Landstar System Inc

NASDAQ:LSTR

Earnings Call Transcript 2022-Q1

[Operator]

Good morning and welcome to Landstar System Incorporated First Quarter Earnings Release Conference Call. All lines will be in listen-only mode until the formal question-and-answer session. Today's call is being recorded. If you have any objections, you may disconnect at this time.

Joining us today from Landstar are Jim Gattoni, President and CEO; Fred Pensotti, Vice President and CFO; Rob Brasher, Vice President and Chief Commercial Officer; Joe Beacom, Vice President and Chief Safety and Operations Officer.

Now, I would like to turn the call over to Mr. Jim Gattoni. Sir, you may begin.

[Jim Gattoni, President and CEO]

Thank you, Annie. Good morning and welcome to Landstar's 2022 First Quarter Earnings Conference Call.

Before we begin, let me read the following statement. The following is a Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts are forward-looking statements. During this conference call, we may make statements that contain forward-looking information that relates to Landstar's business objectives, plans, strategies and expectations.

Such information is by nature subject to uncertainties and risks, including, but not limited to, the operational, financial and legal risks detailed in Landstar's Form 10-K for the 2021 fiscal year described in the section Risk Factors and other SEC filings from time-to-time. These risks and uncertainties could cause actual results or events to differ materially from historical results, or those anticipated. Investors should not place undue reliance on such forward-looking information and Landstar undertakes no obligation to publicly update or revise any forward-looking information.

Our 2022 first quarter financial performance was the best-ever quarterly performance in Landstar's history. Typically, the first quarter of each year is seasonally softer than all other quarters of a given year. In fact, it is highly unusual for our first quarter financial performance to exceed the financial performance of the immediately preceding fourth quarter. The 2022 first quarter did just that. First quarter of revenue, gross profit, variable contribution, operating income and diluted earnings per share were each all-time quarterly records, ahead of even our record 2021 fourth quarter.

During the 2022 first quarter, we initially provided first quarter revenue and earnings per share guidance as part of our 2021 year-end earnings release on January 26. We provided an update on February 28 on a Form 8-K we filed with the SEC to address the potential impact the invasion of Ukraine could have on Landstar's first quarter results. We provided an additional update on our 2022 first quarter performance in a Form 8-K we filed with the SEC on April 5 in advance of managers meeting with analysts at Landstar's annual agent convention.

Overall, revenue was an all-time quarterly record of $1.970 billion in the 2022 first quarter, approximately 13% above the high end of our initial guidance and in line with our April 5 updated guidance. Revenue increased $683 million or 53% over the 2021 first quarter. In particular, Landstar experienced strong growth in both truckload rates and volume, along with significantly increased revenue from ocean freight services largely on rate increases. Typically, truck revenue per load in the first quarter is seasonally lower than that of the second, third and fourth quarters.

In only three of the past 10 years prior to 2022 has first quarter revenue per truckload exceeded that of the preceding fourth quarter. Revenue per load on loads hauled via truck in the 2022 first quarter was an all-time quarterly record and exceeded the 2021 fourth quarter by 4%. The sequential quarter-to-quarter percentage increase in revenue per load on loads hauled via truck for each quarter since the third quarter of 2020 has been above historical trends.

From the 2021 third quarter to the 2021 fourth quarter though, the sequential growth rate slowed. Our initial guidance for the 2022 first quarter assumed that the deceleration in sequential quarter-to-quarter growth would continue and therefore assume revenue per load on loads hauled via truck would return to more normal seasonal patterns on a month-to-month basis.

However, as disclosed in our February 28 Form 8-K, truck rates during the first eight weeks of January and February 2022 exceeded prior year's corresponding period by 27%. That year-over-year increase was due to rates increasing from December to January and from January to February by 3.3% and 2.3%, respectively. Those positive sequential trends put February revenue per truckload approximately 3% above December, far above normal seasonal trends where February rates are always below the prior year's December.

Given the pricing strength Landstar experienced during the first two months of 2022, it wasn't surprising that truck revenue per load in March was equal to that of February, even after considering the recent spike in fuel costs. In this regard, it should be noted that generally for Landstar, changes in the price of diesel at the pump impacts revenue hauled via truck brokerage carries, but has very little direct impact on revenue hauled by BCOs.

