Q1 2022 Landstar System Inc Earnings Call
Yes.
Good morning, and welcome.
The Landstar system Incorporated's first quarter earnings release conference call.
It will be in listen only mode until the formal.
A question and answer session.
Today's call is being recorded.
Any objections you may disconnect at this time, joining us today from Landstar are Jim Maloney, President and CEO second.
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 Maloney, Sir you may begin thank you.
Good morning, and welcome to Landstar is 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 <unk> business objectives plans strategies and expectations such.
Such information is by nature subject to uncertainties and risks include but are not limited to the operational financial and legal risks detailed in Landstar is 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 our 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 history.
Typically the first quarter of each year.
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 2022 first quarter did just that first quarter revenue gross profit contribution operating income and diluted earnings per share were each all.
All time quarterly records ahead of even our record 2021 and 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 28th of a form 8-K, we filed with SEC to address the potential impact the invasion of Ukraine could have on last year's first quarter results.
We provide an additional update on our 2022 first quarter performance in our form 8-K, we filed with the SEC on April 5th in advance of managers meeting with analysts at last year's annual agent Convention overall.
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 5th updated guidance.
Revenue increased $683 million up 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.
Only three of the past 10 years prior to 2022 as first quarter revenue per load 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.
The 2021 third quarter 2000, and total on fourth quarter, though.
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 assumed revenue per load on loads hauled via truck would return to more normal normal seasonal patterns on a month to month basis.
However, as disclosed on our February 2008 form 8-K truck rates during the first eight weeks of January and February 2022 exceeded prior years' corresponding period by 27%.
That year over year increase was due to rates increasing from December to January and from January to February by three 3% and two 3% respectively. Those positive sequential trends put February revenue per truckload, approximately 3% above December far above normal seasonal trends where February right.
<unk> 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 last or changes in the price of diesel at the pump impacts revenue hauled via <unk>.
Brokerage carriers, but has very little direct impact on revenue hauled by BCS.
Additionally, as expected the year over year comparison and truck revenue per load in March was much more difficult to 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 <unk> platform equipment in the 2022 first quarter increased 27% and 19% set respectively over the 2021 first quarter.
So the number of loads hauled via truck our initial guidance on January 26 call for truckload volume to increase over the 2021 first quarter and a 12% to 14 percentage range.
February 20th update reported that January and February truckload volume increased 24% over January and February of 2021 and.
In total first quarter truckload volume increased 20% over the 2021 first quarter in line with our April 5th update.
Our February a form 8-K included discussion regarding two of our largest independent sales agents, who each have administrative operations in the 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, our range by that agencies had almost fully recovered.
Nevertheless, as both of these agencies continue to main administrative operators in Ukraine, no assurances can be provided that these agency agencies will not be significantly disrupted by future developments in the ongoing conflict in Ukraine.
Overall truck load volume in January February and March increased 17%, 30% and 14% over January February and March of 2021.
The February increase in a 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 'twenty one.
We estimate that storms decreased truckload volume in February 'twenty, one by 708000 loads and believe most of those loans were held in March.
March of 2022, lower year over year growth rate was attributable to the tougher comp in March 'twenty, one due to the 778000 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 been volume, 17% over the 2021 first quarter.
The number of loads hauled via onsite 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 into 2022 first quarter. The second highest revenue from new.
<unk> agents over the past 17 quarters the agent the agent pipeline remains full.
We ended the quarter with a record of 11935 trucks provided by Bcl capacity, others 71 trucks above our year end 2021 counts overall, the net increase in the number of Bcl trucks in the 2022 first quarter speaks to <unk> ability to attract quality capacity and the tight truck capacity market.
Most hauled via <unk> increased 7% in 2021 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 our network. The number of third party carriers hauling freight in the 2022 first quarter increased 39% over the 2021 first quarter.
I will now pass it to Fred for his comments on a few specific line items within the Companys first quarter financial statements spread thanks, Jim and good morning, everyone.
You've covered certain information on our 2022 first quarter performance now I'll cover some of the other key first quarter financial information included in our press release.
Now I'll discuss our gross profit and variable contribution just a reminder.
But our cost of revenue for purposes of calculating gross profit as 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 different degrees with revenue, including for example, trailer depreciation and maintenance expenses Bcl recruiting training and qualification costs insurance related expenses, such as premiums paid in cost of claims for various freight.
Transportation related insurance policies.
And other costs included in SG&A in our consolidated statements of income for example, insurance brokerage commissions and other fees incurred to administer the insurance programs available to Bcl independent contractors that are reinsured by the company as.
