Landstar System, Inc. (LSTR) Earnings Call Transcript & Summary

Hey, everyone. Welcome back again to the trucking, rail and logistics segment. I'm your transportation analyst, Jason Seidl from Cowen. This is Cowen's 13th Annual Global Transportation and Sustainable Mobility Conference. Cowen is honored and pleased to have Landstar present. Representing Landstar is President and CEO, Jim Gattoni. Jim, welcome.

I know you guys yesterday filed an 8-K, and I know you'd like to talk a little bit about that and update some investors. So I'll turn it over to you.

Well, thanks, Jason, and a pleasure being on. We -- back in the end of July when we were putting out our third quarter estimate, we were looking at trends that would imply that the quarter was going to be a little bit soft -- the third quarter was going to be a little soft with volume -- truck volume down in the mid-single digits compared to prior year and rates down about similar. As we roll toward the end of July and started heading into August, we saw things significantly start to pick up so much that we decided that we would file an 8-K to demonstrate or show exactly where we think the quarter is coming out. Our original -- what's in the 8-K shows just revenue and EPS for the quarter. We originally, at the end of July, said that the quarter revenue would be $885 million to $935 million. Based on that run rate for the first 3 weeks of July when we were still below prior year levels on both volume and rate, that $885 million to $935 million has now been lifted to $1.02 billion to $1.06 billion for the third quarter, and it looks like it continues to strengthen into September. On the EPS side, we were, I believe, $1.11 to $1.17. With the increase in the revenue and the performance, we are now taking that to $1.40 to $1.46. And it's all driven on just the demand that was totally unexpected that started creeping in, in mid- to late July. I think the one thing we look at is we look at where that stuff came from. And I know that Jason will get into those conversations as we move into the Q&A. But what's surprising, seriously surprising, totally unexpected is that August gross profit for us is the second-highest-ever gross profit in the history of the company, only behind 2018, which is...

That's for August? Or is that just monthly?

Monthly August, August over -- just for August. Not year-to-date August, but just for August. And July was slightly behind 2019, but August is over 2019 and getting close to what our record August of '18 was.

Wow. Well, it's interesting. We had a company on yesterday that talked about -- you mentioned a surprise. It was not only the surprise, but they said the customers were surprised because the customers would tell them this is what we're expecting next week, and then that would be off to the low side, right? And it just -- it seems the cascade here. So I think a lot of people have been caught off guard. And that sort of goes to my first line of questioning, right? When you look at spot truckload rates, exceptionally strong. Depending on who you ask, they're right around peak 2018 levels. Trucking is, as you know, supply/demand-driven marketplace. Is this more supply, more demand, a little bit of a mix? What's your opinion on that?

Well, it's clearly a mix. When you look at -- look, we're -- Landstar is a company that's tied heavily into U.S. manufacturing. And the U.S. manufacturing index was 8% lower in July of 2020 than it was in 2019. So I can't sit here and say it's 100% demand. I think you've got some shake-up on the capacity side also. And several things drive that, right? First, you've got drivers who may not want to be driving due to COVID. They may be old. They may live with someone who's at high risk, and they may not want to share a COVID infection with someone in their household. So you have -- some of our BCOs are still a little hesitant to get on the road. And I would imagine that would transpire throughout the whole industry. So you might have drivers on the side -- sitting on the sideline still. You had the low pricing and stuff coming out of April and May that kind of probably shrank some fleets, right? And then on top of that, the insurance WAC with -- increase of insurance premiums is over 200%, which isn't really -- could turn a profitable company unprofitable within a year. So I think there's a little bit of a capacity tightening. I know there's some capacity tightening, with the same thing coming across -- as manufacturing isn't really moving that great. So that's -- I think that's driving some of that spot market. The other thing is I still think we're sitting in a little bit of disruption as everybody started their -- opened up their plants again and started manufacturing. I think that created some type of disruption where those smaller carriers who stepped away, now the manufacturers are scrambling to find trucks, and the way to do that is the spot market. There's also industries that didn't really fade too much like consumer durables or retail or grocery stuff during the April-May time frame, our consumer durables kind of fell off because our consumer durables is stuff that lasts more than 3 years is we're really hauling truckload. That has come back strong. What we put in there -- for some reason we put in there that substitute line haul business. The e-commerce companies -- carriers use us when there's excess freight running through their networks. And we're getting a lot of freight from them now to move freight between their DCs, and that's from the e-commerce boom. So that's on the demand side. On the other demand side, automotive has come back. Building products has come back. And our -- like I said, consumer durables all came back stronger than compared to where they were during the peak. And the soft spots are still machinery and mounts. We're still seeing softness there. Whether it's the Caterpillars or the heavy machinery or steel is driving the -- continue to drive the softness. So when you look at it -- when I think about the spot markets, at whether it's supply and demand, I think it's a little bit of disruption still. I still think there's some pretty strong industries driving it, like e-commerce. And I also think on the capacity side, I think we're sitting with less capacity today than we were before the pandemic hit in March.

