LSTR
#Thank you, Rita.
Good morning, and welcome to Landstar's 2017 First Quarter Earnings Conference Call.
This conference call will be limited to one hour.
Due to a high level of participation on these calls, I'm requesting that each participant have a 2-question limit.
Time permitting, we can circle back for additional questions.
But before we begin, let me read the following statement.
The following statement 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 the uncertainties and risks, including, but not limited to, the operational, financial and legal risks detailed in Landstar's Form 10-K for the 2016 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 2017 first quarter performance exceeded our expectations.
First quarter revenue, gross profit, operating income and diluted earnings per share were all first quarter records.
During our February 2 year-end 2016 earnings conference call, we provided 2017 first quarter revenue guidance to be in a range of $725 million to $775 million and diluted earnings per share to be in a range of $0.70 to $0.75.
Revenue in the 2017 first quarter was $781 million and diluted earnings per share was $0.77, both above the high end of the guidance.
Revenue exceeded our expectations due to increased loads and revenue per load on loads hauled via truck.
Loads hauled via truck in the 2017 first quarter increased 10% over the 2016 first quarter, ahead of our mid- to high single-digit growth expectation.
In comparing 2017 first quarter truck loadings to the 2016 first quarter, the fact that January 1, 2017, fell on a Sunday and January 1, 2016, fell on a Friday favorably impacted our productivity.
We estimate that the occurrence of New Year's Day on a Sunday in 2017 versus a weekday in 2016 favorably impacted the number of loads hauled during the 2017 first quarter by approximately 2%.
Excluding the favorable impact in January of the timing of New Year's Day, we saw consistent growth in truck volumes in each month of the quarter, with truck loadings increasing over the prior year month by 9%, 7% and 9% in January, February and March, respectively.
The increase was broad based amongst many customers and industries.
Our customer base is highly diverse.
Revenue in the 2017 first quarter from our top 100 customers based on 2016 revenue was slightly lower than 2016, while revenue from all other customers increased 18% in the 2017 first quarter over the 2016 first quarter.
As it relates to revenue per load, we expected revenue per load on loads hauled via truck to be equal to or slightly below the 2016 first quarter.
Revenue per load on loads hauled via truck in the 2017 first quarter was 1% higher than the 2016 first quarter.
The trend in revenue per load on loads hauled via truck improved each month of the 2017 first quarter as revenue per load was 2% lower in January 2017 as compared to January 2016, up slightly in February over prior February and plus 3% in March over prior year March.
The favorable trend in the growth rate in revenue per load on loads hauled via truck was partly due to easier March over prior year March comparisons and with favorable gains in unsided/platform revenue per load in the 2017 first quarter.
In March 2017, we experienced a more normal seasonal uptick in revenue per load as compared to February, whereas in March 2016, revenue per load was lower than February.
Historically, revenue per load in March is typically slightly higher than February.
The number of loads hauled via rail, air and ocean carriers was slightly lower than the 2016 first quarter, and a softness in rail intermodal loading was mostly offset by increased air and ocean loads.
Revenue per load on loads hauled by each of these modes in the 2017 first quarter was below the prior year.
Revenue per load on loads hauled via van equipment was 1% below prior year's first quarter.
The percent decrease was relatively consistent each month of the quarter.
Revenue per load on loads hauled via unsided/platform capacity increased 5% over the 2016 first quarter.
The percentage change improved each month as we moved through the quarter.
The improvement was somewhat due to easier comparison to prior year's month-to-month trend.
The 5% quarter over prior year quarter increase was also partly attributable to a 2% increase in the average length of haul.
Overall, we have experienced a normal seasonal uptick in revenue per load from December until the end of the first quarter.
The number of loads hauled via van equipment during the 2017 first quarter was 11% above the 2016 first quarter, while unsided/platform loadings increased 8%.
Overall, volume increases were strong throughout each month of the quarter for both van and unsided/platform equipment, but even more so in January as a result of the timing of New Year's Day in 2017 versus 2016, as previously mentioned.
The number of loads hauled via vans or controlled trailing equipment was mostly van equipment hauled by BCOs and drop-and-hook operations were 34% of truck loadings in the 2017 first quarter, an increase of 11% over the prior year quarter.
Here's <UNK> with his review of other first quarter financial information.
Thanks, Jim.
Jim has covered certain information on our 2017 first quarter, so I will cover various other financial information included in the press release.
Gross profit, defined as revenue less the cost of purchased transportation and commissions to agents, increased 8% to $121.6 million and represented 15.6% of revenue in the 2017 first quarter compared to $112.2 million or 15.8% of revenue in 2016.
