Landstar System, Inc. (LSTR) Earnings Call Transcript & Summary

Good afternoon, and welcome to Landstar System, Inc. Second 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 Freight Officer; Jim Todd, Vice President and CFO; Matt Miller, Vice President and Chief Safety and Operations Officer. Now I'd like to turn the call over to Mr. Jim Todd. Sir, you may begin.

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

Thanks, JT, and good afternoon, everyone. I'd like to thank our BCOs and agents and all of the Landstar employees who support them every day. It was great to spend time with our Million Mile Safe Drivers and Roadstar honorees at our annual BCO All-Star event earlier this month in Orlando and to celebrate their incredible safety accomplishments. It was my honor to preside over Landstar's 53rd truck giveaway, awarding One Million Mile Safe Driver and Roadstar honoree German Burgueno, from Hallsville, Texas, with a new 2027 Peterbilt 579, 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 dedication to safety, security and service is one of the pillars of success at Landstar. They are exceptional business leaders and key to driving the continued success of Landstar's business model. I was very pleased with our revenue and variable contribution performance during the 2026 second quarter, but the quarter was not without challenges that required our focus and attention. We have a challenging insurance and claims quarter with approximately $10.5 million of net unfavorable adjustments to prior year claims estimates. The prior year development experienced during the quarter was almost entirely attributable to 5 specific claims, 3 of which were truck brokerage claims. We believe greater federal clarity around carrier vetting and selection standards would help support a more predictable operations, insurance and claims environment for truck brokers, carriers and shippers. Transitioning to overall performance, revenue was up 18% year-over-year. As noted in our earnings release, our second quarter revenue per truckload and the number of loads hauled via truck both outperformed pre-pandemic typical seasonality, and the net BCO truck count performance was the strongest quarterly improvement since the first quarter of 2022. In one continued major bright spot, I am extremely pleased with the performance of Landstar's heavy hauled service offering. We generated approximately $164 million of heavy haul revenue during the 2026 second quarter, an 18% increase over the 2025 second quarter. This achievement was driven by a 9% increase in heavy haul volume and an 8% increase in heavy haul revenue per load. Notwithstanding the geopolitical uncertainty experienced thus far in 2026, 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. On the new agent front, we were thrilled to welcome an $18 million freight broker from the Midwest to our agent network earlier this month. This represents one of the largest new agent signings in the past 15 years, inbound interest and conversations with potential new agents has accelerated since the Montgomery decision was released in mid-May. We believe the value proposition of becoming a Landstar independent agent has never been strong. Turning to Slide 5. The freight environment in the 2026 second quarter was characterized by solid demand from a seasonal perspective with the number of loads hauled via truck slightly outpacing normal seasonal patterns, the first time this has been achieved in the second quarter since 2021. This volume performance in the second quarter supports the ISM Index readings from earlier this year with the ISM index above 50 for all 6 months of 2026. Truck capacity tightened significantly during the quarter as evidenced by the very strong sequential truck revenue per load performance, coupled with a 129 basis point compression in our brokerage net revenue margin sequentially. Market conditions, which have favored the shipper since late 2022, have begun shifting rather rapidly in favor of the transportation provider. Considering that backdrop, Landstar's revenue performance was strong in 2026 second quarter with truck revenue per load 17% above the 2025 second quarter and the number of loads hauled via truck up nearly 2% over the same period. Our balance sheet continues to be very strong, and our capital allocation priorities are unchanged. We will continue to patiently and opportunistically execute on our existing buyback authority to benefit our long-term stockholders. As noted in the slide deck during the 2026 first half, the company returned approximately $120 million to shareholders through dividends and share repurchases. And yesterday afternoon, our Board declared a regular quarterly dividend of $0.44 per share payable on September 9 and to stockholders of record as of the close of business on August 18. This quarterly dividend includes a 10% increase over the amount of the company's regular dividend declared following each of the prior 5 quarters. 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 for refreshing our fleet of trailing equipment with a particular focus on investing 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 through the 2026 second quarter. JT will get into the details on revenue, loadings and rate per load in a few moments. Safety is critical 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 support the critical importance of safety, security and service at Landstar. I'm proud to report an accident frequency rate of 0.62 DOT reportable accidents per million miles during the 2026 first half, well below the last available national average DOT reportable frequency rate released by the FMCSA for 2021 and lower than the 0.67 DOT accident frequency we reported during the 2025 first half. The company's long-run average is an impressive operating metric that speaks to the strength, skill, talent and dedication of our BCOs and provides a point of differentiation our agents are able to highlight in discussions with our freight customers. 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, a number we would expect to increase in 2026. Importantly, retention within the Million Dollar Agents network continues to be extremely high. Turning to Slide 8. On a year-over-year basis, BCO truck count decreased by less than 1% compared to the end of the 2025 second quarter but increased approximately 80 basis points sequentially. As noted above, our net 68 truck additions during the second quarter was the strongest quarterly improvement since the first quarter of 2022. Continuing that sequential trend, our BCO truck count has also increased during the first 4 weeks of the 2026 third fiscal quarter. We are also very pleased to see our trailing 12-month BCO truck turnover rate dropped from 31.4% and as of fiscal year-end 2025 to 28.3% at the end of the 2026 second quarter. This is a positive trend that we hope will continue into the third quarter. I'll now pass the call back to JT to walk you through the second quarter financials in more detail.

