Good morning and welcome to Landstar System Incorporated First Quarter Earnings Release Conference Call. All lines will be in 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; Fred Pensotti, Vice President and CFO; 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.

Thank you, Annie. Good morning and welcome to Landstar's 2022 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, including, but not limited to, the operational, financial and legal risks detailed in Landstar's Form 10-K for the 2021 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 2022 first quarter financial performance was the best-ever quarterly performance in Landstar's history. Typically, the first quarter of each year is seasonally softer than all other quarters of a given year. In fact, it is highly unusual for our first quarter financial performance to exceed the financial performance of the immediately preceding fourth quarter. The 2022 first quarter did just that. First quarter of revenue, gross profit, variable contribution, operating income and diluted earnings per share were each all-time quarterly records, ahead of even our record 2021 fourth quarter. During the 2022 first quarter, we initially provided first quarter revenue and earnings per share guidance as part of our 2021 year-end earnings release on January 26. We provided an update on February 28 on a Form 8-K we filed with the SEC to address the potential impact the invasion of Ukraine could have on Landstar's first quarter results. We provided an additional update on our 2022 first quarter performance in a Form 8-K we filed with the SEC on April 5 in advance of managers meeting with analysts at Landstar's annual agent convention. Overall, revenue was an all-time quarterly record of $1.970 billion in the 2022 first quarter, approximately 13% above the high end of our initial guidance and in line with our April 5 updated guidance. Revenue increased $683 million or 53% over the 2021 first quarter. In particular, Landstar experienced strong growth in both truckload rates and volume, along with significantly increased revenue from ocean freight services largely on rate increases. Typically, truck revenue per load in the first quarter is seasonally lower than that of the second, third and fourth quarters. In only three of the past 10 years prior to 2022 has first quarter revenue per truckload exceeded that of the preceding fourth quarter. Revenue per load on loads hauled via truck in the 2022 first quarter was an all-time quarterly record and exceeded the 2021 fourth quarter by 4%. The sequential quarter-to-quarter percentage increase in revenue per load on loads hauled via truck for each quarter since the third quarter of 2020 has been above historical trends. From the 2021 third quarter to the 2021 fourth quarter though, the sequential growth rate slowed. Our initial guidance for the 2022 first quarter assumed that the deceleration in sequential quarter-to-quarter growth would continue and therefore assume revenue per load on loads hauled via truck would return to more normal seasonal patterns on a month-to-month basis. However, as disclosed in our February 28 Form 8-K, truck rates during the first eight weeks of January and February 2022 exceeded prior year's corresponding period by 27%. That year-over-year increase was due to rates increasing from December to January and from January to February by 3.3% and 2.3%, respectively. Those positive sequential trends put February revenue per truckload approximately 3% above December, far above normal seasonal trends where February rates are always below the prior year's December. Given the pricing strength Landstar experienced during the first two months of 2022, it wasn't surprising that truck revenue per load in March was equal to that of February, even after considering the recent spike in fuel costs. In this regard, it should be noted that generally for Landstar, changes in the price of diesel at the pump impact revenue hauled via truck brokerage carriers, but have very little direct impact on revenue hauled by BCOs. Additionally, as expected, the year-over-year comparison in truck revenue per load in March was much more difficult than during the first eight weeks of 2022 as rates in March of 2021 increased 11% over February 2021. Overall truck revenue per load in January, February and March 2022 increased 25%, 29% and 17% over January, February and March of 2021. As to rates by equipment type, truck revenue per load on loads hauled via van and unsided/platform equipment in the 2022 first quarter increased 27% and 19%, respectively, over the 2021 first quarter. After the number of loads hauled via truck, our initial guidance on January 26 called for truckload volume to increase over the 2021 first quarter in a 12 to 14 percentage range. Our February 20 update reported that January and February truckload volume increased 24% over January and February 2021. In total, first quarter truckload volume increased 20% over the 2021 first quarter, in line with our April 5 update. Our February Form 8-K included discussion regarding two of our largest independent sales agents who each have administrative operations in Ukraine. At the onset of the Russian invasion, the administrative operations of one of those agents were significantly disrupted. Remarkably, by the end of March, load volumes arranged by that agency had almost fully recovered. Nevertheless, as both of these agencies continue to remain administrative operations in Ukraine, no assurances can be provided that these agencies will not be significantly disrupted by future developments in the ongoing conflict in Ukraine. Overall, truckload volume in January, February and March increased 17%, 30% and 14% over January, February and March of 2021. The February increase in the year-over-year volume growth rate over the January year-over-year growth rate resulted from a shift in truckloads from February to March in 2021 due to storms that impacted the U.S. in late February 2021. We estimate that storms decreased truckload volume in February 2021 by 7,000 to 8,000 loads and believe most of those loads were hauled in March. March's 2022 lower year-over-year growth rate was attributable to the tougher comp in March 2021 due to the 7,000 to 8,000 loads as well as the disruption of one of the Ukraine agents early in the month. Continued strong demand for consumer durables and small packages via e-commerce helped drive 2022 first quarter van volume 17% over the 2021 first quarter. The number of loads hauled via unsided/platform equipment grew 15% over the 2021 first quarter, mostly due to improving demand for our services within the U.S. manufacturing sector over the 2021 first quarter. We continue to attract qualified agent candidates to the model. Revenue from new agents was $25 million in the 2022 first quarter, the second highest revenue from new agents over the past 17 quarters. The agent pipeline remains full. We ended the quarter with record 11,935 trucks provided by business capacity owners, 71 trucks above our year-end 2021 count. Overall, the net increase in the number of BCO trucks in the 2022 first quarter speaks to Landstar's ability to attract quality capacity in a tight truck capacity market. Loads hauled via BCOs increased 7% in the 2022 first quarter over the 2021 first quarter on higher truck count. We ended the first quarter with a record number of approved third party carriers in the network. The number of third party carriers hauling freight in the 2022 first quarter increased 39% over the 2021 first quarter. I'll now pass it to Fred for his comments on a few specific line items within the company's first quarter financial statements.

