LANDSTAR SYSTEM INC Q2 2025 earnings call

Thank you, Bill. Good afternoon and welcome to Landstar'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. 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 2024 fiscal year described in the section Risk Factors, Landstar's Form 10-Q for the 2025 first quarter, 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 undertakes no obligation to publicly update or revise any forward-looking information. I'll now pass it to Landstar CEO Frank Lonegro for his opening remarks.

Thanks JT and good afternoon everyone. I'd like to thank our BCOs and agents and all of the Landstar 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's 51st truck giveaway awarding newly inducted Million Mile Safe driver George Eason from Owensboro, Kentucky with a new 2026 Freightliner Cascadia. 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 and 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's business model.

Amidst 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. While overall revenue was down 1% year over year, truck revenue was up year over year for the first time since the third quarter of 2022. As noted in our earnings release, our second quarter revenue per truckload outperformed pre-pandemic typical seasonality and the number of trucks provided by BCOs and was approximately equal to the 2025 first quarter, representing the best sequential net BCO truck performance in 12 quarters. Notwithstanding the political and macro-economic 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'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 fivr, the freight environment in the 2025 second quarter was characterized by relatively soft demand from a seasonal perspective.

Admittedly, comping off a 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'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 buyback and repurchased approximately 686,000 shares of common stock. We continue to invest through the cycle in leading technology solutions for the business 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 unsighted platform equipment.

Turning to slide six and looking at our network, the scale, systems, and support inherent in the Landstar model help to drive the operating results generated during the 2025 second quarter. JT will get into the details on revenue, loadings, and rate per load in a few moments. As noted during previous earnings calls, Landstar'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 BCOs operating safely every day and the agents and employees who work to reinforce the critical importance of safety at Landstar. 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'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 9 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 12-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 1/4 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.

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 2024 second quarter, primarily attributable to a 3.2% increase in revenue per load on loads hauled by unsighted platform equipment and by a 1.2% increase in revenue per load on loads hauled via van equipment. On a sequential basis, truck revenue per load increased 3.2% in the 2025 second quarter versus the 2025 first quarter, stronger than the typical pre-pandemic normal seasonality increase of approximately 2%. In comparison to overall truck revenue per load, we consider revenue per mile on loads hauled by BCO trucks a pure reflection of market pricing as it excludes fuel surcharges billed to customers that are paid 100% to the BCO.

In the 2025 second quarter, revenue per mile on unsighted 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 2024 second quarter. Delving deeper into seasonal trends, revenue per mile on loads hauled by BCOs on unsighted 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 unsighted 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 mixed tailwind to our unsighted platform revenue per load as heavy haul revenue as a percentage of the category increased from approximately 33% during the 2024 second quarter to approximately 35% in the 2025 second quarter. Non-truck transportation service revenue in the 2025 second quarter was 22% or $21 million below the 2024 second quarter. 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. Transportation logistics segment revenue was down 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, which collectively make up about 69% of our transportation revenue, declined approximately 3% compared to the 2024 second quarter. While slide 10 displays revenue share by commodity, we thought it would also be helpful to include some color on volume performance within our top five commodity categories. From the 2024 second quarter to the 2025 second quarter, total loadings in 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 2024 second quarter. As we've mentioned many times before, Landstar 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 and provide truck capacity more often than during times of more readily available truck capacity. The amount of freight hauled by Landstar on behalf of other truck transportation companies is reflected in almost all of our commodity groupings, including our substitute line haul service offering. Overall revenue hauled on behalf of other truck transportation companies in the 2025 second quarter was 19% below the 2024 second quarter, 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 2024 second quarters, 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 2025 second quarter compared to gross profit margin of 9.8% in the corresponding period of 2024. In the 2025 second quarter, 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 2025 second quarter compared to 14.3% in the same period last year.

The decrease in variable contribution margin compared to the 2024 second quarter 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. Turn 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 2025 first quarter from customer bad debt to contractor bad debt during the 2025 second quarter as a result of the finalization of certain financial responsibility related agreements with the affected independent commission sales agencies. Excluding the $4.8 million P&L reclassification. Other operating costs increased approximately $700,000 as compared to the 2024 second quarter, primarily attributable to increased trailing equipment maintenance costs, partially offset by increased gains on disposal of used trailing equipment. Insurance and claims costs were $30.4 million in the 2025 second quarter compared to $27.2 million in 2024. Total insurance and claims costs were 6.6% of BCO revenue in the 2025 second quarter as compared to 5.8% in the 2024 second quarter.

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 2024 second quarters, 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 2025 second quarter 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 2024 second quarter.

The increase in selling, general and administrative costs was primarily attributable to an increased provision for incentive compensation, increased information technology cost, 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 2025 second quarter compared to a $1.4 million reversal of previously recorded incentive compensation costs during the 2024 second quarter. Depreciation and amortization was $12.1 million in the 2025 second quarter compared to $14.5 million in 2024. This decrease was primarily due to decreased depreciation on software applications. The effective income tax rate was 24.6% in the 2025 second quarter 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 model. Back to you, Frank.

Thanks, JT. Given the highly fluid freight transportation backdrop and an uncertain political and macro-economic 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 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&A costs would decline by approximately $3 million sequentially as we cycle the impact of the 2025 agent convention held during fiscal April 2. That approximately $3 million sequential tailwind to SG&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. Third, one of Landstar'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 during the 2025 third quarter. Landstar intends to preserve its rights to appeal any such verdict. Additional information regarding this matter is included in Landstar's second quarter 10-Q filed today with the SEC. With that bell, we'd like to open the line for questions.