Landstar System, Inc. (LSTR) Q1 2026 Earnings Report, Transcript and Summary

Good afternoon, and welcome to Landstar System, Inc. First Quarter Earnings Release Conference Call. [Operator Instructions] 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 rip Officer; Jim Todd, Vice President; and CFO, Matt Dannegger, Vice President and Chief Field Sales Officer; Matt Miller, Vice President and Chief Safety and Operations Officer. Now I would like to turn the call over to Mr. Jim Todd. Sir, you may begin.

Thanks, Arlene. Good afternoon, and welcome to Landstar's 2026 First Quarter Earnings Conference Call. Before we begin, let me read the following statement. The following is a safe harbor statement of the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts or forward-looking statements. During this conference call, we may make statements that contain forward-looking information that relate 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 2025 fiscal year described in the section Risk Factors 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 equally update or revise any forward-looking information. I'll now pass it to Landstar's CEO, Frank Lonegro, for his opening remarks.

Thanks, Jim, and good afternoon, everyone. We are excited to discuss our results this quarter given the overall sense of optimism, many in our network are sharing with us. It was great to spend time with many of our BCOs at the Mid-America Trucking Show in March and to celebrate the success of our agent network earlier this month at our annual agent convention. The tone and positivity I heard from my personal interactions with BCOs and agents of these events was the best I've experienced during my tenure at Landstar, and provides an emerging sense of confidence as we head further into 2026. Before diving into our results, I'd like to thank our BCOs and agents and all of Landstar employees who support them every day. 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 impressed. They are exceptional business leaders and key to driving the continued success of Landstar's business model. I'd also like to thank Derek Barrs, the Head of the FMCSA, who recently appeared at our agent convention and discussed many of the significant initiatives he is leading at the FMCSA. These regulatory efforts are having a real tangible impact on the trucking industry and have been very positive for Landstar. We look forward to continuing our dialogue with the USDOT and the FMCSA in support of these efforts. Amidst our improved operating performance, the 2026 first quarter was not without challenges that required our focus and attention. We are driving to incorporate AI into our business and do everything we can to mitigate any perceived industry-specific AI disintermediation risk. We were pleased to have Jim Applegate and Rick Coro, participating in the Goldman Sachs AI and Freight Forum in Chicago in late March, where they shared our AI road map and several in-flight initiatives across the network. We continue to be encouraged by the level of engagement we're seeing among agents and BCOs participating in our beta programs. That collaboration is already yielding tangible progress across a number of workflows, including customer quoting, carrier negotiations, dispatch decision making, automated tracking, appointment scheduling, network modeling and bid optimization. Importantly, these tools are being developed alongside our agents and BCOs with early pilots already live in production or in advanced testing. Initial feedback [ cost ] to meaningful time savings, higher shipment life cycle throughput and improved visibility across the net, empowering our entrepreneurs to spend more time on revenue-generating and relationship-driven activities. At the same time, we are advancing several AI-driven efficiency initiatives at the corporate level, including our Tier 1 ERP modernization proprietary fraud prevention and detection capabilities, service center workflows, BCO retention models and self-service analytics for operations and customer management. Across both the agent network and in our corporate offices, our focus remains on disciplined deployment and scalable adoption. We look forward to providing additional updates as these initiatives continue to progress. We, like everyone else, are monitoring the news on the geopolitical conflict in the Middle East and the related volatility in energy and diesel prices. We also continue to monitor the potential effect of tariffs and trade policy on our business, including the impact of the recent Supreme Court decision and tariff refunds from the federal government. Tariffs has certainly already impacted freight flows. For example, the 2025 first quarter reflected the desire by many customers to pull forward shipments in an effort to get ahead of potential tariffs. This contributed to a relatively tough first quarter volume comp for Landstar. We will also be closely monitoring any developments with respect to trade relations among the United States, Canada and Mexico this year. Against that backdrop, the Landstar business model performed well with revenue increasing approximately 2% compared to the 2025 first quarter, gross profit increasing approximately 14%, variable contribution dollars increasing approximately 7% and basic and diluted earnings per share increasing approximately 36%. As a reminder, earnings per share during the 2025 first quarter were unfavorably impacted by approximately $0.10 per share related to the previously disclosed supply chain for [ automatic ]. As JT will discuss in more detail during his remarks, the 2026 first quarter also experienced lower insurance and claim cost expense compared to the 2025 first quarter primarily due to the company's ongoing efforts to address strategic cargo test. These efforts help Landstar to achieve both a decrease in the frequency of cargo claims incidence during the 2026 period compared to the 2025 period as well as decreased severity of cargo claims incidence. One consistent highlight in our results remains the strength of our industry-leading unsided platform equipment business. This part of our business posted another strong quarter with an 8% year-over-year revenue increase driven by the performance of Landstar's heavy hauled service offering. We generated approximately $134 million of heavy hauled revenue during the 2026 first quarter, representing an 18% increase over the 2025 first quarter. This achievement reflected a 12% increase in heavy hauled revenue per load and a 6% increase in heavy hauled 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 puts Landstar in a great position to leverage improving freight market conditions. We also remain 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 2026 first quarter was characterized by relatively strong demand from a seasonal perspective and an improving price environment as we move through the quarter. We were encouraged to see the ISM index above 50 for each of the 3 months in the first quarter, a positive sign for our business as readings from the prior 3 years to often reflected a far more challenging economic backdrop. We were pleased to see sequential outperformance in the number of loads hauled via truck and truck revenue per load compared to pre-pandemic normal seasonal patterns. As noted in the press release, we were encouraged to see that overall truck revenue per load increased 6% compared to the 2025 first quarter. Our balance sheet continues to be very strong, and our capital allocation priorities are unchanged. We will continue to patient and opportunistically execute on our existing buyback authority to benefit our long-term stockholders. As noted in the slide deck, during the 2026 first quarter, the company returned approximately $104 million to shareholders through our capital return programs. The company returned approximately $82 million in dividends to stockholders during the first quarter and deployed approximately $22 million to share repurchases during the first quarter. And yesterday afternoon, our Board declared a regular quarterly dividend of $0.40 per share payable on June 9 to stockholders of record as of the close of business on May 19. We continue to invest through the cycle in meeting 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 and trailing equipment with a particular focus on investment in new van equipment. Turning to Slide 7 and looking at our network, the scale, systems and support inherent in the Landstar model helped to drive the operating results generated during the 20,261st quarter. JT will get into the details on revenue, loadings and rate for load in a few minutes. Safety, is crucial to 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 critical importance of safety, security and service at Landstar. I'm proud to report an accident frequency rate of 0.64 DOT reportable accidents per million miles during the 2026 first quarter, well below the last available national average DOT reportable frequency rate released by the FMCSA for 2021, and slightly better than the 0.6 DOT accident frequency we reported during the 2025 first quarter. The company 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 the 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-dollar agents based on our 2025 fiscal year results. Importantly, retention within the million-dollar agent network continues to be extremely high. Turning to Slide 8. On a year-over-year basis, BCO truck count decreased approximately 2% compared to the end of 2025 first quarter and approximately 40 basis points sequentially. And it is important to note, however, that the 38 BCO truck decline experienced during the 2026 first quarter is significantly better than our experience in other recent first quarters, when on average, Landstar experienced a decline of 365 BCO trucks across the first quarter of 2023, 2024 and 2025. We are also very pleased to see our trailing 12-month BCO truck terminal rate dropped from 31.4% as of fiscal year-end 2025 to 29.5% at the end of the 2026 first quarter. This is a directionally positive trend that we hope to continue in the second quarter. Through the first 4 weeks of 2026 second fiscal quarter, the number of trucks provided by BCO independent contract is approximately equal to the end of the 2026 first quarter. I'll now pass the call back to JT to walk you through the 2026 first quarter financials in more detail. JT?

