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Date
Tuesday, July 29, 2025 at 8:30 p.m. ET
Call participants
Chief Executive Officer — Frank Lonegro
Chief Financial Officer — Jim Todd
Executive Vice President, Capacity Development — Matt Dannegger
Executive Vice President, Revenue Generation — Jim Applegate
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Risks
Potential for a “substantial verdict” againstLandstar System(LSTR -0.16%) in an ongoing trial involving Landstar Ranger’s role in an accident, with management noting, “the trial could result in a substantial verdict against Landstar System during the 2025 third quarter.”
Insurance and claims costs rose to $30.4 million in fiscal Q2 2025, as CFO Todd linked the jump to “increased severity of trucking accidents,” strategic cargo theft, and unfavorable prior-year claim development.
Non-truck transportation service revenue decreased 22% in fiscal Q2 2025, largely due to a 20% decline in ocean revenue per shipment, a 14% fall in ocean volume, and a 9% drop in intermodal revenue per load.
Management cited continued “sluggish” performance in core end markets including automotive, housing, and cross-border freight, with CEO Lonegro stating, “is a bit sluggish until we see interest rates and tariffs find their equilibrium.”
Takeaways
Revenue: Total revenue declined 1% year over year in the second quarter, with truck revenue up year over year for the first time since 2022.
Heavy haul revenue: Segment revenue reached $138 million for fiscal Q2 2025, up 9% year over year, outpacing core truckload performance, driven by a 5% revenue-per-load increase and a 4% rise in heavy haul volume year over year.
Truck revenue per load: Truck revenue per load increased 2.6% in the 2025 second quarter compared to the 2024 second quarter, primarily due to a 3.2% rise in revenue per load on unsided platform equipment and a 1.2% increase in revenue per load on van equipment.
Load volume: Number of loads hauled via truck fell 1.5% in fiscal Q2 2025, while BCO-provided trucks were flat sequentially—the best sequential net BCO truck performance in 12 quarters.
Gross profit: Gross profit reached $109.3 million in fiscal Q2 2025 versus $120 million in fiscal Q2 2024; gross profit margin fell to 9% from 9.8% over the same period.
Variable contribution: Variable contribution was $170.5 million in fiscal Q2 2025 compared to $175.1 million in fiscal Q2 2024. Variable contribution margin was 14.1% of revenue, down from 14.3% in the prior year period.
Share repurchases and capital return: $103 million in capital deployed for buybacks over the first six months of 2025, plus $97 million in dividends paid for the first half of 2025.
Cash and short-term investments: Closing balance of $426 million as of fiscal Q2 2025; operational cash flow was $63 million for the first half of 2025, and capital expenditures were $4 million for the first half of 2025.
BCO truck count: Ended down approximately 6% year over year for fiscal Q2 2025, but sequential loss narrowed to nine trucks, reflecting improvement in retention and gross adds.
Insurance and claims: Insurance costs totaled $30.4 million for fiscal Q2 2025, with insurance and claims costs as a share of BCO revenue increased from 5.8% to 6.6% in February. The increase in insurance and claims costs compared to 2024 was primarily attributable to increased severity of trucking accidents during the 2025 period and increased severity on cargo claims, primarily due to strategic cargo theft.
Commodity revenue trends: On a 5% volume drop in consumer durables compared to fiscal Q2 2024 (partially offset by a 2% increase in revenue per load for consumer durables compared to fiscal Q2 2024).
Exposure to other trucking companies: Representing 11% of transportation revenue.
Safety performance: Accident frequency rate was 0.67 DOT-reportable accidents per million miles for the first half of 2025, below the national average and trailing close to the company’s five-year average.
SG&A and other costs: Selling, general, and administrative costs were $55.7 million for fiscal Q2 2025, drivers included incentive compensation, IT, payroll, and a large agent convention.
Guidance and outlook: Management provided only directional commentary, noting July truck volumes “slightly better than normal seasonality” but July truck revenue per load was approximately 3% lower than in July 2024.
Summary
Landstar System(LSTR -0.16%) delivered the first year-over-year increase in truck revenue since 2022 in fiscal Q2 2025, primarily driven by gains in heavy haul services and improvements in truck revenue per load. Despite broad-based industrial softness and non-truck transportation segment declines, Landstar System continued to return capital to shareholders through both dividends and share repurchases. The company demonstrated stable truck capacity, with sequential BCO net performance at a twelve-quarter high, while also managing costs in the face of a higher insurance burden and periodic reclassification of bad debt. Management emphasized no current exposure to English language proficiency regulatory changes, with anticipated sector-wide impacts indeterminate until further data becomes available.
Contributing a favorable mix effect.
With an overall decline of approximately 3% in aggregate revenue across these categories—most pronounced in automotive and building products segments.
Shareholder capital return included $97 million in dividends for the first half of 2025 and $102 million in share repurchases during the first half of 2025, reinforcing capital allocation priorities in a weak freight environment.
Management will not issue formal third-quarter guidance but cited seasonal stability in variable contribution margin, noting that it has typically been flat sequentially from Q2 to Q3 based on historical trends and projected SG&A costs to decline by approximately $3 million sequentially in fiscal Q3 2025, partially offset by a $1.5 million event-driven increase in other operating costs in fiscal Q3 2025.
