Landstar System, Inc.
Q1 2021 Earnings Call Transcript

Published: 22 Apr 2021

[Operator:]

Good morning and welcome to Landstar System Incorporated First Quarter 2021 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; Rob Brasher, Vice President and Chief Commercial Officer; 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 B. Gattoni:]

Thank you, Missy. Good morning and welcome to Landstar's 2021 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, included but not limited to, the operational, financial and legal risks detailed in Landstar's Form 10-K for the 2020 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. Our 2021 first quarter financial performance was by far the best first quarter performance in Landstar history. First quarter revenue was a first quarter record while gross profit, operating income, and earnings per share were all time quarterly records. During our year-end 2020 earnings conference call we provided 2021 first quarter revenue guidance to be in the range of $1.100 billion to $1.150 billion and diluted earnings per share to be in the range of $1.55 to $1.65. Our initial guidance anticipated the number of load hauled via truck in the 2021 first quarter to exceed the 2020 first quarter in upper single digit percentage range and revenue per load on loads hauled via truck to exceed prior year in a mid-teen percentage range. Actual first quarter results were significantly higher than anticipated, as both the number of loads hauled and revenue per load on loads hauled via truck exceeded the high end of our guidance. Revenue in the 2021 first quarter was $1.288 billion and diluted earnings per share was $2.01, both significantly above the high end of the range of our earlier guidance. Loads hauled via truck in the 2021 first quarter increased 13% over the 2020 first quarter, while revenue per load on loads hauled via truck increased 24% over the 2020 first quarter. Truckload volume by month in the quarter increased over the prior month by 12%, 8%, and 17% in January, February, and March respectively. February and March truckload volume were impacted by the severe storms that hit the Central U.S. in Landstar’s last week of fiscal February. We estimate the storms decreased truckload volume by approximately 7000 to 8000 loads in February. We also believe, though, that Landstar hauled most of those loads in fiscal March. Under that assumption, the percentage growth in load volume each month in the quarter compared to the prior year month was rather consistent and within a range of 12% to 14%.

[Operator:]

Thank you so much. . The first one is from Bascome Majors of Susquehanna. Your line is now open.

[Bascome Majors:]

Yeah, good morning. Congratulations on the results and thanks for taking my question. Maybe on the cost side, just from a modeling perspective, can you give us a little more fidelity on where you are accrued for the cash incentive comp and the stock comp given the start to the year on an annualized basis and just how that might trend quarterly just for our cost projections?

[Jim B. Gattoni:]

Well if we put it in perspective in the first quarter, okay, we typically our first quarter EPS is the lightest EPS of the year, right, to the other quarters. And the simply put it in perspective to kind of -- if you just take the $2 that we earned and multiply it by 4, you're looking at maybe an $8 EPS that would drive about 25 million to 26 million additional cost into the P&L for the variable comp programs, both the incentive comp and the equity comp. So I would look at it this way, if you believe that this was our either this quarter EPS was equal to the next three or maybe a little higher, you'd see $26 million, $25 million to $26 million increase in SG&A over 2020.

[Bascome Majors:]

And, on a normalized basis with 2020 be something that we could think about being normalized?

[Jim B. Gattoni:]

So I think actually from an incentive comp standpoint, yes, that was about $8 million, which is typically what we have in a year, that's kind of the target. But instead the equity comp was rather low because our expectations of performance, we weren't hitting targets on the equity comp, but we're looking at the equity for 2021 and now there's some performance units now that are actually going to look like they're going to vest or prior they weren't. We were low I think all last year, I want to say that we were at $4.5 million. You would see that climbing up to $16 million to $17 million. So the combination of those two get to the $26 million. The will drive a little more volatility in that equity comp because we switched a variable comp equity programs about 2012, 2013, and they kind of ride with our projections over the next four to five years. So it's not just a one-year event, our performance it's actually just over five years so we do five year projections out and as those have changed, we change the estimation of what's going to vest. And clearly coming into the end of 2020, we did not anticipate looking at something could be upwards of $8 in EPS in 2021. And that caused the revision of the upward equity comp.