Thanks, Jim. Good morning, everyone. Jim covered certain information on our 2022 first quarter performance. Now, I'll cover some of the other key first quarter financial information included in the press release. Before I discuss our gross profit and variable contribution, just a reminder that our cost of revenue for purposes of calculating gross profit has two categories; variable cost of revenue and other cost of revenue. Variable cost of revenue includes purchase transportation and agent commissions, while other cost of revenue includes numerous costs that fluctuate to differing degrees with revenue, including, for example, trailer depreciation and maintenance expenses; BCO recruiting, training and qualification costs; insurance-related expenses such as premiums paid and cost of claims for various freight transportation-related insurance policies; and other costs included in SG&A in our consolidated statement of income, for example, insurance brokerage commissions and other fees incurred to administer the insurance programs available to BCO independent contractors that are reinsured by the company as well as costs related to our internally developed technology that directly support our revenue, as detailed in the table in our earnings release reconciling gross profit to variable contribution. In the 2022 first quarter, gross profit was $214.6 million, an increase of roughly 46% compared to $147.1 million in the 2021 first quarter. Gross profit margin was 10.9% of revenue in the 2022 first quarter compared to 11.4% in the same period last year. As we've mentioned since we started using the term variable contribution, this is a non-GAAP financial measure to refer to the amount represented by revenue less our variable cost of revenue, which again includes our purchase transportation and agent commissions, as detailed in the reconciliation table in our earnings release that I just alluded to. In addition, we define variable contribution margin also a non-GAAP financial measure as variable contribution divided by revenue. This is an important measure for us as purchase transportation and agent commissions are the primary expenses that are 100% variable with revenue and give us a view into spot market trends in the freight transportation industry on a shipment-by-shipment basis. In the 2022 first quarter, variable contribution increased roughly 43% to $270.5 million compared to $189.2 million in the 2021 first quarter driven by strong revenue growth. Our variable contribution margin was 13.7% of revenue in the 2022 first quarter compared to 14.7% in the same period last year. The decrease in variable contribution margin compared to the 2021 first quarter was attributable to the mix between our BCO independent contractor capacity, which has a higher variable contribution margin in loads hauled via truck brokerage carriers. Last point I'll make on these margins is that the year-over-year growth rate and margin performance of gross profit exceeded that of variable contribution due to the ability of the Landstar model to leverage the mostly semi-variable cost I described earlier that are included in gross profit. Moving to our costs. Other operating costs were $11.1 million in the 2022 first quarter compared to $7.6 million in the same period last year. The growth in this expense line was a result of an 11% increase in the average size of our trailer fleet, increased trailing equipment maintenance costs as a result of inflationary pressures on both replacement parts and labor, and an increased provision for contractor bad debt. Insurance and claims costs were $30.8 million in the 2022 first quarter compared to $21.5 million in the same period last year. Total insurance and claims costs were 4.2% of BCO revenue in the 2022 first quarter compared to 3.8% of BCO revenue in the same period of 2021. The increase in insurance and claims as compared to 2021 was primarily due to a $4.3 million of increased net unfavorable development of prior claims in the 2022 first quarter, an increase in insurance premiums for commercial trucking liability coverage, and increased severity of current year trucking claims in the 2022 period. Selling, general and administrative costs were $52.7 million in the 2022 first quarter compared to $45.4 million in 2021. The majority of the increase was related to wage and benefit pressure on our headcount, as our headcount increased to support business growth as well as higher wages due to general wage and inflationary pressures experienced by most employers over the last year in addition to an increased provision for customer bad debt. Appreciation and amortization was $13.8 million in the 2022 first quarter compared to $12.1 million in 2021. This increase was primarily due to increased depreciation on software, resulting from the recent deployment of new upgraded applications for use by agents and capacity, as well as new trailers we put into service late last year. Our effective income tax rate in the 2022 first quarter was 22.8% compared to 24.4% in 2021. Effective income tax rate was favorably impacted in the first quarter of this year by an excess tax benefit related to equity awards invested in January as a result of our fiscal year 2021 performance. We expect effective income tax rate to return at 24.5% in 2022 second quarter. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $182 million, cash flow from operations in Q1 2022 was roughly $95 million and cash capital expenditures were just under $4 million. During the quarter, we returned $194 million to shareholders through a combination of a regular dividend of $9 million, a special dividend of $75 million paid in January of 2022 and $109 million of share repurchases. We funded a portion of our first quarter share purchases with a revolving credit facility, ending the first quarter with a drawn balance of $70 million under that facility. And we now have roughly 2.3 million shares available for purchase under the company's stock purchase program. Before I turn it back over to Jim, I'd like to thank you all for joining us today. With a bit of luck, we'll hopefully be able to see some of you in person at various upcoming investor conferences later this year. Jim?