Interesting. Now when you look at some of those end markets, would you say that the ones that are a little bit of the lower side impact were flatbed division a little bit more than your dry van?

Absolutely. If you see where the strength is coming from, it's mostly on the van side. Van started to -- both volume and rates started to increase over prior year in July. We are still, I believe, for -- on the flatbed side, if I have the stats around here somewhere, which I happen to have the stats. On the -- so if you look at van for July, rate was 3% over prior year and loads were flat to prior year, but in August, it climbed to -- rate climbed 8% over prior year and loads climbed 6% over prior year. Comparing that to flat and the impact of machinery and metals, when you look at the flatbed side, the rate in July was 9% below prior year and volume was 5% below, so much worse than where the van side was. But in August, for the first time in over a year, the rate actually eclipsed prior year by 1%. So we're seeing improvement now as we moved into August on that, but our volume is still 4% behind prior year. So we're starting to see improving trends -- strong trends on the van side and improving trends on the flatbed side.

Perfect. Now we talk a lot about rising spot prices, and it's -- I think it's a lot easier for investors when they look at just a stereotypical truckload carrier, but you guys are far from that. You're a little bit different. Talk about how rising spot prices impact your business.

Well, it is -- we are unique in the way that we are both a motor carrier and arranger of freight. And on the motor carrier side, we are -- we have BCOs, right? We have owner operators, and those owner operators are paid a percent of the revenue. So as rate -- spot rates increase, the BCO makes more money and Landstar makes more money. For example, if a $1,000 load during -- in April, if a BCO holds $1,000 load, $1,000 being the charge to the shipper, that BCO gets $750. And Landstar gets 17% after we pay the agent 8%. If that load goes to $1,500, I mean, we're all sharing $500 more. So that's how -- so we have a fixed -- it's kind of a fixed margin play for 50% of our business. So as rates go up, we make more money on a per-load basis. As rates go down, we make less money. So that adds to the volatility, but the margin kind of similarly stays the same. On the other half of our business, when prices go up and it's driven by tightening capacity. If prices don't go up, shipper prices don't go up as fast as the capacity is charging us, we get squeezed on margin, which is right now. I think what we're seeing is PT rates are climbing a little faster than what the revenue to the shipper is, so you're getting a little squeezed on margin. Yet during the expansion time, during April and May when people are just looking for freight, we expanded margins. The one thing different about Landstar when it comes to that type of business when it goes on a third-party truck is the margin expansion or compression is split with the agent. So if we have a $1,000 load that goes on a third-party truck and the agent pays the truck $800, we share that $200 50-50. If margins compress and the agent can't increase rates to the customer and say we're going to pay $850 million to the guy, now we're sharing $150 50-50. So that's how the model works. And that's -- our compression is less volatile than a normal broker because we -- first of all, half of our business is on a fixed margin. And on the variable cost business, we share the compression or the expansion 50% with an agent.

Right. I think that's a great explanation for investors who weren't sure. Wanted to look in some other areas, really looking at your brokerage carriers. So the number of approved carriers in 2Q fell from both the end of the year and the prior year second quarter. Is this the results of just Landstar trying to keep their BCOs busy? Or is this just some guys leaving the marketplace to -- for maybe COVID or other reasons? And if that's the case, have these trends changed in 3Q any?