As well as costs related to internally developed technology that directly support our revenue as detailed in a table in our earnings release reconciling gross profit to variable contribution.
And 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 in agent commissions.
As detailed in the reconciliation table in our earnings release that I just alluded to.
In addition, we defined variable contribution margin also a non-GAAP financial measure as variable contribution divided by revenue. This is an important measure for us as purchased transportation in agent commissions are the primary expenses that are 100% variable with revenue and gives us a view into spot market trends in the freight transportation industry on a ship.
Meant by shipment basis.
And the 2022 first quarter variable contribution increased roughly 43% to $275 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 Bcl independent contractor capacity.
Which has a higher variable contribution margin on loads hauled via truck brokerage carriers.
Revenue hauled via truck brokerage carriers increased to 52% of total revenue this past quarter up from 49% of total revenue in the same period last year.
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 most semi variable costs. 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.
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.
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 $38 million in the 2022 first quarter compared to $21 5 million in the same period last year.
Total insurance and claims costs were four 2% of <unk> revenue in the 2022 first quarter compared to three 8% of <unk> 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 year 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 'twenty, two 2022 first quarter compared to $45 $4 million in 2021.
The majority of the increase was related to wage and benefit pressure on our head count as our head count increased to support business growth.
As well as higher wages due to general wage and inflationary pressure.
Pressures experienced by most employers over the last year.
In addition to an increased provision for customer bad debt.
Depletion and depreciation 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 vested in January as a result of our fiscal year 2021 performance. We expect the effective income tax rate to return to 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 dividends of $9 million.
Special dividend of $75 million paid in January of 2022.
And $109 million of share repurchases.
Funded a portion of our first quarter share repurchases with our revolving credit facility ending.
Ending the first quarter with a drawn balance of $70 million under that facility.
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, Brett.
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 to you may impact revenue per load at Landstar.
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 <unk>, which represented 42% of truck revenue into 2021 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% of the bcl hauling those loads and are not included in the Companys revenue.
However, with respect to lowest hauled via truck brokerage carriers. The cost of fuel is often reflected an all in rate billed to the customer by landstar.
Accordingly accordingly.
An increase in fuel costs of this magnitude with.
It would typically be expected to increase truck revenue per load on loads hauled via <unk>.
Hauled by truck brokerage carriers, which represent a 58% of truck revenue in the 2022 first quarter in.
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 and 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 Atlanta.
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.
In 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 costs 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 'twenty 2022 was a record first quarter truckload count.
From 2016 to 2021 without 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 towards the lower end of the range of recent historical first to second quarter sequential percentage increases and therefore expect truck load count to increase over the 2021 second quarter in a low double digit percentage rates.
Based on the expectations of truck revenue per load and the number of loads hauled via truck I. Currently anticipate 2022 second quarter revenue would be in a range of $2 billion to $2 billion $50 million.
Based on that range of revenue and assuming insurance and claim costs are approximately four 2% of Bcl revenue I anticipate 2022 second quarter diluted earnings per share to be in a range of $3 22 to $3 32.
Overall I'm extremely pleased with our start to 2022 2022 first quarter revenue was our 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 2020 to 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 precedence to start any year over the past couple of decades.
Perhaps even more impressive than the topline 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 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 BCE loss on van equipment.
As mentioned previously fuel surcharges billed to customer are excluded from revenue and the cost of purchase trends.
<unk> called via Bcl capacity.
Revenue per mile on loads hauled via <unk> equipment increased 5% from December to January .
3% from January to February and decreased 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 our revenue per mile is far below the decrease we have been reading about in recent reports.
It also.
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 two months.
In our view the overall via Landstar continues to remain robust revenue per load continues at all time highs on demand for our truck transfers 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 without any we can open to questions.
Thank you guys.
At this time, we will begin the question and answer session. If you would like to ask a question. Please press star one of your Touchtone phone. Once again. This time once you ask your question and to cancel your question. Please press star two.
First question will be from Bakken.
Your line is open. Please go ahead.
Hey, good morning, and thanks for taking my questions.
Jim Thanks for the comments on seasonality and how you're seeing that trend.
Tops down into the second quarter here can you talk a little bit more on the anecdotal like from a volume and demand perspective are there regions or types or verticals or business, where you're feeling things a little weaker or is the is the guidance at the lower end of demand seasonality for the second.
Quarter really more about the expectation that it probably cost us from some of the math.
I am on the expectation side that there is an expectation that it cools, mostly its expectation, but let's not say that we're not seeing little signs.
Of softness as I said, you saw that revenue van revenue per load.