Additionally, as expected, the year-over-year comparison in truck revenue per load in March was much more difficult than during the first eight weeks of 2022 as rates in March of 2021 increased 11% over February 2021. Overall truck revenue per load in January, February and March 2022 increased 25%, 29% and 17% over January, February and March of 2021.

As to rates by equipment type, truck revenue per load on loads hauled via van and unsided/platform equipment in the 2022 first quarter increased 27% and 19%, respectively, over the 2021 first quarter. After the number of loads hauled via truck, our initial guidance on January 26 called for truckload volume to increase over the 2021 first quarter in a 12 to 14 percentage range. Our February 20 update reported that January and February truckload volume increased 24% over January and February 2021. In total, first quarter truckload volume increased 20% over the 2021 first quarter, in line with our April 5 update.

Our February Form 8-K included discussion regarding two of our largest independent sales agents who each have administrative operations in 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 arranged by that agency had almost fully recovered. Nevertheless, as both of these agencies continue to remain administrative operations in Ukraine, no assurances can be provided that these agencies will not be significantly disrupted by future developments in the ongoing conflict in Ukraine.

Overall, truckload volume in January, February and March increased 17%, 30% and 14% over January, February and March of 2021. The February increase in the year-over-year volume growth rate over the January year-over-year growth rate resulted from a shift in truckloads from February to March in 2021 due to storms that impacted the U.S. in late February 21. We estimate that storms decreased truckload volume in February 21 by 7,000 to 8,000 loads and believe most of those loads were hauled in March.

March's 2022 lower year-over-year growth rate was attributable to the tougher comp in March 21 due to the 7,000 to 8,000 loads as well as the disruption of one of the Ukraine agents early in the month. Continued strong demand for consumer durables and small packages via e-commerce helped drive 2022 first quarter van volume 17% over the 2021 first quarter. The number of loads hauled via unsided/platform equipment grew 15% over the 2021 first quarter, mostly due to improving demand for our services within the U.S. manufacturing sector over the 2021 first quarter.

We continue to attract qualified agent candidates to the model. Revenue from new agents was $25 million in the 2022 first quarter, the second highest revenue from new agents over the past 17 quarters. The agent pipeline remains full. We ended the quarter with record 11,935 trucks provided by business capacity owners, 71 trucks above our year-end 2021 count. Overall, the net increase in the number of BCO trucks in the 2022 first quarter speaks to Landstar's ability to attract quality capacity in a tight truck capacity market.

Loads hauled via BCOs increased 7% in 2022 first quarter over the 2021 first quarter on higher truck count. We ended the first quarter with a record number of approved third party carriers in the network. The number of third party carriers hauling freight in the 2022 first quarter increased 39% over the 2021 first quarter.

I'll now pass it to Fred for his comments on a few specific line items within the company's first quarter financial statements. Fred?

[Fred Pensotti, VP and CFO]

Thanks, Jim. Good morning, everyone. Jim covered certain information on our 2022 first quarter performance. Now, I'll cover some of the other key first quarter financial information included in the press release.

Before I discuss our gross profit and variable contribution, just a reminder that our cost of revenue for purposes of calculating gross profit has two categories; variable cost of revenue and other cost of revenue.

Variable cost of revenue includes purchase transportation and agent commissions, while other cost of revenue includes numerous costs that fluctuate to differing degrees with revenue, including, for example, trailer depreciation and maintenance expenses; BCO recruiting, training and qualification costs; insurance-related expenses such as premiums paid and cost of claims for various freight transportation-related insurance policies; and other costs included in SG&A in our consolidated statement of income, for example, insurance brokerage commissions and other fees incurred to administer the insurance programs available to BCO independent contractors that are reinsured by the company as well as costs related to our internally developed technology that directly support our revenue, as detailed in the table in our earnings release reconciling gross profit to variable contribution.

In the 2022 first quarter, gross profit was $214.6 million, an increase of roughly 46% compared to $147.1 million in the 2021 first quarter. Gross profit margin was 10.9% of revenue in the 2022 first quarter compared to 11.4% in the same period last year.

As we've mentioned since we started using the term variable contribution, this is a non-GAAP financial measure to refer to the amount represented by revenue less our variable cost of revenue, which again includes our purchase transportation and agent commissions, as detailed in the reconciliation table in our earnings release that I just alluded to.