Thanks, Fred. As it relates to our 2022 second quarter expectations, I anticipate the strong freight environment to continue from the 2022 first quarter, although at a decelerated rate of year-over-year growth as compared to the previous seven quarters. As it relates to rates for our truck transportation services, it is important to note how changes in the cost of diesel fuel may impact revenue per load at Landstar. The current nationwide average cost of a gallon of diesel fuel has increased approximately $1 compared to the average nationwide cost during February 2022. With respect to loads hauled via BCOs, which represented 42% of truck revenue into 2022 first quarter, an increase in the cost of diesel fuel has minimal impact on revenue per load as fuel surcharges billed to customers are paid 100% to the BCO hauling those loads and are not included in the company's revenue. However, with respect to loads hauled via truck brokerage carriers, the cost of fuel is often reflected in all-in rate billed to the customer by Landstar. Accordingly, an increase in fuel cost of this magnitude would typically be expected to increase truck revenue per load on loads hauled by truck brokerage carriers, which represent 58% of truck revenue in the 2022 first quarter. In March, revenue per load for all of our truckload revenue was approximately equal to that of February, even with the increase in the cost of a gallon of diesel fuel at the pump. This suggests a small decrease in March compared to February in revenue per load on loads hauled via truck brokerage carriers if one were to exclude the implied cost of fuel reflected in rates charged by truck brokerage carriers to Landstar. Through the first several weeks of April, the average cost of diesel fuel and truck revenue per load remained consistent with the average fuel cost we saw in truck revenue per load generated in March. Notably, March recorded the second highest monthly truck revenue per load in the history of the company behind February 2022 by only $1 per load. Assuming we maintain truck revenue per load throughout the remainder of the second quarter consistent with levels we have seen in March and early April, and fuel cost also remained steady throughout the rest of the quarter, truck revenue per load would be above the 2021 first quarter in a mid-teen percentage range. The first quarter of 2022 was a record first quarter truckload count. From 2016 to 2021, without including 2020, which was impacted by the onset of the pandemic, truckload count has increased sequentially from the first quarter to the second quarter in a range of 4% to 13%. Considering the record number of truck loadings in the 2022 first quarter, I expect that 2022 second quarter truckload count to trend toward the lower end of the range of recent historical first and second quarter sequential percentage increases, and therefore expect truckload capacity to increase over the 2021 second quarter in a low double-digit percentage range. Based on the expectations of truck revenue per load and the number of loads hauled via truck, I currently anticipate 2022 second quarter revenue to be in the range of $2 billion to $2.5 billion. Based on that range of revenue and assuming insurance and claim costs are approximately 4.2% of BCO revenue, I anticipate 2022 second quarter diluted earnings per share to be in the range of $3.22 to $3.32. Overall, I'm extremely pleased with the start to 2022. 2022 first quarter revenue was the highest quarterly revenue in the company's history, and increased 53% compared to the 2021 first quarter. In fact, it seemed in many ways like the demand for our services we typically see in the fourth quarter of any year simply continued from the 2021 fourth quarter to the 2022 first quarter. Particularly in terms of the strength we saw in the business during January and February of this year, it is very hard to find comparable historical precedents to start any year over the past couple of decades. Perhaps even more impressive than the top line growth was the fact that the 2022 first quarter gross profit, variable contribution, operating income, net income and diluted earnings per share were the highest ever achieved by Landstar in any quarter in the company's history. There have been recent reports that indicated significant slowing of spot rates, especially as it relates to rates on freight hauled via van equipment. Those reports do not currently correspond to the recent trends Landstar is experiencing. One of many metrics we follow is revenue per mile on revenue hauled by BCOs on van equipment. As mentioned previously, fuel surcharges billed to customers are excluded from revenue and the cost of purchase transportation on loads hauled via BCO capacity. Revenue per mile on loads hauled via BCOs using van equipment increased 5% from December to January, 3% from January to February, and decreased 0.1% in March compared to February. During the first few weeks of April, that metric is running about 5% below March. The April decrease experienced in our revenue per mile is far below the decrease we have been reading about in recent reports. I also do not find it unusual for revenue per mile to have pulled back just a bit from the all-time high set in the last few months. In our view, the overall environment for Landstar continues to remain robust. Revenue per load continues at all-time highs and demand for our truck transportation services remain elevated. We continue to focus on profitable load volume growth and increasing our available capacity to haul those loads. 2022 is setting up to be another great year for Landstar. And with that, Annie, we can open to questions.

