Landstar System, Inc. (NASDAQ:LSTR) Q3 2023 Earnings Call Transcript

Landstar System, Inc. (NASDAQ:LSTR) Q3 2023 Earnings Call Transcript October 26, 2023

Operator: 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 [Operator Instructions]. 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.

Jim Gattoni: 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 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 statement. 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 include but not limited to the operational, financial and legal risks detailed and Landstar’s Form 10-K for the 2022 fiscal year described in the section risk factors and other SEC filings from time-to-time.

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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 or undertakes no obligation to publicly update or revise any forward-looking at 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 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, Landstar performed relatively well in 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 billion $1.325 billion and earnings per share guidance of $1.65 to $1.75. 2023 third quarter revenue was approximately $1.290 billion, 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 that 2023 performance continues to significantly outpace pre-pandemic levels. The 2023 third quarter revenue and earnings per share each exceeded the 2019 third quarter by over 25%.

Overall truck revenue was $1.174 billion in 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 difficulty over your 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 and load hauled via truck below what would be expected based on normal seasonal patterns. The below normal trend and the number of loads hauled via truck from June to July followed the pattern that started 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 a slowing U.S. manufacturing sector.

In contrast, sequential month-to-month revenue per truckload trends during 2023 had 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. Landstar’s normal seasonal patterns for truckload volumes have reflected an average sequential decrease of approximately 1% 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, our truckload volume in 2020 the 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 impact of the years of 2021 and 2022. The inconsistency in truckload pricing month-to-month has been very atypical from a seasonal perspective, 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. Yes, I mentioned earlier the change in revenue per truckload from June — from July to August and August to September were both better than normal trends.

At the breakdown — as to the breakdown of truck transportation over by equipment type, unsided platform equipment held up comparatively better than revenue generated via rent van equipment and other truck transportation services. The quarter over prior year quarter revenue comparisons for van are much more challenging that for revenue hauled on unsided platform, 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 on-site equipment increased 54% from its low point in May of 2022 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 experienced a relatively soft freight environment.

The year revenue per mile, which excludes fuel surcharges on bad equipment and on site 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 27, looking forward to expect little room for spot market decreases due to these cost pressures. That explain — that expectation has held true as revenue per mile on BCO van and unsided 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 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 was 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 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 more readily available truck capacity. The freight hauled by Landstar 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 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 2022 third quarter. There’s not seem to be an 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 freight 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 not pass the Jim Todd to comment on other additional P&L metrics regarding the 2023 third quarter performance.

Jim Todd: Thanks Jim. Jim G’s 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 2023 third quarter, as compared to gross profit margin of 10.2% in the corresponding period of 2022. In 2023 third quarter variable contribution was $187.4 million compared to $245.7 million in 2022 third quarter. Variable contribution margin was 14.5% of revenue in 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, and 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 to 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 2022 third quarter. Other operating costs were $50.2 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 increase provision for contractor bad debt partially offset by increased gains on sale of used trailing equipment. Insurance and claims costs are $29.5 million in 2023 third quarter compared to $31.4 million in 2022. The decrease in insurance and claim costs as compared to 2022 was primarily attributed attributable to a decreased severity of accidents during the 2023 period, and a decrease in BCO miles traveled in the 2023 period, partially offset by increased cargo plane 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 cost 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 decrease 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 2023 third quarter the provision for compensation under variable programs was $1.3 million compared to $8.1 million in 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 in cash capital expenditures were $50 million. Back to you Jim.

Jim Gattoni: Thank you, Jim. We don’t expect let’s change the overall freight economy in the 2023 fourth quarter compared to what we’ve experienced thus far throughout 2023. We also anticipate a muted peak season this year. Overall demand for freight transportation expect to remain relatively soft for the remainder of 2023, continue to drive truckload volumes significantly lower compared to 2021 and 2022. Directionally it is difficult to forecast truckload volume levels beyond the next few months as future economic conditions are very unpredictable. Yesterday earnings release make note that early October truckload cat was trending below historical sequentially monthly patterns. Given the lower starting truckload volume we have experienced at the beginning of the fourth quarter, we expect truckload volume from the 2023 third quarter to the 2023 fourth quarter to trend below normal seasonal patterns.

Additionally, due to how our physical year calendar works the 2023 fourth quarter has one less operating week than a 2022 fourth quarter. Given we expect to remain below normal quarter-to-quarter seasonal trends, truckload count at 2023 fourth quarters is forecasted to be 20% to 22% below the 2022 fourth quarter. Excluding the extra week of operations from the 2022 fourth quarter truckload count, the decrease in truckload volume at 2023 fourth quarter compared to 2022 fourth quarter is expected to be similar to slightly worse than our performance in the 2023 third quarter compared to the 2022 third quarter. We expect 2023 fourth quarter truckload pricing to be 6% to 8% below the 2022 fourth quarter, seasonally in line to slightly ahead of normal seasonal patterns.

We also expect revenue from our non-truck modes be similar to that of the 2023 third quarter. Based on the assumptions mentioned, we expect revenue in 2023 fourth quarter to be in the range of $1.225 billion to $1.275 billion and earnings per share to be in a range of $1.62 $1.70. The 2023 fourth quarter guidance incorporates a valuable contribution margin of 14.5% to 14.7%. And insurance and claim costs to approximately 5.5% of forecasted BCO revenue. And with that, we will open it to questions.

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Q&A Session

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

Scott Group : Hey, thanks. Good morning. So I want to try and understand the volume situation a little bit better. If you look, your guidance for Q4 volumes are going to be about 10% lower than they were in Q1. You go back historically, they typically grow I don’t know if 5%, 10% or something from the beginning to the end of the year. What’s — it’s hard to sort of understand, is this just the freight environment? Is this something about your model with the BCO camp that keeps falling so sharply? Is this– is it the auto strike? What do you think is really causing such a continued underperformance of seasonality on volume?