[Bascome Majors:]

Maybe I'll ask one more from a high level, I mean, the -- to script an environment that would be better for your business model in the way that this year is starting to play out, can you give us some perspective, as you have in recent quarters, about how unusual this is and as things start to mean revert whenever they do and however they do, how the financial aspects of the model need to kind of go back to the baseline? Thank you.

[Jim B. Gattoni:]

Yeah, we are talking about some of the unusual things. I mean, when you're talking about the first quarter records, that is very unusual because typically our first quarter is seasonally softer than the other three quarters. And to come out with gross profit and operating income, EPS all like all time quarterly records, that's unusual. From an operations metric the other thing that's unusual, the trailer demand that we have coming through the first quarter is usually our lighter quarter for demand. We're kind of setting up for the rest of the year. And our trailer guys, here on the fourth floor are just trying to get trailers from almost anywhere, as you know. So that's pretty unusual right now. So there's high demand for equipment in the marketplace. In some cases, we're having difficulty satisfying some trailer demand that typically is a fourth quarter phenomenon, not a first quarter phenomenon. The high rates climbing into the -- coming into March, there's a lot of things unusual right now. But I'm not -- I don't know if it's not going to continue, at least for a while now. My pessimism would typically say, and as I said in January, that I would expect we're in a typical cycle and that cycle goes 12 to 18 months and we'd see softness coming into the back half of the year. Based on the dynamics we're looking at right now my pessimism, I'll still say it's going to slow down back half, but not back up. I think, maybe after the third quarter but I'm feeling a little bit more like this is an 2018 to 2019 transition where 2018 was relatively good throughout the year and 2019 really saw the softness after the first quarter. Some of the things I think that will carry us to is if things are getting more expensive through insurance costs today are up 200% compared to where they were. Claims costs, whether it's claim costs or premiums cost and you can read a lot about what's going on with driver wages and the asset base guys are trying to do anything they can to get drivers and seats. So they're driving wages up so I think, we will probably see a normal cycle, whether it starts in the fourth quarter or sometime next year. I just don't see the spot market pulling back as far as the 2016, 2015 numbers or 2017 numbers due to the costs that have come into the system. So I think -- in my thing, I'd say we're going to see some kind of normal cycle, but not to the extent it's going to get rid of all the benefits we're getting today. And in this environment we build relationships with new customers. Customers who can't find trucks come to us. And I think all that benefits our future into pulling not having a -- we're not looking at 2008, 2009 crash, right, we're looking at just a normal cycle where spot rates pull back a little bit. So that would be my take on where we are and what I see going out.

[Bascome Majors:]

Appreciate the candid response there, Jim, I'll pass it on to the next guy.

[Operator:]

Thank you so much. Our next question is from Jack Atkins of Stephens. Your line is now open.

[Jack Atkins:]

Yeah, good morning and congrats again on a great quarter here. So I guess, Jim, if I could maybe start and maybe think about cross-border activity, which is really kind of coming into focus here more and more especially given the activity we're seeing with rail M&A or proposed rail M&A but, you guys really have a unique asset down in Laredo with your cross border facility there. Could you just talk about, your long-term sort of vision for cross-border activity and sort of how that plays into the investment process over the next several years, because it really seems like you guys are at an advantage position there to take it to really benefit from what we're seeing with regard to near shoring and things like that?

[Joe Beacom:]

Yeah, Jack this is Joe. I'll take a crack at that. So I would agree with you, when we built our facility in Laredo in 2017 and previous to that we really didn't have a well-established cross docking capability. We didn't have a customs brokerage capability. We had fewer trailers in markets and while a good service offering, we saw the opportunity that it could be better. And we've seen that in the quarter, volume across the border for us was up about 18%. And we're not -- we're nowhere clear what we could do. We've still got capacity there. If we add people, add shifts, and I think we continue to invest in trailing equipment in the market as we see the opportunities and the revenue grow. So and again, there's room to move there and I'd also say that we've -- while we don't have company facilities and other points across the border, we do have similar capabilities in third party locations. So we're not just stuck with Laredo as the only gateway where we're doing similar things in California, Arizona, and across the border in Texas. So like what we're doing there, dedicated salesforce to support that effort now, and it's only gotten stronger. And I think, you'll see other people trying to do what we're doing. But I think we've got a lot of carrier relationships south of the border that are very strong, that we work with those carriers provide visibility. And I think things are going -- couldn't be going better down there Jack.