Thanks, Frank. Turning to Slide 10. As Frank mentioned earlier, overall truck revenue per load increased 17% in the 2026 second quarter compared to the 2025 second quarter, primarily attributable to a 19.9% increase in revenue per load on loads hauled by unsided/platform equipment and a 15.8% increase in revenue per load on loads hauled by van equipment. On a sequential basis, truck revenue per load increased 14.4% in the 2026 second quarter versus the 2026 first quarter, that represents the largest sequential increase in truck revenue per load over the past 15 years, edging out the 13.5% sequential increase experienced during the 2020 third 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 second quarter revenue per mile on unsided/platform equipment hauled by BCOs was 10% above the 2025 second quarter, and revenue per mile on van equipment hauled by BCOs was 11% above the 2025 second quarter. Delving deeper into seasonal trends, revenue per mile on loads hauled by BCOs on unsided/platform equipment increased 5% from March to April, increased 2% from April to May and increased 6% from May to June. Importantly, the sequential month-to-month performance as we move through the second quarter when compared against typical pre-pandemic trends suggest positive momentum in this aspect of our business. In fact, revenue per mile on loads hauled by BCOs on unsided/platform equipment outperformed typical pre-pandemic trends in each month during the second quarter. Turning to van freight, revenue per mile on van equipment hauled by BCOs increased 3% from March to April, increased 3% from April to May and increased 7% from May to June. Similar to the unsided/platform revenue per mile, revenue per mile on loads hauled by BCOs on van equipment outperformed typical pre-pandemic trends in each month during the second quarter. It should be noted that the month-to-month seasonal trends on unsided/platform equipment are generally more volatile compared to that of van equipment. This relative volatility is often due to the mix between heavy specialized loads and standard flatbed volume. As Frank alluded to, we've been particularly pleased with the sustained strong performance of our heavy hauled service offering. Heavy hauled revenue was up 18% year-over-year in the second quarter. Heavy hauled loadings were up 9% year-over-year, and revenue per heavy hauled load increased 8% year-over-year. Non-truck transportation service revenue in the 2026 second quarter was 6% or $5 million above the 2025 second quarter. The increase in non-truck transportation revenue was mostly due to a 50% increase in air revenue per load and a 16% increase in intermodal pricing. Turning to Slide 11, we provided revenue share by commodity and year-over-year change in revenue by commodity. Transportation Logistics segment revenue was up 18% year-over-year on a 16% increase in revenue per load and a 2% increase in volume compared to the 2025 second quarter. Within our largest commodity category, consumer durables, revenue increased 24% year-over-year on a 23% increase in revenue per load and a 2% increase in volume. Aggregate revenue across our top 5 commodity categories, which collectively make up about 69% of our transportation revenue increased approximately 20% compared to the 2025 second 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 second quarter to 2026 second quarter, total loadings of machinery increased 2%, automotive equipment and parts decreased 1%, building products increased 8% and electrical loadings increased 31%. 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 half. Turning to Slide 12. In the 2026 second quarter, gross profit was $132.3 million compared to gross profit of $109.3 million in the 2025 second quarter. Gross profit margin was 9.2% of revenue in the 2026 second quarter as compared to gross profit margin of 9% in the corresponding period of 2025. In the 2026 second quarter, variable contribution was $199.4 million compared to $170.5 million in the 2025 second quarter. Variable contribution margin was 13.9% of revenue in the 2026 second quarter compared to 14.1% in the same period last year. The decrease in variable contribution margin compared to the 2025 period was primarily due to decreased variable contribution margin on revenue generated by truck brokerage carriers. As the rate paid to truck brokerage carriers was 136 basis points higher than the rate paid in the 2025 second quarter, partially offset by an increase in the percentage of revenue generated from BCO independent contractors. Turning to Slide 13. Operating income decreased as a percentage of gross profit due to higher selling, general and administrative costs in the 2026 second quarter. Operating income increased by approximately 20 basis points as a percentage of variable contribution. Other operating costs were $17.9 million in the 2026 second quarter compared to $19.6 million in 2025. This decrease was primarily due to the reclassification of the $4.8 million supply chain fraud charge established during the 2025 first quarter from customer bad debt to contractor bad debt during the 2025 second quarter. Excluding the $4.8 million P&L reclassification, other operating costs increased approximately $3.2 million. 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 $39.4 million in the 2026 second quarter compared to $30.4 million in 2025. Total insurance and claims costs were 7% of BCO revenue in the 2026 second quarter as compared to 6.6% in the 2025 second quarter. The increase in insurance and claims cost as compared to 2025 was primarily attributable to increased net unfavorable development of prior year claim estimates, increased BCO miles traveled during the 2026 period, increased severity of current year trucking claims, partially offset by decreased frequency of both current year trucking claims and current year cargo claims. During the 2026 and 2025 second quarters, insurance and claims costs included $10.5 million and $2.3 million of net unfavorable adjustment to prior year claim estimates, respectively. Selling, general and administrative costs were $68.2 million in the 2026 second quarter compared to $55.7 million in the 2025 second quarter. Excluding the impact of the previously mentioned $4.8 million reclassification, selling, general and administrative costs increased approximately $7.7 million as compared to the 2025 second 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 information technology project costs, partially offset by decreased employee benefit costs. The provision for incentive compensation was $6.4 million during the 2026 second quarter as compared to $1 million during the 2025 second quarter. Depreciation and amortization was $10.4 million in the 2026 second quarter compared to $12.1 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 second quarter compared to an effective income tax rate of 24.6% in the 2025 second quarter. The increase in the effective income tax rate for the 2025 second quarter to 2026 second quarter is primarily due to 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 $348 million. Cash flow from operations for the 2026 first half was $28 million and cash capital expenditures were $9 million. It should be noted that free cash flow was negative during the 2026 second quarter, given the sharp sequential revenue growth experienced. The 2026 second quarter negative free cash flow represents only the third negative free cash flow quarter in the past decade. The other 2 comparable quarters for the 2020 third quarter when the freight economy recovered strongly from the early impacts of the COVID-19 pandemic and the 2017 fourth quarter when the ELD mandate took effect. Despite the significant net working capital draw experience during the 2026 first half, the company continues to return significant amounts of capital back to stockholders, with approximately $95 million of dividends paid and approximately $24 million of share repurchases during the 2026 first half. The strength of our balance sheet is a testament to the cash-generating capabilities of the Landstar model. Back to you, Frank.

