Earnings Call Transcript - LSTR Q1 2025

Operator, Operator

Good morning and welcome to Landstar System Incorporated First Quarter Earnings Release Conference Call. All lines will be on a listen-only mode until the formal question-and-answer session. Today’s call is being recorded. If you have any objections, you may disconnect at this time. Joining us today from Landstar are Frank Lonegro, President and CEO; Jim Applegate, Vice President and Chief Corporate Sales, Strategy and Specialized Freight Officer; Jim Todd, Vice President and CFO; Matt Dannegger, Vice President and Chief Field Sales Officer; Matt Miller, Vice President and Chief Safety Officer. Now I’d like to turn the call over to Mr. Jim Todd. Thank you, sir. And you may begin.

Jim Todd, CFO

Thank you, Elle. Good morning and welcome to Landstar’s 2025 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 2024 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. I’ll now pass it to Landstar’s CEO, Frank Lonegro, for his opening remarks.

Frank Lonegro, CEO

Thanks, JT, and good afternoon, everyone. We’d like to thank our investors and analysts for their patience with us as we work through the previously disclosed supply chain fraud matter resulting in the postponement of first quarter earnings. We will be sharing the details at a high level with you shortly. I’d also 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 team in Louisville at the Mid-America Truck show recently and to celebrate the success of our agent network in Hollywood, Florida at our Annual Agent Convention. 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 service for our customers in this highly fluid freight transportation backdrop is truly impressive. They are exceptional business leaders and key to driving the continued success of Landstar’s business model. The 2025 first quarter presented a unique set of macroeconomic challenges with the inauguration of a new president and the uncertainties associated with aggressive U.S. trade and tariff policies. We continue to monitor the impact of tariffs and other federal trade policies on international trade relationships between the United States and many countries throughout the world, most notably China, Mexico and Canada, very closely. As a reminder, U.S.-Mexico cross-border revenue was approximately 11% of consolidated revenue during the 2024 fiscal year, while U.S.-Canada cross-border revenue was approximately 4% of consolidated revenue during the same period. Our direct exposure to freight to and from China is minimal. Amidst ongoing challenges in the freight environment compounded by a highly volatile federal trade policy, the 2025 first quarter included several important positive developments for Landstar. As noted in our earnings release, the number of loads hauled via truck exceeded the high end of our guidance issued in connection with our fourth quarter 2024 earnings release on January 29, 2025. This was the first time in at least 15 years where the number of loads hauled via truck in the first quarter exceeded the immediately preceding fourth quarter. Although it is hard to determine how much of our first quarter load count was related to efforts by shippers to get ahead of tariffs, we certainly saw this as a positive sign to start 2025. 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’m extremely pleased with the performance of Landstar’s heavy-haul service offering. We generated approximately $113 million of heavy-haul revenue during the 2025 first quarter, or a 6% increase over the 2024 first quarter. This achievement was driven by a 3% increase in heavy-haul revenue per load and a 3% increase in heavy-haul volume...

Jim Todd, CFO

Thanks, Frank. Turning to Slide 9. As Frank mentioned earlier, overall truck revenue per load decreased 0.6% in the 2025 first quarter compared to the 2024 first quarter primarily attributable to a 2.1% decrease in revenue per load on loads hauled by truck brokerage carriers, partially offset by a 1.5% increase in revenue per load on loads hauled by BCO independent contractors. Revenue per load on loads hauled by truck brokerage carriers was negatively impacted by a year-over-year decline in diesel prices. Overall truck revenue per load in the 2025 first quarter was negatively impacted by a 1% decline in average length of haul as compared to the 2024 first quarter...

Jordan Alliger, Analyst

Yes. Hi. Good morning. I was wondering if you could talk a little bit more about the insurance and the insurance developments. And I don’t know if you could pinpoint like I know you gave sort of the unfavorable variance, but how much of these prior period claims, the actual dollar amount sort of like maybe one-time in nature. And then how do you think about sort of what’s normal for insurance going forward? Just because it seems like these types of things recur frequently. Thanks.

Frank Lonegro, CEO

Hey, Jordan, thanks. And obviously it’s an industry phenomenon, not just a Landstar phenomenon. I would say, and you’ll see it in the 10-Q a little bit later today. But the year-over-year difference in prior year development was significant, like $10 million or $11 million. JT will get into the details. So I do think it was a unique quarter. I mean our normal run rates just below 5% of BCO revenue on that insurance and claims line. There’s always some prior year development in that line, but this was a pretty unique quarter for us. JT?

