Good morning, and welcome to Landstar System Incorporated Year-End 2022 Earnings Release Conference Call. All lines will be in a listen-only mode until the formal question-and-answer session. Today's call is being recorded. If you have any objections, you may disconnect at this time. Joining us today from Landstar are Jim Gattoni, President and CEO; Jim Todd, Vice President and CFO; Rob Brasher, Vice President and Chief Commercial Officer; and 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, Bill. Good morning, and welcome to Landstar's 2022 Fourth Quarter Earnings Conference Call. Before we begin, let me read the following statement. The following is the 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 unless we undertake no obligation to publicly update or revise any forward-looking information. Note throughout these remarks that the 2022 fourth quarter included 14 weeks of operations and the 2021 fourth quarter included 13 weeks of operations. Once again, Landstar delivered record financial results in fiscal year 2022. Our record performance in 2022 followed another record year for Landstar in 2021. Among many new annual financial records we established in 2022, Landstar achieved record annual revenue of $7.4 billion, $900 million higher than the previous annual record set in 2021. Diluted earnings per share in fiscal year 2022 was an annual record of $11.76, an increase of $1.78 or 18% above our prior fiscal year record of $9.98 in 2021. During fiscal 2022, Landstar generated a record free cash flow of $597 million. Additionally, during fiscal year 2022, Landstar paid dividends of $116 million and purchased $286 million for the company's stock. In December, the Board declared an additional dividend totaling $72 million to be paid in January 2023. Within our record financial performance in 2022, the 2022 first quarter proved to be a peak following six consecutive quarters of strengthening in the macroeconomic freight environment. As we move further into the year, supply chain congestion began to ease, and the macroeconomic freight environment, although still relatively strong by historical standards, began to weaken, not unlike typical cyclical patterns historically experienced in the best domestic freight environment. Beginning in the 2022 second quarter, Landstar experienced a deceleration in quarter-over-prior-year growth rates for both truck revenue per load and the number of truckloads that ultimately led to truck revenue per load and the number of loads hauled via truck in the 2022 fourth quarter to both be below the 2021 fourth quarter. Heading into the 2022 fourth quarter, it was clear these cyclical conditions were continuing. As such, during our October 22, 2022 third quarter earnings conference call, we provided 2022 fourth quarter revenue guidance of $1.775 billion to $1.825 billion, below the 2021 fourth quarter revenue by 6% to 9%. The guidance anticipated truck volume to decrease from the 2021 fourth quarter in a range of 2% to 4%, even given the extra week in the 2022 fourth quarter, and revenue per truckload to be 5% to 7% below the 2021 fourth quarter. 2022 fourth quarter loads hauled by truck were 6% below the 2021 fourth quarter, and revenue per truckload was 7% below the 2021 fourth quarter. Note that the number of truckloads hauled by Landstar reached an all-time record level in the 2021 fourth quarter and remained relatively strong by historical standards throughout 2022. Although revenue came in below the low end of the earnings guidance, earnings per share came in at the low end of the guidance. This can be attributed to a higher variable contribution margin than projected, along with lower SG&A and other operating costs in the 2022 fourth quarter compared to the estimated amount reflected in the guidance. As compared to the 2021 fourth quarter, revenue hauled via truck was $211 million, or 12% below the 2020 fourth quarter, approximately 16% when excluding the estimated truck revenue of $60 million contributed by the extra week in the 2022 fourth quarter. And revenue hauled via other modes was almost $60 million below the 2021 fourth quarter. While we experienced a 12% decrease in truck revenue from the 2021 fourth quarter, to be fair, one needs to put the impact of the pandemic-driven demand and supply chain congestion in perspective. Since the end of the summer of 2020, strong consumer demand along with supply chain congestion drove truck rates and volume to historic highs. Landstar's two-year growth in truck volume from the pre-pandemic fourth quarter of 2019 to the record 2021 fourth quarter was 37%. Truck revenue per load grew 39% during that same time period. We expect that that growth was going to subside, as supply chain disruptions eased and economic cyclicality returned to the freight industry. And when that happened, year-over-year comparisons will become very challenging. Leaving aside the tough quarter-over-prior-year comparisons we experienced in the 2022 fourth quarter, truck revenue in the 2022 fourth quarter was still 68% higher than that of the pre-pandemic 2019 fourth quarter. Revenue hauled via van equipment in the 2022 fourth quarter was $154 million lower than the 2021 fourth quarter, but $373 million above the 2019 fourth quarter. Revenue hauled via on-site and flatbed equipment in the 2022 fourth quarter was only $13 million below the 2021 fourth quarter, about $121 million over the 2019 fourth quarter. And revenue generated via other truck transportation services, mostly power-only services, was $48 million lower than the 2021 fourth quarter, yet $116 million above the 2019 fourth quarter. Clearly, the van market was more favorably impacted by the pandemic-driven consumer demand than the unsided flatbed market throughout the past two years. Van loadings in the 2022 fourth quarter were 5% lower than the 2021 fourth quarter. Unsided flatbed loadings were 2% below the 2021 fourth quarter, and other truck transportation loadings were 16% below the 2021 fourth quarter. After the decrease in van and other truck transportation loadings, the number of loads hauled via our substitute line haul service offering, primarily on van equipment and some power-only moves, was 35% below the 2021 fourth quarter, even with the extra week in 2022. Additionally, load counts for consumer durables, building products and foodstuffs were down 8%, 6%, and 31%, respectively, from the 2021 fourth quarter. One of the few volume growth areas was in automotive parts and materials, which grew 13% over the 2021 fourth quarter. New agents as of the end of 2022, which we define as agents contracted with the company on or after the beginning of 2021, contributed $144 million of revenue in fiscal 2022. This followed new agent revenue of $181 million in 2021. Our agent base is strong, and these new agent additions will continue to drive new customers and truck volume into the network. During 2022, there were 625 agents who generated over $1 million of Landstar revenue. This is the highest annual number of million-dollar agents in our history. Turnover for $1 million agents is typically very low. During 2022, $1 million agent turnover was only 2%, in line with historical million-dollar agent turnover rates. We ended 2022 with 11,281 trucks provided by BCOs. The number of trucks provided by BCOs decreased by 583 trucks or 5% from the beginning of 2022. Overall, BCO truck turnover was 29% in 2022 compared to 21% in fiscal year 2021. A decrease in the number of trucks provided by BCOs is typical during a cycle of decreasing revenue per mile. In December 2022 compared to December 2021, revenue per mile on van equipment hauled by BCOs decreased by 16%. In December 2022 compared to December 2021, revenue per mile on on-site equipment held by BCOs decreased only 2%. In each case, revenue per mile excludes the impact of fuel surcharges billed to shippers, as 100% of fuel surcharges billed to customers are excluded from Landstar's revenue and paid 100% to the hauling BCO. In fiscal year 2022, total fuel surcharges billed to customers and paid 100% to BCOs were $445 million, compared to $260 million in fiscal year 2021.