Thanks, Frank. Turn to Slide 10. As Frank mentioned earlier, overall truck revenue per load increased 5.6% in the 2026 first quarter compared to 2025 first quarter, primarily attributable to a 10.8% increase in revenue per load on loads hauled by unsided platform equipment and a 5.2% increase in revenue per load on loads hauled via van equipment. On a sequential basis, truck revenue per load increased 0.2% in the 2026 first quarter versus the 2025 fourth quarter. It is an unusual sign for truck revenue per load to be higher in the first quarter than in the immediately preceding fourth quarter as pre-pandemic normal seasonality would typically be expected to yield a 4% sequential decrease and revenue per load in a given first quarter compared to the immediately preceding fourth quarter. 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 2026 first quarter revenue per mile and unsided platform equipment hauled by BCOs was 2% above the 2025 first quarter, and revenue per mile on van equipment hauled BCOs was 3% above the 2025 first quarter. Delving deeper into seasonal trends, revenue per mile and loads hauled by BCOs on unsided platform equipment declined 6% from December to January was approximately flat January to February and increased 2% from February to March. Importantly, the sequential month-to-month performance as we move through the first quarter when compared against typical pre-pandemic trends suggest growing positive momentum in this aspect of our business. In fact, while the December to January change in revenue per mile in BCO loads hauled on unsided platform equipment underperformed pre-pandemic seasonal trends, January to February's flat performance outperformed pre-pandemic trends and the February to March increase outperformed pre-pandemic seasonal trends. Turning to van freight. Revenue per mile on van equipment hauled by BCOs was approximately flat from December to January, outperforming historical trends. increased 3% from January to February, also outperforming these trends, but decreased 1% from February to March, underperforming pre-pandemic February to March historical trends. Based on preliminary April BCO process revenue for load data, we expect the underperformance experience from February to March to reverse during fiscal April. It should be noted that month-to-month seasonal trends on unsided platform equipment are generally more volatile compared to that van equipment. This relative volatility is often due to the mix between heavy specialized lows and standard flatbed volume. As Frank alluded to, we've been particularly pleased with the sustained strong performance of our heavy hauled service offering. Heavy hauled revenue was up an impressive 18% year-over-year in the first quarter, significantly outperforming core truckload revenue. Heavy hauled loadings were up approximately 6% year-over-year and revenue per heavy hauled load increased 12% year-over-year. This represented a mixed tailwind to our [indiscernible] side of platform revenue per load as heavy hauled revenue as a percentage of the category increased from approximately 33% during the 2025 first quarter to approximately 36% in the 2026 first quarter. Non-truck transportation service revenue in the 2026 first quarter was [ 19% ] or $16 million below the 2025 first quarter, the decrease in non-truck transportation revenue was mostly due to a 31% decrease in ocean volume, which we believe was partially driven by shipper pull-forward behavior during the first quarter of 2025. Turning to Slide 11. We've provided revenue share by commodity and year-over-year change in revenue by commodity, transportation and logistics segment revenue was up 2% year-over-year on a 4% increase in revenue per load, partially offset by a 3% decrease in volume compared to the 2025 first quarter. Within our largest commodity category, consumer durables revenue increased 1% year-over-year on a 7% increase in revenue per load, partially offset by a 5% decrease in volume. Aggregate revenue across our top 5 commodity categories, which collectively make up about 70% of our transportation revenue increase approximately 4% compared to the 2025 first quarter. While Slide 11 displays revenue share by commodity, we thought it would also be helpful to include some color on volume performance within our top commodity categories from the 2025 first quarter to 2026 first quarter, total loadings on machinery increased 5%. Automotive equipment and parts decreased 4%, building products decreased 10% and Hazmat decreased 6%. Additionally, substitute line haul loading is one of the strongest performers first during the pandemic and one which varies significantly based on consumer demand, increased 1% from the 2025 first quarter. The decline in automotive, hazmat and building product loadings noted above was partially offset by a 23% increase in electrical volumes, a 17% increase in energy volumes and an 8% increase in government volumes. 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 2026 first quarter. Turning to Slide 12. The 2026 first quarter gross profit was $112.5 million compared to gross profit of $98.3 million in the 2025 first 1st quarter. Gross profit margin was 9.6% of revenue in the 2026 first quarter as compared to gross profit margin of 8.5% in the corresponding period of 2025. In the 2026 first quarter, variable contribution was $172.2 million compared to $161.3 million in the 2025 first quarter. variable contribution margin was 14.7% of revenue in 2026 first quarter compared to 14% in the same period last year. The increase in variable contribution margin compared to the 2025 first quarter was primarily attributable to an increase in the percentage of revenue generated from BCO independent contractors. Turning to Slide 13. Operating income increased as a percentage of both gross profit and variable contribution as we cycle the impact of the international supply chain fraud matter in the 2025 first quarter, lower insurance and claim costs in the 2026 first quarter and the impact of the company's fixed cost infrastructure, principally certain components of selling, general and administrative costs in comparison to larger gross profit and variable contribution basis. Other operating costs were $14.8 million in the 2026 first quarter compared to $11.8 million in 2025. This increase was primarily due to increased trailing equipment maintenance costs, increased trailing equipment rental costs and decreased gains on disposal of used trailing equipment. Insurance and claims costs were $35.6 million in the 2026 first quarter compared to $39.9 million in 2025. Total insurance and claim costs were 7.5% of BCO revenue in the 2026 first quarter as compared to 9.3% in the 2025 first quarter. The decrease in insurance and claim costs as compared to 2025 was primarily attributable to decreased net unfavorable development of prior year claim estimates, decreased severity of current year trucking claims in the 2026 period and a decrease in both cargo claim frequency and cargo claim severity, which reflects a significant decrease in expense related to strategic cargo effect in the 2026 period, partially offset by increased BCO miles traveled during the 2026 period. During the 2026 and 2025 first quarters, insurance and claims costs included $4.9 million and $11.4 million of net unfavorable adjustment to prior year claim estimates, respectively. Selling, general and administrative costs were $61 million in the 2026 first quarter compared to $61.6 million in the 2025 first quarter. The decrease in selling, general and administrative costs was primarily attributable to the impact of the $4.8 million charge to selling, general and administrative costs during the first quarter of 2025, in connection with the previously disclosed international supply chain fraud matter and a lower provision for customer bad debt, largely offset by an increased provision for incentive compensation and increased employee benefit costs. The provision for incentive compensation was $3.4 million during the 2026 first quarter as compared to $1 million during the 2025 first quarter. Depreciation and amortization was $10.6 million in the 2026 first quarter compared to $12.2 million in 2025. This decrease was primarily due to decreased depreciation on software applications and decreased depreciation on our fleet of trailing equipment. The effective income tax rate was 25.2% in the 2026 first quarter compared to an effective income tax rate of 24.7% in the 2025 first quarter. The increase in the effective income tax rate from the 2025 first quarter to the 2026 first quarter was primarily due to an increased provision for state taxes, the impact of tax deficiencies on stock-based compensation arrangements during the 2026 period and the impact of nondeductible executive compensation on the 2026 income tax provision. Turning to Slide 14. Looking at our balance sheet. We ended the quarter with cash and short-term investments of $411 million. Cash flow from operations for the 2026 first quarter was $78 million and cash capital expenditures were $6 million. The company continues to return significant amounts of capital back to stockholders with approximately $82 million of dividends paid and approximately $22 million of share repurchases during the 2026 first quarter. The strength of our balance sheet is a testament to the cash-generating capabilities of Landstar model. Back to you, Frank.