[Jack Atkins:]

Yeah, no, absolutely. And then I guess maybe one other and this is just another high level question and I'll leave the cyclical questions for others. But, I think recently you guys had an opportunity to purchase an agency, sort of bring that agency in house. And I think maybe the idea is to use that as a platform for bidding on larger freight packages. Could you maybe talk about, that opportunity set over the over the next several years, as you sort of -- I think people traditionally think about Landstar as being more of a spot market focus player, but do you see some opportunity to take market share with larger contractual related customers over the next few years, if you could just talk about that for a moment that'd be great? Thank you.

[Rob Brasher:]

Sure Jack, this is Rob. Yeah, so we have purchased the agency and we started a company called Landstar Blue. The initial reasoning for doing so was simply to test and develop new technologies, and also go out to committed contractual freight opportunities. And we absolutely believe it fits well within our model because as you and everyone else points out, we play heavily in the spot market. But as we go out and develop these relationships with customers on a contractual committed capacity standpoint, it also brings other opportunities. It brings other opportunities in the spot market for those customers or brings other opportunities in other modes. So we absolutely love to continue to grow that, we get deep relationships with our customers, and better understanding about their needs, and quite frankly we're embedded more deeply with them, and work to help them grow with everything that we have to offer as a company.

[Jack Atkins:]

Okay, that makes sense. Thanks again for the time.

[Operator:]

Thank you so much. Our next question is from Todd Fowler of KeyBanc Capital Markets. Your line is now open.

[Todd Fowler:]

Hey, great. Thanks and good morning. Jim, just want to follow up on your guidance commentary. It sounds like for second quarter the revenue per load expectations is that it's going to be flat with March. I understand that March was elevated. Typically, I think we think about some seasonal build throughout 2Q. So can you kind of square a little bit how you're thinking about the seasonality into the second quarter?

[Jim B. Gattoni:]

Yeah, I think when you do what -- tracking Q1 to Q2, you're really seeing maybe historically a 1% bump. But taken out 2020 obviously. I look back 2016, 2017, 2018, 2019 just seeing that 1% bump, what we're basically saying is we're going to see a mid-single-digit increase over the first quarter because of we're going to run. We think that we're going to stay elevated at the March rate, which would put us in that mid-single-digit growth over the first quarter. So it's actually the seasonally better, but it's really just because we had that jump up in March, right. So like, just to repeat in summary is historical, last four years, excluding last five years, excluding 2020 we would see about a 1% bump in rate. But we're looking at mid-single-digits because of the way March acted and how March spiked up. And we don't see that pulling back at least and the things that drove it, even we believe part of that was from disruption early in the month. It just continued through April. So we're anticipating a good strong number throughout the rest of the April, May, and June periods.

[Todd Fowler:]

Yeah, okay, that makes sense. And that's consistent with the numbers that we see. But it sounds like if we do see some seasonal strengthening in May and June that that would be -- your guidance could be conservative, if we see upside from where we're at right now?

[Jim B. Gattoni:]

That would be a true statement.

[Todd Fowler:]

Got you, okay. And then I just wanted to follow-up, thinking about the mix of your business, in the first quarter van revenue was over 70%. Obviously, you're seeing a lot of strength in the substitute line haul offerings. Can you talk a little bit about how much of that is by design, I know, you've been investing in the trailer pool, you've got some initiatives, obviously, to kind of grow there. Is that something that you expect that mix of business to remain at that level going forward or as the industrial markets come back do you think that you see unsided and platform kind of get back to that normal 35% or so of revenue, I think that would be helpful? Thanks.