I think we are seeing more growth now from that low of April and May on the active carrier count. So we're starting to see that improve into August. But I think it was nothing more than the lack of freight in the system. And our BCOs -- as freight -- our BCOs is always going to haul -- they can only haul for us, so they're always going to haul -- there are certain amount of loads per month. And if there's fewer loads in the system, there's less available to the third-party trucks. And I think that's more what the indication is of why that went down as opposed to us forcing the -- not forcing, but trying to keep the BCOs loaded. I think they kind of do that on their own. And I think it's more just the lack of the shrink in the available loads during that April-May time frame, and I think that's probably why you'll see it climb back up here into the third quarter.

Yes. And in terms of BCO recruitment and growth at Landstar, where do you see that going? And typically, what's the best environment for Landstar to add to their BCO count?

Well, I think right now, we're kind of sitting in a great environment. You got high pricing and a lot of available freight. So I think what you're looking at, we've just grown BCO count to -- I want to say we were at -- we closed the year at 10,243. We're up about 200 trucks right now. I think we're sitting at 10,454. So I believe we were at a low when April-May hit. A lot of BCOs -- not a lot, but we had increased turnover. Guys just going to park the truck, sit on the sideline. So they come back, but sit on the sideline. So we were as low as 10,109 trucks sometime in April when pandemic hit. But once that hit and things started to pick up, recruiting got very good. And we're -- our turnover is a lot lower than it was last year. So I think it's -- I think we've got a strong next couple of months when it comes to that because I think our pipeline of freight is full, and I don't see that changing. I think your pricing looks good right now. We've also rolled out some more effective tools over the last year or 2 that might attract new BCOs that hadn't seen it before. We launched something called LandstarOne. So it's all in one app. It provides them everything they need to know about fuel stops and stuff like that. Where is the lowest prices. It shows them the discounts at the fuels. It also provides them all their available loads. And it can sort and search differently than it has in the past. So I think there's some -- hopefully, there's a little bit of a traction on what we're providing to them via the technology also.

I have a couple more questions, and I know some -- I have a question that just popped up here from one of the clients. [Operator Instructions]. But I think you also mentioned that you'd like to share a slide or 2 with the investors out there. I don't know if you wanted to bring those up now before we run out of time?

Yes. No, that'll be good. Just these slides will give you an idea of what the -- our business looked like from January 1 to now based on loads. So we always show this slide. This slide provides your average loads per day by month. And the orange -- I think that's yellow. The 2018, you can see where our average loads per day throughout 2018 by month, and then the black was 2019. And look what happened in 2020. I mean we finally in August eclipsed the 2019 monthly load count. Kevin, go to the one we've never shown before, the next one. This shows on a weekly basis of our dispatched truckloads compared to the prior year week. It's a dispatch. It's not necessarily processed, it's not necessarily delivered. But this -- and there is some error factor in here of maybe 10%. But take a look, we started off year-over-year what the pandemic did. For the first time we were talking about this in the second quarter call, we finally saw in the week 11 or week 10 there, we finally eclipsed last year's dispatch load count and things were looking really positive. And then they started closing plants and shut down the country, and our dispatch load count dropped to as low as 26% below the prior year. Now when you look at the rest of the chart, you can see how we picked -- the 13.9%, I think that was a timing thing. I think that was 4th of July. I think that's noted on there. So you can see on a week-to-week basis and how that trended into the last week. Kevin -- and that's on the number of loads, and then here's rate. You can see the rate has finally climbed over where it was last year. But as we said, Jason, you see it's not near the peak of 2018 on a per-load basis. If you look on a per-mile basis from our BCO standpoint, it does a little -- look a little closer, but on a per-load basis, we're not up there yet.

Now this is dry van and platform, correct?

That's combined. Yes, these are dry van, and both of these were dry van and flatbed. And then Kevin, can we...

Now if we looked at this as a dry van only, would it be closer to 2018?

On a rate per mile -- this is rate per load. On a rate per mile basis, I do have that. The -- I think it was July of '18 was -- Kevin, do you have those numbers somewhere? It was just sitting right in front of me. Well, here it is. It is in front of me. On -- so here on van, the peak, what I would call, it was $2.88 in July 2018. And today, it's $2.58. That is -- Jason, that is van BCO freight without fuel.

Got you.