The ongoing trial involving Landstar Ranger represents a material risk, with management warning the proceeding “could result in a substantial verdict” in the third quarter.
Industry glossary
BCO: Business Capacity Owner—independent owner-operators contracted to Landstar System who provide truck capacity through their own equipment and drivers.
Unsided platform equipment: Open-deck or flatbed trailers that lack sided enclosures, used for hauling large or heavy items, especially for heavy haul and specialized freight.
Variable contribution: Revenue minus variable direct costs, representing the profit generated on marginal activity before fixed overhead is assessed.
Substitute line haul: Transportation service substituting for regular scheduled line haul, often involving parcel or LTL movements outside the core freight network—demand driven by major shippers.
DOT-reportable accident: Any motor vehicle accident that must be reported to the U.S. Department of Transportation, typically involving a fatality, injury, or significant property damage.
SG&A: Selling, general, and administrative costs—non-production operating expenses not included in cost of goods sold, such as payroll, IT, and administrative overhead.
Full Conference Call Transcript
Jim Todd: Thank you, Bill. Good afternoon, and welcome to Landstar System, Inc.'s 2025 Second 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. This conference call, we may make statements that contain forward-looking information that relates to Landstar System, Inc.'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 System, Inc.'s Form 10-K for the 2024 fiscal year described in the section Risk Factors, Landstar System, Inc.'s Form 10-Q for the February, and our 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 System, Inc. undertakes no obligation to publicly update or revise any forward-looking information. I'll now pass it to Landstar System, Inc.'s CEO, Frank Lonegro, for his opening remarks.
Frank Lonegro: Thanks, JT, and good afternoon, everyone. I'd like to thank our BCOs and agents, and all of the Landstar System, Inc. employees who support them every day. It was great to spend time with our BCO million milers and road stars at our annual all-star event in Savannah, Georgia recently and to celebrate their incredible safety accomplishments. It was my honor to preside over Landstar System, Inc.'s fifty-first truck giveaway, awarding newly inducted million-mile safe driver, George Esen, from Owensboro, Kentucky with a new 2026 Freightliner Cascadian. The capability, resiliency, and level of commitment exhibited day in and day out by our network of independent business owners is unique in the freight transportation industry.
Their adaptability, dedication to safety, security, and service for our customers is truly impressive. They are exceptional business leaders and key to driving the continued success of Landstar System, Inc.'s business model. Amidst the ongoing challenges in the freight environment, compounded by volatile federal trade policy, and lingering inflation concerns, the 2025 second quarter included several important positive developments for Landstar System, Inc.
While overall revenue was down 1% year over year, truck revenue was up year over year for the first time since 2022. As noted in our earnings release, our second quarter revenue per truckload outperformed pre-pandemic typical seasonality. The number of trucks provided by BCOs was approximately equal to the 2025 first quarter, representing the best sequential net BCO truck performance in 12 quarters. Notwithstanding the political and macro uncertainty thus far in 2025, our focus continues to be on accelerating our business model and executing on our strategic growth initiatives. In one continued major bright spot, I am extremely pleased with the performance of Landstar System, Inc.'s heavy haul service offering.
We generated approximately $138 million of heavy haul revenue during the 2025 second quarter, or a 9% increase over the 2024 second quarter. This achievement was driven by a 5% increase in heavy haul revenue per load and a 4% increase in heavy haul volume. Turning more broadly to our core truckload service offering, the foundational work we continue to invest in puts us in a great position to leverage the freight environment when it eventually turns our way. We are also focused on our commitment to continuous improvement in the level of service and support we provide to our customers, agents, BCOs, and carriers each and every day.
Turning to slide five. The freight environment in the 2025 second quarter was characterized by relatively soft demand from a seasonal perspective, admittedly comping off seasonally strong first quarter. The impact of accumulated inflation remains a drag on the amount of truckload freight generated in relation to consumer spending. Truck capacity continued to be readily available with small pockets of supply-demand equilibrium, and market conditions continue to favor the shipper amidst choppy conditions in the industrial economy as evidenced by an ISM index below 50 for the entire 2025 second quarter.
I would note, however, that the combination of sequential truck revenue per load improvement coupled with the sequential compression of our brokerage net revenue margins would indicate a market that we believe is working its way back toward being balanced. Considering that backdrop, Landstar System, Inc.'s revenue performance was admirable. In the 2025 second quarter, with truck revenue per load 2.6% above the 2024 second quarter, partially offset by a 1.5% decrease in the number of loads hauled via truck over the same period. Our balance sheet continues to be very strong, and our capital allocation priorities are unchanged. We will continue to patiently and opportunistically execute on our existing buyback authority to benefit our long-term stockholders.
As noted in the release, during the first six months of 2025, we deployed approximately $103 million of capital towards buybacks and repurchased approximately 686,000 shares of common stock. We continue to invest through the cycle in leading technology solutions for the benefit of our network of independent business owners and have allocated a significant amount of capital this year towards refreshing our fleet of trailing equipment, specifically on unsided platform equipment.