Thank you very much. We will now start the question-and-answer session. Our first question will come from Bascome Majors of Susquehanna. Your line is open. Please proceed.

Good morning, and thank you for my questions. Jim, I appreciate your comments on seasonality and how that trend is appearing as we enter the second quarter. Can you discuss more about the anecdotal observations regarding volume and demand? Are there specific regions, business types, or sectors where you're noticing some weakness, or is the lower guidance for second quarter demand really based on expectations that things may cool off?

I expect there to be some cooling in demand, and while that's primarily based on expectation, we are noticing slight signs of softness. For instance, van revenue per load has decreased by about 5% since March on the BCO, which excludes fuel. That gives us a clear indication. In terms of commodities, automotive performance has improved significantly compared to last year when it was quite weak. Our sub line-haul business has remained mostly flat, but we've observed volume growth in the e-commerce segment between parcel carrier hubs, even though there has been a decline in rates per load. The consumer durables sector remains strong, albeit slightly softer than in the last six or seven quarters. However, we are not identifying real weakness in any particular commodity area. Energy makes up only 3% of our business and hasn't recovered notably. Overall, we're not seeing indications that align with some of the reports in the market. I find it surprising that there's such a disparity between what some in the industry are reporting and what we've experienced. While we have observed some softness, it's not as severe as you may read about. For example, despite claims of a 37% drop in spot rates since December, our spot rates for van services have actually increased from December into early January and then saw a slight dip in March, remaining at or above December levels. We haven't witnessed the drastic drop in rates some reports suggest. Historically, significant declines in our metrics have taken time, and we've never experienced a 37% decline in such a short period. The largest drop historically was about 24% over an 18-month span during the pandemic. Although I anticipate a slowdown, I don't believe it's as pronounced as some reports suggest.

