Earnings Call Transcript
Landstar System Inc (LSTR)
Earnings Call Transcript - LSTR Q4 2025
Operator, Operator
Good afternoon, and welcome to the Landstar System Inc. Fourth Quarter Earnings Release Conference call. Today's call is being recorded. Joining us from Landstar are Frank Lonegro, President and CEO; Jim Applegate, Vice President and Chief Corporate Sales, Strategy and Specialized Officer; Jim Todd, Vice President and CFO; Matt Dannegger, Vice President and Chief Field Sales Officer; and Matt Miller, Vice President and Chief Safety and Operations Officer. Now I'd like to turn the call over to Mr. Jim Todd. You may begin. Thank you.
James Todd, CFO
Thanks, Elmer. Good afternoon, and welcome to Landstar's 2025 Fourth Quarter Earnings Conference Call. Before we begin, let me read the following statement. Following is the 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 20,251st quarter and our other SEC filings from time to time. These risks and uncertainties could cause 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 Lance, our CEO, Frank Lonegro, for his opening remarks.
Frank Lonegro, CEO
Thanks, J.T., and good afternoon, everyone. I want to express my appreciation for our BCOs, agents, and all Landstar employees who support them daily. The capability, resilience, and commitment shown consistently by our network of independent business owners is unparalleled in the freight transportation industry. Their adaptability and dedication to safety, security, and service for our customers is truly remarkable. They are outstanding business leaders and essential to the ongoing success of Landstar's business model. Before we dive into the fourth quarter results, I would like to take a moment to reflect on my first two years leading this organization. Despite the prolonged freight recession lasting longer than many anticipated, we have accomplished significant milestones over the past two years. We established our key priorities, referred to as the 5 points of the star, to guide our operations: accelerating the model, executing our growth strategy, managing risk, leveraging our financial strength, and enhancing support. The top focus is accelerating the model, which centers on our agents and BCOs. When they are strong, growing, and equipped with the necessary tools and support, the Landstar model truly excels. We have intensified our company's strategic growth initiatives, with heavy haul and U.S.-Mexico cross-border accounting for about 20% of our business. Although the cross-border business has faced challenges due to geopolitical factors, we are prepared to utilize our new cross-border leadership alongside our strong agent presence and market position when conditions improve. On the heavy haul front, with fresh leadership and a strong agent focus, Landstar achieved a new revenue record of $569 million during the 2025 fiscal year, representing about 14% growth over the record-setting year of 2024. We are also continuing to build the leadership team of the future with our executives and VPs, dubbed our top 60, nearly half of whom are new to their roles, responsibilities, or the company. This group is collectively focused and incentivized to drive Landstar's growth and profitability, maintaining our industry-leading transportation and logistics business based on three key elements: safety, security, and service. We've reduced the time it takes to become a Landstar BCO while maintaining our highly stringent qualification standards. Huge thanks go to Matt Miller for his efforts here. This year, we will also implement a redesigned BCO onboarding and training program to ensure the delivery of relevant, high-quality instruction and to support Landstar BCOs in upholding the highest standards of service for our customers. We're leaning into the future in deploying technology and specifically AI to benefit our agents, BCOs and Landstar employees. It's all about enhancing our support for the Landstar network. You'll hear more this afternoon about our AI strategy and specific initiatives like the contact center, our path to deploying an ERP and AI-enhanced tools focused on pricing, BCO retention, trailer requests and credit approvals. You'll also hear about our new web portal featuring embedded AI that was built specifically for the needs of Landstar freight agents and that we believe is unique in the industry. As we continue our efforts to find new ways to embed AI in our business, I'm pleased to report that approximately 50% of our IT CapEx budget for 2026 is dedicated to AI enablement and solutions. And importantly, we've continued Landstar's rich tradition of strong capital returns to our shareholders. Over the last 2 years, Landstar returned approximately $261 million to shareholders in the form of share repurchases and another $245 million in cash dividends, we remain committed to our capital return program while continuing to invest capital to improve and grow our business and making our network of entrepreneurs as successful as possible. We've been busy these last 2 years. We're excited about the future, and we look forward to sharing more with you down the road. Turning back to the 2025 fourth quarter results, the challenging demand conditions experienced in the Truckload freight environment over the past 3 years continued during the 2025 fourth quarter. Volatile federal trade policy and lingering inflation concerns continue to generate supply chain uncertainty. Nevertheless, the Landstar team of independent business owners and employees performed well. Truck transportation revenue in the fourth quarter was nearly flat year-over-year as the slight decrease in total revenue was primarily attributable to decreased ocean revenue. Moreover, as previously disclosed, we are in the process of selling Landstar Metro, the company's Mexican logistics subsidiary. Excluding the revenue contribution from Landstar Metro, for both 2025 and 2024 fourth quarters as well as approximately $16 million in reported revenue during the 2024 fourth quarter that was associated with the previously disclosed agent fraud matter, total revenue decreased approximately 1% year-over-year in the 2025 fourth quarter. As disclosed in our prerelease 8-K filed with the SEC on January 21, the 2025 fourth quarter financial results were negatively impacted by several discrete items impacting insurance and claims expense. First, the company recorded pretax charges of $11 million or $0.24 per share related to 2 separate tragic vehicular accidents involving BCOs leased on with subsidiaries of the company. Second, the company recorded a pretax charge of $5.7 million or $0.13 per share in connection with the court entry of a judgment in January 2026 that Landstar intends to appeal and which related to a trial that ended in August 2025 relating to an accident that occurred in fiscal 2022. Third, the company recorded a $5.3 million pretax charge or $0.12 per share related to an increase in the company's actuarially determined claim reserves. JT will cover these items in greater detail during his prepared remarks. Nevertheless, we are encouraged by several positive signs. One consistent highlight is the continued strength in the unsided platform equipment business, which posted another strong quarter with an 11% year-over-year revenue increase driven by the performance of Landstar's heavy haul service offering. We generated approximately $170 million of heavy haul revenue during the 2025 fourth quarter or a 23% increase over the 2024 fourth quarter. This achievement reflected a 16% increase in heavy haul revenue per load and a 7% increase in heavy haul volume. Our focus continues to be on accelerating our business model and executing on our strategic growth initiatives. We are continuing to invest in the foundational work that will put Landstar in a great position to leverage the freight environment as it 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 5. The freight environment in the 2025 fourth quarter was characterized by relatively soft demand from a seasonal perspective. The impact of accumulated inflation remains a drag on the amount of truckload freight generated in relation to consumer spending while the industrial economy remains soft as evidenced by an ISM index below 50 for the entire 2025 fourth quarter. We are pleased to see sequential outperformance by our overall truck revenue per load compared to pre-pandemic normal seasonal patterns despite fiscal October underperforming pre-pandemic seasonal trends. As noted in the press release, we were encouraged to see our overall truck revenue per load increased approximately 6% from fiscal October to fiscal December and appreciate everything the U.S. DOT is doing to support the American trucker. Considering that backdrop, Landstar's revenue performance was admirable in the 2025 fourth quarter with the number of loads hauled via truck down approximately 1% and almost entirely offset by approximately 1% increase in truck revenue per load compared to the 2024 fourth quarter. Our balance sheet continues to be very strong. Our capital allocation priorities are unchanged and we will continue to patiently and opportunistically execute on our existing buyback authority to benefit our long-term stockholders. As noted in the slide deck, during 2025, we deployed approximately $180 million of capital toward buybacks and repurchased approximately 1.3 million shares of our common stock. And yesterday afternoon, our Board declared a $0.40 quarterly dividend payable on March 11 to shareholders of record as of the close of business on February 18. We continue to invest through the cycle in leading technology and AI 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 with a particular focus on investment in new van equipment. At this stage of the call, I would normally hand it off to JT, but we felt it was important to provide analysts and investors with an update on our AI-related activities. I'll now pass the call to Jim Applegate for a discussion of in-flight and planned AI-related initiatives going on at Landstar. Jim?
James Applegate, Vice President, Corporate Sales
Great. Thank you, Frank. Since 2016, Landstar has been executing a digital transformation strategy to ensure our network of agents and BCOs remains highly competitive in an increasingly technology-driven freight environment. Our goal from the outset was not simply modernization, but enablement, delivering tools that help automate the agent office, simplify the experience in operating as a Landstar business capacity owners and scale the efficiency and effectiveness of our entrepreneurs. Those early efforts branded as Landstar 2020 included the rollout of a new transportation management system, advanced pricing and capacity tools, agent analytics, BCO retention capabilities, mobile applications and trailer management. Landstar 2020 was never viewed as an endpoint. It is the foundation of a long-term commitment to building and deploying industry-leading technology across our entire ecosystem. As we move beyond 2020, that commitment expanded, we invested further into digital capabilities within our corporate operation and the support we provide in the network, including the rollout of modern contact center technology and significant upgrades to our financial, settlements and back office systems. These investments strengthen the overall connectivity and support provided to our entrepreneurial network. What truly differentiates Landstar's technology strategy is how it's conceived and deployed. Our approach is not driven by top-down mandates designed solely to reduce costs. Instead, it's built through close collaboration with our agents and BCOs with a clear focus on enabling growth. By aligning technology investments with the needs of our entrepreneurs, we're able to deliver tools that are adopted and leverage to drive growth and deliver wins in the highly competitive transportation sector. Our agency model growth is often constrained by resources. Without technology, a new agent may reach a couple of million dollars in revenue before needing to add headcount. This is a difficult decision, given the financial risk involved. Our objective has been to deploy technology to fundamentally change that equation. By automating workflows and improving office efficiency, we have helped agents to embrace our tools to significantly increase their revenue base without adding resources. The same philosophy applies to our BCOs. By eliminating manual and administrative friction, we enable them to be more productive, haul more freight and better serve our agent customers. The end result is a differentiated value proposition for customers, a combination of advanced, purpose-built technology and highly motivated professionals with a direct economic stake in delivering freight safely, securely and with exceptional service. Artificial intelligence represents the next major acceleration of this strategy. The pace of innovation and breadth of potential applications are unprecedented, and we view AI as a powerful enabler of our entrepreneurial ecosystem. Importantly, our AI strategy is evolutionary, not experimental. We're building on the strong digital foundation we already have in place. Today, machine learning is embedded within our pricing and BCO retention tools, allowing them to continuously improve as we scale the available data. Our new contact center platform leverages AI to enhance the knowledge base of the service representatives, analyze sentiment, automate routine tasks, summarize interactions and free our teams to focus on higher-value problem solving. We've embedded AI into our Landstar agent portal, improving access to information, providing actionable business insights and enabling better, faster decision-making. We've also deployed an AI-powered fraud detection solution that analyzes behavioral patterns, documentation, invoice images and shipment characteristics to identify high-risk freight and reduce shipment losses. Looking ahead, beginning in the first quarter of 2026, our AI task force will work with transportation-focused AI start-ups and established technology partners to accelerate AI applications across the shipping life cycle and within agent offices. These efforts are focused on driving efficiency, improving decision-making and further unlocking growth across our network. As technology continues to evolve, Landstar intends to remain at the forefront. We see AI as a strategic enhancement to the competitive advantage of the Landstar business model and the resiliency and capability of our strong network of entrepreneurs. Entering this new era, we believe AI represents another meaningful opportunity to strengthen the safety, security and service we provide to our customers every day on every load. Back to you, Frank.