Turning to slide six and looking at our network, the scale, systems, and support inherent in the Landstar System, Inc. model helped to drive the operating results generated during the 2025 second quarter. JT will get into the detail on revenue loading and rate per load in a few moments. As noted during previous earnings calls, Landstar System, Inc.'s safety culture is a crucial component of our continued success. Our safety performance is a direct result of the professionalism of the thousands of Landstar System, Inc. BCOs operating safely every day, and the agents and employees who work to reinforce the critical importance of safety at Landstar System, Inc.
I'm proud to report an accident frequency rate of 0.67 DOT reportable accidents per million miles during the 2025 first half, well below the last available national average released from the FMCSA for 2021. We continue to be committed to driving down that number closer to the company's trailing five-year average of 0.61 or lower. This long-run average is an impressive operating metric that speaks to the strength, skill, talent, and dedication of our BCOs and provides a point of differentiation our agents are able to highlight in discussions with our freight customers. I'd also like to take a moment to recognize Landstar System, Inc.'s nearly $500 million agents based on our 2024 fiscal year results.
Importantly, retention within the million-dollar agent network continues to be extremely high.
Turning to Slide seven on the capacity side. On a year-over-year basis, BCO truck count decreased approximately 6% compared to the end of the 2024 second quarter. On a sequential basis, BCO truck count was essentially flat, decreasing only nine trucks in the second quarter from the first quarter, representing the best net truck count performance in 12 quarters. It is typical to incur turnover in BCO truck count in a low rate per load environment. BCO turnover continues to be influenced by a persistent low rate per load environment combined with the significant increase in the cost to maintain and operate a truck today compared to before the pandemic.
Directionally, we are pleased to see our trailing twelve-month truck turnover rate drop from 34.5% as of fiscal year-end 2024 to 31.9% at the end of the 2025 second quarter. Through the first four weeks of our 2025 third quarter, the number of trucks provided by BCO independent contractors has declined by 23 or approximately one-quarter of 1% sequentially. Directionally consistent with the trend in truck revenue per load experienced during fiscal July. I will now pass the call back to JT to walk you through the 2025 second quarter financials in more detail. JT?
Jim Todd: Thanks, Frank. Turning to Slide nine. As Frank mentioned earlier, overall truck revenue per load increased 2.6% in the 2025 second quarter compared to the February, primarily attributable to a 3.2% increase in revenue per load on loads hauled by unsided platform equipment and by a 1.2% increase in revenue per load on loads hauled by van equipment. On a sequential basis, truck revenue per load increased 3.2% in the February versus the February, stronger than the typical pre-pandemic normal seasonality increase of approximately 2%. As it excludes fuel surcharges billed to customers that are paid 100% to the BCO.
In the February, revenue per mile on unsided platform equipment hauled by BCOs was 14% above the 2024 second quarter, and revenue per mile on van equipment hauled by BCOs was 3% above the February. Delving deeper into seasonal trends, revenue per mile on loads hauled by BCOs on unsided platform equipment declined 1% from March to April, was approximately flat April to May, and increased 8% from May to June. The March to April decline and the April to May approximately flat performance both underperformed pre-pandemic seasonal trends, while the May to June increase outperformed pre-pandemic historical trends.
With respect to loads hauled by BCOs on van equipment, revenue per mile was more stable, grinding slightly higher as we move through the second quarter. Revenue per mile on van equipment hauled by BCOs was approximately flat from March to April, outperforming these trends, increased 1% from April to May, outperforming these trends, and increased another 1% from May to June, underperforming pre-pandemic May to June historical trends. It should be noted that month-to-month seasonal trends on unsided platform equipment are generally more volatile compared to that of van equipment. This relative volatility is often due to the mix between heavy specialized loads and standard flatbed volume.
As Frank alluded to, we've been pleased with the recent performance in our heavy haul service offering. Heavy haul revenue was up an impressive 9% year over year in the second quarter, significantly outperforming core truckload revenue. Heavy haul loadings were up approximately 4% year over year, and revenue per heavy haul load increased 5% year over year. This represented a mix tailwind to our unsided platform revenue per load as heavy haul revenue as a percentage of the category increased from approximately 33% during the February to approximately 35% in the February. Non-truck transportation service revenue in the February was 22% or $21 million below the February.
The decrease in non-truck transportation revenue was mostly due to a 20% decrease in ocean revenue per shipment, a 14% decrease in ocean volume, and a 9% decrease in intermodal revenue per load.
Turning to slide 10, we've provided revenue share by commodity and year-over-year change in revenue by commodity. 1% year over year on a 2% decrease in loadings, partially offset by a 1% increase in revenue per load compared to the 2024 second quarter. It should be noted that our U.S. Mexico and U.S. Canada cross-border businesses both underperformed our domestic revenue performance during the 2025 second quarter. Within our largest commodity category, consumer durables, revenue decreased 3% year over year on a 5% decrease in volume, partially offset by a 2% increase in revenue per load. Aggregate revenue across our top five commodity categories, collectively making up about 69% of our transportation revenue, declined approximately 3% compared to the February.
While slide 10 displays revenue share by commodity, we thought it would also be to include some color on volume performance within our top five commodity categories. From the February to February, total loadings of machinery increased 4%. Automotive equipment and parts decreased 16%. Building products decreased 6%, and hazmat decreased 7%. Additionally, substitute line haul loadings, one of the strongest performers for us during the pandemic and one which varies significantly based on consumer demand, increased 24% from the February. As we've mentioned many times before, Landstar System, Inc. is a truck capacity provider to other trucking companies, 3PLs, and truck brokers.