Thanks, JT. Given the highly fluid freight transportation backdrop and a volatile geopolitical and macroeconomic environment, the company will be providing second quarter financial and operational commentary rather than formal guidance. Turning to Slide 16 and looking at historical seasonality from Q1 to Q2, pre-pandemic patterns would normally be expected to yield sequential increases of 7% in the number of loads hauled via truck and 2% in truck revenue per load resulting in a top line that typically increases by a mid-single digit to a high single-digit change. It should be noted that with respect to the sequential truck volume increase during more recent history, it has been closer to plus 3% to plus 4%. The number of loads hauled via truck in April 2026 was essentially equal to April 2025 on a dispatch basis, while revenue per load in April was approximately 13% above April 2025 on a process basis. As a result, we view anticipated truck revenue per load in April is outperforming normal seasonality while anticipated April truck volumes are trending essentially in line with normal seasonality. Please also note that historically, the company has often experienced a 25 to 45 basis point compression in variable contribution margin from the first quarter to the second quarter, primarily driven by mix, as BCO revenue typically represents a larger percentage of overall revenue in the first quarter of a given year as compared to the immediately following second quarter. We're excited to build upon the positive momentum generated during the first quarter and are energized by the opportunity to support the best network of independent business owners in the transportation space in an environment that after nearly 4 years appears to be turning in our favor. With that, operator, we'd like to open the line for questions.