The cost of purchased transportation was 76.3% of revenue in the 2017 quarter versus 75.9% in 2016.
The rate paid to truck brokerage carriers in the 2017 first quarter was 55 basis points higher than the rate paid in the 2016 first quarter.
Commissions to agents as a percentage of revenue were 13 basis points lower in the 2017 quarter as compared to 2016, due to a decreased net revenue margin, revenue less the cost of purchased transportation on loads hauled by truck brokerage carriers.
Other operating costs were $6.9 million in the 2017 first quarter compared to $7.4 million in 2016.
This decrease was primarily due to decreased trailing equipment maintenance costs as the age of the fleet has decreased over the past few years.
The company currently has 11,223 trailers in its company-controlled fleet, a 5% increase over prior year, as the number of BCOs hauling Landstar trailing equipment has increased with the increased demand for drop-and-hook services.
Insurance and claims cost were $14.5 million in the 2017 first quarter compared to $14.2 million in 2016.
Total insurance and claims cost for the 2017 quarter were 4.0% of BCO revenue compared to 4.3% in 2016.
The increase in insurance and claims compared to the 2016 period was due to increased severity of accidents in the 2017 first quarter as compared to the 2016 first quarter.
Selling, general and administrative costs were $38.3 million in the 2017 first quarter compared to $34.6 million in 2016.
The increase in SG&A costs was mostly attributable to an increase in the provision for bonuses under the company's incentive comp plans.
The provision for incentive comp was $2.9 million in the 2017 first quarter compared to $200,000 in the 2016 first quarter.
As a result, SG&A expense as a percent of gross profit increased from 30.8% in the prior year to 31.5% in 2017.
Depreciation and amortization was $9.9 million in the 2017 first quarter compared to $8.4 million in 2016.
This increase was due to the increase in the number of company-owned trailers.
Operating income was $52.3 million or 43% of gross profit in the 2017 quarter versus $47.9 million or 42.7% of gross profit in 2016.
Operating income increased 9% year-over-year.
The effective income tax rate was 36.8% in the 2017 first quarter compared to 38% in 2016.
The effective income tax rate, which has historically approximated 38.2%, was impacted in both periods by tax benefits resulting from disqualifying dispositions of the company's common stock and in 2017 by implementation of Accounting Standards Update 2016-09.
Looking at our balance sheet, we ended the quarter with cash and short-term investments of $278 million.
Cash flow from operations for the 2017 period were $62 million, and cash CapEx was $5 million.
There are currently 1 million shares available for purchase under the company's stock purchase program.
Back to you, Jim.
Thank you, <UNK>.
We continue to attract qualified agent candidates to the model.
Revenue from new agents was $17.2 million in the 2017 first quarter.
Although below our target for new agent revenue, the agent pipeline remains full, and I expect to see improvement in new agent revenue in the upcoming quarters.
We ended the quarter with 9,370 trucks provided by business capacity owners, 69 trucks below our year-end 2016 count.
However, BCO utilization increased in the 2017 first quarter, resulting in a 10% increase in the number of loads hauled by BCO truck capacity.
During the 2017 first quarter, we recruited more BCOs than we have in recent years\xe2\x80\x99 first quarters.
However, we also experienced a slightly elevated BCO turnover rate.
We typically experience a net decrease in the number of trucks provided by BCOs during the first quarter of any year.
Overall, the net decrease in the number of BCO trucks in the 2017 quarter was consistent with the typical decrease we've experienced during the first quarter over the past 10 years.
We expect continued strength in recruiting in 2017.
We had a record number of third-party broker carriers haul freight on our behalf during the 2017 first quarter.
Our network is strong and continues to attract third-party truck capacity.
During the 2017 first quarter, we continued to have a challenging insurance and claim cost experience.
Although accident frequency was slightly below our historical frequency experience in the 2017 first quarter, increased severity of accidents drove insurance and claim costs to 4% of BCO revenue compared to 4.3% in the 2016 first quarter, both periods well above our historical run rate of insurance and claims as a percent of BCO revenue.
I continue to believe that insurance and claim costs will approximate 3.3% of BCO revenue over the long term.
However, accidents in the trucking industry can be severe, and occurrences are unpredictable.
Overall, I'm very pleased with the 2017 first quarter results.
2017 first quarter revenue increased approximately 10% compared to the 2016 first quarter on a 10% increase in the number of loads hauled.