During periods of tight truck capacity, those other freight transportation providers reach out to Landstar System, Inc. to provide truck capacity more often than during times of more readily available truck capacity. The amount of freight hauled by Landstar System, Inc. on behalf of other truck transportation companies is reflected in almost all of our commodity groupings, including our linehaul service offering.
Overall, revenue hauled on behalf of other truck transportation companies in the February was 19% below the February, a clear indicator that capacity is readily accessible in the marketplace. Revenue hauled on behalf of other truck transportation companies was 11% and 13% of transportation revenue in the 2025 and February, respectively. Even with ups and downs in various customer categories, our business remains highly diversified with over 23,000 customers, none of which contributed over 8% of our revenue in the 2025 first half.
Turning to Slide 11. In the 2025 second quarter, gross profit was $109.3 million compared to gross profit of $120 million in the 2024 second quarter. Gross profit margin was 9% of revenue in the February as compared to a gross profit margin of 9.8% in the corresponding period of 2024. The February variable contribution was $170.5 million compared to $175.1 million in the 2024 second quarter. Variable contribution margin was 14.1% of revenue in the February compared to 14.3% in the same period last year.
The decrease in variable contribution margin compared to the February was primarily attributable to a decreased variable contribution margin on revenue generated by truck brokerage carriers as the rate paid to truck brokerage carriers was 46 basis points higher than the rate paid in the 2024 second quarter.
Turning to slide 12. Operating income declined as a percentage of both gross profit and variable contribution, primarily due to the impact of the company's fixed cost infrastructure, principally certain components of selling, general, and administrative costs, in comparison to a smaller gross profit and variable contribution basis. Other operating costs were $19.6 million in the 2025 second quarter compared to $14.1 million in 2024. This increase was primarily due to the reclassification of the $4.8 million supply chain fraud charge established during the February from customer bad debt to contractor bad debt during the February. As a result of the finalization of certain financial responsibility-related agreements with the affected Independent Commission sales agency.
Excluding the $4.8 million P and L reclassification, other operating costs increased approximately $700,000 as compared to the February, primarily attributable to increased trailing equipment maintenance costs partially offset by increased gains on the disposal of used trailing equipment. Insurance and claims costs were $30.4 million in the February, compared to $27.2 million in 2024. Total insurance and claims costs were 6.6% of BCO revenue in the February as compared to 5.8% in the February. The increase in insurance and claims costs as compared to 2024 was primarily attributable to increased severity of trucking accidents during the 2025 period, increased severity on cargo claims primarily due to strategic cargo theft, and increased net unfavorable development of prior year claim estimates.
Partially offset by decreased BCO miles traveled during the 2025 period and a decreased frequency of cargo claims during the 2025 period. During the 2025 and February, insurance and claims costs included $2.3 million and $1 million of net unfavorable adjustment to prior year claim estimates, respectively. Selling, general, and administrative costs were $55.7 million in the February, compared to $54.9 million in the 2024 second quarter. Excluding the favorable impact of the previously mentioned $4.8 million reclassification from selling, general, and administrative costs, those costs increased approximately $5.6 million as compared to the February.
The increase in selling, general, and administrative costs was primarily attributable to an increased provision for incentive compensation, increased information technology costs, increased wages and employee benefit costs, and increased costs associated with our annual agent convention. The provision for incentive compensation was approximately $1 million during the February compared to a $1.4 million reversal of previously recorded incentive compensation costs during the February. Depreciation and amortization were $12.1 million in the February, compared to $14.5 million in 2024. This decrease is primarily due to decreased depreciation on software applications. The effective income tax rate was 24.6% in the February compared to an effective income tax rate of 24.5% in the 2024 second quarter.
Turning to slide 13 and looking at our balance sheet, we ended the quarter with cash and short-term investments of $426 million. Cash flow from operations for the 2025 first half was $63 million, and cash capital expenditures were $4 million. The company continues to return significant amounts of capital back to stockholders with $97 million of dividends paid and approximately $102 million of share repurchases during the 2025 first half. The strength of our balance sheet is a testament to the cash-generating capabilities of the Landstar System, Inc. model. Back to you, Frank.
Frank Lonegro: Thanks, JT. Given the highly fluid freight transportation backdrop and an uncertain political and macroeconomic environment, as well as challenging industry trends with respect to insurance and claims costs, the company will be providing third-quarter revenue commentary rather than formal guidance. Turning to Slide 15. The number of loads hauled via truck in July was approximately 1% above July 2024 on a dispatch basis. While revenue per load in July was approximately 3% below July 2024 on a process basis. As a result, we view July's truck volumes as slightly better than normal seasonality, whereas July truck revenue per load was below normal seasonality.
It should be noted that the launch point of the second quarter from a sequential pricing perspective was relatively high, given the strong seasonal performance of the 2025 second quarter truck revenue per load. Looking at historical seasonality from Q2 to Q3, pre-pandemic patterns would normally yield a slight decrease in the number of loads hauled via truck. Almost entirely offset by a slight increase in truck revenue per load yielding a relatively flat top line sequentially. As noted above, fiscal July truck volumes trended slightly above normal seasonality, while fiscal July truck pricing trended slightly below.