Thanks, JT. Before we jump into the current market update, I'd like to briefly touch on our press release from last Thursday. We're extremely excited to welcome transportation industry veteran, Bill Clement, as our new Vice President and Chief Commercial Officer, effective August 1. Bill brings more than 30 years of transportation and logistics leadership experience with him to Landstar. We are eager to introduce Bill to our agent network over the coming weeks through a series of previously scheduled agent meetings throughout the country. Bill will be charged with supporting the success of our agent network, advancing customer relationships and enhancing the effectiveness of the entire commercial organization. In addition, he will focus on accelerating growth across our strategic initiatives. Importantly, Bill has a proven track record of success in the transportation space. He will be a tremendous addition to our organization and help enhance our safety, security and service value proposition to drive sustainable, profitable growth throughout our network. In addition, we're excited for Jim Applegate to step into his new role as Chief Strategy and Transformation Officer. This newly created position will leverage Jim's deep transportation and logistics experience and unique skill set as we strengthen our ability to deliver innovative solutions and create value for our agents, customers, capacity providers and shareholders. Turning to Slide 16. Given the highly fluid freight transportation backdrop and an evolving geopolitical and macroeconomic environment, coupled with a highly volatile litigation and claims environment, the company will be providing third quarter financial and operational commentary rather than formal guidance. Looking at historical seasonality from Q2 to Q3, pre-pandemic patterns would normally be expected to yield a sequential increase of approximately 1.5% in truck revenue per load, but an approximately 1.5% decrease in the number of loads hauled via truck, resulting in a relatively flat top line sequentially. Please also note that historically, the company has normally experienced a de minimis variance in variable contribution margin from the second quarter to the third quarter. The number of loads hauled via truck in July 2026 was approximately 5% above July 2025 on a dispatch basis, and revenue per load was approximately 26% above July 2025 on a process basis. As a result, we view anticipated truck revenue per load in July is outperforming normal seasonality, while anticipated July truck volumes are trending slightly ahead of normal seasonality. The slight seasonal outperformance in truck volumes during July was almost entirely attributable to a strong first week of fiscal July, driven in part by the timing of the 4th of July holiday. For context, the year-over-year truck volume increase during the last 3 weeks of fiscal July range from plus 1.5% to plus 3.5% on a dispatch basis. We're excited to build upon positive momentum generated during the first half and are energized by the opportunity to support the best network of independent business owners in the transportation space, especially in an environment that after nearly 4 years appears to have turned in our favor. With that, Arlene, we'd like to open the line for questions.