Considering the continued soft U.S. economic environment, especially the soft U.S. manufacturing sector, the Landstar model continued to demonstrate how well we perform even in a soft economic environment as we generated record first quarter revenue, gross profit and diluted earnings per share.
As it relates to our 2017 second quarter expectations, I anticipate that truck capacity will continue to be readily available in the 2017 second quarter.
Therefore, I expect gross profit margin to be in a range of 15.3% to 15.6% in the second quarter, assuming fuel prices remain stable and truck capacity remains readily available.
Seasonally, revenue per load on loads hauled via truck in the first quarter is typically lower than the second, third and fourth quarters.
During the first quarter, we experienced a normal seasonal increase in revenue per load on loads hauled via truck.
In early April, we have been experiencing a continuation of the seasonal trend.
I expect those normal seasonal trends to continue into 2017 second quarter and therefore, expect revenue per load on loads hauled via truck to be higher than the 2016 second quarter in a range of 1% to 3%.
I also anticipate the normal seasonal increase in number of loads hauled via truck from the first quarter to the second quarter after taking into account the favorable impact of the timing of New Year's Day in the first quarter.
Therefore, I expect the number of loads hauled via truck in the 2017 second quarter to increase over the prior year second quarter in a mid- to high single-digit percentage range.
Based on the continuation of recent revenue trends, I currently anticipate 2017 second quarter revenue to be in a range of $820 million to $870 million.
Based on that range of revenue and assuming insurance and claim costs are approximately 3.3% of BCO revenue, I anticipate 2017 second quarter diluted earnings per share to be in a range of $0.84 to $0.89.
Our 2017 first quarter results were above expectations even with a soft operating environment and low economic growth in the U.S. Even with the soft pricing, 2017 first quarter diluted earnings per share were the highest first quarter diluted earnings per share in the company's history.
We continue to focus on profitable load volume growth and increasing our available capacity to hold those loads.
With continued load volume growth, we are well positioned for when the pricing environment improves.
And with that, Rita, we are ready for questions.
This is Pat O'Malley.
I would say it's all those things.
Clearly, it's bringing on new agents, that's automatic market share.
I think if you harken back to Jim's opening comments when he talks about being broad-based and across many industries and customers, I think that demonstrates the power of the model and the natural diversification that comes from using agents to generate revenue.
So to answer your question, it is ---+ it's all of those.
I don't think historically whether it's in a tight market or a loose market, we see the impact on our load volumes.
So I don't think it's a market condition other than our agents are executing well in the environment they're playing in right now.
Well, I think on the van side we're pretty consistent over the last ---+ even back into 2016 I think we're still seeing that consistency of more readily available capacity.
But I'd say we're consistent about where we were on the van side back compared to first quarter last year.
I think we're seeing a little bit of tightening on the flatbed side because we saw rates climbing as we move through the quarter.
So a little bit is coming regionalized.
You're looking at Texas region is coming off of what I would consider a pretty low point in the 2015, 2016 periods.
So I think there's a little bit of that fracking business or oil and gas kind of ---+ it's not picking up a lot, but it's starting to tighten up the flatbed side.
So from a comparison standpoint to sum up, I'd say that the vans are pretty consistent on the available capacity throughout '16 and where we sit today, but it feels like a little bit of flatbed market\u2019s tightening up a little bit.
Not extreme, but I think that's where we're seeing some tightness.
Well, clearly, out in Texas, yes.
I mean, clearly regionalized.
I think that area for us grew about 18% in that region.
I know a lot of it was driven by the flatbed business going in and out of Texas.
Yes.
I would ---+ I don't know where those comments come on the tightening in the second half unless someone really thinks there's going to be an increase in demand.
I mean, economically I can't speak to what I think is going to happen in the economy.
I would expect what's going on with the administration and some of the things they're trying to do sound all great.
And ---+ but when is that going to kick in on regulation, or tax or all the other stuff.
I don't see manufacturing picking up over the next 6 months.
If they\u2019re talking about the very back half in ELDs, yes, maybe there is a pickup there in tightening.
There aren't a lot of trucks coming out of the system.
Demand is relatively stable.
I would say we're going to stay in this market at least through the second quarter and into the third.
So I don't see that tightening of capacity any, in the short term.
And leading the flatbed, I guess, what's driving is the consumer-heavy industry right now, it seems to be some of the industry, some of the oil and gas that's driving that flatbed market.
If this infrastructure stuff kicks in or the wall kicks in, you'll see a tightening of flatbed before you see the van.
Right.
And we've seen like for a while, the van\u2019s been relatively chugging along flat.
And to see the flatbed that I do think that's a positive on the economic trends.