In addition, we define variable contribution margin also a non-GAAP financial measure as variable contribution divided by revenue. This is an important measure for us as purchase transportation and agent commissions are the primary expenses that are 100% variable with revenue and give us a view into spot market trends in the freight transportation industry on a shipment-by-shipment basis.

In the 2022 first quarter, variable contribution increased roughly 43% to $270.5 million compared to $189.2 million in the 2021 first quarter driven by strong revenue growth. Our variable contribution margin was 13.7% of revenue in the 2022 first quarter compared to 14.7% in the same period last year.

The decrease in variable contribution margin compared to the 2021 first quarter was attributable to the mix between our BCO independent contractor capacity, which has a higher variable contribution margin in loads hauled via truck brokerage carriers. 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 mostly semi-variable cost I described earlier that are included in gross profit.

Moving to our costs. Other operating costs were $11.1 million in the 2022 first quarter compared to $7.6 million in the same period last year. The growth in this expense line was a result of an 11% increase in the average size of our trailer fleet, increased trailing equipment maintenance costs as a result of inflationary pressures on both replacement parts and labor, and an increased provision for contractor bad debt.

Insurance and claims costs were $30.8 million in the 2022 first quarter compared to $21.5 million in the same period last year. Total insurance and claims costs were 4.2% of BCO revenue in the 2022 first quarter compared to 3.8% of BCO revenue in the same period of 2021.

The increase in insurance and claims as compared to 2021 was primarily due to a $4.3 million of increased net unfavorable development of prior claims in the 2022 first quarter, an increase in insurance premiums for commercial trucking liability coverage, and increased severity of current year trucking claims in the 2022 period.

Selling, general and administrative costs were $52.7 million in the 2022 first quarter compared to $45.4 million in 2021. Majority of the increase was related to wage and benefit pressure on our headcount, as our headcount increased to support business growth as well as higher wages due to general wage and inflationary pressures experienced by most employers over the last year in addition to an increased provision for customer bad debt.

Appreciation and amortization was $13.8 million in the 2022 first quarter compared to $12.1 million in 2021. This increase was primarily due to increased depreciation on software, resulting from the recent deployment of new upgraded applications for use by agents and capacity, as well as new trailers we put into service late last year.

Our effective income tax rate in the 2022 first quarter was 22.8% compared to 24.4% in 2021. Effective income tax rate was favorably impacted in the first quarter of this year by an excess tax benefit related to equity awards invested in January as a result of our fiscal year 2021 performance. We expect effective income tax rate to return at 24.5% in 2022 second quarter.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $182 million, cash flow from operations in Q1 2022 was roughly $95 million and cash capital expenditures were just under $4 million. During the quarter, we returned $194 million to shareholders through a combination of a regular dividend of $9 million, a special dividend of $75 million paid in January of 2022 and $109 million of share repurchases.

We funded a portion of our first quarter share purchases with a revolving credit facility, ending the first quarter with a drawn balance of $70 million under that facility. And we now have roughly 2.3 million shares available for purchase under the company's stock purchase program.

Before I turn it back over to Jim, I'd like to thank you all for joining us today. With a bit of luck, we'll hopefully be able to see some of you in person at various upcoming investor conferences later this year. Jim?

[Jim Gattoni, President and CEO]

Thanks, Fred. As it relates to our 2022 second quarter expectations, I anticipate the strong freight environment to continue from the 2022 first quarter, although at a decelerated rate of year-over-year growth as compared to the previous seven quarters. As it relates to rates for our truck transportation services, it is important to note how changes in the cost of diesel fuel may impact revenue per load at Landstar. The current nationwide average cost of a gallon of diesel fuel has increased approximately $1 compared to the average nationwide cost during February 2022.

With respect to loads hauled via BCOs, which represented 42% of truck revenue into 2020 first quarter, an increase in the cost of diesel fuel has minimal impact on revenue per load as fuel surcharges billed to customers are paid 100% to the BCO hauling those loads and are not included in the company's revenue. However, with respect to loads hauled via truck brokerage carriers, the cost of fuel is often reflected in all-in rate billed to the customer by Landstar.

Accordingly, an increase in fuel cost of this magnitude would typically be expected to increase truck revenue per load on loads hauled by truck brokerage carriers, which represent a 58% of truck revenue in the 2022 first quarter. In March, revenue per load for all of our truckload revenue was approximately equal to that of February, even with the increase in the cost of a gallon of diesel fuel at the pump. This suggests a small decrease in March compared to February in revenue per load on loads hauled via truck brokerage carriers if one were to exclude the implied cost of fuel reflected in rates charged by truck brokerage carriers to Landstar.