[Operator Instructions] Our first question comes from the line of Jonathan Chappell from Evercore ISI.

Frank or Jim, heavy haul obviously doing really well and also in the backdrop of a narrative about unsided platform or flatbed being incredibly strong. but your 1Q volumes were down 2% year-over-year, 2% sequentially, clearly made up some of that in the rev per load. So can you just help us understand, is that market as strong as it's been portrayed? And if it continues to, say, strengthen or build momentum from here, does that start to show up in the loads as well as in the rev per load? Or is it mostly going to be represented in the price side?

Jon. So clearly, if we see an incremental uptick in demand, you're going to see it on the volume side. I think everything right now is being supply-induced on the capacity side and getting us higher rates. We do think we've got a competitive advantage in heavy hauled and honestly on the platform side. So when you see those ISM numbers and some of the ITP numbers in the kind of low single digits. We're pretty optimistic about how that's going to play through volumes and rate for us going forward into the rest of the year. And maybe either Jim Todd or Jim Applegate can comment on that.

Yes, Jon. No, good question. From the heavy hauled side, which did experience year-over-year volume growth, Jon, I would tell you, it continues to be very, very strong, broad-based strength. We had 17 individual heavy-hauled customers grow volumes less by at least 50 loads year-over-year in the 91-day first quarter. And those customers came from wide degree of industries of data center customers, energy, government, machinery, aerospace and defense, I think some of the softness to your point, year-over-year, if you look at some of the commodity categories we called out, building products, automotive, that kind of stuff on the standard flatbed, standard step has been a little weaker. One thing I do want to call out, Jon, from a pricing standpoint on the unsided platform, it's really been a heavy haul mix story, and that continued in the first quarter. but standard platform step deck pricing year-over-year in the fourth quarter was only up 50 basis points. that accelerated the 730 basis points year-over-year. So a meaningful lift in yields on the standard flats and standard steps from a pricing standpoint.

And Jim Applegate, you might just want to talk about the designation of heavy hauled as a strategic initiative and the things you guys are doing among [indiscernible], particular area.

Yes. This is one of our areas that we really identified as far as Landstar goes, where we do the hard stuff well. This is definitely one of those areas that we can lean in. And we've invested quite a bit not only into leadership. We actually brought in almost a couple of years now, a new heavy hauled leader that's really kind of put his arms around that department, brought in some talent and laid out a strategy that's agent engagement, recruiting BCOs into the model making sure that we have the right equipment to go ahead and handle that those agent opportunities, investing in technology. You name it, we've got initiatives in place to make sure that our agents can be successful. Paired on top of that, we have a dedicated sales and marketing effort. We're really leaning into those markets with messaging and some sales support for our agents to help them grow in those different industries. And I think what's really nice about what JT laid out is the growth is broad-based. It's also a mix of new and existing customers. So we're seeing a lot of new customers come into the fold across the different industries that are seeing success right now. And we're seeing industries even outside of the data centers, you'll start to see oil and gas and some of the other industries that have been historically depressed starting to come back a little bit. So we see this as an area for continued growth, and we've been strengthening up that area over the last couple of years and expect it to continue to be strong for Landstar.

Our next question comes from Scott Group of Wolfe Research.

So your rev per load tends to lag industry spot rates by a matter of months, quarter or whatever. We're seeing it play out, do you think, is it realistic to think that we see a meaningful further acceleration from that 13% in April, as the rest of the quarter plays out. And if that's what's happening, how should we think about margin or a margin in a quarter like that.

Yes. So fair questions, Scott, as always, thanks. I'll let JT walk you through the sequential pricing through the quarter. I think the month-over-month trends are important to understand, and he's got that detail for you. I think if we look forward, assuming that capacity continues to exit and/or we see demand in a spring lock like we do in many years. If those two things happen, then the obvious impact on [indiscernible] is going to be favorable. I think when you see what JT is going to tell you in terms of January, February and February, March and honestly, March into April, I mean, clearly, we're going to have some level of lag, and we're seeing that come through the numbers.

Well said, Frank. And Scott, we are seeing above seasonal pricing strength here into April, both on the BCO side and the brokerage side. I would point out from a comp standpoint, last year's second quarter, we got a 320 basis point lift in pricing, and we typically get about 200 basis points. So the comps do step up a little bit as we get into May and get into June. Certainly, from a margin standpoint, I mean, we just printed the first variable contribution dollar increase since, I think, the third quarter of 2022. And if you do some back of the envelope on adjusting 2025 for the international fraud matter. I think the incremental push-through numbers were well above 70%. So that's where we'll be judging ourselves.

Obviously, when that comes through it's [ great ], it's certainly easy to drop it all the way down.