<UNK>, this is Joe.
Right now there's a big wait-and-see mentality for most of the small carriers, right.
I think a lot of them are still optimistic that maybe Trump will take this thing and put it on the back burner or that OOIDA might come through with some court challenge that makes a difference.
So I think there's a bit wait-and-see with some of the small guys.
And, as you know, a pretty good percentage of our brokerage capacity comes from small carriers.
But if you think about it, even our BCOs, not everybody's converted to an ELD as yet.
They're waiting to see and for a few reasons, and ---+ but generally, it's an additional cost to them, right.
So right now they're doing paper logs, they're getting along fine.
If you go to an ELD, it's $30 a month in airtime and they're just trying to avoid the airtime.
I think the mentality from most capacity providers, small capacity providers, is that they're agreeable to the fact ---+ to the notion that they're going to have to get it done, but they're going to wait till the last minute.
So I don't anticipate a huge exit of capacity from the overall marketplace or certainly, amongst our BCO community.
But I do think you'll have some, but it will be very late in the year, this year, and a big impact, probably a bigger impact, in 2018.
Yes, <UNK>.
If you go back to our first quarter release, we highlighted a couple items there.
We think the agent workflow IT projects going to be similar to slightly up this year as compared to last year.
I think we gave a range of $6.9 million to $9.5 million for the year.
Obviously, incentive comp is a headwind this year.
We're booking about $8 million to $9 million now on an annual basis.
And as far as the convention goes, it was in the same period this year as compared to last year.
It's a second quarter event in both.
So you'll see that it's about $2 million that will hit in the second quarter.
Well, I think there's a little bit of uniqueness of our model, right, <UNK>.
Our guys, as we always said, what they kill are small business owners and our role here is to support them and give them the tools they need to succeed.
And they're just hitting the market hard right now, and I think they're executing very well.
And like I said, there's a lot of demand for our trailing equipment and the drop-and-hook side.
Flatbed is starting to lift a little bit compared to where we were.
I think if you look at back 2015, 2016, heavy haul growth in load volume was negative every month for '15 and '16 except for maybe 1 or 2 months.
And we just finally seen heavy haul start to lift a little bit.
So I think there's a lot of in our niche markets and some of the special stuff we do is we're getting that penetration into the marketplace.
We're expanding it to different ---+ in some of the retail stuff.
Not that we're moving retail, but some of the large retailers are looking at us for some of those more lane-driven moves when they need capacity.
So I think we're expanding in ---+ and it's all about our agents bringing us into some new markets and along with the growth in the flatbed side and the demand on our drop-and-hook services.
So it's ---+ like we always say, it's very broad based and it continues to be that way.
The reason it's hard to describe like when we ---+ as I've said before, our top 100 customers in this first quarter were actually flat to down to last year's first quarter.
The growth came from every customer that's smaller than that.
And we just really expand our customer base in these type of environments.
It\u2019s customers doing $0.5 million a year with us.
It's those kind of customers currently driving it.
We penetrate into the smaller markets.
Yes, putting Amazon aside, let's just talk about those ---+ the ---+ we call them digital freight matching or the Ubers of transportation.
They're replicating what we have.
I mean, we already ---+ we send out 250,000 load alerts a week.
We're automated, right.
And our capacity can put in a subscription of where they want to go, at what price they want to go there.
All that technology that people are talking about exists today, and we're using it.
So from a technology standpoint, it's really not a concern.
I think what we're dealing with is guys who are trying to get into the brokerage industry and just play a price game.
The bigger concern is it's hard to compete against companies that don't want to make money.
That's really what we look at.
Amazon being a different story.
They already have scale.
And they already have a network.
That competition is probably little more real than I think.
I'm not saying that the digital freight matching companies aren't real and we're not paying attention to some of the stuff they're rolling out.
But the Amazon is a little bit different, and how they're playing the game.
But again, we have assets, we have trailers in the system.
We specialize in heavy specialized, that type of stuff.
We're not necessarily in e-commerce.
So do they ---+ are they going to go into our niche markets, yes, maybe.
But, I think we can compete pretty well there.
I mean, we're well positioned.
We're deep inside customers.
We're part of the strategic plans of a lot of our customer base.
So I think we're well positioned to compete against any of these guys.
Amazon being the ---+ that is the bigger picture to take a look and watch what they're doing.
It is not from a gross margin perspective.
There is maybe slightly better, but it wouldn't be something you'd noticed.
So I don't think from a margin perspective.
It's really about just, it's a higher revenue per load, but it's not driving bigger margin.