Frank Lonegro, CEO
Thanks, Jim. Turning to Slide 10 and looking at our network, the scale systems and support inherent in the Landstar model helped to drive the operating results generated during the 2025 fourth quarter. JT will get into the details on revenue, loadings and rate per load in a few minutes. As noted during previous earnings calls, Landstar's Safety First 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 0.59 DOT reportable accidents per million miles during 2025, and well below the last available national average DOT reportable frequency released from the FMCSA for 2021 and slightly better than the company's trailing 5-year average of 0.61. This long-run average is an impressive operating metric that speaks to the strength, skill, talent, and dedication of our BCOs and provide the point of differentiation. Our agents are able to highlight in discussions with our freight customers. We remain committed to driving a best-in-class safety culture. I'd also like to take a moment to recognize Landstar's $457 million agents based on our 2025 fiscal results. Importantly, retention within the million-dollar agent network continues to be extremely high. Turning to Slide 11. On a year-over-year basis, BCO truck count decreased approximately 4% compared to the end of the 2024 fourth quarter and approximately 1% sequentially and BCO turnover continues to be influenced by a persistent relatively low rate for 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 turnover rate dropped from 34.5% as of fiscal year-end 2024 to 31.4% at the end of the 2025 fourth quarter. Through the first 4 weeks of the 2026 first fiscal quarter, the number of trucks provided by BCO independent contractors is down fractionally, consistent with typical first quarter seasonality, and I will now pass the call back to JT to walk you through the 2025 fourth quarter financials in more detail.
James Todd, CFO
Thanks, Frank. Turning to Slide 13. As Frank mentioned earlier, overall, truck revenue per load was up approximately 1% in the 2025 fourth quarter compared to the 2024 fourth quarter primarily attributable to a 7.5% increase in revenue per load on loads hauled by unsided platform equipment and a 2% increase in revenue per load on less than truckload loadings partially offset by a 3.4% decrease in van revenue per load and a 4.2% decrease in revenue per load on other truck transportation loadings. On a sequential basis, truck revenue per load increased 1.5% in the 2025 fourth quarter versus the 2024 third quarter outperforming typical pre-pandemic normal seasonality increase of approximately 1% despite a relatively soft start out of the gate with fiscal October underperforming normal seasonality. 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 fourth quarter, both revenue per mile and unsided platform equipment hauled by BCOs and revenue per mile on van equipment hauled by BCOs were 1% below the 2024 fourth quarter. Delving deeper into seasonal trends, revenue per mile on loads hauled by BCOs on unsided platform equipment declined 2% from September to October, was flat from October to November and increased 4% from November to December. The September to October decline underperformed pre-pandemic seasonal trends, while the October to November approximately equal and the November to December increase, both outperformed pre-pandemic historical trends. Revenue per mile on van equipment hauled by BCO sequentially decreased 1% from September to October and an additional 1% from October to November, underperforming pre-pandemic historical trends. However, in what we hope was a possible inflection point, revenue per mile on van equipment hauled by BCOs increased 3% from November to December, slightly above pre-pandemic historical trends. It is important to mention that the month-to-month seasonal trends for unsided platform equipment tend to be more volatile than those for van equipment. This volatility is typically due to the combination of heavy specialized loads and standard flatbed volume. We have been pleased with the recent performance in our heavy haul service offering, as heavy haul revenue increased by an impressive 23% year-over-year in the fourth quarter, significantly exceeding core truckload revenue growth. Heavy haul loadings experienced a rise of approximately 7% year-over-year, and revenue per heavy haul load increased by 16% year-over-year. This was a positive factor for our unsided platform revenue per load, as heavy haul revenue as a percentage of this category grew from about 38% in the 2024 fourth quarter to roughly 42% in the 2025 fourth quarter. Non-truck transportation service revenue in the 2025 fourth quarter was 28% or $30 million below the 2024 fourth quarter. Excluding approximately $16 million in revenue reported during the 2024 fourth quarter that was associated with the previously disclosed agent fraud matter, transportation service revenue in the 2025 fourth quarter decreased by approximately $14 million or 15% compared to the 2024 fourth quarter. Turning to Slide 14, we've provided revenue share by commodity and year-over-year change in revenue by commodity. Transportation & Logistics segment revenue was down 2.9% year-over-year on a 2% decrease in revenue per load and a 1% decrease in loads compared to the 2024 fourth quarter. Within our largest commodity category, consumer durables, revenue decreased approximately 2% year-over-year on a 3% decrease in volume, partially offset by a 1% increase in revenue per load. Aggregate revenue across our top 5 commodity categories, which collectively make up about 71% of our transportation revenue, increased approximately 2% compared to the 2024 fourth quarter. While Slide 14 displays revenue share by commodity, we thought it would also be helpful to include some color on