Through the first several weeks of April, the average cost of diesel fuel and truck revenue per load remained consistent with the average fuel cost we saw in truck revenue per load generated in March. Notably, March recorded the second highest monthly truck revenue per load in the history of the company behind February 2022 by only $1 per load.

Assuming we maintain truck revenue per load throughout the remainder of the second quarter consistent with levels we have seen in March and early April, and fuel cost also remained steady throughout the rest of the quarter, truck revenue per load would be above the 2021 first quarter in a mid-teen percentage range.

The first quarter of 2022 was a record first quarter truckload count. From 2016 to 2021, without including 2020, which was impacted by the onset of the pandemic, truckload count has increased sequentially from the first quarter to the second quarter in a range of 4% to 13%.

Considering the record number of truck loadings in the 2022 first quarter, I expect that 2022 second quarter truckload count to trend toward the lower end of the range of recent historical first and second quarter sequential percentage increases, and therefore expect truckload cap to increase over the 2021 second quarter in a low double digit percentage range.

Based on the expectations of truck revenue per load and the number of loads hauled via truck, I currently anticipate 2022 second quarter revenue be in the range of $2 billion to $2.5 billion. Based on that range of revenue and assuming insurance and claim costs are approximately 4.2% of BCO revenue, I anticipate 2022 second quarter diluted earnings per share to be in the range of $3.22 to $3.32.

Overall, I'm extremely pleased with the start to 2022. 2022 first quarter revenue was the highest quarterly revenue in the company's history, and increased 53% compared to the 2021 first quarter. In fact, it seemed in many ways like the demand for our services we typically see in the fourth quarter of any year simply continued from the 2021 fourth quarter to the 2022 first quarter.

Particularly in terms of the strength we saw in the business during January and February of this year, it is very hard to find comparable historical precedents to start any year over the past couple of decades. Perhaps even more impressive than the top line growth was the fact that the 2022 first quarter gross profit, variable contribution, operating income, net income and diluted earnings per share were the highest ever achieved by Landstar in any quarter in the company's history.

There have been recent reports that indicated significant slowing of spot rates, especially as it relates to rates on freight hauled via van equipment. Those reports do not currently correspond to the recent trends Landstar is experiencing. One of many metrics we follow is revenue per mile on revenue hauled by BCOs on van equipment.

As mentioned previously, fuel surcharges billed to customer are excluded from revenue and the cost of purchase transportation on loads hauled via BCO capacity. Revenue per mile on loads hauled via BCOs using van equipment increased 5% from December to January, 3% from January to February, and decreased 0.1% in March compared to February.

During the first few weeks of April, that metric is running about 5% below March. The April decrease experienced our revenue per mile is far below the decrease we have been reading about in recent reports. I also do not find it unusual for revenue per mile to have pulled back just a bit from the all-time high set in the last few months.

In our view, the overall environment for Landstar continues to remain robust. Revenue per load continues at all-time highs and demand for our truck trans services remain elevated. We continue to focus on profitable load volume growth and increasing our available capacity to haul those loads. 2022 is setting up to be another great year for Landstar.

And with that, Annie, we can open to questions.

[Operator]

Thank you very much, sir. At this time, we will begin the question-and-answer session. [Operator Instructions]. Our first question will be from Bascome Majors of Susquehanna. Your line is open. Please go ahead.

[Bascome Majors, Susquehanna]

Good morning, and thanks for taking my questions. Jim, thanks for the comments on seasonality and how you're seeing that trend kind of 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 of business where you're feeling things a little weaker, or is the guidance at the lower end of demand seasonality for the second quarter really more about an expectation that it probably cools just from some of the --?