[Jim B. Gattoni:]

Yeah, I think it's more of the environment is driving us. Like the one thing good about us we live in a spot market, we go to the demand, right. And if the demands in the e-commerce we end up there, if the demand is on flatbed, we end up there. And we're very reactive, and we're very good at attacking the markets that are hot. So it's not a deliberate move to drive more van business into the system. It's just a very attractive market right now. So when you look at the e-commerce stuff or what we call the substitute line haul business or the consumer durables and stuff in van, that's really where -- that's really where the shift in you're seeing that a little bit of growth on the van percentages, as compared to where the flatbeds are. I wouldn't say that we're deliberately doing that. I think it's just the way -- it's the way the model works. Clearly we have more agents moving van freight. So when the van freight gets hot, they penetrate that really good. And on flatbed side, those guys are guys running flatbeds on the agent side. When it starts to heat up, don't get in there but right now it's just not as good as where the van play is.

[Todd Fowler:]

Yeah, okay, that makes sense. That's helpful. Thanks for the time this morning.

[Operator:]

Thank you so much. Our next question is from Stephanie Benjamin of Truist. Your line is now open.

[Stephanie Benjamin:]

Hi, good morning.

[Jim B. Gattoni:]

Good morning.

[Stephanie Benjamin:]

Hopefully, you could just touch on the unsided side of your business on the LTL side, nice acceleration from the fourth quarter, maybe just what you're seeing and from the overall industrial economy standpoint and really your view on that side of the market as we move through 2021?

[Jim B. Gattoni:]

Yeah, it's just -- it's more general demand than it is like specific sectors or anything like that. That's why when we -- on the read through we kind of talk about Mel's machinery got a little bit better, but not to the point that it's great right now. But if you were to look at our customer list of what's driving the improvement on flatbed, it's just there's 500 customers that are contributing to that growth. So it's more of a pretty diversified group of customers that are helping improve that machinery business compared to where it was six or eight months ago. But it's really hard to talk to specifics of whether it was specific to metals or machinery, because it's kind of -- it came equally across from various customers and industry sectors that drove that little improvement of flatbed that we saw as compared to last year.

[Stephanie Benjamin:]

Absolutely. Thank you. And then -- go ahead.

[Jim B. Gattoni:]

Oh yeah, I think you also asked question about LTL.

[Stephanie Benjamin:]

I did.

[Rob Brasher:]

LTL as substitute line or LTL as true LTL?

[Stephanie Benjamin:]

Honestly, both sure.

[Rob Brasher:]

What do you got kind of in the LTL markets, we're reseller that you've got other disruption, right. So it kind of follows the same thing, the consumer spending is high, the LTL they are stressed. And right now, that market that we deal with so we're seeing a lot of that overflow into other areas, because they're stressed with their capacity. They're not taking on any new customers, new opportunities. The rates are going sky high. They're kind of limiting their services in areas and increasing in others where they can maximize it. So we've been able to -- we've got great partnerships with our LTL companies and we've been able to leverage our relationships to get exactly what we're doing in the spot market onto their side and help increase their profitability.

[Jim B. Gattoni:]

And on the substitute line haul that's where I was coming out of the end of the year into January, I was a little more pessimistic on that one. And it's why maybe part of the reason why we significantly exceeded not the entire reason I did just think we had a great quarter. But if anybody recalls the conversations for me on January, I would have expected the subs through line haul too slow as e-commerce demand coming through the system. So I was expecting not to slow down a little bit and it didn't. So I got that one a little bit. It wasn't actually correct on my assumptions there but the anticipation now and what we're hearing from the capacity or the companies who provide that freight to us is that they expect that to continue further along the year, into the year. So another reason why I'm taking my cycle thing and saying maybe it's late this year and next year, because it does feel like that e-commerce business will continue. And as compared to my prior comments back in January, I thought it would pull back a little bit as they optimize their systems and get it more routine. Right now there's still more freight coming through the system. So I think it's going to stay elevated for longer than I thought.