With respect to variable contribution margin, the company typically experiences a relatively flat variable contribution margin from the second quarter to the third quarter. Although we are not providing guidance, there are three points regarding the expense side in the 2025 third quarter that we want to bring to everyone's attention. First, assuming a normalized provision for customer bad debt, and normalized employee benefit costs, we would assume SG and A costs would decline by approximately $3 million sequentially as we cycle the impact of the 2025 agent convention held during fiscal April.
Second, that approximately $3 million sequential tailwind to SG and A will be partially offset by the impact of our BCO All-Star celebration in fiscal July, which we expect to result in a $1.5 million sequential headwind on the other operating costs line. And third, one of Landstar System, Inc.'s operating companies, Landstar Ranger, is a defendant in a trial currently underway in El Paso, Texas, involving a tragic accident between an RV occupied by a family and a small independent trucking company that at the time of the accident was hauling a load brokered to it by Landstar Ranger.
The plaintiffs assert that with respect to the accident, Landstar Ranger acted as the responsible motor carrier and not a broker. Although it is hard to predict the potential outcome of this matter, the trial could result in a substantial verdict against Landstar System, Inc. during the 2025 third quarter. Landstar System, Inc. intends to preserve its rights to appeal any such verdict. Additional information regarding this matter is included in Landstar System, Inc.'s second quarter 10-Q filed today with the SEC.
Operator: With that, Bill, we'd like to open the line for questions.
Operator: Thank you very much, sir. At this time, we will begin the question and answer session. If you would like to ask a question, please press 1 on your touch-tone phone. Once again, that is 1 to ask a question. To cancel request, please press 2. We have the first question coming from the line of Jon Chappell of Evercore ISI. Your line is now open.
Jon Chappell: Thank you. Good afternoon. Jim, hate to start off with a super minutiae question, but here we go. Frank gave us that SG and A outlook for 3Q. You had mentioned earlier the $4.8 million impact to the good guy in second quarter SG and A. So when we think about that $3 million minus the $1.5 million sequential decline, is that off the $55.7 million that was actually reported in 2Q? Or is that the $5.07 plus the 4.8 and then make the seasonal adjustment?
Jim Todd: Hey. Hey, Jon. All good. Yeah. So the $55.07 on an as-reported basis was inclusive of a P and L reclass out of G and A into other operating costs. So that favorably impacted the customer bad debt line in the '25. So I would tell you to put that back and then have $3 million fall off from the convention.
Jon Chappell: Great. Helpful. And then, another one, maybe a bit in the weeds. The unsigned platform revenue per load really stepped up sequentially. You'd mentioned kind of the monthly cadence, and then that big 8% move from May to June. So how do we kinda put those two together? Did you just have a phenomenal June kind of exit rate? That kinda helped you both from a volume perspective and a pricing perspective at the same time? And is that the right kinda launch point as we think about seasonal trends in the March?
Jim Todd: No. Jon, it's a great question. So that comment was specific to BCO van rate per mile on the inside of the platform. So our BCO as a percentage of that category is probably 30% or so, and the folks that play in that space, the BCOs, they tend to skew more on the heavy specialized side. So to your point, on a sequential basis, it was steady, Jon. So it was a 320 basis point good guy. March to April, 620, April to May, and four forty. May to June. So it was impressive, and each month in a quarter, I would tell you van revenue per load as well wasn't as pronounced, but plus 0.8% plus 0.6%.
Plus 1.1%, April, May to June. So we felt good about rates on both equipment types all the way through the quarter.
Jon Chappell: Great. Thanks a lot, Jim.
Jim Todd: For sure, Jon.
Operator: Thank you. We'll move now to the next person coming from the line of Daniel Imbro of Stephens. Your line is now open.
Daniel Imbro: Yeah. Hey. Good evening, guys. Thanks for taking the questions. For sure. Maybe starting on a higher level one. You know, Frank, feel like a few months ago, a lot of uncertainty from shippers. As I think about some of your bigger movers this quarter, I think auto down 17 energy electrical up meaningfully. Can you offer some color by end market on how you're thinking about the back half of the year? Any updated thoughts on how they're changing maybe by those big end markets you're exposed to?
Frank Lonegro: Yeah. No. Good question. I see your voice, and I'll kick it over to Jim Applegate here in a second. But when you look at the second quarter and then think about the translation into the third quarter, I think you're largely gonna see the same trends, I would say. Automotive, that's going to move in interest rates or incentives or something like that to stimulate demand. I would continue to see auto as being something that is a bit sluggish until we see interest rates and tariffs find their equilibrium. Housing hasn't been our friend either. So on the construction side, that's obviously gonna impact building product and things like that.
On the other side of building products is gonna be the data center business and things like that, which have done fairly well. In JT's remarks, he did mention the cross-border business, both, US Mexico and US Canada. And, again, until I so we see something that shows a level of stability politically and through trade, I do think we're gonna continue to see that on the year over year probably trend to the negative side. I think on the positive side, the data centers, the wind business, the government, the heavy haul that we mentioned, are all things that we are seeing on the positive side. I think you're continuing to see that into the third quarter. Yep.
Daniel Imbro: No. I think I mean, Frank, well said, you know, we do look at, you know, kind of the data centers and everything. It's kinda powering that whole infrastructure build with AI.