Jim Todd, CFO

Yes. Good morning, Jordan. To Frank’s point, so of the $11 million unfavorable development in the 2025 first quarter, about $7 million came from our cargo programs. We had two incidents in the 2024 fourth quarter that weren’t reported until the 2025 first quarter. Very timely, I think Courtney Reagan did a nice job on Friday on CNBC special on freight fraud and the supply chain. And it’s impacting Landstar, it’s impacting the entire industry. I’ll let Matt Miller talk about some of the things we’re doing from a technology and a people standpoint. 2023 full year insurance as a percent of BCO revenue was 570 basis points. Jordan, it stepped up to 630 in the 2024 fourth quarter. We’re working on a lot of things as evidenced by the decrease in cargo claims frequency. Just when these folks are hitting, they’re hitting on high-value loads as evidence. I think our severity on cargo claims was up something like 155% year-over-year in the 2025 first quarter. Matt?

Matt Miller, VP of Chief Safety Officer

Yes. Thanks, Jim. Thanks, Frank. So we are seeing a decrease in the frequency but as Jim alluded to, an increase in severity. And that really speaks to the sophistication of the networks and the bad actors out there. We’ve seen that happen from 2023 to 2024. And Courtney Reagan, I agree with Jim, did a really nice job going into detail about what’s really going on in the space. That said, we’re investing significantly; we stood up a fraud department and are continuing to add people to that subject matter expertise. We’re educating our constituents out there, whether it’s the agents or the capacity. And then we’re investing in technology. So we’ve stood up various vendors that are helping us attack from really all fronts, whether it’s people, education or technology. But this is an area where you got to remain vigilant, and you’re really always playing defense here.

Jordan Alliger, Analyst

Just as a quick follow-up, then I’m realizing that these things pop up, I get the severity. Is there a way to think about the baseline percent of BCO revenue going forward? Just like if it was a normalized number? Thanks.

Frank Lonegro, CEO

Yes, that was a bit difficult just given the environment that we’re in. I think that the historical run rate that we mentioned in the prepared remarks of 4.9% given the current environment is probably low. But then again, I look at the first quarter result in the 9%, 9.5% range and to me that’s high. And one of the things that happened in the 2025 first quarter, as JT mentioned, usually these are short cycle events where you find out pretty quickly that there’s something that’s happening in the couple of incidents that JT mentioned. We didn’t find out for 30, 60, 90 days in some cases. So it’s a little surprising. There have been arrests in one of these particular incidents that we’re alluding to. And so I see that as a good thing. It is going to take not just the industry and the people in the process and the technology that Matt mentioned, but also a fair amount of government help. So I do think the fact that CNBC came out with their piece on fraud, I do think that’s going to help elevate the concerns of the industry. And it’s not just in trucking. I mean, good lord, it’s happening in rail and intermodal and in shipping and in truck transportation as well. So this is something that we collectively need to get our arms around, and we are going to need government help to get there.

Jason Seidl, Analyst

Thanks, operator. Hey, Frank. Hey, team, good morning. Wanted to dive in a little more on the heavy-haul. Obviously loads volumes up 3%. Seems like a pretty decent result for the quarter. I wonder if you could break out sort of the end markets within heavy-haul that are doing better for you guys. And then I have a follow-up.

Frank Lonegro, CEO

Yes, sure thing, Jason. Heavy-haul has been a bright spot for us pretty much since we designated it as a strategic area of focus. It’s nice to see an area where we have, I think, a competitive advantage. We have a lot of legacy. We’ve got some great agents and some internal folks. We hired somebody from the outside who is an industry expert in heavy-haul. Rob Simon is his name. You’ll hear his name from time to time on these calls as we continue to improve the service offering there. And the BCOs who are capable of doing this and approaching customers who have that as maybe not the mainstay of their business, but certainly a piece that we can participate in. As you know, Jim Applegate has got this heavy-haul area. So let me let him provide some commentary on the end market question you had, Jason.

Jim Applegate, VP of Chief Corporate Sales

Yes. And how are you doing, Jason? From a heavy-haul standpoint, to Frank’s point, we’ve really leaned into this whole area, and we’re engaging our agents. We’ve got additional resources over within our corporate office to kind of help them work through the opportunities. We’ve got a dedicated sales focus. So our growth in that area has actually been pretty broad-based. We’ve got machinery, electrical, building products, the energy industry. We’re kind of seeing it in multiple areas with multiple customers. So we view this as a bright spot here. Not only from 2024, I think it’s carried over here into 2025, and our pipeline is very strong. So to Frank’s point, we’re a very strong player in this market, and it seems like the end markets are really kind of turning in our favor, and we’ve got the right support system to make sure that we grow.