Dropped about 5% since March on the Bcl, which is clean of fuel. So that's kind of a kind of a very clean metric.
When you talk about commodities or industries or things like that.
Year over year automotive was really good because automotive is really soft last year. So you've got to kick back in automotive are sub line haul business look relatively flat, but it is really.
That area. When you look sub line haul, which was a lot of that e-commerce business between hubs of the.
Parcel carriers.
We saw volume growth there, but we saw it offset a decrease in rate per load.
From a consumer durables still still very strong.
Little softening compared to where we've been for the last six or seven quarters.
But otherwise theres no individual area within our commodity base that we're saying, we're seeing any kind of like real weakness I mean energy clearly, it's only 3% of our business it really hasn't bounced back.
But theres no real areas that you'll see that our pointing to some of the things we're seeing in the.
And the write ups look we look at some of the data whether it's truck stop we look at the AP.
And.
We sit here today.
In a position where I don't think in the history of my career here I have seen the differential between what some of the street is saying.
And some of the information out there.
Compared to what we're seeing.
Like I said at the beginning of this conversation is.
While we've seen a little softness absolutely, but it's not what you are reading about.
Not even close to what <unk> seen in the Wall Street Wall Street Journal article from last week about 37% drop in.
In spot rates since December to tell you the truth.
And what I went through there is our spot rates actually climbed from December into when we talk about this band like the clean band without the fuel in it you are talking about an increase in spot rates on van side from December to January January February and then a little bit of pullback in March but it's we're still sitting at or above the December number when we close out the <unk>.
But so we're just not seeing.
What some of the metrics or the industry metrics are giving look it could be we lag like we do tend to lag a little bit, but I still find it hard to believe that rates dropped 37% over the last three months, we've never seen that happen in the history of our numbers.
Look back on that that metric, we're talking about on <unk>.
One of the biggest drops we had.
Pre basically pre pandemic. If you look at July of 2018 that that revenue per mile. On <unk> was it was at its highest ever in July of 2018.
It was at its lowest in a really long time may of 2020 because of the pandemic.
So it took about 18 months to drop but it only went down 24% so.
Over that whole period of time from the from the best point effort to the lowest point.
The drop off that the pandemic. So don't look I'm a cycle guide to I expect things to slow absolutely. It's why it's my pessimism and me, we're just not seeing the extent that's being put out.
Some of the reports.
I appreciate that context.
<unk>.
Can you help us on the similar question I mean, obviously investors are trying to.
Think about the worst case and hope it doesn't happen in position for that if it does but.
When we are doing that are your shareholders are doing that what are you often.
People Miss on the Landstar model.
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 were trying to do it would be helpful. Thanks.
I don't know you guys missed that much on the way the cycle works for US I think what everybody is struggling with is if the cycles down how far does the cycle go down which right now.
I'm not sure even the experts in this room I'm not talking about me I am talking about Joe Beacom.
In this room could say, whereas if we go to a trough, whereas the drop on the revenue per mile or revenue per load I think thats kind of difficult to come up with we know that we have.
Trailer inflation right that not only does maintenance and labor costs, a lot higher than they used to be to fix a trailer the price of new trailers coming in hasnt hit us yet, but we start by and those are going to start hitting next year.
Even just employee costs when you look at what's going on and you're trying to maintain your employee base with this shift in people transitioning out of one job into another employee wages and benefits are climbing.
That all bills into elevating that revenue per mile, but I don't think we know exactly how much how much you can how much the we're at a peak revenue per mile today, how low can that go.
Thats a question it would be.
Great to have the answer to do I personally believe it's going to pull back to where we were back in even 2018, which was all time records no I don't think it can because all the.
All the costs that were built into the system today and then we didn't even mention the insurance and claims Greg we were running two five years ago. Our insurance line was $50 million to $60 million now is going to run 100 120.
It's all of those things that are built in there and really trying to figure out what the trough or bottom revenue per mile is probably difficult and I don't want to be that pessimistic, even though I am a pessimist I just don't see it pull it back that far I, just think it's a normal cycle and you might pull back is it unrealistic to think we could pull back 15%, 20% no I don't think it is.
37% kind of surprises me.
As one of the reports that came out.
Yes.
Thank you for that I'll pass it on.
Thank you. Our next question will be from Jack Atkins of Stephens. Your line is now open. Please go ahead.
Hey, great. Good morning, everybody. Thanks for taking my questions.
Sure 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.
Some it's a pretty significant.
Gross profit tailwind from that as well could you maybe kind of talk a little bit about.
How do you think that business over the course of maybe.
For the next few quarters is going to trend.