Absolutely right. Yes. And the final point there, Scott, the BCO utilization numbers, we've talked about in the last 3 quarters strong third quarter '25, accelerated in the fourth quarter '25, accelerated further first quarter '26. So we'll look for that trend to continue. Certainly, that has a big impact on the number of BCO loads that capture that rate increase in the second quarter.

Okay. Helpful. And then on the volume side, it's interesting. You got BCO volume up 7% and brokerage volume down 9%, what do you think is driving such a big sort of mix difference? Is this -- are the agents or maybe the underlying customer? Are they saying we don't want to go through brokerage anymore and maybe tie this into how you think about like the outcome of this Supreme Court case, if you think this could exacerbate some of this trend between BCO and brokerage?

I'll give you my view, Scott, and then Frank will add on. I think, the agents are going to sell what they can sell. And certainly, we have some customers that will engage with us only as BCO only, and then cargo fraud environment. I think that has probably ticked up some. But I think it's a function of the agents that are going to market, servicing their customers and the BCOs have just really been stepping up in this rate environment, and we've seen it in the last 8 or 9 months or so.

Yes. And I think I'd like Matt Miller to comment a little bit on the BCO environment and all the things you're seeing on the BCO front, Matt. But broadly speaking on your Supreme Court question, I mean we're watching it like everybody else and we'll be prepared whichever way it goes. I think ultimately, Congress probably looks at this as a result of the Spring Court decision, whichever way it goes and tries to make policy legislative rather than through the court system, but we're actively looking at what's going to happen there. And I think what many people we would expect a decision sometime in the June, July time period. But Matt, maybe a little bit on the BCO.

Yes, sure. I appreciate it. First quarter, typically, the most challenging quarter of the year for us when it comes to BCO truck count. And we finished the quarter, as Frank said, earlier, down 38 trucks. That was a better first quarter finish than we've seen in several years. A 100% of that decline happened in January. So that was followed by a positive result -- net result in February and a positive net result in March. So we're encouraged by the trends that we're seeing in net truck count as well as the trends we're seeing in the net weekly check average going to the BCOs after deductions, which more recently is the highest we've seen since the fourth quarter of and an indicator of improving financial health of the BCOs. In the quarter, gross truck adds were up 2.7% sequentially and effectively flat year-over-year. Gross truck cancels were down 7.8% sequentially and down 23.5% year-over-year. And this marks our ninth consecutive quarter of turnover improvement, where our high watermark on turnover was the fourth quarter of '23 at 41%. And we finished the quarter at 29.5%, just about in line with our long-term average of 29%. As Jim stated, we also saw a very strong BCO utilization in the quarter, up 10% year-over-year. And that comes on the heels of a really strong fourth quarter utilization, which was up 8% compared to the fourth quarter of '24. And then finally, sort of anecdotally, I'd like to add that we experienced strong interest from potential BCOs at the Mid-America Truck Show in March. And I think should we see sustained pricing, that level of interest and sentiment will be helpful for us as we move through Q2.

Our next question comes from the line of Chris Wetherbee from Wells Fargo.

I just want to kind of piggyback on the BCO kind of outlook. I guess, maybe what do we need to see from a spot perspective, have we seen enough, you think, from a spot perspective to begin to actually moved that up sequentially. It sounded like maybe April was sort of net flattish, I think, from what you said at the end of the first quarter was. But maybe you could elaborate a little bit on how we think about maybe that progress is going to trend throughout the rest of the year.

Chris, so yes, absolutely. When BCOs see multiple months in a row of sustained rate improvement, the word gets around pretty quick and the percentage pay model is a really attractive one as Matt Miller just mentioned. I mean, he and I were both at the Mid-America Truck Show, which is nickname [ Matt ]. So we were out there. And we have a good spot on the expo floor. And I think we had sort of a record take away there in terms of potential BCO candidates. I would say we have people there that are actively recruiting and people who are willing to say, yes, I'm interested, please follow up with me. I mean that was a bigger number at least that we've kind of kept on record over a bunch of years. So we feel pretty good about the interest. As Matt was just saying a little while ago, we're continuing to see hundreds of ads every quarter, and the cancels are coming down. So what he would tell you is the cancel to [ lead ] the ad. So you see better cancellations and then you see better additions, but I'll let you pick up the thread from there.

No, I would just echo what you said, Frank. Generally speaking, if you look back in history, as the cancels slow and utilization picks up, word starts to spread and it spreads fast. And so that's what I would say as a takeaway. This is pretty much a leading indicator for us on when ads start to turn. And that first quarter tends to be, as I said, a very challenging quarter, and that finish was pretty strong given the backdrop over the past several years.

Okay. That's very helpful. I appreciate that. And then just maybe one quick one on sort of van demand as we think about loads as we go through the second quarter and I guess, trends from an April standpoint. Any sort of indication of if there is some improvement in various end markets kind of towards the end of the month? Just trying to get a sense of whether or not, obviously, the pricing side is really accelerating here. Just want to get a sense of what your view broadly speaking about demand.

Chris, so I think there's a couple of things that happened naturally this time of the year. I mean, building products unlocks on a sequential basis because you're cycling out the January, in the February and you're adding in the May and the June so to speak. So there are certain ones that are much more seasonal in nature Q1 to Q2, which is why you generally get some of the lift on a sequential basis. But then there are things that right now are just not being heavily supported by the interest rate environment. Automotive would be an example of that. But look, I think the demand that we're seeing right now certainly supports rates where they are, but it's more a reflection of where the capacity is. If we happen to get a couple of points of GDP, IDP type growth, when supply is coming down like our chances this year.