[Stephanie Benjamin:]

Great, no, that's really helpful. And then more is just a housekeeping question. Can you remind us what the normal seasonal pattern for gross margin is from 1Q to 2Q and to the best that you can kind of talk through that now, what are you kind of looking at for this year, just given how the dynamics are shaking out?

[Jim B. Gattoni:]

Well, seasonally typically you'll feel a little bit -- it depends on who's calling the prey right. In the first quarter you tend to see a little bit improved gross margin if more freight is being hauled by the BCO, as opposed to the brokers. But the back three quarters were kind of, there's not a lot of consistency there and come up with a gross margin trend or anything like that. Because sometimes you're in a tight market, we get more broker freight, but the margins get squeezed. And then there's less fixed business. So your margins get squeezed a little bit more. So it's really hard to speak about those trends. I will say, for our second quarter estimate, I'm using a 14.7, a 14.9 gross margin, which is slightly ahead of the first quarter. And the reason I believe it's going to be a little ahead is because if you recall, I made a comment about BCO utilization being down in the first quarter, because we had that one, one and a half weeks of storms, where the BCOs kind of idled themselves. So, I don't expect to have that impact so I could see BCO utilization climbing into the second quarter. And, with a bottom on the 14.7, which is what we did in the first quarter, and an upper end of 14.9 if BCO utilization stays higher in the second quarter. So that's the second quarter, beyond that I would expect that if the conditions stay like they are, I would expect 14.5 to 15, throughout the rest of the year.

[Stephanie Benjamin:]

Great, really appreciate it. Thank you, guys.

[Operator:]

Thank you so much. We have two more questions on queue. . Our next person on queue is Scott Group from Wolfe Research. Your line is now open.

[Scott Group:]

Hey thanks, good morning, guys. Jim, you had a comment earlier about you weren't -- you didn't go into your thing you do over $8 of earnings. If we just assume that the back half of the year is similar with the second quarter, it'd be closer to $9 of earnings. Is there something wrong with that assumption that the back half should be similar with, given everything that you're saying?

[Jim B. Gattoni:]

There's nothing wrong with your math. I'm just conservative and pessimistic. I mean, look, if you look at our trends over the last 10 years, the first quarter is usually softer. And if you just assume that Q3, Q4, Q5 does 2.20 to 2.30, you're -- it's a valid comment. You know, you're talking to a guy who tries not to get ahead of everything. It would be -- yes, it would be somewhere in the mid to higher 8 as opposed to just $8.

[Scott Group:]

Right. And so, I mean, one of the things that stands out here is the net operating margins, well above 50% now, and I guess I want to think to sort of the other side here, if and when rates start to normalize, can you stay above a 50% net operating margin or do you think we normalize back below that 50% as we think about what could happen to earnings when rates start to fall if that happens?

[Jim B. Gattoni:]

I would again, remember who I am. I always take the pessimistic view. Absolutely. I think we'll pull -- not that we will but yeah, there's a good chance that we will pull back under 50. I mean, we just -- if you – well, it's easy, if we continue to push out $180 million of gross profit a quarter we're going to be over 50%. Right. So that's really how you got to look at it because we don't have to grow the infrastructure. Other operating costs, SG&A, insurance is volatile, right? That one can drive it up or down. So that one could cause a miss to the 50% and depreciation. Though we do have continuing investments coming across in technology but our goal was to get the 50% was to do a mid-single-digit gross profit growth and we just blew it out. If gross profit stays elevated yeah, we can stay at 50%. If we cycle like 2018, if we cycle back the way -- if you believe that we're in this year looks like 2018, and we're going to follow that path of 2019 we will pull back below 50% sometime in 2019 -- 2022, I'm sorry.

[Scott Group:]

Okay, and then just last question, everyone is talking about drivers and it's everywhere beyond just the trucking world. Why so much success on BCOs right now?