Jim Applegate: You know, the electrical equipment, any of the power generation.
Daniel Imbro: Type stuff has really been a positive, and that's gonna continue. We see a pretty long runway. And I think a lot of that infrastructure build-out is just in its infancy. And I think, you know, if you kinda tack on, you know, just some of the administration things now that they're doing with the big beautiful bill and trying to spur domestic investment. It plays very nicely into additional infrastructure type investment. So we're very positive about that. I think Frank touched on kinda some of the negatives that, you know, around the tariff-related impacted industries. You know, automotive, obviously, very down. You know?
And until you get some clarity as far as where some of these tariffs are gonna shake out, I think that continues. I mean, same thing with, you know, other, like, metals and kind of some of the consumer-related products. I think you're gonna continue to see some choppiness over on that end.
Daniel Imbro: Yep. That's helpful. And then, JT, maybe a near-term one on 3Q kind of setup. I guess, I think Frank mentioned variable contribution margins typically flat sequentially from 3Q or 2Q to 3Q. Obviously, rates have underperformed, seasonality. I would think that's helping. Variable contribution margin. But how should we think about BCM relative to that historical flat? Is there any offset we should be aware of from mix or something else that would keep us from being better than that seasonally normal?
Jim Todd: It's a good question, Daniel. So to Frank's point, I mean, we're essentially flat if you go back fifteen years and walk two q to three q. To your point, if the rate softness today full disclosure today is day two of July close. So I don't have perfect visibility. But to your point, if the rate revenue per load softness we're seeing in July results in wider spreads on the brokerage side that could be a tailwind to BCM outperformance. The other thing I would call out, that Matt Miller can speak to better than me, the BCO utilization number was a good number in the second quarter. I think it ticked up 3% year over year.
Now that could face a little bit of a headwind with the rate direction we see rates going in July. But if that continues at a strong clip, that could help. And, you know, conversely, if rates fade a little bit, could be a headwind from the utilization side. That's how I'm thinking about it.
Daniel Imbro: Great. Appreciate the color, guys. Good luck.
Jim Todd: Thanks.
Operator: Thank you. We'll move now to the next person coming from the line of Scott Group of Wolfe Research. Your line is now open.
Scott Group: Hey. Thanks. Afternoon, guys. I just wanna clarify one thing about Q2 just to start. Right? So there was a reclassification of that, what, $4.8 million or whatever of costs from one line to another, but the net of it is clean. Right? So, like, the dollar 20 is a clean quarter and we just take, like, the earnings from Q2 and then add back a million and a half for the net of the agent convention. Is that right? Or do we need to I just yeah. Is that right?
Frank Lonegro: Yeah. So when you think about the agent matter that we talked about last quarter, as you think about the classification on the P and L, we had to move a couple of things around, but you're correct. The net number is zero in terms of that reclass. I'll let JK hit the other moving parts.
Jim Todd: Yeah. No. That's absolutely right, Scott. You're thinking about it the right way. It was a 0p impact in the second quarter, just P and L geography. So, yeah, the convention falls off. $3 million tailwind. I the way BCO All-Star is probably $1.2 to $1.5 million headwind discrete to the third pool.
Scott Group: Okay. Perfect. Okay. That's what I thought. And then the BCO count flat sequentially. That's good to see. The number of approved inactive brokerage carriers fell off a decent amount is that your are you seeing accelerated paces of bankruptcies? Is that what's causing that, or any additional color there?
Frank Lonegro: Yeah. One of the things we telegraphed, Scott, on the last call was we mentioned on the last call that there would be a pretty significant change as a result of some things that Matt's doing there. So we did exactly what we thought it was gonna do. We'll let Matt pick up the color on it.
Matt Dannegger: Sure. And just a great deal of efforts that's happening on the fraud front and really becoming more selective on who we're choosing to do business with is a result of all the work that's going on there to really through the carriers that are in the database and make sure we're partnering with those we wanna partner with.
Scott Group: Okay. And then just last one. You know, you talked about the rev per load finally inflecting positive in Q2, and I guess July is back negative again. Do we think this is there something unusual about July from a comp standpoint, or is this just we can't get a sustained inflection yet?
Frank Lonegro: I think the short answer is the last thing that said. When I look at the sequential improvement, which literally started you know, March to April, April to May, May to June, you know, we thought maybe we were catching a bid there. When you look at it in retrospect, I think there's a couple of things. There were some unique items in Q2. You've got certainly the road checks in Memorial Day, and then you had the you know, very late quarter implementation of the English language proficiency, which we got, what, matter weeks of or something like that. Ten days. So that will remain to be seen what actually happens there.
Then we probably had some tariff pull forwards in the first half of the year, which probably gave it a little bit of bid. And then the launch point, you know, from June to July, it was a pretty good June number for us and a pretty good July 2024 number. So I think you're coming off of some head of your comps and you know, demand's demand's just okay. Inventory levels are probably a little higher based on some of the pull forward. You've got the tariff uncertainty and I think it's too early to tell what the ultimate impact is gonna be from the big bill. But we're certainly favorable on the things that we saw in
Scott Group: Thank you. Appreciate it, guys.
Jim Todd: Thanks, Scott.