How are you thinking about that and then longer term do you feel like that.
That business will come maybe return back to historical levels or do you feel like your agents that specialize in those modes that maybe taken some market share.
Well, we've recruited a few agents into it so when we recruited agent and it clearly takes market share on the Ocean side, we're really Rob's team did a good job of bringing in at an agent or two to help grow on the on the ocean side.
The that trend is really with a lot of that ocean stuff is when we look at it it's coming across on the right right you guys know that the rates on the <unk>.
On the Ocean has kind of gone through the roof over the last 18 months.
Volumes grew a little bit too on a small base I think it's always just going to be.
5% of the overall busy.
Business for us, it's kind of niche a spot Mark project project oriented type rate with a couple of routine customers that we have that are driving rate and I think thats, what youre seeing the growth in more of a cut off the project list. We have some routine customers in there now that are driving the ocean stuff.
On the air side.
That volume is down and Thats very sporadic on what happens to can you get the cargo on the ship or should we put it on air expedite. It. So there's a lot of volatility and air side, but I would say I'd say Jack going forward. It's not we still have about 10 agents who operate in each one of those metrics different agents within whether it's rail air Ocean.
And they are the experts in that field and we provide a little support but I would say, it's going to kind of rumble around where it is today.
With the potential to add more agents into the network and help agents grow but consistent I would say keep it consistent with where it is okay. Okay. That's helpful. Thank you and then I guess just one follow up question.
Maybe this is for Fred but I guess as we're thinking about the <unk> 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 the 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.
Hey, Jack Thanks for the question.
We're assuming pretty much steady kind of.
Rent trends of what we're seeing currently continue.
As Jim said, there are 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. Okay. That's really helpful. Thanks again for the time guys sure Jack.
Thank you. Our next question will be from Stephanie Julien. Your line is now open ma'am. Please go ahead.
Hi, Good morning, Thank you for the question sure.
I wanted to touch a little bit on what you're seeing a talk about that.
But on the demand side, and let's fast forward through the year expectations around maybe incremental port congestion and supply chain disruption.
Lot of the backlog of ships leave Asia and come to the U S. Maybe what youre hearing from any customer say about any expectations or preparations they might be making ahead of peak season.
Given that dislocation that we're seeing between Asia and the U S here and what that can mean for your business.
Well I think all the ships are hung up off of Shanghai. So if anything it's probably put a little damper in the disruption right things are starting to get cleaned up on the west coast ports.
With the lack of ships coming in there I think that so I do disruptions good for us so when they do open up the <unk>.
<unk> shipping to stop by the Shanghai again, I think that'll be a positive thats one of the positive you can see going forward.
Of note.
Yes.
Fourth get congested again, I'm not saying they are not congested there's still a lot of ships out there. The dwell times are still more than it used to be thats just coming down.
But the way it would impact our businesses again create more freight coming into the west coast.
When they start moving out of China, again, and just create more truckload volumes because the rails can handle it.
What it overflows.
Got it. Thank you and then maybe on the other side of that 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.
Down cycles.
<unk> Friday.
Yes, Stephanie <unk>. Thanks for the question I think you've seen a tremendous amount of small carrier capacity coming into the market over the last 18 months to two years and I think.
I don't see that it's going to be a whole lot different there if things do begin to cycle down I think as we've seen in the past Youll see.
Decreased utilization and then Youll see some of those trucks leave the market we've seen that here in the past to look at 2019, where we had growth in capacity and then we lost <unk> late in the year I would I would suspect that that.
Won't change.
Demand changes price changes you will see some some cyclical impact from a capacity standpoint, I think the inability to get used trucks in the and the difficulty in repairing trucks and the inability to get the quantity of trailers you want when you want I think that exacerbates it a little bit right now.
But you'd like to think in the coming 23 or beyond some of that stuff begins to get more normalized.
But I think as the.
With all the with the incremental small carriers that have entered the market. <unk> also entered the market at a higher operating rate and I think historically, we've seen before is that something that we should kind of factor in as we think about that.
The magnitude of any kind of rate deceleration.
Path yet in the market.
Yes, if there is.
A significant decline.
Unlike what we're seeing but maybe something thats worse or later.
Thank you could see some of these small carriers as we've seen in the past.
Where they don't really have the safety net debt.
Maybe others have right there 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 'twenty through 'twenty one.
You can see them exit to some degree if things got worse in and their cost structures werent 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 with Wolfe Research. Your line is now open.
Hey, Thanks. Good morning, good morning, So I wanted to go back to the disconnect that you are talking about between spot rates and what Youre seeing if you look over time, there certainly is a.