volume performance within our top 5 commodity categories. From the 2024 fourth quarter to 2025 fourth quarter, total loadings of machinery increased 6%. Automotive equipment and parts decreased 5%. Building products decreased 11% and hazmat decreased 3%. Additionally, substitute line haul loading is 1 of the strongest performers for us during the pandemic and 1 which varies significantly based on consumer demand, increased 3% from the 2024 fourth 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 to 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 fourth quarter was 15% below the 2024 fourth quarter, an indicator that capacity is reasonably 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 fourth quarters, respectively. Even with the ups and downs in various customer categories, our business remains highly diversified with over 20,000 customers, none of which contributed over 8% of our revenue in the 2025 fiscal year. Turning to Slide 15 and the 2025 fourth quarter, gross profit was $85.6 million compared to gross profit of $109.4 million in the 2024 fourth quarter. Gross profit margin was 7.3% of revenue in the 2025 fourth quarter as compared to gross profit margin of 9% in the corresponding period of 2024. In the 2025 fourth quarter, variable contribution was $166 million compared to $166.5 million in the 2024 fourth quarter. Variable contribution margin was 14.1% of revenue in the 2025 fourth quarter and 13.8% in the 2024 fourth quarter. Turning to Slide 16, operating income declined as a percentage of gross profit, primarily due to the impact of highly elevated insurance and claim costs in the 2025 fourth quarter and 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 base. Operating income declined as a percentage of variable contribution primarily due to the impact of the highly elevated insurance and claim costs in the 2025 fourth quarter and the impact of the company's fixed cost infrastructure, while the variable contribution basis were essentially equal. Other operating costs were $14.6 million in both the 2025 and 2024 fourth quarters. Insurance and claim costs were $56.1 million in the 2025 fourth quarter compared to $30.1 million in 2024, and total insurance and claim costs were 12.3% of BCO revenue in the 2025 fourth quarter as compared to 6.7% in the 2024 fourth quarter. The increase in insurance and claim costs as compared to 2024 was primarily attributable to $11 million of costs related to 2 separate tragic vehicular accidents involving BCO independent contractors leased on with subsidiaries of the company, each of which occurred during the 2025 fourth quarter. Two, a $5.7 million pretax charge associated with a broker liability judgment entered on January 13, 2026, where a trial court in El Paso, Texas, found Landstar Ranger responsible for 100% of the $22.8 million of total damages awarded rather than the 15% apportioned to Landstar by the jury during the summer of 2025. Landstar disagrees with the judgment and plans to vigorously appeal this matter. And three, the impact of a $5.3 million increase in actuarially determined IBNR reserves relating specifically to loss exposure in excess of $1 million per claim. During the 2025 and 2024 fourth quarters, insurance and claim costs included $9.2 million and $2.2 million of net unfavorable adjustments to prior year claim estimates, respectively. Importantly, $5.7 million of the $9.2 million of prior year development reported in the 2025 fourth quarter was attributable to the El Paso broker liability judgment entered during January 2026. The Selling, general and administrative costs were $56.2 million in the 2025 fourth quarter compared to the $54.4 million in the 2024 fourth quarter. The increase in selling, general and administrative costs was primarily attributable to an increased provision for incentive compensation, increased stock-based compensation expense and increased wages, partially offset by a decreased provision for customer bad debt. The provision for incentive compensation was $700,000 during the 2025 fourth quarter compared to a reversal of $200,000 during the 2024 fourth quarter. Stock-based compensation expense was approximately $800,000 during the 2025 fourth quarter as compared to a $100,000 reversal of previously recorded stock-based compensation costs during the 2024 fourth quarter. We continue to manage SG&A in part by closely managing headcount at Landstar. Our total number of employees based in the United States and Canada is down approximately 45% since the beginning of 2025. Depreciation and amortization was $10.5 million in the 2025 fourth quarter compared to $12.7 million in 2024. This decrease was primarily due to decreased depreciation on software applications and decreased depreciation on trailing equipment. The company recorded an additional $2.1 million or $0.05 per share as a noncash impairment charge during the 2025 fourth quarter relating to the ongoing sales process of Landstar Metro. The effective income tax rate was 18.3% in the 2025 fourth quarter compared to an effective income tax rate of 21.4% in the 2024 fourth quarter. The decrease in the effective income tax rate was primarily due to the favorable resolution of certain state tax matters during the 2025 fourth quarter. Turning to Slide 17 and looking at our balance sheet. We ended the quarter with cash and short-term investments of $452 million. Cash flow from operations for 2025 was $225 million and cash capital expenditures were $10 million. The company continues to return significant amounts of capital back to stockholders with $125 million of dividends paid and approximately $180 million of share repurchases during fiscal 2025. The strength of our balance sheet is a testament to the cash-generating capabilities of the Landstar model. Back to you, Frank.