I appreciate that context. Can you help us on the similar question? Obviously investors are trying to think about the worst case and hope it doesn't happen and position for that if it does, but when we are doing that or your shareholders are doing that, what do you often think people miss on the Landstar model and how it flexes cyclically from a very strong market to a weak market? Just any thoughts on that exercise and how you would hold people's hands when they are trying to do it would be helpful? Thanks.

I don't really know if you all missed much about how the cycle operates for us. The main challenge everyone seems to face is understanding how far a downturn can go, and even the experts here, like Joe Beacom, might struggle to provide that clarity. When we discuss the low point for revenue per mile or revenue per load, it becomes quite tricky to determine. We are aware of the rising costs associated with trailers; maintenance and labor have significantly increased, and the impact of new trailer prices hasn’t affected us yet, but it will come into play next year. Additionally, employee costs are rising, especially as we try to retain our workforce during these transitions, and this affects overall revenue per mile. However, we can’t accurately predict how low peak revenue per mile might decline. Personally, I don’t believe it will drop back to the all-time record levels we saw in 2018 because the current costs are already integrated into the system. Moreover, we haven't even touched on insurance and claims; five years ago, our insurance expenses were around $50 million to $60 million, but now they are expected to be between $100 million and $120 million. All these factors complicate our ability to identify the trough for revenue per mile. Though I tend to be a pessimist, I don't foresee a drastic pullback. It feels like a normal cycle, and a decline of 15% to 20% seems reasonable, but the idea of a 37% drop is surprising based on recent reports.

Thank you for that. I'll pass it on.

Thank you. Our next question will be from Jack Atkins with Stephens. Your line is now open. Please go ahead.

Okay, great. Good morning, everybody. Thanks for taking my questions.

Sure. Hi, Jack.

Hi, Jack.

So I guess maybe shifting gears a little bit, I know a lot of the discussion on the call typically is around truck transportation. But as I sort of think about the last couple of years, you guys have seen a pretty significant level of growth within your air and ocean business in particular. And I would imagine there's been some pretty significant gross profit tailwinds from that as well. Could you maybe kind of talk a little bit about how you think that business over the course of maybe the next few quarters is going to trend, however, you're thinking about that? And then longer term, do you feel like that business will maybe return back to historical levels or do you feel like your agents that specialize in those modes are maybe taking some market share?

We have brought on a few agents, which has helped us gain market share. On the ocean side, Rob's team successfully recruited one or two agents to support growth in that area. Much of the ocean business is influenced by rising rates, which have surged over the past 18 months. Volumes have increased slightly from a small base, but I anticipate it will remain about 5% of our overall business. This segment is niche, focused on project-oriented freight with a few regular customers driving the shipments. Currently, the growth is primarily from custom projects, as we have established some routine clients in that space. On the air freight side, volumes have decreased, and the situation is unpredictable, depending on whether we can ship cargo by ocean or need to expedite it by air. There is considerable volatility in air freight. However, we still have about 10 agents who manage different metrics across rail, air, and ocean. These agents are field experts and we provide them with some support. Overall, I expect operations to remain fairly stable where they are now, with the possibility of adding more agents to our network to facilitate growth while keeping things consistent.

Okay, that's helpful. Thank you. And then I guess just one question, maybe this is for Fred. But I guess as we're thinking about the 2Q guidance, obviously a lot of volatility with what's going on in Ukraine and your agent that has operations over there. Very glad to hear that their operations have been able to return to normal despite what's going on. But I guess what are you kind of baking in to the guidance for that? I know that can have a little bit of a swing factor. Just sort of curious what's assumed for that?