Thanks, Jim. Jim G has covered certain information on our 2022 fourth quarter, so I will cover various other fourth quarter financial information included in the press release. In the 2022, 14-week fourth quarter, gross profit was $180 million compared to gross profit of $209.8 million in the 2021, 13-week fourth quarter. Gross profit margin was 10.7% of revenue in the 2022 fourth quarter, as compared to gross profit margin of 10.8% in the corresponding period of 2021. In the 2022 fourth quarter, variable contribution was $234 million, compared to $263.3 million in the 2021 fourth quarter. Variable contribution margin was 14% of revenue in the 2022 fourth quarter, compared to 13.5% in the same period last year. The increase in variable contribution margin compared to the 2021 fourth quarter was primarily attributable to an increased variable contribution margin on revenue generated by truck brokerage carriers, as the rate paid to truck brokerage carriers in the 2022 fourth quarter was 294 basis points lower than the rate paid in the 2021 fourth quarter. Other operating costs were $10.3 million in the 2022 fourth quarter, compared to $9.4 million in 2021. This increase was primarily due to increased trailing equipment maintenance costs, partially offset by increased gains on sale of operating property. Insurance and claims costs were $29.6 million in the 2022 fourth quarter, compared to $30.3 million in 2021. Total insurance and claims costs were 5% of BCO revenue in the 2022 period and 4.2% of BCO revenue in the 2021 period. The decrease in insurance and claims costs as compared to 2021 was primarily attributable to decreased net unfavorable development of prior year claim estimates, partially offset by an increased severity of accidents during the 2022 period. During the 2022 and 2021 fourth quarters, insurance and claim costs included $3.8 million and $5.2 million, respectively, of net unfavorable adjustments to prior year claim estimates. Selling, general and administrative costs were $56.1 million in the 2022 fourth quarter, compared to $62.6 million in 2021. The decrease in selling, general and administrative costs was primarily attributable to a decreased provision for incentive and equity compensation under our variable compensation programs and decreased employee benefit costs, partially offset by increased wages and an increased provision for customer bad debt. In the 2022 fourth quarter, the provision for compensation under variable programs was $5.3 million, compared to $16.8 million in the 2021 fourth quarter. Depreciation and amortization was $14.8 million in the 2022 fourth quarter compared to $13.1 million in 2021. This increase was almost entirely due to increased depreciation on software applications resulting from continued investment in new and upgraded tools for use by agents and capacity. The effective income tax rate of 24.7% in the 2022 fourth quarter was 140 basis points higher than the effective income tax rate of 23.3% in the 2021 fourth quarter, as the effective income tax rate in the 2021 fourth quarter was favorably impacted by the resolution of certain state tax matters. In addition, the effective income tax rates in the 2022 and 2021 fourth quarter were each unfavorably impacted by the impairment of deferred tax assets related to employee equity compensation arrangements as a result of performance conditions being attained as of year-end. The increase in the effective income tax rate in the 2022 fourth quarter compared to the 2021 fourth quarter drove approximately $0.05 of the $0.39 quarter-over-prior-year quarter earnings decline. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $394 million. Cash flow from operations for 2022 was $623 million, and cash capital expenditures were $26 million. The operating cash flow generation of $623 million during fiscal year 2022 was more than double the previous annual record operating cash flow of $308 million in fiscal year 2019. Back to you, Jim.