Our next question comes from the line of Jordan Alliger from Goldman Sachs.

This is Paul Stoddard on for Jordan Alliger. I guess the First question I have is, so is the mix gets weaker with BCOs going into the second quarter. How did the mix in the first quarter compare historically? And as rates are increasing in the marketplace, could we see brokers come back into your network and potentially see more compression happening from the first quarter to the second quarter?

Yes. Paul, happy to field that one. So if you recall in the January conference call, we did not want to bake in the full variable contribution margin expansion that typically happens fourth quarter to first quarter. There were two reasons for that. One was the utilization number in the fourth quarter was very strong. And two, we did not think winter storm activity would negatively impact loadings. However, when a BCO is down for a week because of storms, we have seen in quarters past and years past where that could hurt from a [ BCM ] standpoint, that clearly did not happen, right? Utilization accelerated further, and we did get our typical or standard fourth quarter, first quarter variable contribution margin expansion. In the scenario that Frank laid out, right, of what's normal from a spring peak standpoint and use round numbers, about a 7-point lift in volume sequentially first quarter to second quarter. I would note the last 2 or 3 years, we've not seen that degree of lift. But if we were to get that it would disproportionately come from third-party trucks, right? Because as much as we'd love to grow the fleet 7% on 8,500 trucks in 90 days, that's just not going to happen. So that's really what drives the historical compression. It's just there's more volume flowing into the network, and we've got to utilize brokerage more.

Makes sense. And then I guess kind of a follow-up to the discussion on the Montgomery Supreme Court case. With your unique structure with the BCOs and having insurance already within your model, how does that set you up versus peers depending on how the decision might go?

Yes. I mean, I think the insurance tower we have, it covers BCOs while they're loaded. We also have other insurance programs that cover BCO-type and non-BCO-type issues. I think the entirety of the brokerage population is going to have to look at insurance very differently if the decision goes against the industry than they do today. And right now, they essentially look at F4A and say we're immune. And the truth of the matter is if Supreme Court goes against it, they're going to have to get coverage. I think it likely create a situation where your smaller players are going to get priced out of the market because of the cost structure going up. And I think you've got so much fragmentation in our industry on the brokerage side. that may not survive in an environment where you got to have $5 million or $10 million of insurance just to cover our single incident.

Our next question comes from the line of Bruce Chan from Stifel.

Maybe just to start, you've talked about the tailwinds from data center exposures on, I think, at least a couple of calls, and I know that you've got exposure there in several of your end markets. But I don't think you've ever talked about an explicit revenue percentage. Any sense for what that is today and maybe how that's trended versus prior periods?

Yes. So it's fine. We're sort of smiling at each other because we were looking at this earlier today. So think about it broadly as a data center ecosystem, and I'll let Jim Applegate handle this one in a sec. But you got to look at it not just at the data center itself, but all new [indiscernible] to it. So it's got to have generators for power, it's got to have batteries for power. It's got to have chillers to make sure that the raised floor is cooled and then it's got all the stuff that goes inside of the data center, but if you can give us a sense of kind of what that business looks like.

With our top 100 customers, and we look at this, we look at our exposure, we have 9 of our top 100 fall within directly data center related. It represents about 12% of our total revenue. So from an exposure standpoint, that's what you're looking at. But even if you look at this big build-out and what's been happening and even what's in place today, it's not just the constructing and the actual data center players today. There's real energy needs. There's real kind of side benefits that you get as you're seeing this big build-out happen. So from an exposure standpoint, we feel like it's a limited exposure from that standpoint. And we've got a lot of other kind of side benefits that are happening just because of the macro environment that's been created here.

That environment is still growing. And then you have all of the refresh and replacement of all of those things over time. So we're pretty bullish on continued investment in maintenance investment on a going forward basis there.

Okay. Yes, that's super helpful. And then maybe just one final question here on the supply environment. Obviously, we've heard a lot of commentary about regulatory changes I think a few carriers talked about an affected OTR population somewhere in the 15% range. Any sense for what the noncompliant population would be in unsided and maybe how fungible those two populations of drivers are in your network?

Yes. I don't know that we have a great read on exactly what that looks like. I mean the interesting thing from a Landstar perspective is we don't have language proficiency challenges. We don't have non-domiciled CDL challenges. All of our folks are professional drivers, average age is 51 years. I mean they suppose to be driving a long time. They are [indiscernible] operators. I mean I can go on and on and on. And I'm sure Matt Miller will have some commentary here, too. But at the end of the day, there is capacity coming out of the environment. It's generally what I believe is coming out of the lower end of the environment, and you're ultimately going to have a much safer and much more professional environment given the work that USDOT and FMCSA are doing. Matt?

Yes. No, I'd agree. When you think about English language proficiency, the non-domiciled CDLs, the CDL mills, the ELD technology. We applaud the actions of Secretary Duffy and FMCSA administrator, Derek Barrs. And we find ourselves virtually unimpacted with our BCOs because of a focus on safety, security and service. And I think there's more to come here. They're sort of telegraphing if you saw the 60 minutes piece on Chameleon carriers, my suspicion is that's probably the next target, and that just serves us very, very well in the grand scheme of things.

Our next question comes from the line of Stephanie Moore from Jefferies.