But when you ---+ the other piece you got to think about is on the flatbed side, most of those trailers are provided by the BCOs, whereas on the van side, 60% of the ---+ it's like 60% of our van is on our trailers, but like 40% of the flat is on our trailers.
So you have a higher PT rate, but lower operating costs.
So there's a little mix in there.
But it moves so slow, you don't see it.
That is not something you see transition within a 12-month period.
It could be a long-term thing.
But you wouldn't see the impact over the year.
Right.
Yes.
We're ---+ for insurance, we continue to expect the 3.3% be back to our normal historical trend, again, subject to the unpredictability of accidents.
But on the effect of that Easter holiday, it was like a couple ---+ we didn't mention it because it's like a couple thousand.
Those might be 2,000 loads at most on the impact of the way the holiday fell this year compared to last year.
So it's not material through the quarter.
Yes.
I mean, we talked about ---+ the reason I spoke to the effect of January 1 is because of sequential trend into the second quarter.
If you notice that we grew volumes 10% first quarter 2017 over first quarter 2016, and then we said mid- to high single digits for the second quarter and that's really just to point out the reason we grew 10% was partly due to the ---+ about 8,000 loads we got in the first quarter due to the comparison.
Yes.
Much bigger impact on the New Year's holiday than the Easter holiday.
It's about ---+ right about 24%, Matt.
This is Joe.
Yes, Matt, so we are in the process of talking.
There's about 2,200 BCOs that don't have an ELD today.
And the reason they don't have one today is because they don't really ---+ they have roadside violations for logbook, so that they are ---+ we've not required them to get one.
And we are talking to them ---+ as we speak, we've talked to about half of them to find out what their plan is to try to uncover the very questions that you just asked.
And it's a very, very small percentage that are really contemplating doing anything but waiting until the last moment, right.
So they understand they will have to get one.
They accept that.
It's purely a big brother and a cost-related issue.
But they don't intend to abandon the industry.
They don't intend to leave Landstar in great numbers.
They're just not anxious to absorb that $30 a month or whatever it might be in airtime charges unnecessarily when they're perfectly happy doing it on paper.
That's the sentiment from the BCOs that we've talked to thus far.
And again that's, over 1,000 BCOs that we've talked to one-on-one to get that assessment.
And as ---+ that relates to the sentiment towards ELDs in general, there was a surprising positive sentiment from a large percentage of our BCOs when we started to implement ELDs pretty rigorously in 2013.
And that really hasn't changed.
I think there is a fear and a more of a principle objection to ELDs.
But once they're installed, the BCOs tend to adopt them, use them.
We've done a pretty nice job of integrating them to provide some efficiencies in the way of fuel taxes as well as log submission.
So again, I think it's not going to be a huge disruption at the end of 2017 for us on the BCO front.
My pleasure, Matt.
Well, we're still kind in a prototype atmosphere, where we have 2 agents utilizing the system.
I will say we are a little bit behind.
We hope to catch up over the summer this year, where we start a rollout to a limited number of agents is kind of where we stand.
Nothing that's unexpected.
I mean, it's an IT rollout and I think we're pretty happy with where we are on it.
And we just have a lot going on.
We have a big weekend coming up, doing some testing again.
But it's ---+ the 2 agents that are on it love the system and all the agents we rolled it, we demonstrated at the convention, 2 weeks ago and are very excited to be getting it.
And we're just kind of more of a wait-and-see, and hopefully by the next call I'll tell you that we're starting to put more agents onto the system.
No, no, no.
No, big change.
We said $6.5 million to $9.5 million this year on the project.
We expect those numbers kind of to continue for the next couple of years as we roll it out.
But there's no change in the plan and no change to our expectations of how this is going to roll out.
We're probably 6 to 12 months behind of our planned 3- to 5-year project.
Yes, that's right, <UNK>.
The agent convention is $2 million to $2.5 million.
All of that will be booked in the second quarter.
So there will be no impact to the third or the fourth.
Because of the CARB regulation we've turned over our fleet over the past 5 years.
We're going to have dramatically less as far as CapEx goes.
We do the trailers by cap release anyway.
So you won't see that in the CapEx numbers on the cash flow.
But we had $5 million CapEx in the first quarter.
Part of that was the Laredo facility we opened in January.
But we still expect $8 million.
That's our run rate on an annual basis if you exclude the Laredo on ---+ for each quarter probably $2 million CapEx.
Thank you, Rita.
And thank you, and I look forward to speaking with you again on our 2017 Second Quarter Earnings Conference Call currently scheduled for July 27.
Have a nice day.