Thanks, Jim. As it relates to our 2023 first quarter guidance, recent trends in truck revenue per load and load volume indicate the continuation of a softer freight environment consistent with cyclical trends we believe we have seen return to the marketplace over the last three quarters. As to truckload count, we generally experienced a 2% to 3% sequential decrease in volume from the fourth quarter to the first quarter. Excluding the extra week from the 2022 fourth quarter, a truckload volume assumption has volume decreasing at a slightly more rapid rate than the historical typical range as demand softening has continued into the beginning of the 2023 first quarter. Revenue per truckload trends from the fourth quarter to the first quarter have been inconsistent over the past several years. Over the past several weeks, revenue per truckload has drifted down, which is often the case in January. We finished 2022 with revenue per load approximately 10% below where we were as of the beginning of 2022. And our expectation is we could experience an additional 5% to 7% decrease in revenue per load during the 2023 first quarter. Note that revenue per truckload reached its all-time high at Landstar in February 2022 and experienced levels without historical precedent throughout much of the 2022 first quarter. As a result, the revenue per truckload comparisons for the 2023 first quarter compared to the record revenue per truckload established in the 2022 first quarter makes for an extremely difficult year-over-year comparison. Overall, we expect revenue in the 2023 first quarter to be in the range of $1.400 billion to $1.445 billion and diluted per share to be in a range of $2.05 to $2.15. This earnings estimate anticipates variable contribution margin ranging from 14.2% to 14.5%. Although we do not plan on providing full-year earnings guidance due to the unpredictable nature of the spot market, Jim will cover our estimates of cost and expenses for fiscal year 2022, as they are more predictable and fixed in nature. Jim?

Thanks, Jim. With respect to my expectations for Landstar's full year other operating costs, assuming a normalized provision for contractor bad debt, I estimate 2023 other operating costs would increase by $1 million to $3 million, as increased trailing equipment maintenance costs and increased transaction costs associated with the software rollout are partially offset by increased gains on sales of used trailing equipment. With respect to anticipated insurance and claims costs, I continue to believe 4.5% of BCO revenue is the appropriate measure to utilize, but we will continue to reevaluate each quarter. My base case assumption on selling, general and administrative costs is a $3 million to $6 million increase year-over-year, assuming a normalized provision for customer bad debt. Included in that base case assumption is approximately $12 million of tailwinds from potential decreases in the company's variable compensation programs. In a hypothetical 20% revenue decline scenario, those tailwinds could grow closer to $18 million to $20 million, which will result in a slight decrease in selling general and administrative costs year-over-year. I expect depreciation and amortization costs to increase $4 million to $6 million year-over-year depending on the timing and ultimate acquisition cost of new trailing equipment. I also expect that the information technology headwinds we have experienced on this line in recent periods will begin to recede in 2023, as a greater portion of our IT spend is expected to shift from initial development work to maintenance and enhancements of existing in-service digital tools and products. Back to you, Jim.

In closing, and as previously mentioned, the macro freight environment gathered strength from late-summer 2020 through 2021 and drove Landstar's truck revenue to historic highs. The 2021 fourth quarter truck revenue was 91% above the pre-pandemic 2019 fourth quarter. The prior upmarket cycle reached peak in the 2021 fourth quarter and 2022 first quarter and was followed by decelerating year-over-year growth rates in truck revenue per load and volume beginning in the 2022 second quarter. Regardless of challenging year-over-year comparisons, less robust freight environment, and the inflationary pressures of labor, equipment, and insurance costs, the resiliency of the Landstar variable cost business model continues to generate significant free cash flow and financial returns. For example, if we were to experience a 20% revenue decrease from the $7.4 billion of revenue reported in fiscal year 2022, we believe Landstar could still generate an operating margin, representing operating income over a variable contribution of 50% or more. We also expect free cash flow to exceed $350 million under that scenario. 2021 and 2022 were historic years at Landstar, during which the company achieved new levels of record financial performance that resulted in Landstar's historically strong business and balance sheet becoming even stronger than before. 2023 has its work cut out for it, due to the tough comparisons to the prior year and a less robust freight environment to start the year. Nevertheless, we have been through many business cycles before and we still expect nothing less than 2023 being a terrific year by historical standards with anticipated annual revenue well above pre-pandemic levels. And with that, Bill, we will open up to questions.

Thank you very much, sir. We have the first question coming from Todd Fowler of KeyBanc Capital Market. Your line is now open.