Pretty tight relationship between your Rev per load in spot rates, if you like.
Our yields by about a quarter or so so do you think that this is just a lag and youre about to see it or is there something that you think is different this time around and why youre not going to see it to the same extent that maybe the spot market might see it.
Yeah.
Sure.
The lag would be beyond us with this drop came from December and it dropped into March and I think most of the.
Wall Street Journal report that I'm talking about it says 37% drop in drive end truckload spot rates since December , but I think 27% came in the past month.
I do believe that we probably have a little bit of a lag, but when you look how we do correlate with either.
Data in the spot market data, we're not as volatile like Youll still shows they'll show price has gone up 30% will go 15, they'll go down in 'twenty will be down 10.
I think we will follow that trend going forward, maybe on a little bit of a lag, but not to the extremes that we're reading and if you look back in history.
The volatility in the spot market indexes that are published out there is a lot more significant than ours and I think there's reasons for it one is when you think about.
Even though we play in the spot market.
Half or more of our <unk> are hauling our trailers, it's a little more sticky right. So it's not that true negotiated youre not all of a sudden take a 25% of our price there because they are using our trailers right. So theres I think theres, a more stickiness in our model and a true spot market, even though we work in the spot market. We do have dedicated customers with Bcl is hauling in those routes.
And the 10 the rates tend to hold a little more than that would do in a true spot move so do I expect us to trend down, yes, I've been saying that since January of 2021. So.
It's just a question.
Does it go down and I don't think it goes down as much as what we're reading in the papers because I think we're a little more sticky than what they are putting out.
Okay, and then just so we understand that the guidance for Q4.
May and June or are you assuming rev per load similar with April or are you assuming some reduction in May June Rev per load from April .
Yes, we're assuming pretty consistent.
March to April .
April April to May may to June as we kind of level that off because thats what were kind of seeing in our numbers right now.
And then just longer term.
Net operating margins for you guys or are fantastic right now.
At some point as the cycle plays out where do you think.
Those can do those go back to where they were or back to your comment earlier, Jim that you don't think rates go back to where they were do you think net operating margins can stay above what they used to be.
We're always going to target, 50% I would think that we can keep them over there, but a drastic reduction clearly would put pressure on that comment.
Look we did 60% in the quarter. That's that's just a just a fabulous quarter I'm not going to try and benchmark for that number.
But do I think that.
If you have the downturns that people are talking about you could be back under 50%, but our goal is to try and maintain that over 50% margin.
Okay. Thank you for the time guys I appreciate it.
Thank you.
If you would like to ask a question. Please press star one on your Touchtone phone. Once again. This time once you ask your question and our next question will be from Scott Schneeberger.
From Oppenheimer.
Your line is now open. Please go ahead.
Thanks, Jim I know you touched upon.
And in technology spend a day that your recent convention, but could you and following.
Following up on that last question is that a line item that you would manage in a significant downturn or are you going to be pretty consistent with that spend line going forward and if you can just touch upon again, a little recap of where that folks here. Thank you.
Yes, we're going to try and hold the line with that regardless of.
We're going to we're going to generate profits regardless of what happens.
It's just a question of how big or small those privates are and our goal is to continue to provide the best technology to the agents out there. So our roadmap goes up five or seven years, we're not going to cut back on that roadmap.
One of the discussions I had was there is like.
We don't have the.
We do about where do we approved about a $30 million incremental spend last two years to help build out the projects that we're working on we're focused on user experience outside the building.
When we get those all done then we move inside the building and I think we're going to try and keep that 25% to 30 million irregardless of what the environment is.
Because there are some things we can kick the can down the road and other things we want to get done today.
But that tech spend probably will stay relatively even.
Going forward for that.
Into the future and Thats. The thing is what happens to us so youre going to see like the tech spend is one thing it's not going direct into this into the P&L. Some of them were building out some tools that actually get depreciated over three to five years. So it will have an impact.
<unk> impact it will be spread over three to five years as we rollout new products.
Great. Thanks, and then 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 of about 30%. This year just from the last update which has only been a couple of months are you seeing any change to that in that specifically in any.
Any change to what you're 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 maybe.
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 second quarter. This year it didn't last year and I apologize. If you said this is the beginning of a glitch on early in the call but Fred.
Fred did you did you mentioned what type of impact we should factor in the model for that thanks.
I did not mention it but.
It's about two $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 up kind of high 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 I would like to turn the call back over to you Sir for closing remarks, alright. Thank you Annie and thank you and I look forward to speaking with you again on our 'twenty 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. Thank you disconnect your lines at this time.
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