Frank Lonegro, CEO
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 claim costs, the company will be providing first quarter revenue commentary rather than formal guidance. Turning to Slide 19. The number of loads hauled via truck in January was approximately 1% below January 2025 on a dispatch basis, while revenue per load in January was approximately 4% above January 2025 on a processed basis. As a result, we view truck revenue per load in January as modestly outperforming normal seasonality, while January truck volumes are trending essentially in line with normal seasonality. Looking at historical seasonality from Q4 to Q1, pre-pandemic patterns would normally yield a 4% decrease in both the number of loads hauled via truck and truck revenue per load yielding a top line that typically decreases by a mid-single digit to a high single-digit percentage. As just noted, though, fiscal January truck revenue per load outperformed normal seasonality, while truck volumes trended essentially in line. It should be noted that we faced a challenging year-over-year truck volume comparison during the first quarter as 2025 first quarter truck volumes exceeded the immediately preceding fourth quarter truck volumes for the first time in 15 years, with tariff pull-forward behavior likely driving the strength. Moving through the first quarter, historically, truck revenue per load sequentially declined approximately 1.5% from fiscal January to fiscal February before improving approximately 1.8% from fiscal February to fiscal March. We estimate that in the event fiscal February and fiscal March truck revenue per load outperformed normal seasonality, in line with the outperformance we experienced in fiscal January, the sequential revenue change experienced during the 2026 first quarter could be down low single digits versus the fourth quarter of 2025. With respect to variable contribution margin, the company typically experiences a 40 to 60 basis point expansion in variable contribution margin from the fourth quarter to the first quarter, typically driven by increased BCO mix. However, I would note we had a very strong BCO utilization in the fourth quarter of 2025 at plus 8% year-over-year. In addition, winter storm activity experienced in January could have a negative impact to first quarter 2026 BCO utilization, resulting in a first quarter 2026 VCM performance that does not necessarily follow normal seasonal patterns. With that, Elmer, we'd like to open the line for questions.
Operator, Operator
Our first question is from Jason Seidl from TD Cowen.
Jason Seidl, Analyst
Maybe sticking on that last comment, in terms of maybe a sequential decline in utilization for your BCOs, where are you standing right now with the big storm that just swept through the country?
Unknown Executive, Executive
Yes, that's a good question. And look, that's off to the BCOs who are out there and doing it safely every day. We certainly have had folks with a little bit of equipment challenges and also some customers who aren't open to either allow us to pick up or to allow us to deliver. JT can get into the very specifics on the day-to-day loading challenges that we've had. Typically, if you look back at his, again, JT will get into more detail, we generally recover that. So we're kind of early to mid-quarter. So the hope is that we'll be able to recover it. But this is a fairly widespread storm that impacts geographically all throughout the country. So let me let JT maybe just chime in on the specifics there because we are watching it very closely, as you would expect.
James Todd, CFO
Yes. No, absolutely. Jason. So I would estimate the storm impact to the fourth week of fiscal January and the first week of fiscal February, probably 5,000 to 6,000 knockdown impacted dispatch loads. But to Frank's point, unlike a dedicated carrier contract carrier, if a plan is shut down and they're not producing and you're not picking up your 15 loads a day, that freight is gone. In our business, we tend to gap back up when the weather eventually clears. So we'll continue to keep an eye on it.
Frank Lonegro, CEO
But I do think, to the point you made on BCO utilization, and I'll also get Matt Miller to chime in here in a second. We've had a nice run of BCO utilization even with the count coming down some in the fourth quarter and as expected in the first quarter. So the folks are out there responding to the demand. And obviously, we're pushing folks to load BCOs as much as possible, and those guys do a really good job on the 3 things that are really important to customers. Meaning safety, security, and service, but maybe Matt a little bit on the BCO utilization.
Matthew Miller, Chief Safety and Operations Officer
Sure. No, we're definitely encouraged by the utilization we saw in the fourth quarter. When you look at the fourth quarter compared to prior year, we were up 8% compared to the fourth quarter of '24. And that compares to the third quarter '25, we were up 6% compared to the third quarter of '24. So that trajectory was absolutely something we were encouraged by.
Jason Seidl, Analyst
I appreciate the commentary. If I could slip one more in. On the AI stuff, obviously, one of your competitors out there, Robinson has been talking a lot about AI and really showing some results to the bottom line. Where are you guys in AI helping you get more bids out there in the marketplace in general?
Frank Lonegro, CEO
Yes. I mean, I think the AI for us is a little bit different than Robinson for a couple of different reasons. Obviously, we've got a different business mix. We also have a different model with essentially all of their folks inside the building and the majority of the folks who support Landstar are not W-2s, which is why you heard Jim Applegate talk about here's what we're doing for the network, which would include the agents and the BCOs. And then obviously, on the inside, what we're doing for Landstar employees to help support the network. I think where you're going to see the benefit for us is not going to be on the cost line given the fact that we have a smaller employee base than Robinson does. So I really did say 10% of. So they have 10 times more employees than we do. So they're certainly going to see it in the cost line. But what we're doing and going to do is enable the agent offices, the Landstar independent agents to go out there and be able to work smarter and to work faster. And to one of the points that Jim Applegate raised to not have to add employees until much later in their growth trajectory, which obviously allows them to grow faster. But I mean let Jim, you pick up on that?
James Applegate, Vice President, Corporate Sales
Yes. No, I think I didn't bring great explanation around the strategy. I think the specific question was around bids at the very end of that comment. We operate in a much different model, specifically in the spot market as it relates to pricing. And we've been kind of underway, and I mentioned in my opening comments in 2016, pricing was one of the first things that we hit. We built a big machine learning model with our pricing tools that give our agents just a wealth of information. And really, the key for us winning in the spot market is just making sure that we give our agents the confidence, right, to go out there to price the business and to do it quickly. So they got to assess a ton of information depending on the types of customers that they're trying to serve in a very short time period. And the winner in that game is the one that can do it quickly and confidently. So we'll continue to invest into that. AI is going to help that. We're doing a lot specifically around our complex freight segments around permitting, routing really being able to kind of hone down our pricing where our agents feel that they have the right information and they can support that and back that up with the capacity that they're out there looking for within the industry. So I feel like our model is a little bit different when you start hearing about some of the numbers that CH is putting out there, I will tell you the investment in growth that we're giving for our agents, a lot has to do with pricing. A lot has to do with matching of different capacity, getting utilization for our BCOs up and just being able to operate within that spot market. And I think we're ahead of the game there, and we'll continue to invest there when we find opportunities to leverage more data sources. Maybe should open that up for us.