Hey. Hi. Great. Good morning, everybody. Jim, I guess to start on the revenue per load commentary for the first quarter, it sounds like that the down 5% to 7% is in line with what you see from a typical seasonal standpoint. But you've got a little bit of easier comparisons coming off of the fourth quarter. And I think that on a year-over-year basis it kind of implies like a mid-teen decrease. Can you just comment on do you feel that that's reflecting where the market is or a little bit of a lag in kind of how your pricing flows through on the revenue per load side and then, just some expectations maybe as we move through 2023 for revenue per load during the year?

I would say that we generally lag the market climb by about three to four weeks due to the reaction time of shippers and agents coordinating pricing. However, it's not a significant delay. The current market trends seem to be more reflective of the market than what we usually observe in our business. We did experience a decline in December and, based on current market dynamics, it seems likely that we will continue to trend downward in January as well. Although December did end up being slightly lower than we expected, it hasn't led to a larger drop in January. We remain confident that we will see the typical decline of around 10% from the fourth quarter to the first quarter, along with an additional 5% to 7% drop, leading to a mid-teen decline in the first quarter. Currently, the market appears a bit more stable compared to the last several weeks, although there is still a level of unpredictability due to rapid fluctuations over the past few months. If we consider the last two years, I believe in cycles, and regardless of the pandemic, the cycle between spot and contract markets will continue. As capacity tightens, the spot market will rise, followed by a loosening of capacity leading to a drop in the spot market. My perspective is that we peaked in February, having experienced about 18 months of growth from August 2020 to February 2022, and if we anticipate another 18 months of decline, we could see a trough around the summer. I expect improvements and more seasonal rate increases in the second half of the year, particularly as the spot market drives rates up, albeit with typical seasonal increases from Q1 into Q3 and Q4.

Yes, that makes sense. It's been surprising how it can feel like a cycle even when it might not be. I have a quick follow-up. I know you discussed the end markets in detail, but are you noticing any changes now? It seems like during much of last year, the consumer durable sector was slowing down, while some of your industrial end markets are managing to hold steady. Could you provide any general observations about the differences in strength and weakness across these end markets? Thanks.

Hey Todd, this is Rob. Specifically, on the output equipment plan, we're seeing a lot of positive trending on heavy-haul projects. We're seeing a lot of heavy equipment really pick up for us from the manufacturers direct. Now, that could be the fact that again due to supply chain constraints that they're now filling orders that they couldn't over the past year and a half. But to that point exactly, to the cycling up and cycling down, more so in the metals and some of that more specialized open equipment freight, we're seeing that come down, which is a typical cycle because it's winter time, right? There's not a lot when the ground freezes up north; there's not a lot of those projects going on. But we do anticipate as the season warms up and the year moves on that will continue on an upward basis. Automotive continues to be where it's been both from a van and a flatbed perspective for us. When you look at the automotive suppliers and you talk about the business that we're doing, I don't know if they're going to be caught up any time this year. That's really hard to predict, but it doesn't look like they are. So, that will continue in that trend.

Got it. Thanks for the time this morning. I'll pass it along.

Thank you. We have the next question coming from the line of Scott Group of Wolfe Research. Your line is now open.

Hey, thanks. Good morning, everyone. I wanted to get your thoughts, Jim, on the cycle. It seems like you're optimistic that rates are hitting their lows in the first and second quarters. Looking at the data, we've seen over a 60% increase in rates from the trough to the peak, and we're nearing a 20% decline from the peak to the trough. With your extensive experience, do you think this pattern aligns with what you've observed in previous cycles regarding the sustainability of these pricing increases?

I believe the timeline for the peak-to-cycle of 18 to 24 months makes sense. However, we have never experienced a trough-to-peak growth of 60%. One of the points of discussion is what the peak-to-trough looks like. Currently, we might see the trough down by 20% or 25%, but clearly, we are not going to see a 60% decline. I don’t think we will return to 2019 levels due to significantly higher costs from inflation and insurance. It seems unlikely that the industry can revert to those rates. From what we’ve observed in the first few weeks of January, we are seeing a gradual decline, but not a drastic one. I feel fairly optimistic about my outlook. I’m uncertain if we will continue to see a drop into the second quarter, but there may be slight improvements during that time, leading to more favorable conditions for spot markets later on.

Okay. So, do you have a ...

The high lows over the last two years have been crazy, right? Before that, it moved 10% or 15% from peak to trough. And not just the pandemic drove it to new highs. And like I said, I just don't think it pulls back that far, as far as it grew because of the cost structures.

Do you have any insights on our contracts versus spot rates? Additionally, regarding the increase in costs, we've noticed a significant decrease in the BCO count and in the approved broker carriers. What are you observing in terms of capacity? Can you provide an update on how that is progressing in Q1?

Yes, this is Rob. From a pricing perspective, there are still significant pressures on rates right now due to the substantial drop in spot market rates. I think they are starting to stabilize a bit. Assets have been pushing back for a while because of their increased operating costs, and we are beginning to see those carriers and contract rates starting to relax and respond to some of the pricing pressures. I believe it's weakening, but I don't think we have reached the bottom yet. However, from our perspective, I do see some stabilization in rates from spot to contract.