Yes. Hi, Jack. Thanks for the question. We are assuming pretty much steady kind of trends of what we're seeing currently continue.

Okay.

As Jim said, they're pretty much in line to what they were doing last year, might be a little bit above it. And we expect that to continue.

Okay, that's really helpful. Thanks again for the time, guys.

Sure, Jack.

Thank you. Our next question will be from Stephanie Moore of Truist. Your line is now, ma'am. Please go ahead.

Hi. Good morning. Thank you for the questions.

Sure.

I wanted to touch a little bit on what you're seeing. You talked about this some, but on the demand side, and let's fast forward through the year, expectations around maybe incremental port congestion and supply chain disruptions as a lot of the backlogs of ships leave Asia and come to the U.S., maybe what you're hearing from any customers about any expectations or preparations they might be making ahead of peak season just given that dislocation that we're seeing between Asia and the U.S. here and what that can mean for your business?

I believe all the ships are currently stuck off the coast of Shanghai. This situation has likely dampened disruption to some extent. On the West Coast, things are starting to improve with fewer ships arriving. Disruption tends to benefit us, so when they begin shipping out of Shanghai again, that should be a positive development. It's one of the positives we can anticipate moving forward, although the ports are still congested, with many ships in the area. Dwell times are still longer than usual, but they are decreasing. The impact on our business will be an increase in freight arriving on the West Coast once shipping resumes from China, leading to a higher volume of truckloads since the rail systems cannot manage the overflow when the congestion returns.

Got it. Thank you. And then maybe on the other side of it, just on the supply side, and the ability for incremental capacity to enter the market. Maybe you can talk a little bit about what you're seeing this year on both the labor front as well as with both trailers and trucks and how this could be different from past down cycles on the capacity front?

Yes, Stephanie, it's Joe Beacom. Thank you for your question. There has been a significant increase in small carrier capacity in the market over the past 18 months to two years. I don't expect much change even if the market begins to decline. Historically, we've seen decreased utilization leading to some trucks exiting the market, as was the case in 2019 when we saw capacity grow but also lost some BCOs by year-end. I suspect this pattern will continue. If demand and prices fluctuate, there will be cyclical effects on capacity. Currently, challenges in acquiring used trucks, repairing them, and obtaining trailers when needed are making the situation more difficult, but I hope that by 2023 or later, things will start to normalize.

But I think as you think through it with the incremental small carriers that have entered the market, they've also entered the market at a higher operating rate than I think historically we've seen before. Is that something fair to you that we should kind of factor in as we think about the magnitude of any kind of great deceleration and capacity exiting the market?

Yes, if there is a significant decline unlike what we're seeing, but maybe something that's worse or later, yes, I think you could see some of these small carriers, as we've seen in the past, where they don't really have the safety net that maybe others have, right. They might look to find a home, some company that offers a great place for owner operators to put their business. Yes, that would be great or they could leave the market. Just like they entered the market when things really picked up in the back half of '20 and through '21, you can see them exit to some degree if things got worse and their cost structures weren't able to be supported by the rate environment. Yes, I think that would be a logical conclusion.

Great. Thank you guys so much.

Thank you.

Thank you. Our next question will be from Scott Group of Wolfe Research. Your line is now open. Please go ahead.

Hi, thanks. Good morning.

Good morning.

So I want to go back to the disconnect that you're talking about between spot rates and what you're seeing. If you look over time, there certainly is a pretty tight relationship between your revenue per load and spot rates if you lag your yields by about a quarter or so. So do you think that this is just a lag and you're about to see it, or is there something that you think is different this time around and why you're not going to see it to the same extent that maybe the spot market might see it?