Operator, Operator
Our next one is from Jordan Alliger from Goldman Sachs.
Paul Stoddard, Analyst
This is Paul Stoddard on for Jordan Alliger. I guess one of the questions I have is just with the BCO count. We see that it came down in the fourth quarter. I mean, typically, you tend to see that come down a little bit, I believe, into the first quarter as well. I guess I'm just curious, what are you guys thinking about when it comes to the first quarter? And do you guys think that you can hold on to those BCOs, especially if rates are starting to come up?
Frank Lonegro, CEO
Yes. I think the case for us, as we've talked about many times before, when the rate environment sustainably improves, we generally see an uptick. Obviously, seasonality plays a part of it. I'd say at least half of the time in the fourth quarter, we see a downtick in the BCO count. We almost always see a downtick in the first quarter, so we would expect some seasonality. We're only down fractionally in the first month or so of the quarter. So I'd say the trend relative to the prior year feels pretty good so far in the first quarter. What's interesting, and I'll let Matt Miller talk more about it because he's living it every day. The additions are still coming in better than expected. So I feel good about the model and the attraction of BCOs to the model. We just got to make sure that the retention keeps up with us.
Matthew Miller, Chief Safety and Operations Officer
Net truck count decreased by 104 trucks in the quarter. In comparison to the fourth quarter of last year, we were down 184, showing some improvement. Gross truck additions increased by 8.9% compared to the fourth quarter of last year, while gross truck cancellations decreased by 5.1%. This is our eighth consecutive quarter of turnover improvement, with a high of 41% in the fourth quarter of 2023, followed by 34.5% in the fourth quarter of 2024, and finishing this year at 31.4%, which is near our long-term average of 29%. Our focus is on managing what we can influence. We acknowledge that we cannot control rates, which have not been particularly favorable recently. Therefore, we are concentrating on recruiting and ensuring that candidates who show interest in joining Landstar efficiently transition to being on the road hauling loads.
Frank Lonegro, CEO
And so over the course of 2025, we've made significant improvements by focusing on people, by focusing on process and focusing on technology, driving efficiencies into that process without sacrificing safety. That's something we're not going to sacrifice. However, meaningful progress on driving down the time that it takes to get in the door ready to haul your first load and at the same time, improving the conversion rate on those folks expressing interest to come in the door hitting a higher bogey when it comes to that conversion rate. What we're intending to do in 2026 is drive that onboarding experience further by refreshing our orientation and our ongoing education really setting up the BCOs for success within the network once they're out there on the road. So Paul, if rate helps us a little bit this year and the things that Matt is working on, combined with some of the AI things that Jim Applegate talked about, we're certainly expecting to grow the fleet in 2026.
Paul Stoddard, Analyst
That's great. And if I could follow up I guess how I understand is that the BCO trucks tend to have a higher variable contribution margin. So as we start to see more trucks coming in, could we see that margin improve throughout the year?
James Todd, CFO
Yes, Paul. Certainly, can. To your point, the BCO business tends to be, round numbers over several cycles, about 2.5 times more lucrative on the VCM line. But remember that we've got cost in between VCM and operating income with trailers and insurance and claims costs, etc. So to the extent you get growth in the fleet count in 2026 and some spot rate improvement, that will absolutely be supportive of VCM and a high degree of drop-down operating leverage in a rising rate environment. The flip side, Paul, is when demand returns. Looking at the second quarter, it's typical to see a 7% to 8% sequential increase in loadings. I would like Miller to grow the BCO count by 7% to 8% in that quarter, but usually, that volume growth is captured by third-party trucks. While this adds positive variable contribution dollars, it can slightly negatively impact our variable contribution margin, if that makes sense.
Operator, Operator
Our next one is from Bascome Majors from Susquehanna.
Bascome Majors, Analyst
Just to put a period on the BCO discussion, has utilization been a leading indicator in your own analysis of fleet growth? Or is it really just rate that drives that historically?
James Todd, CFO
Bascome, we certainly see utilization tend to pick up when rates go up. The only thing I would say to caveat that is in fourth quarters historically, if BCOs are having a good year, they tend to take a little holiday time in the fourth quarter. So the utilization acceleration that Miller talked about from plus 6% year-over-year in the third quarter to plus 8% was a positive surprise for us. But yes, longer term, rising rates tend to drive higher utilization.
Bascome Majors, Analyst
And Jim, why don't we have you, can you walk us through some of your expense sort of views in a little more detail at any kind of pacing or cadence, things that we should be considering?