Yes, Scott, this is Joe. I'll address the BCO and capacity question. We anticipate that the first quarter will mirror the fourth quarter, showing a net decline. The factors driving this situation remain unchanged. When we consider our model, on the ad side, the challenge arises when individuals cannot acquire used trucks, making it difficult for them to transition from other systems to ours. There is still significant interest in Landstar, but much of this interest hinges on the ability to locate a truck. As new trucks enter various systems and become available in the market, this will positively impact the used truck market. Once the availability and pricing become more reasonable, I believe we will see improvement in the ad aspect. On the retention side, the key issues are the parts and labor needed to maintain existing equipment. As you may know, BCOs are using older equipment, and we have encountered delays in getting trucks prepared and repaired, which has affected our utilization throughout 2022 and continues to do so in 2023. So as that used truck market improves, as the ability to get parts and get trucks into shops and get equipment back on the road, we think that helps a great deal because it's really been pretty disruptive for the last few quarters. Stabilization of demand is a significant factor for BCOs. Once prices stabilize, I believe there will be increased interest in returning to the fleet, as many are currently sidelined. In my view, there is not a dramatic difference in the challenges BCOs face with carriers, given that over 60% of our brokerage business involves carriers with fewer than 10 trucks. They are experiencing similar supply-related, cost-related inflation, and access to equipment challenges. Many are just trying to navigate through these difficulties. It is a tough environment for many truckers right now. As some of these uncontrollable factors become manageable, I anticipate a recovery, but that may take a couple of quarters.

Okay. Thank you for the time, guys. Appreciate it.

We have the next question coming from the line of Jack Atkins of Stephens. Your line is now open.

Thank you for the time. I appreciate it. Good morning. I have a macro question divided into two parts. The first is for Joe and the second for Rob. On the industrial side, there are concerns about potential destocking of industrial inventories, similar to what we have seen on the retail consumer side in the past nine months. Are your customers indicating anything about the need for that? Additionally, regarding Scott's question about capacity, with the pressure on small fleets, are you noticing any signs of capacity leaving the market, or is that exit potentially accelerating? I know that was a long question, but I'd like to hear about both of those points.

Yes, I'll start, Jack. I think yes just based on the FMCSA data and some of the stuff we're reading, the net revocations of carrier authorities has really – it's been like 6000 to 8000 a week for the last several weeks of 2022. And we've seen our approved carrier count decline as well into the first quarter. So I think you're going to continue to see that. I think until some of the conditions I was just referring to with Scott kind of find a floor and start to see some level of consistency or predictability, whether it's predominantly getting trucks fixed, getting drivers the labor side of things and keeping their trucks healthy, and again just feeling comfortable with where the environment is, I think you're going to continue to see the larger market contract a little bit from a capacity standpoint and particularly in the small carrier realm, which is a lot of that one to 10 truck fleets.

And Jack, this is Rob. To address the destocking comment. That is not something that we're experiencing or have in those conversations, again due to a lot of the constraints that have taken place over the last two years. We're really starting to see a lot of the projects come back in the aerospace and the energy, automotive, government things of that nature. So where they couldn't get supplies before or they couldn't actually fulfill their projects or orders, we're starting to see those now come to fruition and continue going forward.

Okay. No that's really helpful. And I guess Rob another question for you and Jim Gattoni, Jim Todd, sorry. No questions for you from me on the call today. But I guess Rob, I'd love to get your thoughts on Landstar Blue in 2023 sort of what's the plan for that part of the business this year? And sort of I guess – as you think about that kind of as a springboard into 2024, what do you hope to accomplish to prepare that? I think we're looking at that as a potential growth engine but would just be curious if you could maybe talk about what the plan is for Landstar Blue in 2023?

Yes, absolutely. Landstar Blue is the volume growth mechanism. That's what we're there for. And we see this as a time of opportunity, because as I'm sure you're hearing from others, companies are putting their freight out for it. Companies are looking for partnerships. They're looking for solutions. Now a lot of the reasons why they're doing it is in their mind is to drive rates down or get the rates back to where they were but it gives us an opportunity into lanes into places that we haven't been into different sections of their business to continue to grow that. So we look at it as an opportunity. The more customers that we're in front of talking about their supply chains, their needs in trying to provide solutions, I look at that as a benefit to that company.

From an organizational standpoint I know Jack, I had to jump in because I know you weren't going to ask me a question. So I'm jumping in anyway. We are working like crazy, trying to get Rob all the automation into his systems for – to automate dispatch capacity stuff like that. So there's I don't want to say we are pulling – I don’t say we're holding back on growth there but we're doing it properly and we don’t want to disturb anybody's supply chains until we get automated.

Okay. All right. That makes sense. Thanks again for the time and thoughts, guys. Appreciate it.

We have the next question coming from the line of Bruce Chan of Stifel. Your line is now open.

