Landstar System(LSTR) - 2022 Q3 - Earnings Call Transcript

Financial Performance - The third quarter of 2022 marked the best financial performance in Landstar's history, with revenue approximately 5% above the third quarter of 2021 [6] - Earnings per diluted share increased by 7% compared to the third quarter of 2021, aligning with the low end of guidance [7] - Gross profit was $185.7 million, down from $189.2 million in the same period last year, with a gross profit margin of 10.2% compared to 10.9% in 2021 [25][26] - Variable contribution margin decreased to 13.5% of revenue from 14% in the previous year, primarily due to a higher percentage of revenue from truck brokerage carriers [27] Business Line Performance - Truck revenue was up 1% year-over-year, driven by a 1% increase in truckload volume, while revenue from other transportation modes surged by 49% [7] - Revenue per mile on van equipment decreased sequentially since peaking in February 2022, with a notable decline in August 2022 [13][14] - Revenue per mile on loads hauled by BCOs via unsided equipment reached a record high, increasing by 5% year-over-year [17] Market Performance - Total truckload volume in July was 5% higher than the previous year, but August was flat, and September saw a 1% decline compared to September 2021 [18] - The growth rate in load count for key industry verticals slowed in the third quarter compared to the second quarter [19] - Substitute line haul volume decreased by 27% compared to the third quarter of 2021, attributed to softer consumer demand [20] Company Strategy and Industry Competition - The company continues to invest in technology and facilities while returning cash to shareholders through stock buybacks and dividends [45][46] - Management anticipates a challenging first half of 2023 due to difficult comparisons and a softening economy [54] - The company does not foresee significant M&A opportunities that would conflict with its business model, focusing instead on supporting its agent network [117] Management Commentary on Operating Environment and Future Outlook - Management noted a softening demand environment, with expectations for a muted holiday shipping season and a potential decline in truckload volume of 2% to 4% in the fourth quarter [41][42] - The effective income tax rate remained stable at 24.3%, with expectations of continued strong free cash flow generation even in a downturn [33][44] - Management expressed concerns about pricing volatility and its impact on revenue per load, emphasizing that volume changes have less impact on the business model [102] Other Important Information - The company ended the quarter with cash and short-term investments totaling $228 million, with operating cash flow generation exceeding any full fiscal year in the company's history [34] - The number of approved third-party carriers increased by 21% year-over-year, indicating a growing network [24] Q&A Session Summary Question: Macro outlook and customer feedback on inventory demand - Management noted a shift from expectations of a strong peak season to a more muted outlook, with customers now anticipating flat to soft demand [52] Question: Maintaining operating margins in a downturn - Management highlighted that fixed costs are low relative to variable contributions, allowing for some margin maintenance even in a revenue decline scenario [56] Question: Variable compensation and its impact - Current accrual for variable compensation in 2023 is about $31 million, with potential adjustments based on revenue performance [63] Question: Impact of housing market slowdown on flatbed demand - Management indicated that a slowdown in housing would negatively impact the unsided market, particularly in building products [74] Question: Strength in air and ocean transportation - The increase in air and ocean revenue was primarily rate-driven, with some contribution from new agents in those categories [80] Question: Revenue per load trends versus spot rates - Management discussed the decoupling of revenue per load from spot rates, attributing it to the nature of their business model and the stability provided by contracted rates [86]