James Todd, CFO
Yes. No, happy to, Bas. And the big one, as you're aware, if we kind of reset here in 2026 as we start a new year, a new calendar year and rebuild the variable compensation programs, incentive comp and stock comp comping off 2025, where we had about $10 million in the P&L for that. We've got a hypothetical $12 million headwind if we hit plan right on the nose in 2026. If we don't hit plan in 2026, that cash comp headwind doesn't come back in, but I would still expect probably $2 million to $3 million headwind on stock-based compensation as a tranche, for which we didn't have any compensation recorded in '25 falls off and a new equity tranche comes on board in '26. We will very much endeavor, Bascome, as you're aware, to offset as much of that as possible. We have a significant equipment refresh planned for our vans, which might lead to around a $750,000 increase in our depreciation expenses. However, we usually benefit from selling off used trailers, which helps counterbalance that cost. Additionally, maintenance and tire expenses for new trailers compared to older ones generally result in savings of $2,000 to $3,000 per trailer, which positively impacts our maintenance costs. Insurance costs are harder to forecast; we faced higher expenses in the fourth quarter, and the cargo claim situation remains challenging. We are working on strategies to address this and hope to see improvements in our insurance costs in the coming years.
Operator, Operator
Our next one is from Stephanie Moore from Jefferies.
Stephanie Moore, Analyst
Maybe it would be helpful if you could talk a little bit about what you're seeing in the current environment. You noted some better than seasonal trends to start January any green shoots that you're seeing in specific end markets or any other supply commentary that would suggest the above seasonal performance.
Unknown Executive, Executive
Thanks, Stephanie. If you consider the U.S. DOT and their initiatives, the combined impacts of factors like English language proficiency, nondomiciled CDL, CDL schools often referred to as CD mills, and some ELD providers exiting the network have come together at a time of year usually marked by seasonal demand fluctuations or a slight reduction in capacity due to the holidays. Looking at the DAT rates in December compared to November, there was a notable increase on the van side, while the flatbed side remained relatively stable due to our different business mix. However, we did observe sequential month-over-month improvements in the quarter. As JP mentioned, tracking our January performance indicates some level of sustainability that we haven't experienced in quite a while. We believe this is largely driven by supply-side factors. We are hopeful that tax refunds, bonus depreciation, fiscal policies, and a lower monetary rate environment, along with recent infrastructure investment announcements from both domestic and foreign companies, will yield significant freight opportunities. While we haven't seen those developments unfold yet, the potential for unlocking freight is definitely there, and it would be advantageous for us.
Stephanie Moore, Analyst
Absolutely. And then maybe just a follow-up. I think we're all very aware of the hypothetical bull case, and we've been waiting for it for some time now. But let's just say that bull case doesn't materialize this year and maybe that gets pushed into 2027 for whatever reason. What is the strategy or business plan for 2026 if we still see these mining less on the supply side, but the demand just doesn't come through?
Frank Lonegro, CEO
Yes. If the supply dynamics remain consistent, I believe we will continue to experience some rate positivity compared to the previous year. I previously mentioned our focus on heavy haul and cross-border efforts, but I would also like to highlight our work in hazmat and cold chain logistics. We plan to strengthen our efforts in these areas and ensure our agents and BCOs are centered on moving this type of freight. I wouldn’t discount potential growth in 2026. We will do everything possible to succeed in the market where we believe we have a competitive edge. As I mentioned, we excel at tackling difficult challenges, and our strong history of promoting safety, security, and service is what our agents present to customers every day. Otherwise, the discussion revolves around rates, which is not beneficial for anyone.
Operator, Operator
Our next one is from Bruce Chan from Stifel.
Andrew Cox, Analyst
It's Andrew Cox filling in for Bruce. I wanted to gather more information about the potential challenges in implementing new technologies, especially the AI tools being developed through the centralized agent network. You mentioned that this model differs from CH. I’m curious if there are any additional challenges related to training, data safety, or costs. Additionally, if you could share any data or examples from early adopting agents using these tools, that would be helpful in understanding the opportunities and timelines for implementation.
Frank Lonegro, CEO
Yes. No, really, really good set of questions. We've done a bunch of agents segmentation work over the last couple of years, which gives us a sense of whether it's the size of the agents or the types of businesses that they do, the split between how much spot and how much contract they do, things like that. So we have a pretty good handle of where some tools would apply to everyone. Pricing would be an example of that one who doesn't want to have good information around what the market price is, and others are going to be a little bit more segmented to it. One of the unique things is we can't force adoption of tools. We can certainly provide them. And obviously, the agent uptake of that is something that we're going to be accountable for ourselves. And most agents, if they believe it will provide them a competitive advantage in the marketplace. They're going to want to use those tools. So I feel pretty good about that one. There are tools that are also fraud-related and BCO related and and things like that. So I think the tools that we're providing, the first layer is going to be applicable to all and then there are going to be some other ones that are going to be a little bit more tailored to folks who have certain types of businesses relative to others. And then obviously, we got all of the work that we're doing inside the building.
James Todd, CFO
Yes, I think it's a great question. This is something we've been doing since 2016 as we go through this digital process. The entrepreneurial model does have challenges, but ultimately, there's no better resource than an entrepreneur equipped with technology tools that can adapt, pivot, and effectively use them to serve customers. It always comes back to safety, security, and service; the tools we're developing truly enable those agents to achieve that. I will say we're seeing success. We've got different groups. We've got our AI task force that I talked about. We've got certain instances where we've automated data entry off a bill where we can shoot that information right back to customers, and we're doing that for agents today. We're doing some intelligent load matching. We're optimizing some of our BCOs for some of our larger BCO accounts. When I talked about pricing tools and some of the things that we're doing with pricing tools and adding some of that stuff back in tracking. We're investigating some things with agents today over on the tracking side and analytics as well, too. So as we go through this, as AI comes about we've got resources, we've got beta agents. We've got a process in place to make sure that as we're identifying opportunities, we've got a team of people that can really develop those opportunities, work with vendors and do it safely and do it in a way that we can really have a meaningful impact across the organization. So the muscle is there. Now we've got this great new opportunity with AI that we can actually use the muscles that we've built as we've gone through this digital transformation strategy. And just kind of leverage more tools on top of it. So I think it's really exciting to think about all these different areas that we can really impact our agents and really what they're going to do with those tools. It's going to be a neat thing to see. So we're excited about it. We see there's a big opportunity.