Hey, good morning, everyone. Appreciate the time here. Jim, Jim Gattoni, I guess maybe just a follow-up on that automation comment. You all talked about a lot of the new technology investments that you're making and how that's going to start to ramp down this year. Can you maybe just give us an update on what those are and as far as the automation how far you are along in that process and what the rollout looks like?

We are operating in two distinct areas. Starting with Blue, it is primarily a contract-focused lane business that necessitates some automated dispatch, which agents can utilize. We are experimenting with Blue to develop tools for our agents. On the core side, it took about six or seven years to establish a Transportation Management System (TMS). The TMS serves as the order-to-delivery system that agents use to input orders, dispatch trucks, and manage transactions. Our largest expenditure has been on developing this new TMS over the past five to six years. In addition, we've integrated a pricing tool, a credit tool, and we are launching a new trailer maintenance app to assist drivers in maintaining trailers more efficiently. Our visibility tool, Clarity, allows us to track freight effectively. All these components of technology are crucial for the successful transport of freight from point A to point B with adequate communication. These systems have been operational for the last year or two and have transitioned from being recorded as assets on our balance sheet to active implementations. Now that they are rolled out, we are depreciating them. The TMS rollout is progressing quickly, with about 15% of our truckloads currently utilizing it, and we aim to increase this significantly this year so that most agents will be using it. Initially, change can be challenging, and feedback from agents who have been using it for 90 days may vary. However, those with 120 days of experience tend to provide very positive feedback on the efficiencies gained in their operations.

Okay. That's great. Really appreciate all that color. And then maybe Rob, just one follow-up. You mentioned some of the glimmers of positivity on the flatbed side. We've heard some discussion on a few of the industrials conference calls about mega projects this year, whether that's related to chips or the Inflation Reduction Act. Just wanted to know, if you're able to attribute any of that positivity on the unsided side to that project business there?

To the project business. Again, a lot of what I've seen is heavy equipment aerospace government. So, while any time that we want to talk about infrastructure, anytime we want to talk about that, I can't directly say that we have an impact in that directly. But I can say that the people that feed those projects we have an impact with them. I don't know, if I answered your question exactly the way you wanted. But I see it more from the manufacturing side than I do from the actual project itself.

You're observing it from the supply chain perspective, where we're dealing with the raw materials and equipment needed for those projects, rather than being hired directly by the project manager. Instead, we are engaged by the suppliers who provide the necessary materials.

Got it. Fair enough. Appreciate it.

We have the next question coming from the line of Bascome Majors from Susquehanna. Your line is now open.

Jim, thinking about your hypothetical 20% revenue decline downside scenario, one thing you've really been good at over the years is outgrowing the market and a volume perspective and protecting not all of that, but a lot of that in downturns. Can you talk a little bit about if a scenario were to present itself where revenues were to fall 20% or close to that? Like where would you have to really break the model? Is it volumes would have to do something that they really haven't done, or is it just a rate reversion that's more commensurate with the rate inflation? Can you just walk us through where you would be most surprised if we did print a 20% revenue decline for 2023? Thanks.

I would be surprised if we experienced a 20% revenue decline. Our revenue decline in the first quarter is already above that threshold. Looking at our projections for the year, I want to note that we monitor analysts' revenue estimates closely. The first quarter's results indicate that we need to improve, and we expect to see a return to seasonal norms. I anticipate pricing strength in the latter half of the year, along with typical volume trends following the first quarter. The unpredictable aspect of our model is typically related to spot pricing, which can fluctuate month-to-month and quarter-to-quarter. While I’m not surprised by the fluctuations, I expect them to remain within a 10% range up or down until year-end. Volumes are what surprise us the most; we observe a consistent pattern year-over-year and month-to-month. If we were to see a decline greater than 20% driven by volume, we would have to investigate further to understand the reasons behind it. However, typically, when we experience a drop, our performance aligns with industry rates, and I would be both surprised and concerned if our volumes declined more than the industry's.

Thank you for the clarification. I noticed that revenue per truck has increased by 25% since 2018 on a yearly basis, and your net revenue per load has also seen the same increase. When considering the model conceptually, is there anything that could cause net revenue per load to diverge significantly from rates, which are crucial for your business's bottom line? Or will it primarily be influenced by the rates as they decline? Thank you.

There's a mix involved. It's BCO or broker. One of the challenges we've faced over the last three quarters is BCO utilization, as they're not driving as much, which affects the variable contribution per load since BCOs typically have a higher contribution per load. This is because we cover their losses on insurance, leading to additional costs. The mix of who is hauling a load—BCO versus broker—impacts revenue. Additionally, there's a typical market spread between tight and soft markets for third-party trucks in our freight. We're currently in an expansion phase regarding variable contribution per load, which we expect to continue at least in the first half as capacity remains loose. However, our model does not fluctuate as much as a pure broker's model because about 40% of our business operates on a fixed margin. If revenue per load decreases for BCOs, the variable contribution per load will decrease accordingly, affecting that margin. For 2023, we anticipate maintaining a variable contribution margin approximately 50 to 70 basis points higher than in 2022, due to current market conditions with more available capacity.