Jim Gattoni : The only thing I would touch on as it relates to our model is the variability in the volume we hauled for other 3PLs and trucking companies. As I described in my remarks when capacity is really tight, and it’s hard to find truck capacity, our agents are very good at putting trucks on loads. And so, the other 3PLs and the other brokers and truck companies reach out to us more frequently in a tight environment they do. So that would be a model differentiator. Other than that, it’s just the environment. I just when you look at what’s going on in manufacturing and in the U.S. it’s been soft all year it’s since March has been negative. So I just don’t think that demand is there and that but I don’t think it’s anything specific to the model at this point.

I would also say coming to October, we have so I had mentioned that our six sequential trend from September to October is actually below normal season as it relates to truckload volume, part of that clearly is due to some of the automotive plants shutting down, but that’s not entirely it. It’s contributing to that seasonal underperformance from September to October. But other than that, it’s just — it feels pretty much economic on the demand side.

Scott Group : Okay. And then I know it’s probably hard to predict. But when do you think you have a shot for revenue per load to start inflecting higher year-over-year? Do you think — would you expect that rates and earnings could grow in 2024? Is that too hard to know. How are you thinking about that?

Jim Gattoni : Well — you look at the spread, what could drive — if demand doesn’t pick up, the only thing that’s going to drive rates is the spread between contract and spot rates, right? But right now, the gap looks like it’s maybe $0.40 between contracts being hired in spot. So in our world since we’re heavy spot eventually, that kind of transitions and the shippers start taking advantage of the spot market discount to contract rate. Haven’t really seen much of that happen yet. And if you look at the year, that gap has — it’s tightened a little bit, but not as much as I would expect. So we’ve been sitting on this gap for like 8 months it’s kind of hard to predict when that will turn. Assuming demand stays relatively flat, it’s going to turn where the shippers start coming back into the spot market to get a little bit of a discount.

But I don’t see that happen. We haven’t seen it happen yet. But the expectation is that’s part of the normal cycle. My prediction now is sitting here, is I think in the second quarter, I said we’re hoping for a late fourth quarter, early 2024, maybe inflection of that gap. I’m a little more pessimistic today. I’m looking at maybe the our cycle might be instead of on the short end of the six-quarter cycle more to the eight, which puts us in the summer next year.

Scott Group : And just for — just one quick thing to clarify, that $0.40 gap with contracts still above spot. What’s normal in your mind? And just do you think there’s further risk to contract from here?

Jim Gattoni : I think that’s a very large number, the $0.40 on a $2 revenue per mile. So to be honest with you, I’m a little surprised that, that gap is holding as large as it is. Maybe it’s because shippers are scared to start playing in the spot market. They like the consistency of the contract rates. And the contract rates, the other thing that looks good in a shipper’s mind, the contract rates have been coming down at the same time. So they’re looking at their history, thinking hey, I’m getting a better deal today than it was 12 months ago. So you might be hesitant to take a little longer to make the shift back in the contract, which to me might delay this is why I think it might be delayed a little longer. I’m a true believer in cycles, it’s going to cycle back and Scott, I just don’t know when.

Right now, I’m going to say it’s going to be more toward the end of the typical peak to trough cycle, trough to peak is going to be more of the eight quarters right now as opposed in the short line where it’s six quarters.

Scott Group : Make sense. Thank you for the thoughts, Jim. Appreciate it.

Jim Gattoni : Yeah.

Operator: Thank you. We have the next question coming from Jason Seidl of TD Cowen. Your line is now open.

Jason Seidl : Hey, thanks operator. Good morning, Jim and team. Jim, going back to that $0.40 gap between contract and spot. You said it’s held in there for about eight months. When is the last time you’ve seen that something hold that long on a cycle?

Jim Gattoni : I don’t think eight months is that unusual. I think the fact that we’re not seeing it move directionally much is more of the — it’s more of the indication. I mean when you think about it, if the spot versus contract is tight, it’s not that far apart and shippers are sitting on 12-month contracts, that could last all 12 months, right, before they jump in a spot market or even if they do. So I don’t have a good historical perspective because this — it’s a little to me, it seems like there’s a larger gap than we’ve had historically. And again, as I’ll say, I’m a little surprised that that it hasn’t pulled back. Like clearly, 2019, there was a gap, but then that was disrupted by the pandemic. That cycle was kind of disrupted by the pandemic.

So it was a shorter-term where the — so it’s hard to look back when you look back at 2017, right, when we had the massive ELD, the run-up because these were getting implemented. At the same time, industrial production was cleaning up. So that disrupted that cycle. So there’s been a lot of disruptions in the cycles when I look back five or six years, and so it’s really hard to look at that as a trend.

Jason Seidl : All right. That makes sense. And you talked a little bit about in terms of pricing in the fourth quarter expectations a little bit above normal seasonality, I think, was your line. With a muted peak season and an auto strike, so should we conclude that you’re finally starting to see a little bit of capacity coming out of the marketplace?

Jim Gattoni : It’s hard for us to measure the capacity to come out of the marketplace. We read kind of what you read about bankruptcies and truck covers shutting down. What we aren’t seeing is load acceptance rates dropping. We’re not seeing that. Some of the stats we’re looking at, it doesn’t show that a significant amount of capacity is coming out of the market yet. But we are hearing about the capacity coming out. I just look at our BCO count, right, being down 39% because things are more expensive. Clearly, there’s capacity coming out right now, but I just don’t believe that it’s had a significant impact on the supply-demand equation to start turning the needle on that metric, supply and demand.