I actually -- I had a question, but I'm going to ask a different one now just based on this prior question. Maybe just for pure visibility here. I guess, maybe just talk a little bit kind of specifically looking at the [indiscernible] law and really just the use of foreign dispatch and administrative services. So I think in the past, you guys have disclosed having some foreign brokerage. So maybe just talk a little bit about that, if that's still the case. I think this was several years ago, so I could be out of date here. But maybe just if you could talk a little bit about any foreign dispatch that you might have.

Fair question. All of our agents are U.S. domiciled agents. We do have a handful of agents who do some back office work overseas, but we don't believe we have any exposure under our reading of any of the draft in the [indiscernible] law under the phrase that you mentioned.

Okay. That's really helpful. Well, then my actual question here. Maybe just talk a little bit about -- as you think about just your -- as you think about this next cycle, if we are in fact at the beginning of an up cycle. Maybe just talk a little bit about how you think Landstar is positioned from a competitive standpoint to maybe gain share or drive better margin and the like, just as we kind of think through investments that have been made over the course of this down cycle, just how you're in a different position on this up cycle versus past?

Yes. No awesome question. So a couple of different reads from my perspective. I think on the last conference call, I said it was hard to tell whether or not we were at the beginning of the end or the beginning of the beginning. I feel pretty convinced we're at the beginning of the beginning. As we look at the last few months, and our results would prove that out. I think we've done a lot in the last couple of years clearly designating the strategies and the strategic growth areas that we put forward. You know those as heavy all in U.S. Mexico cross-border and things like that. I think we've done the right work internally to put the right leadership there and the right investments as Jim Applegate, referenced a few moments ago. I think on the BCO side, the work that Matt Miller has done in looking at BCO qualifications and time to qualify and the sort of reduct of orientation and what we call the cabs class. I mean there's a lot of things that are happening there. I think that is showing through in the way that BCOs are sticking with us even in more difficult times at the end of last year, the Q1 numbers in terms of the BCO count looked really, really good. I mean they were 10x better than they were in the last 3 years. So that makes you feel pretty good. I think the work that we've done in working with the regulators over the last year or 2. I think our relationships are a lot closer with USDOT and FMCSA than they've ever been. I think we have the ability to talk with them about the realities of our industry and what needs to be done and they're moving at pace that I don't think any of us have ever seen. I've said an open company a number of times that, we've never had a more favorable administration to the U.S. trucker than we have right now. And again, as I mentioned earlier, it's making it a safer and more professional environment. And I think those are the important things. That's what Landstar has always been about. I mean we are independent owner operators, who are out there doing a great job for us every single day. And those are the folks who are going to win in this environment. There's been a bit of a flight to quality. I mean we're getting bids back that, freight back that we maybe lost on rate over the last couple of years because of safety, security and service and customers wanting to make sure that their loans get there on time and the load is secured and not stolen and the track and trailers are not over turned in the side of the road. I mean those are the things that we're really good at. So I think we're winning in the marketplace with respect to that on the flatbed and heavy haul side, clearly, our numbers over the last 2 years would indicate that we're doing really well relative to that market, and we're going to continue to recruit drivers. We're going to continue to invest in the fleet. We're going to continue to designate the hard things as strategic initiatives, and I look forward to that future.

Our next question comes from the line of Brian Ossenbeck from JPMorgan.

I just want to see if you can get a little bit more detail on the AI initiatives that you guys listed out here in the back slides, both maybe separate the Landstar corporate for the scale network of entrepreneurs. But maybe more generally, do you feel like you can scale some of these productivity initiatives that we hear about across the industry when you have some of the business, it's a little bit more centralized with either corporate or brokerage, and then you've got agents that are a little bit more decentralized, of course. So I would like to get a little bit more specifics on that, including what's the -- you talked about the CapEx budget here being about AI being about half of the IT capital budget. But what's also running through the expense line there?

Good question, Brian. Thanks, good to hear your voice. I think the AI work we're doing, as we disclosed in the Q4 call, those 2 slides are really replicas of what we did in the main deck in the Q4 call, we wanted to put it in there to make sure that everybody had an opportunity to see those that may not have been on the Q4 call. Jim Applegate is the business side of AI. We've obviously got Rick Coro, our CIO, that's on the tech side as we did mention to you a good point. We sort of laid down the expectation that more than half of our capital budget on the IT side will be AI. We met that. My belief is if you in arrears sitting at 12/31/26, it will probably turn out to be more than that as we revisit the other half of the capital that IT spending, just to decide whether or not we truly do need systems versus a top of the existing systems. So I think you'll see that more over time. And certainly, we'll look at a higher expectation as we turn the page into 2027. On scalability and adoption, as I mentioned in my prepared remarks, are clearly what we're trying to make sure we're accomplishing by virtue of, for example, the pilots that we're doing. Jim Applegate to get you into some details there. We're doing very active agent pilots were working with half a dozen or so AI companies that some of those will be, I'll say, household names. Some of them will be more on the startup side. I mean you've got to make sure that you're playing the field a little bit here. They're doing pilots with about a dozen or so of our agents. And therefore, we are in the agent office working on AI, which clearly gives you the replicability across the age environment. There are things that agents do different, but there are an awful lot of things that agents do similarly that have to be part of the shipment life cycle. But I'll let Jim Applegate pick up the...