[Jim Gattoni, President and CEO]

I am on the expectation side that there's an expectation that it cools. Mostly it's expectation, but let's not say that we're not seeing little signs, right, of softness. As I said, you saw that van revenue per load dropped about 5% since March on the BCO, which is clean of fuel. So that's 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 was really soft last year. So you got to kick back in automotive. Our sub line-haul business looked relatively flat, but it's really, in that area when you look at sub line-haul, which is a lot of e-commerce business between hubs of the parcel carriers, we saw volume growth there, but we saw an offset of a decrease in rate per load. From the consumer durables, it's still very strong, a little softening compared to where we've been for the last six or seven quarters. But otherwise, there's no individual area within a commodity base that we're saying we're seeing any kind of like real weakness. Energy clearly is only 3% of our business, it really hasn't bounced back. But there's no real areas that you see that are pointing to some of the things we're seeing in the write ups. And, look, we look at some of the data, whether it's truck stop, we look at DAT. And we sit here today in a position where I don't think in the history of my career here, I've seen a differential between what some of the Street is saying and some of the information out there compared to what we're seeing. And like I said at the beginning of this conversation is, while we've seen a little softness, absolutely, but it's not what you're reading about. It's not even close to what I've seen in the Wall Street Journal article from last week about 37% drop in spot rate since December. And 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 van, like the clean van without the fuel in it, you're talking about an increase in spot rates on van side from December to January, January to February, and then a little bit of pullback in March. But we're still sitting at or above the December number when we closed out the March book. 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 the rates dropped 37% over the last three months. We've never seen that happen in the history of our numbers. If I look back on that metric we're talking about on BCO van, one of the biggest drops we had, it -- basically pre-pandemic, if you look at July of 2018, that revenue per mile on BCO van was 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 it and only went down 24%. So over that whole period of time from the best point ever to the lowest point at the drop off to the pandemic. Look, I'm a cycle guy. Do I expect things to slow? Absolutely. It's my pessimism in me. We're just not seeing the extent that's being put out in some of the reports.

[Bascome Majors, Susquehanna]

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

[Jim Gattoni, President and CEO]

I actually don't know if you guys missed that much on the way the cycle works for us. I think what everybody's struggling with is if the cycle is down, how far does a cycle go down, which right now I'm not sure even the experts in this room -- I'm not talking about me, I'm talking about Joe Beacom -- in this room could say, whereas if we go to a trough where is the trough on the revenue per mile, revenue per load? I think that's kind of difficult to come up with. We know that we have trailer inflation, right. Not only is maintenance and labor cost a lot higher than they used to be to fix a trailer, the price of new trailers coming in haven't hit us yet. But if we start buying those, they are going to start hitting next year. Even just the employee costs, when you look at what's going on and you're trying to maintain your employee base with this shift and people transitioning out of one job into another, employee wages and benefits are climbing. And that all builds into elevating that revenue per mile, but I don't think we know exactly how much of the peak revenue per mile today, how low can that go? It's a question that 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 costs were built into the system today. And then we didn't even mention the insurance and claims grant. We were running -- five years ago, our insurance line was $50 million or $60 million. Now it's going to run $100 million to $120 million. It's all 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 pulling back that far. I just think it's a normal cycle and you might pull back. Is it unrealistic to think we can pull back 15% to 20%? No, I don't think it is. 37% kind of surprises me. It's one of the reports that came out.

[Bascome Majors, Susquehanna]

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

[Operator]

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

[Jack Atkins, Stephens]

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

[Jim Gattoni, President and CEO]

Sure. Hi, Jack.

[Fred Pensotti, VP and CFO]

Hi, Jack.

[Jack Atkins, Stephens]

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

[Jim Gattoni, President and CEO]

Well, we've recruited a few agents into it. So when we recruit an agent, it clearly takes market share. On the ocean side, we really did -- Rob's team did a good job of bringing in an agent or two to help grow on the ocean side. That trends really with -- a lot of that ocean stuff is when we look at it, it's coming across on the rate, right. You guys know that the rates on ocean have kind of gone through the roof over the last 18 months. Volumes grew a little bit too on the small base. I think it's always just going to be a 5% of the overall business for us. It's kind of niche [ph], spot market, project-oriented type freight with a couple of routine customers that we have that are driving freight. And I think that's what you're seeing. The growth is more of a custom 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 that's very sporadic on what happens to, can you get the cargo on the ship or should we put it on air because it's expedited? So there's a lot of volatility on the air side. But 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 or ocean. And they're 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 I would say keep it consistent with where it is.

[Jack Atkins, Stephens]

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

[Fred Pensotti, VP and CFO]

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

[Jack Atkins, Stephens]

Okay.

[Fred Pensotti, VP and CFO]

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

[Jack Atkins, Stephens]

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

[Jim Gattoni, President and CEO]

Sure, Jack.

[Operator]

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

[Stephanie Moore, Truist]

Hi. Good morning. Thank you for the questions.