Thank you for the time.

Thank you. We have the next question coming from the line of Stephanie Moore of Jefferies. Your line is now open.

Hi. Good morning. Thank you.

Yes.

Jim I really appreciate the additional color on just kind of your thoughts on the cycle and I think very clear and you can see it in the trends just peak activity in February of 2022. And to your point that based on normal cycle timing that puts us in a bit of a recovery or a normal period in the second half of this year. I'm just curious if you just look at what has transpired with the kind of deceleration since February. How much of that do you think is just kind of an unwind normal cycle from what was a very abnormal two years with COVID? And how you think about what happened if the US macroeconomic environment deteriorates at some point here more so than we're at right now and how that kind of fits into somewhat of an improvement here in the back half? Just would love to give your general thoughts on how the freight cycle and economic cycles can kind of intersect together? Thank you.

Yes, I've been reading a lot about the economy. I'm not an economist, and I find that a challenging word. When looking at economists, some predict a significant recession, while others suggest a soft landing. Therefore, I won't rely too heavily on their forecasts because opinions are all over the place. Clearly, if the economy softens more than we expect, we will struggle to meet the revenue projections currently out there. Typically, our first quarter revenue of $1.4 billion to $1.45 billion accounts for about 22% of our annual revenue in a normal year. If that holds true, the second half would need to contribute to the remaining 78%, bringing us to a projected $6.2 billion to $6.4 billion in revenue. This assumes a standard seasonal growth following the first quarter. If we don’t see that growth, it would put more pressure on us to achieve those numbers. Predicting outcomes is difficult, but if a downturn occurs, it would likely make it harder for us to meet those top-line revenue figures.

Right. No, that's really helpful. And then as you kind of go back and I know thinking over what has happened the last really let's call it February. Do you feel like the commentary that you were carrying from your end markets your customers particularly on the consumer side will make it seem like it was a bit more of an economic slowdown in there end like they were already in the recession, or was this just again kind of come down from a weird COVID environment? I'd just love to hear what your customers were saying and how they were feeling about the environment?

I believe many customers misjudged the situation with overstock. They expected that the trend would eventually slow down and that we would revert to normal business cycles. As a result, several of our customers ended up with excess inventory, which became apparent towards the end of 2021. They are still managing inventory challenges today. This situation led to a reduction in spending as they became concerned about their inventory levels, which contributed to our decline. While not all customers reacted this way, some were late in reducing their inventory production. We've been tracking inventory issues since early summer, but their problems may have started a bit earlier, and they only recently started acknowledging them.

We have the next question coming from the line of Scott Schneeberger of Oppenheimer. Your line is now open.

Good morning. It's Daniel on for Scott. Thanks for taking our questions here. Curious on the other truck transportation line item. What you've been seeing recently across those categories and how we should think about that in the first quarter and maybe beyond please? Thank you.

In the other truck transportation segment, we mainly focused on power-only services, which included a significant amount of substitute line haul business. We were placing trucks there and connecting them with other trailers. However, we noticed a decline in this area around the middle of last year. I expect that this decline will continue, as it previously experienced rapid growth. This segment was one of the fastest-growing during the pandemic, but I believe it will slow down more than the van or flatbed segments. This is mainly due to our activities within the substitute line haul category, which was largely driven by consumer demand.

Thank you. And on SG&A, I mean helpful color earlier, but how should we think about the cadence this year? Anything unusual?

Anything unusual in SG&A in 2023?

Yes, as far as the cadence goes.

Yes. The unusual would be kind of the mean reversion on the compensation under variable programs. But to Jim's point earlier, there's still a little bit of sticky wage inflation benefits inflation. And with softness in the general economy, that could pressure the customer bad debt line a little bit. But that was all scrubbed and part of the guide earlier.

I think one of the areas too is the one you didn't mention, other operating costs, which is really a smaller piece but we're experiencing like 20% to 25% inflation on the trailer maintenance per trailer. So there's some inflationary not just in the SG&A line; some of the biggest inflationary factors we have going on right now is trying to maintain our trailing equipment between the labor and availability of parts.

Got it. Thank you. Thanks so much.

We have the next question coming from the line of Jason Seidl of Cowen. Your line is now open.

Hey. Thank you, operator. Hey. Good morning, guys. I want to circle back a little bit to Jack's question but come at it a little bit different of a way. If we just assume normal seasonality from here in 1Q and into 2Q how oversupplied is the market right now? Are we 2% 3%? Is it more than that? So in other words, how much capacity do you think needs to continue to come out of the marketplace from here to get us back to sort of equilibrium?

That's a very hard question to answer. I would say it's like.

That's why I'm asking for you guys. You guys are the experts.

I know. I was going to say it’s oversupplied by 2.2774%.

Well, that's what I thought. I was probably 2.2777% but.