[Joe Beacom:]

Scott, this Joe. I think Jim hit on it in his comments. We've done a little bit better job bringing trucks in the door. But we've done a really nice job of keeping those that are here. And I think a lot of that is environment. I think we've done some things internally with how we've structured our retention efforts. We've done some things on how we've deployed tech to help them be more productive right and to run their businesses better. We've created field operation centers that are not yet fully deployed, but aim to make Landstar which is a large organization feel small when you're an owner operator, right. So just provide services differently. So, it's really -- it's largely around the environment and the retention effort that's here. And just having a pretty good network of support, both from employees and our agent family. The van business strength and the drop in hook clearly helps. All those things are really coming together to help on the BCO side. And then on the carrier side, again, I think there are -- the environment helps bring carriers and small carriers in particular, who maybe were on the sidelines off the sidelines, based on the strong rate for rate per load. And that's I think going to continue to be seen as we move through 2021. I like the way our capacity offering has grown. And I think I don't see any reason that it wouldn't continue to grow as we move through the year.

[Scott Group:]

Okay, thank you guys.

[Jim B. Gattoni:]

Yup, take care.

[Operator:]

Thank you so much. Our last question on queue is from Scott Schneeberger of Oppenheimer. Your line is now open.

[Scott Schneeberger:]

Thanks very much. Good morning. Congratulations. I'm just curious, it looks like it's going to be a very robust cash flow year, free cash flow. I'm curious what your thoughts are with regard to CAPEX and use of cash and just anything on the technology initiatives and/or trailers that you're going to be doing differently, given the strong start to the year?

[Jim B. Gattoni:]

No, we are definitely going to be adding some more trailing equipment over the next couple months into the system to try and satisfy the current demand and be ready for peak season. But those you'll see that we borrow to get those so it doesn't really impact the cash when we're buying those. So it's really tech spend and it's not going to be anything different than last year. So there's nothing unusual in our capital allocation compared to last year. So it's really, you're looking at this run rate would probably be about 300 million in cash flow or a little bit more. Now we look at share buybacks versus dividends and as you know and we talk about it all the time, as the stock's running up we don't chase the run up, we let investors get in when they want to get in, and then when it settles we'll get in. So again, management really likes the buyback programs. And if at the end of the year we sit on it, we're looking at our cash balance and looking at projections, what's going to happen into the future, we could end up doing a dividend. So our philosophies haven't really changed but there's nothing unusual in the year that we're going to start, no big CAPEX that would be abnormal in the situation we're in. Like I said, we will be adding some trailers, but that's through capital leases.

[Scott Schneeberger:]

Thanks. And then I guess I kind of have to ask, it seems the demand is so strong right now, but the infrastructure bill is going to be off in the distance when it applies. But any positioning you're doing now or getting set up for that, with regard to particularly down sided business facts?

[Jim B. Gattoni:]

No, typically anything like that whether it is road construction or bridges or stuff like that doesn't directly impact us, but it absorbs the flatbed market, the capacity gets tighter. So indirectly it helps us a lot, right. Because we have -- we're doing a billion dollars worth of flatbed every year, and one of the biggest providers. So anything that tightens that flatbed market, it's more of an indirect impact to us in a direct way. We're not staging or setting up or having significant conversations with the entities that might be taking advantage of the infrastructure bill. So I would say that it's just, it's good for everybody's on the flatbed, if they start doing if they pass an infrastructure bill, and eat up that flatbed capacity.

[Scott Schneeberger:]

Understood, thanks.

[Jim B. Gattoni:]

Yeah.

[Operator:]

Thank you so much. At this time, we don't have any more questions on queue. You may continue, Mr. Gattoni.

[Jim B. Gattoni:]

Alright, thank you, Missy. And thank you and I look forward to speaking with you again on our 2021 second quarter earnings conference call currently scheduled for July 22nd. Have a good day.

[Operator:]

Thank you so much for joining the conference call today. Have a good morning. Please disconnect your lines at this time.