[Jim Gattoni, President and CEO]

Sure.

[Stephanie Moore, Truist]

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

[Jim Gattoni, President and CEO]

Well, I think all the ships are hung up off at 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. Disruption is good for us. So when they do open up -- start shipping stuff out of Shanghai again, I think that will be a positive -- that's one of the positive you can see going forward and when the ports get congested again. I'm not saying they're not congested, there's still a lot of ships out there. The dwell times are still more than they used to be, that's just coming down. But the way it would impact our business is, 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't handle it when it overflows.

[Stephanie Moore, Truist]

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

[Joe Beacom, VP and Chief Safety and Operations Officer]

Yes. Stephanie, it's Joe Beacom. 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, you'll see decreased utilization and then you'll see some of those trucks leave the market. We've seen that here in the past. Look at 2019 where we had growth in capacity and then we lost some BCOs late in the year. I would suspect that that won't change. If demand changes, price changes, you'll see some cyclical impact from a capacity standpoint. I think the inability to get used trucks 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.

[Stephanie Moore, Truist]

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

[Jim Gattoni, President and CEO]

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

[Stephanie Moore, Truist]

Great. Thank you guys so much.

[Jim Gattoni, President and CEO]

Thank you.

[Operator]

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

[Scott Group, Wolfe Research]

Hi, thanks. Good morning.

[Jim Gattoni, President and CEO]

Good morning.

[Scott Group, Wolfe Research]

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

[Jim Gattoni, President and CEO]

The lag would be beyond us if this drop came from December and it dropped into March. And I think most of this Wall Street Journal report that I'm talking about that says 37% drop in van truckload spots 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 the DAT data and the spot market data, we're not as volatile, like their yields don't show prices going up 30%, we'll go up 15%. They'll go down 20%, we'll be done 10%. So 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 BCOs are hauling our trailers. It's a little more sticky, right? So it's not that true negotiated. You're not all of a sudden taking 25% of a price there because they're using our trailers, right? So I think there's a more stickiness in our model than a true spot market, even though we work in the spot market. We do have dedicated customers. We have BCOs hauling in those routes and 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 of 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're putting out.

[Scott Group, Wolfe Research]

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

[Jim Gattoni, President and CEO]

Yes, we're assuming pretty consistent.

[Fred Pensotti, VP and CFO]

March to April -- yes, it's March to April, April to May, May to June as we level that off, because that's what we're kind of seeing in our numbers right now.

[Scott Group, Wolfe Research]

Okay. And then just longer term, net operating margins for you guys are fantastic right now. As at some point 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?

[Jim Gattoni, President and CEO]

We're always going to target 50%. I would think that we could keep them over there. But a drastic reduction clearly would put pressure on that comment. We did 60% in the quarter. That's just a fabulous quarter. I'm not going to try and benchmark off of that number. But do I think that we could -- 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.

[Scott Group, Wolfe Research]

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

[Operator]

Thank you. [Operator Instructions]. And our next question will be from Scott Schneeberger from Oppenheimer. Your line is now open. Please go ahead.

[Scott Schneeberger, Oppenheimer]

Thanks. Jim, I know you touched upon IT and technology spend a bit at your recent convention. But could you -- and 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 spin line going forward? And if you can just touch upon, again, a little recap of where that focus is? Thank you.

[Jim Gattoni, President and CEO]

Yes, we're going to try and hold the line with that, regardless of -- look, we're going to generate profits regardless of what happens. It's just a question of how big or small those profits are and our goal is to continue to provide the best technology to the agents out there. So our roadmap goes out five or seven years. We're not going to cut back on that roadmap. I think one of the discussions I had was there's like I -- we don't have the -- we approved about $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 million to 30 million year regardless 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 into the future. And the thing is what happens to us, so you're going to see, like the tech spend is one thing, it's not going direct into the P&L. We're building out some tools that actually get depreciated over three to five years. So we'll have an impact, a delayed impact that will be spread over three to five years as we roll out new products.

[Scott Schneeberger, Oppenheimer]

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

[Fred Pensotti, VP and CFO]

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

[Scott Schneeberger, Oppenheimer]

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

[Fred Pensotti, VP and CFO]

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

[Scott Schneeberger, Oppenheimer]

Thanks, guys. I appreciate it.

[Operator]

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

[Jim Gattoni, President and CEO]

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

[Operator]

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