Frank Lonegro, CEO

Yes, Jason, great question. I’ll let Matt chime in here in a second. The good thing is that we don’t expect any impact on our BCO fleet. Our standards here are extremely high, as you might imagine. Our qualification process, our orientation process certainly ferrets out folks who are unable to comply with that federal requirement. I don’t think that every company is as stringent as we are. And so I think it is going to impact capacity in what I’ll say is a favorable way for the industry and certainly for Landstar. And I think we’re going to see that in a couple of different ways through standard road checks, but also in the use of what we call B-1 visa folks who were previously anyway involved in a lot of cross-border business. So I do think it’s going to be an overall positive for us. But Matt can fill in the gaps there.

Matt Dannegger, VP of Chief Field Sales Officer

Sure. I appreciate the question. This relates to the executive order on English language proficiency that Trump put out April 28, and that was followed May 1 by CVSA indicating that English language proficiency was going to be considered as an out-of-service criteria. That’s really the big change here. English language has been required. It’s the out-of-service element here that can impact shippers as well as the drivers when they’re out there on the road. And really, the big question that we have is the enforcement guidance. So we’re waiting on FMCSA. They have about 60 days to put out guidance in terms of enforcement for law enforcement. But we’ve heard upwards of 100,000 drivers could be impacted. That’s an industry number. That’s not my number that we’ve heard.

Jason Seidl, Analyst

I appreciate that color guys. Wanted to switch over to sort of the new requirements or I guess, the requirements that were brought back for English proficiency for CDL operators. Wanted to get sort of your thoughts on how that would impact the overall driver supply market. Not only in sort of enforcement but also in maybe new CDL applicants going forward?

Frank Lonegro, CEO

Yes, Jason. Great question. I’ll let Matt chime in here in a second. The good thing is that we don’t expect any impact on our BCO fleet. Our standards here are extremely high as you might imagine. Our qualification process, our orientation process certainly ferrets out folks who are unable to comply with that federal requirement. I don’t think that every company is as stringent as we are. And so I think it is going to impact capacity in what I’ll say is a favorable way for the industry and certainly for Landstar. And I think we’re going to see that in a couple of different ways through standard road checks, but also in the use of what we call B-1 visa folks who were previously involved in a lot of cross-border business. So I do think it’s going to be an overall positive for us. But Matt can fill in the gaps there.

Matt Dannegger, VP of Chief Field Sales Officer

Sure. And appreciate the question. This relates to the executive order on English language proficiency that Trump put out April 28 and that was followed May 1 by CVSA indicating that English language proficiency was going to be considered an out-of-service criteria. That’s really the big change here. English language has been required. It’s the out-of-service element here that can impact shippers as well as the drivers when they’re out there on the road. And really the big question that we have is the enforcement guidance. So we’re waiting on FMCSA. They have about 60 days to put out guidance in terms of enforcement for law enforcement.

Jon Chappell, Analyst

Thank you. Good morning. I’m going to stick with the capacity theme. Frank, I’ll start with you. Obviously the BCO account's been kind of in the crosshairs and it sounds like this quarter trends remain the best quarter-over-quarter in 12 months...

Frank Lonegro, CEO

Yes, good question, Jon. And on the BCO account, yes, we are actually pretty excited about the trends that that we’ve seen in April and even more so in the first couple of weeks of May. And so I’ll let Matt cover that one. You are right, there has been an uptick on the capacity side, the third-party capacity side. There are reasons behind that. And also given the question that Jason just asked and Matt’s excellent answer, I mean, I do think that capacity number is probably going to come down but let Matt fill in the gaps.

Matt Dannegger, VP of Chief Field Sales Officer

Sure, sure. And that’s a great point. It did jump about 10,000 carriers and that really relates to our partnership with an industry-leading vendor on the carrier vetting and oversight. They’re partnered with many other carriers or brokers, I should say, in our space. Therefore we got access to more approved carriers that qualify for our criteria as a result of that implementation, which took place in the first quarter. That said, this is going to give us the ability to become more and more selective with those that we do business with as it relates to fraud, as it relates to really choosing those high-quality carriers to partner with.

Jim Todd, CFO

Frank Lonegro, CEO

Jim Todd, CFO

Bruce Chan, Analyst

Hey, good morning everybody. Sorry to ask another one here on the fraud issue. I know it’s under investigation, but you’ve called out a $0.10 impact here and there’s an implication that it’s more one time in nature. Outside of just the magnitude of this charge and the fact that it’s in forwarding, is this a separate issue from the double brokering and imposter scams?

Frank Lonegro, CEO

Yes. This one is extremely unique. I mean, this was a relationship which was created 10, 15 years ago, which over a period of time, there were some ownership changes and things like that in this satellite environment. And then there was a very unique set of circumstances. This is not your typical double brokering or anything like that...

Daniel Imbro, Analyst

Yes. Hey, good morning guys. Thanks for taking our questions.

Frank Lonegro, CEO

In looking at Q1, absent insurance and claims, we would have hit our guidance, and so we felt really good about the core operating performance of the business.

Operator, Operator

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