to note, despite some moderate wage inflation pressure and selective human capital investment in certain areas, principally heavy haul cross-border and fraud prevention, total wages from the 2023 first quarter to the 2024 first quarter declined slightly, as the company continues to be very disciplined with respect to managing headcount. Depreciation and amortization was $14.1 million in the 2024 first quarter compared to $15.2 million in 2023. This decrease was primarily 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 third-party capacity providers.

The effective income tax rate was 23.5% in the 2024 first quarter compared to an effective income tax rate of 23.3% in the 2023 first quarter, primarily attributable to larger net excess tax benefits from stock-based compensation arrangements during the 2023 first quarter. Turning to Slide 13 and looking at our balance sheet. We ended the quarter with cash and short-term investments of $530 million. Cash flow from operations for the 2024 first quarter was $94 million and cash capital expenditures were $9 million. The strength of our balance sheet is a testament to the cash-generating capabilities of the Landstar model. Back to you, Frank.

Frank Lonegro: Thanks, JT. As we progress through the 2024 second quarter, year-over-year comparisons should begin to ease. In the 2023 second quarter, the number of loads hauled via truck and truck revenue per load both significantly underperformed pre-pandemic seasonal patterns. In 2024, as we moved from March into the first few weeks of April, our truck volumes seem to have moved more in line with what we would view as normal sequential month-to-month patterns based on pre-pandemic seasonal performance trends. Truck revenue per load has slightly underperformed these pre-pandemic patterns, though the sequential week-to-week trends in truck revenue per load in the first three weeks of April have been favorable. Turning to Slide 15.

Our year-over-year expectations for the 2024 second quarter are the truck load volumes will be 5% to 9% below the 2023 second quarter and truck revenue per load will be in a range of flat to down 4% versus the 2023 second quarter. Looking at the 2024 2nd quarter on a sequential basis. Pre-pandemic patterns would normally yield an 8% improvement in truckload volumes and a 2% improvement in truck revenue per load. Our guidance for the second quarter implies a 4% to 8% sequential improvement in truckload volumes and truck revenue per load ranging from down 1% to up 3% sequentially. We also expect revenue for our non-truck loads to be similar to what we experienced in the 2024 first quarter. Based on these assumptions, we expect revenue in the 2024 second quarter to be in a range of $1.2 billion to $1.3 billion, and earnings to be in a range of $1.35 per share to $1.55 per share.

The 2024 second quarter guidance incorporates a variable contribution margin range of 13.9% to 14.2% and insurance and claims costs of approximately 5.5% of estimated BCO revenue. We also want to highlight some specific items embedded in the 2024 second quarter EPS guidance range of $1.35 per share to $1.55 per share compared to the 2024 first quarter actual EPS of $1.32 per share. First, SG&A in the second quarter is expected to be above the first quarter, due in part to the cost of Landstar’s annual agent convention in April. Second, we expect variable contribution to be 20 to 50 basis points below the 2024 first quarter, which is in line with pre-pandemic historical sequential patterns. Third, the second quarter tax rate is expected to be approximately 100 basis points higher than the first quarter, in line with our normal tax rate assumptions, driving a $0.02 per share unfavorable variance compared to the first quarter.

We also want to note that the company has widened the guidance range for both revenue and earnings per share. While these ranges reflect the fact that economic and freight conditions are still quite dynamic, we believe the strength and resiliency of the Landstar model position us well to successfully navigate this environment. With that, Bill, we’d like to open the line for questions.

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Q&A Session

Operator: Thank you very much, sir. At this time, we’ll begin the question-and-answer session. [Operator Instructions] We do have the first question coming from the line of Scott Group of Wolfe Research. Your line is now open.

Scott Group: Hey, thank. Good morning. Frank, nice to speak with you again. Welcome back to transports. You guys gave more color on some of the monthly trends. That was helpful, but it was going quick. So it sounded like March deteriorated. And then maybe, Frank, at the end, your comments around pricing in April were a little bit better. Maybe just a little bit more color on sort of what happened in March and what you’re seeing in April?