Unknown Executive, Executive
I'll leave you with one final thought. We have an annual agent pickup. We're doing all the agents together virtually, and we talked to them about what the plans are for this year and obviously get some feedback from them. And we ask them in advance, what are the key topics you want to hear from us and the largest by far topic that they wanted to hear was what are we doing on the technology and the AI side. So the pull is definitely there. And obviously, through all the work that you heard Jim Applegate talk about, we are ready, willing and able to fulfill that need and have some pretty neat things on the deck for this year.
Operator, Operator
Our next one is from Chris Wetherbee from Wells Fargo.
Rob, Analyst
It's Rob on for Chris. We're seeing the BCO productivity kind of achieve levels where historically, it's kind of peaked out at in the quarter. Maybe could you talk a little bit more about are all your AI initiatives can get us above and beyond where we've historically peaked out from the BCO productivity and thoughts about where that can go.
Frank Lonegro, CEO
Yes. I would give you 2 thoughts on that 1 and then let others chime in. Can the AI tools help? If it helps match a BCO to a load more quickly, it has them out of route fewer miles to get the next load. Of course, it can impact BCO productivity. At the same time, we sell what we say is freedom and opportunity for the BCO. So there will be some. Again, the average number of loads really belies the truth. You've got people who haul many more loads than the average on the BCO side and some who haul less than that. The mix of the business obviously plays into that as well, given some loads are longer haul than others. So some loads are not long haul, but require a lot of prep work, and therefore, it may take you 2 or 3 days to reach destination rather than 1 or 2 days. So all of those factors play into that.
Matthew Miller, Chief Safety and Operations Officer
Yes. I would just really echo what you said, Frank. I think the tools that we're building allow for the BCO to become more efficient, being able to do paperwork more rapidly having to spend time in a truck stop where they otherwise would have to do scanning and emailing things back and forth. The tools allow for more effective load selection. So providing those tools to allow for them to optimize load opportunities. But again, to Frank's point, we sell that freedom. We sell, you get to haul what you want when you want, where you want. And so that freedom and opportunity that is there is available to them, but certainly, the tools allow for them to become more efficient in their daily lives.
James Todd, CFO
And Rob, just real quick on historical perspective. It's certainly true that this is the highest BCO utilization year at Landstar in the last 7 years. But if you go back a little further, the trailing 15-year average on BCO loads per year is actually 92.1%, and we finished a little bit better than that at 92.4%. If you look back to '18 and '17, we were at 94% and 96%, respectively. And then similar '14 and '13, we were 95% and 94%. So if we get the efficiencies that Miller is talking about, plus a good tailwind in rate environment, I think you can get another 1, 2 or 3 loads a year out.
Rob, Analyst
That's really helpful. Shifting gears a little bit to the $1 million agents, that's stepped down a decent amount in '25 off of flattish revenue and flattish loads. What was the big driver of that? And are there a bunch of agents that are just below the $1 million mark in '25.
Frank Lonegro, CEO
Good question. I'm glad you're watching it. We're watching it just as closely. So yes, nothing to be concerned about there. Obviously, some agents grow and some agents don't depending on the environment and some of the business mix that I was talking about earlier. So nothing to be concerned about, but JT will give you the numbers here.
James Todd, CFO
Yes, Rob, I'm starting to think you've got my office bug. But no, all kidding aside, we had 37 agents, Rob, that just fell below $1 million, they're still with us. So that's a 37 count reduction. Then we had 4 million agents that were acquired during 2025 by other million-dollar agents. Our million-dollar agent turnover was just over 1% in 2025. So right in line, maybe a little slightly better than long-run history.
Operator, Operator
At this time, I show no further questions. I'd like to turn the call back over to you, sir, for closing remarks. Thank you.
Frank Lonegro, CEO
Thank you, Elmar. In closing, while the demand for freight transportation services remains challenging, including an unfavorable impact on dispatch loadings at the end of fiscal January, likely driven by winter storm activity, we believe we have seen some positive signals. We are encouraged by the pricing improvement we experienced from fiscal October to fiscal December and with a choppy industrial economic backdrop, we were extremely pleased with a 23% year-over-year increase in our heavy haul service offering. We also believe the potential impact of various federal regulatory developments could provide some positive lift to our BCO business, in particular. And regardless of the economic environment, the resiliency of the Landstar variable cost business model continues to generate significant free cash flow. Landstar has always been a cyclical growth company, and we are well-positioned to navigate the coming months as we continue to look forward to higher highs when freight demand turns our way. Thank you for joining us this afternoon. We look forward to speaking with you again on our 2026 first quarter earnings conference call in late April. Thank you.
Operator, Operator
Thank you for joining the conference call today. Have a good evening. Please disconnect your lines at this time. Thank you.