Thanks, Frank. And Brian. I love the way you posed the question separating the corporate from the agent. As you know, corporate is a little bit easier to get your arms around. It's a little bit easier to control with over 1,000 agents in our network. We've got to be a little bit more deliberate on how we go about it, and it's got to be a scalable solution that fits our entrepreneurs, which is really a lot different. I look at the benefit of what Landstar brings to the table, it is our entrepreneurs and pairing our entrepreneurs with technology, I think, is what wins in this market is one for Landstar in the past. We feel in this next run with AI, it's going to help us win even more so with the motivated agents that we have and given the right tools to compete. As Frank mentioned, we have several pilots going on right now. We have 7 active pilots. We're hitting all stages of our shipment life cycle. We started off with 6. [ Now we ] got about 10 stages that we're going to get within the shipment life cycle. And when I say that, those are things like how our agents market sell, how they price how they actually find capacity and manage that capacity, assign that capacity, dispatching that capacity, making sure that they're tracking and tracing those shipments within the network. And we're hitting that right now. We've got about a dozen agents that are in active pilots. And as Frank mentioned, we've got household names, and a lot of new start-ups that we're working with from a pilot standpoint. Those start-ups are going to sit up on top of our technology stack. And we're right now working with our agents to identify the workflows and to implement a agentic AI bots over at the agent office within those different shipment life cycle categories that I mentioned. We've got a lot of excitement right now with the agents that are using it. We're identifying really a lot of the business cases that you hear out in the industry that's applying directly for our agents. We're getting a lot more shipment life cycle throughput. They're doing things faster. They're able to do more, and we're actually seeing more wins as well, too. It's very early on. As far as how that actually deploys across the network, we're going to get to a point where we say, hey, these pilots are done. We're building out our use cases, and we'll identify the right vendors to work with, and they will also identify how we want to go out to the market to [indiscernible] an agent family. And if you really look at it, Brian, it's a little bit different. You can't really push that down into the network. It is more influence and control. So part of our plan is to actively look for agents that are going to adopt that technology, we'll do an assessment and we've got agents that want to grow and they want to use their resources to grow, we'll start with them. We'll do that outreach. We'll get them excited about what we're doing. And then from there, there's a consultation and design that we need to do at each agent office. We need to take a look at their business, the types of customers that they actually operate with and we did design the workflows along with the agentic solutions that we put in place specific for those agents. And then behind that, we're going to be easy behind that. We're going to make sure that we do it safely. We're going to make sure that they have the right resources in place and we're going to be monitoring along the way. Brian, we've done this before. We've done this with our rollout with our different technology tools. We've been doing this since 2014. I don't see it a big difference from what we've done over there, but it's going to be a lot more integrated within our agent offices and is very excited about where we're going. So more to come on that, but thank you for asking the question. I think it's very fitting for us to be able to tell our story specific to Landstar because I think we've got a great story to tell there.

We will take the last question from [ Harrison Beller from Soskiania. ]

Great. You guys have talked extensively about the BC capacity dynamics. But your third-party brokerage carrier side, approved carrier count there was down significantly around 20% year-over-year, although up a little bit versus last quarter. Can you walk through what's changed in your carrier vetting and approval process, and then maybe connect that to how you could help decrease your expenses related to cargo theft, fraud and then maybe insurance costs and then tie that into how technology might be helping that expense line as well.

Thanks, Harrison. I think you actually answered your own question. You're absolutely right. We have, I'd say, put a higher degree of rigor around vetting our carriers, and it is largely because of the advances that we've made in technology and AI and then some of the relationships that we have with some of our vendor partners and what they're doing to make sure that we have a good understanding of who owns the entity, what is their safety record, whether or not they've involved the double brokering, whether they've been involved in cargo theft incidents like all those things and many more are part of that analysis. I'd say that we probably got religion a little bit earlier than most because we did have [indiscernible] about a year or so ago, we had a tough cargo that quarter. And so we started down that path before many, and even before that, we had started creating our anti-fraud department and putting resources and technology with 1 of our early AI projects. that we deploy to make sure that we could understand what the parameters that will potentially lost load would look like so that we could try to prevent it before it happened. Part of that is making sure that we're doing business with carriers who are reputable carriers. Matt, why don't you pick it up from the...

Sure. Sure. I appreciate the question. And I would say if you went back in time, we had probably three attributes that we used to determine if a carrier was eligible to be approved our network. And with the advent of fraud and strategic theft and everything that's happened over the past several years, we've invested heavily. We invested in people, stood up a fraud group. We invested in the process and refining that process and we invested in technology. I don't expect that to stop anytime soon. But we continue to add layers upon layers of attributes. We're up to, say, dozens of attributes that we're looking at to scrub that area database to do our best to mitigate to prevent [ detect, ] any sort of anomalies and the tools that we've invested in are proving to be working, as you saw on the first quarter results. But this is something that today is a constant defense, and we're continuing to find ways that we can mitigate against it. It's very sophisticated bad actors out there, so you have to remain vigilant, but the technologies that we're adopting are proving very, very valuable and would expect that sort of rigor to continue for the foreseeable future.

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

Thank you. In closing, the management team has been energized by our interactions with our BCOs and agents thus far in 2026. And we are all encouraged by the current pricing environment and what we believe is the strongest heavy haul service offering in our industry. And regardless of the economic environment, 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 capitalize on improving conditions and gathering momentum in freight markets. Thank you for joining us this afternoon. We look forward to speaking with you again on our 2026 second quarter earnings conference call in late July. Thank you.

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