On the flatbed side, our peak is -- again, was July 2018 at $4.42. And today, it's at $4.16. Again, that's flatbed BCO only with no fuel.

So getting closer, but not there yet.

Yes. We are not there yet. And then, Kevin, if you show the monthly on the price, you can see how big the impact was from the pandemic coming in through the 22nd week. But look how we've grown after week 31, and that shows where -- we were probably projecting out -- we were -- week 26 was the second quarter close, and week 27, 28, 29, is what we were using to come up with our projection for the third quarter. And as soon as we released, take a look at what happened to pricing. So this kind of shows a good -- it shows the depiction of what happened and why we ended up putting out an 8K that is significantly better than what we were projecting at the end of the second quarter.

Well, these are areas where you want to be wrong, though, right, Jim?

I love being wrong in this direction.

Same here. Well, listen, this is great. I have a couple more questions, and then I got one here. [Operator Instructions] You had paid some special, and you're not the only one, some special COVID bonuses this year. Just checking, were there any in 3Q? And if there were, are we done for the year given where freights come back?

Yes. We cut that -- we stopped that on May 29. And it wasn't a reaction to the pricing. Like, we live with -- the owner operators in Landstar, we live with price increases and price decreases all the time. Look at 2009, we did not do it. We didn't do it because that's really -- that's how the business works. What -- the concern was -- coming into March was how fast loadings were disappearing. And what that does is disrupt -- that would disrupt the BCO's life, right? He's sitting there going, "I used to run this route from Atlanta to Tampa and it's gone. Now I have to go onto the freight board and get loads maybe might be 200 miles away from where I usually was." So that $50 was really more intended not to offset the price decline, it was more to help them with some maybe additional empty miles that they had to drive to go find freight that they weren't used to doing. So once load started coming back and the plants started opening up, and it looked like we were getting a more consistent pattern in loadings, we stopped that. And there was none in the third quarter, and I don't anticipate any in the future, unless we end up with the -- another rapid decline, like we saw in mid-March to -- in volume in mid-March to April.

Let's hope we don't have to go back to that. I think we think we all want to put them in the rearview mirror, as they say. Look, you guys have historically generated a really good amount of free cash flow, and you've used a portion of it to repurchase your shares. You didn't purchase any in 2Q. I guess, how active have you been lately? And what should we expect for the remainder of the year?

We haven't been active. We're still sitting on that prudent sideline because it's so unpredictable into the future. Now recently, with what's happened in our business, I think we're probably a little bit more comfortable with -- coming out of June -- when you're still 15% high in revenue, you're not really jumping to spend a lot of cash coming out of June. And July wasn't that -- it was much better, but still not great. Now we're looking at a situation where it would -- it might open up the appetite to get back in the market. But I don't it's -- I think it's still premature. We're still trying to get our feel for how long this will last. So I'm not sure you'll see anything in the third quarter. And look, we're going to wait and see to get through the third quarter before we make a decision on what we're going to do there.

I guess, we all should look forward to you buying back stock because it means the market has gotten that more -- that much stronger and more consistent. I'm going to hop to one of the client questions here to make sure we get them in because I just got a warning from these guys that where we need to be wrapping up soon. It says you mentioned August was the second best in history. The implied gross profit per load in your preannouncement is roughly $310 per load, which is reasonably close to the 2018 peak $325 per load. Is that the right way to think about your profitability as the cycle improves? Can it go higher than that level?

It absolutely can go higher than that level, and it would be the right way if you're using precise numbers, yes. We look at it we look at it that way also. We just -- we look at the gross profit per load based on the services that are provided, whether it's on a BCO, whether it's on a broker, whether it's air, land or ocean. But yes, that is in a very top-sided look, and I would say that that's probably pretty valid.

Perfect. Well, that's all the questions we have. Before I go, I'd be remiss without thanking the men and women of Landstar who have been continually working out there in this pandemic, keeping our supply chain moving. I will express my gratitude towards them, Jim. Again, I've always had a deep appreciation, as you know, coming from the trucking space before I became an analyst. So please extend my gratitude towards them, and thank you for spending the time with Cowen and its clients.

No, always our pleasure, and enjoy the rest of your conference.

Will do. Take care now.

Yes. Bye.