The lag would exceed our expectations if this decline started in December and continued into March. According to a Wall Street Journal report, van truckload spot rates have dropped 37% since December, with 27% of that occurring in the past month. I believe we may experience some lag. However, when we analyze our correlation with DAT data and spot market data, our volatility is less pronounced; for instance, if their yields rise by 30%, ours may only rise by 15%, and if they drop by 20%, ours might only decrease by 10%. I anticipate that we will follow this trend moving forward, perhaps with a slight lag, but not to the extremes described in the reports. Historically, the volatility of the published spot market indexes is significantly greater than ours, and there are reasons for this. Even though we participate in the spot market, a significant portion of our business is tied to customers hauling our trailers, which creates more stability. It’s not a straightforward negotiation leading to a 25% price drop because of our trailer usage. Thus, our model maintains more stability compared to a typical spot market, despite our operations within it. We have dedicated customers and BCOs on those routes, leading to rates that tend to remain steadier than pure spot market movements. While I do expect a downward trend, as I have indicated since January 2021, I don't think it will decrease as drastically as what is suggested in the media, because our business model is more stable than what they portray.

Okay. And then just so we understand, the guidance for 2Q for May and June, are you assuming revenue per load similar with April, or are you assuming some reduction in May, June revenue per load from April?

Yes, we're assuming pretty consistent.

Yes, it's from March to April, then April to May, and May to June as we smooth that out, because that's what we're currently observing in our numbers.

Okay. And looking at the longer term, your net operating margins are currently excellent. As the cycle progresses, do you think those margins will return to their previous levels, or, as you mentioned earlier, Jim, do you believe rates won't revert to what they were? Do you think net operating margins can remain higher than they have been in the past?

We're always aiming for a 50% margin. I believe we can maintain that level, but a significant decrease would definitely put pressure on that target. We achieved 60% in the last quarter, which was an outstanding performance. I'm not looking to use that number as a benchmark, but considering potential downturns, it's possible that we could drop below 50%. Nonetheless, our objective is to keep the margin above 50%.

Okay. Thank you for the time, guys. I appreciate it.

Thank you. Our next question will be from Scott Schneeberger from Oppenheimer. Your line is now open. Please go ahead.

Thanks, Jim. I know you discussed IT and technology spending at your recent convention. Could you elaborate on whether that's an area you would manage significantly during a downturn, or will you maintain consistent spending in that category? Additionally, could you briefly recap where that focus currently lies? Thank you.

Yes, we aim to maintain our spending on technology regardless of external circumstances. Our focus is on generating profits, and the size of those profits may vary. We remain committed to delivering the best technology to our agents, with a roadmap that extends five to seven years. We approved an additional $30 million in spending over the last two years to support our ongoing projects. Our primary focus is on enhancing user experience externally first, with internal improvements coming later. We plan to sustain our annual tech spending between $25 million and $30 million, no matter the market conditions. While some initiatives can be postponed, others require immediate attention. Our technology expenditures will remain stable moving forward. It's important to note that this spending does not immediately affect our profit and loss statements, as we are developing tools that will depreciate over three to five years. Therefore, the financial impact of our investments will be felt gradually as we introduce new products.

Great, thanks. And two more quick ones from me, please. I'll ask them separately. On trailers, I think you highlighted last quarter you're seeing some inflation there, about 30% this year. Just from the last update, which has only been a couple of months, are you seeing any change to that specifically and any change to what you're planning to procure this year? Thanks.

Yes, Scott, thanks. Good question. We have been given a little bit of hope that we might get a small number of trailers very late in the year and the price has not been firmed up. But we do anticipate it will be at a premium. It's hard to say what the number is, but it will be maybe in that 30% range.

Okay, thanks. And just the last one is a housekeeping. The convention occurred in the second quarter this year, didn't last year and I apologize if you said this in the beginning. I had a glitch early in the call. But, Fred, did you mention what type of impact we should factor in the model for that? Thanks.

No, I did not mention it. But it's about $2.5 million to $3 million impact in the second quarter compared to the first quarter. So that's going to be the biggest driver of our SG&A costs sequentially from Q1 to Q2. You should see that SG&A line go off kind of high single digit percentage rates compared to Q1, mostly because of that.

Thanks, guys. I appreciate it.

At this time, I'm showing no further questions. So I would like to turn the call back over to you, sir, for closing remarks.

Thank you, Annie, and thank you and I look forward to speaking with you again on our 2022 Second Quarter Earnings Conference Call currently scheduled for July 21.

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