Operator: Thank you. We'll move now to the next person coming from the line of Bruce Chan of Stifel. Your line is now open.
Bruce Chan: Hey. Good evening, guys. Appreciate the time here. Maybe just a follow-up on some of the end markets. You mentioned that substitute line haul was up nicely this quarter. Wondering if that was related to post-pause restocking at the end of the quarter, and maybe get your thoughts on whether that sustains into 3Q or maybe that falls off a little bit. And then, you know, I know it's early, but, any kind of early read on, you know, what the sort of peak season looks like, especially with that line?
Jim Todd: Hey, Bruce. So substitute line haul for us is probably our least diversified end market. So we had some pretty good demand in the first quarter from one of the big parcel players. In the second quarter, we had pretty solid demand from the other parcel player along with one of the LTLs. So, just less diversified, and you could have one or two shippers really move the needle there. For thoughts on read-through to the back half, I'll let all the sales team come in.
Matt Dannegger: Hey, Bruce. This is Matt Dannegger. In regards to peak, we're right at that time of year where we start looking into that. To JG's point, it's really just on our part, a handful of the parcel players and substitute line haul. So we're starting to look into that now. We don't have a full look at what that's gonna be yet. You we normally firm that up September, October, and have a better look at rates and volumes. But the early is we're not looking for a huge peak. Just like last year. A lot's changed since the post-COVID over the last couple of years. I think there's more people going back into the stores. You got e-commerce.
They're finding different ways to manage their own trans. So we're just not seeing the same amount of that substitute line haul from our traditional customers that we've seen in the past. So early estimation, like I said, probably a little bit flat. I think last year, we were one or 2% over 23, and we're probably looking pretty similar this year, flat, maybe up a little, maybe down a little bit, but no huge swings like we've seen in some of the years past. But we'll have better information on that later on in the fall.
Bruce Chan: Okay. Yeah. Super helpful. And then just a quick follow-up on the forwarding side. I know, you know, smaller part of the business, but, obviously, a big drop-off in the second quarter, I'd imagine, you know, related to tariff kerfuffle. Any line of sight on that, you know, improving so far in 3Q?
Jim Todd: Bruce, I do not have a view based on July thus far. We saw ocean rates probably start to roll over a quarter or two ago. And I think on a year-over-year basis, that continued in sequential, I believe it continued as well. But to your point, not a huge piece for us and some project-type stuff can influence that from quarter to quarter.
Bruce Chan: Got it. Thank you.
Operator: Thank you. We'll move now to the next person coming from the line of David Zazula of Barclays. Your line is now open.
David Zazula: Hey. Thanks for taking my question. You answered the question about the brokerage capacity providers, but sequentially, the BCO count, the losses seem to have stemmed. Were there any actions you took to be able to better recruit or better retain BCOs during the quarter?
Frank Lonegro: Yes. No, David. Good question. A quarter ago, we mentioned that as the rate environment stabilized, and as the actions that Matt and his team have started to take took hold, that we would see fewer cancellations and more ads. Obviously, being in the second quarter versus the first quarter, is helpful just from a seasonal perspective. We were delighted to see effectively a flat quarter-over-quarter BCO count and, you know, continuing to do everything we can on the recruiting and the qualifications and the orientation and we do from a retention perspective. But I'll let Matt sing his own praises because he's done a heck of a job for us here in the last six months.
Matt Dannegger: I appreciate that, Frank. I appreciate the question. Yeah. Ads are tough in this environment. Would love to get a little bit more help on rate. That said, as Frank mentioned, we have a number of strategic initiatives focusing on how we recruit, how we qualify, how we onboard without sacrificing safety. Safety is one of those things we hold near and dear to the heart. A big differentiator for us. That said, best gross ads in seven quarters. Sequentially, the gross adds were up nine and a half percent, and year over year, the gross adds were up 12 and a half percent. So overall, pleased with the improvement we've seen.
David Zazula: Thanks. And then if I just squeeze one in on heavy haul. Seems like a very positive environment for you out there. Are there any headwinds on the horizon? Is that segment to tariffs? Or anything else that would keep that from continuing the momentum?
Frank Lonegro: Yeah. I think on the heavy haul side, not necessarily tariff-related. There's a little bit that goes cross-border, which we'll keep our eyes on, but a lot of that's domestic. You know, I think the question on everybody's mind as we look at the big bill is what the impact of that's gonna be on wind energy and some of the things that have been subsidized. But let me let Jim Applegate talk a little bit more about that.
Jim Applegate: Yeah. And as it relates to, you know, kinda near term, no. I mean, I think we're hearing from all of our customers, and it's pretty broad-based. I mean, we're not just kind of, you know, pigeonholed in one customer or one industry. We're seeing it wind, machinery, electrical equipment, data centers, even 3PLs that kinda specialize in that type of movement of equipment. We're seeing it across the board. So we think people are pretty well insulated from a customer and industry standpoint. There are some things in the bill, to Frank's point, you know, the alternative energy credits. You know, we're keeping an eye on that, but we do feel no matter what happens, people need energy.
People need power. We're gonna see that business, you know, just kinda move to different, different customers and different providers depending on where they're gonna need to kinda build their power to power all this investment that's happening across North America right now. So we still remain bullish on it, but we're keeping a good eye on, you know, what, you know, customers might benefit from this bill.