Frank Lonegro: Hi, Scott, thanks, and good to hear your voice again, for sure. We’re watching this thing on a daily and weekly basis as you would imagine, just given the desire to see an inflection. And so what we don’t want to do is over index on a day or two. We want to look at the trends over time. And I think the point that I was making toward the end was the week-by-week view in April on rate was beginning to show some positivity. And so we’re hopeful that, that is the beginning of an inflection. It’s not going to be a kind of a rapid rebound as maybe we saw in the immediate post-COVID time period, but a little bit of sign of green shoots is always help. I’ll let JT fill in some color there.

James Todd: Yes. No, absolutely, Frank. So Scott, the good guy top line to the model really was strong February. So February versus the model was about plus 8%, as both the number of loads hauled via truck and truck revenue per load in February outpaced typical seasonality. March was about 3.5%, good guide to the model on the top line, but both loadings and rev per load in March seasonally underperformed typical February to March, again, off a stronger base, a starting point of fiscal February.

Scott Group: And then any thoughts about April there?

James Todd: Yes. To Frank’s point, we saw truck revenue per load probably peak in the middle of fiscal March and then starting to slide on us a little bit. To Frank’s point, in fiscal April, week one to week two truck revenue per load improved week two to week three and improved, such that we don’t have April close, but our best guess is we’re going to be maybe flattish March to April, and that compares with a historical plus 100 basis point good guy on truck revenue per load historically March to April.

Scott Group: Okay. That’s helpful. And then Frank, just bigger picture, right? If you look net revenue is coming back to where it used to be pre-pandemic, but the cost structure is just so much higher. Is there anything you could do or any initiatives to meaningfully reduce cost, one. And then secondly, we’ve had a view that there is — there should be an opportunity to meaningfully accelerate the pace of buyback here. Any thoughts on that in your new role?

Frank Lonegro: Yes, for sure. And all good questions, as always. So on the cost side, it is always going to be something that we’re focused on. As JT went through the math, especially in the first quarter year-over-year, I mean we are very disciplined on headcount. And JT’s got the [labouring] (ph) on that one in holding the organization accountable. So what you’re really seeing are selective investments that are really driving the year-over-year change, and whether that’s on the depreciation side or adding some selective positions in those strategic areas that we called out on the phone. Technology is always going to be an area that we continue to invest in. I mean our job is to support the agents and the BCOs and the carriers out there.

So there’s no initiative to really go hard at cost right now. It’s more around the growth side of the equation. We think we’re going to come out stronger when we start to inflect. So I think we’re in good position there. The sales organizational changes are going to be helpful there. We do have some real focus on things like the cross-border Mexico as well as heavy haul. And those are areas that we have a scale business already and being able to focus on those areas that are more, I’d say, secular growth in nature rather than cyclical. And then on your buyback question, obviously, we’re just getting started joining mid-quarter. We’ve got a pristine balance sheet, as you know, and it’s wonderful to inherit that from Jim Gattoni, and obviously, the Board has had a big hand in that one.

And the company has really got a kind of a long and successful history of returning cash to shareholders, that’s not changing. The company has been very selective about when it’s in the market, and we’re going to continue to evaluate where we are in the market on a price basis pretty much every day. Being patient clearly has its advantages. You look at where we traded in the first quarter between about 180 and 200. And obviously, it’s come down since then for a lot of different reasons, including what the Fed is going to do. And we want to be great stewards of the shareholders’ money. So we’re going to be selective in the market, but we are going to return capital to shareholders.

Scott Group: Okay. Makes sense. Thank you guys. Appreciate the time.

Frank Lonegro: Thanks, Scott.

Operator: Thank you. We will move now to the next question coming from the line of Tom Wadewitz of UBS. Your line is now open.

Thomas Wadewitz: Yes. Good morning. And yes, also kind of welcome back to the transports, Frank. Nice to talk with you again. How do you think about the dynamic on agents and BCOs? I think you said that the decline in BCOs is slowing a bit. So when do you — I mean, do you think that’s just kind of like spot rates, bottoming, you’ll see that bottom out? Or what do you think the dynamic will be and kind of, I guess, key levers for how the BCO count goes and also the Million Dollar Agent count, if you think about that in, let’s say, 2Q, 3Q?