It's clear that the market is oversupplied, as the rates we were paying for trucks in the fourth quarter were likely the lowest we've seen in a decade. Quantifying exactly how much excess capacity exists is challenging. There's a psychological aspect at play; when rates drop significantly, it causes fear among truck operators, prompting them to lower their rates to secure shipments. This creates a cycle of excess capacity and insufficient demand, coupled with the urgent mentality of needing to secure loads due to the fear of declining rates. Determining the exact number of trucks is difficult, as the market dynamics are complex. Currently, truckers are still charging us competitive rates. Typically, we see a period of three to six months for the market to tighten. I can't provide a precise truck count or excess number, as I believe adding 50,000 trucks will not significantly affect the market. It's more about demand than supply. Sales have indeed increased and were quite high in December compared to previous years, but we need to consider that many operators are replacing older trucks rather than adding new ones. Additionally, the challenge of attracting drivers complicates our understanding of market capacity. Knowing how many trucks are operational and what the demand looks like is tough. However, it was quite loose in the fourth quarter, looser than we’ve experienced in a long time based on the rates we paid. I expect this situation to last through the first quarter, with a possible tightening after we move past the second quarter.

That sounds good. Are we seeing any impact from weather? Because we've been hearing stories about truckers getting stranded down south of all these big storms sweeping through.

Yes. In situations like we're seeing now in Texas, our dispatch loadings were likely quite low yesterday because we don’t deploy trucks under those conditions. However, the loads that were delayed can often be picked up the next day. This usually only has a short-term impact on us and doesn’t significantly affect our quarterly results. The quarter can be impacted more when we are running a contract business and a plant shuts down, preventing the production of a significant number of loads. In our case, we don’t really lose freight; it’s just rescheduled for a different day.

Sounds fair. Gentlemen, I appreciate the time, as always.

And if that's not true, maybe I'll have to come up with a weather excuse in the agenda for the first quarter.

We have the next question coming from the line of Scott Group of Wolfe Research. Your line is now open.

Hey, guys. Thanks for the follow-up. So I’d go back and look in 2019 where revenue was down 10% and SG&A was down 15%. Explain to me, again, just why you think revenue could be down 20%, but SG&A up? I'm just not following.

Why would SG&A be up?

Yes, thinking.

Well, I mean, like the last time we had a big drop in revenue, SG&A was down a lot. So why would this year be so different?

Prior to the pandemic, inflationary pressures were primarily concentrated in the insurance and technology sectors. However, after the pandemic, we have experienced two consecutive years of significant wage inflation. The inflation related to benefits has increased as well. Additionally, in 2019, the compensation under our variable program was approximately $4 million.

It was very low.

We have some recent equity tranches that are based on lower base years, such as 2020. Therefore, while we will experience some softening, it will not be as pronounced on those lines from 2018 compared to 2019 and from 2022 into 2023.

The other piece is not just SG&A. I believe that the insurance line was around $70 million and we're currently at $125 million. So there's $50 million of pressure right there from 2019 into 2023. That's a significant factor.

Jim, I know, you guys did the dividends. I didn't see any buybacks. What's the thought on buyback this year?

This year, we plan to continue buying back shares, which is something we really enjoy aside from our day-to-day work. However, we did not buy back in the fourth quarter because we observed the stock price increasing. At the end of the third quarter, the stock was around 145, and by the end of the fourth quarter, it had risen to between 160 and 170. That’s why we held off; we’re waiting for the price to stabilize. If the stock maintains its current range and we notice some stability in both pricing and volumes over the next couple of months, we would be interested in buying back shares. We want to be opportunistic and ensure there is stability before we make any moves. Right now, it's too early in the first quarter to know if rates will stabilize as we hope, and we need to assess the volume trends as February approaches, since it was our best month last year. We are monitoring all these factors closely, but our stance on buybacks remains unchanged; we still favor them.

Okay. And then just last thing, I may have missed some sort of comments you made about profitability on contractual over spot right now. I haven't heard you talk about it that way before. If you could just expand on that because I think I missed it.

We don't consider blue to be significant. Blue handles most of the contract work, but it's relatively small, so we lack substantial data for comparisons. Our focus is on profitability, and we do not have a lot of contract dedicated freight from the agent base at the core. They manage some of it, but these contract rates are almost equivalent to spot rates. If we are operating under what resembles a contract and rates begin to decline, the shipper will come back to us and lower our rates. So we have contract rates. They just don't hold. So our whole world almost works in the spot world other than the little piece over at blue. I think the question was we're trying to figure out where our spot rates today as compared to contract rates. And I don't think we had a very good answer because I don't think we know where they stand today. We get the data just like you get it from people who publish it.

Okay. Thank you, guys. Appreciate it.

Yes.

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

Thank you. Before I sign off on 2022, I want to thank all of Landstar's agents, BCOs, and employees for putting up another record year. The people in Landstar's unique network of agents, capacity providers, and employees are what truly sets Landstar apart in our industry and enables the success we all achieved together. Thank you and I look forward to speaking with you again on our 2023 first quarter earnings conference call currently scheduled for April 27. Have a good day.

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