David Zazula: Thanks so much.
Operator: Thank you so much. We will move now to the next person, coming from the line of Brian Ossenbeck of JPMorgan. Your line is now open.
Brian Ossenbeck: Thanks. Good evening. Appreciate taking the question. Just to go back to the comment on the EOP, I know there's a lot of other different implications from them. There's via their truckload regulations out there as well that might tighten some capacity, but wanna get your thoughts, having some exposure to that, especially down around the border, or imagine a lot of the focus is. So any thoughts in terms of what you've seen so far, and any trends you expect? You know, was that gonna be a big impact to capacity or not?
Frank Lonegro: Yeah. Good question, Brian. I'll let Matt fill in some of the numbers that we've been looking at. And obviously, the FMCSA is publishing in arrears of their experience with ELP enforcement. We think from a BCO fleet perspective that we don't have any exposure. I mean, we have a very disciplined approach to qualifying and recruiting and retaining our BCOs. So we don't feel like we have any unique exposure at Landstar System, Inc. But, obviously, if there are, you know, any other capacities that happen to come out, we see that as a benefit to us, certainly. Regionally, if not nationally, depending on the size of the let that take.
Matt Dannegger: Hey, Brian. Appreciate the question. So to Frank's point, we really don't see that as a Landstar System, Inc. specific challenge. And to this point, we've not received any violations that relate to that. That said, this was implemented June 25 coming out of the executive order on April 28. So the data that we have so far from FMCSA really covers ten days. So it's June 25 through July 4. So far, 349 out of service violations. That's the big change here is that it's now an out service violation. So you wouldn't have likely seen any out of services prior to June 25.
So that three forty-nine, it's hard to read into ten days with, you know, the potential enforcement ramp-up. So we think come next quarter, we'll have a much better read on that. Coming out of that executive order on April 28, there's also a review of non-domiciled CDLs, and that has the potential to have an impact. But right now, Secretary Duffy announced an FMCSA compliance review of the states issuing non-CDLs. So that's kind of a wait and see right now. Think there is potential there, Brian.
Brian Ossenbeck: Okay. Thanks for the rundown there. Maybe as a follow-up for Jim, can you just talk about the insurance cost and claim trends? It sounds like you've got a potential settlement coming out, so we could talk a little bit more about that. And then also just the underlying trends that you're seeing when it comes to claims. And then know, what you think renewals are gonna start to look like, before we get there before too long. Thanks.
Jim Todd: Sure, Brian. And just to be clear, so you're looking for a color on the second quarter. The one coming up, you mentioned that could hit in the third quarter, I think, the accident claim. And then just more broad comments about just severity instance premiums, you know, just generally about the backdrop.
Frank Lonegro: Yeah. On the first one, Brian, let me take that one. Obviously, we were alerting investors and analysts to the fact that we have an ongoing trial. And given the fact that it's an ongoing trial, we probably shouldn't go into any level of detail. If you go back to my prepared remarks and look at a couple of the disclosures in the 10-Q, you'll get a sense of what we're talking about. I'll let JT hit the trends as well as, you know, potential impact on renewal as we get into next year.
Jim Todd: That's right. Yeah, Brian. So you heard Frank in his prepared talk about a little slightly higher DOT accident frequency. And as a result of that, we've seen our severity or cost per crash on the trucking side run hotter thus far in 2025 than 2024. We wrapped up our insurance renewal back on May 1 on an apples-to-apples basis.
We actually achieved a slight decrease, but we procured some additional risk transfer some other policies that basically brought it to flat year over year, which if you go back, you know, two years, three years, five years, we were pleased to achieve a flat renewal despite the fact clearly exposure is running lower and truck revenue per load has continued to run soft as compared to 2022, which then pressures your insurance as a percentage of that BCO revenue number.
Frank Lonegro: I gotta think, Brian, that flat year over year compares really well against the group. Credit to the safety profile and the professionalism of the BCOs.
Brian Ossenbeck: Right. Okay. Thanks very much, guys.
Jim Todd: Thanks, Brian.
Operator: Thank you. So we will have the last person to ask the question coming from the line of Stephanie Moore of Jefferies. Your line is now open. Stephanie Moore from Jefferies. Your line is now open.
Stephanie Moore: No. We can go ahead and close out of the queue.
Jim Todd: I see.
Operator: That is noted. So at this time, I show no further questions. I would like to turn the call back over to you, sir, for closing remarks.
Frank Lonegro: Thank you, Bill. In closing, while the freight environment remains challenging, we do see some positives in the near term. We're encouraged by the sequential pricing trends during the second quarter and with a choppy industrial economic backdrop, we were pleased with the 9% year-over-year revenue increase in our heavy haul service offering. And regardless of the economic environment, the resiliency of the Landstar System, Inc. variable cost business model continues to generate significant free cash flow. Landstar System, Inc. has always been a cyclical growth company, we are well-positioned to navigate the coming months as we continue to look forward to higher highs when the freight market turns our way. Thank you for joining us this afternoon.
Look forward to speaking with you again on our 2025 third-quarter earnings conference call in late October. Thank you.
Operator: Thank you for joining the conference call today. Have a good afternoon. Please disconnect your lines at this time.