[Operator Instructions] Our first question comes from the line of Scott Group of Wolfe Research.

So I guess, let's start maybe how you're thinking about the business post last week's, the nuclear verdict, and how you think about your insurance cost going forward? Do you worry big brokers are just going to be more at risk of these big litigations? And then maybe like what are the positives that you could argue are coming out of this in Montgomery, is this good for your ability to get BCOs or gain share from small brokers? I don't know what -- help us think through the pluses and minuses here?

Yes. No, that sounds good, Scott. I anticipated that would come early on in the dialogue. Obviously, we watch what happens in litigation involving other brokers and other carriers just to get a pulse of what's happening in the environment. We have renewed our insurance tower for the next 12 months. That was effective June 1. So we're in good shape there. I feel like we are amply covered and I think did quite well. I'll let Matt and JT, talk a little bit more about that one. I think scale remains important. I think safety remains very important. The folks who are going to be successful in this environment in the post-Montgomery world are those that put safety, security and service high on the list. And as you've heard us say for the last couple of years, those are the things that we think we're good at, and were also the things that give us the opportunity when we do those well to have our agents sell that to customers. You've heard us reference a new agent addition in the quarter, the Midwest broker that I mentioned of about $18 million. That dialogue started prior to Montgomery, but certainly under the possibility of an adverse verdict in Montgomery. So I think that what you're seeing is in an environment where small- to medium-sized brokers concerned about an existential risk. And I think we're seeing our pipeline of potential agent candidates continue to increase and be, I'd say, in the individual life case, a little bit larger than what we've done historically, if we've generally played in the sub-$5 million space for new agent additions, we're beginning to see traction in numbers that are higher than that. But Matt, maybe a little bit on the insurance piece, and obviously, your focus on safety, I think it would be important. And JT, obviously, any commentary you want to provide.

Sure. Sure. I appreciate that. I think it really reinforces why we're doing what we have been doing with a focus on safety, security and service over more than 20 years in brokerage, we've always looked for ways to enhance our carrier vetting with people, process, technology and information over the past 4 years, we've gone from over 100,000 approved carriers in the second quarter of '22 to just over 64,000 at the end of the second quarter or 35% reduction. As new technologies and information become available, we're going to continue to do just that, exactly what we've been doing. We're always looking for opportunities to drive safety, security and service. On the insurance front, to Frank's point, we had a very favorable outcome on the auto liability tower. We were effectively flat. Again, that was a June 1 renewal. That was post-Montgomery decision, which I think was May 14. And then on the broker liability, we were plus 3%. So net-net, I think we had a favorable outcome there.

Yes. And I would just piggyback that, Scott. Certainly, the Montgomery, half the country free the SCOTUS ruling did not recognize F4A. So now we've got basically half the country that we used to be able to submit a very well-crafted motion for summary judgment and usually get out a very high degree of probability, those now, we'll have to fight those, right? So that will look like the half of the country that did not recognize that F4A pre-Montgomery. And then I think there's certainly going to be some element plaintiffs involved -- being more emboldened to pursue these cases in terms of the figure that came out late last Thursday, I'm not familiar enough with the case. As you know, most of these things on big nuclear verdicts, and we're certainly aware on the BCO side on the trucking side of the business, have got a big degree of experience with large losses, both at the trial level and settlement. But I would expect this thing to play out 2, 3, 5 years through the appellate process, et cetera.

Okay helpful. And then just second question on the BCO count. So picked up a little bit. When we start hearing about rates up mid-teens, now mid-20s in Q3, like we historically have seen like pretty dramatic increases in the BCO count. Is that something we should expect to start seeing in the back half of the year or in this world of more supply-driven tightness, do you think it's any different in terms of how quickly the BCO count starts to really ramp?

Scott, thanks. I mean, we're actually excited about seeing the trend improve here in the last few months. When you look at where we started off the first, gosh, Matt, 2 or 3 weeks of January were a challenge for us and looked a little bit more like prior years. But I think we ended up the first quarter down a very, very modest amount. And in comparison to the past 4 or 5 years was radically better even though it was a slightly negative number. And then what Matt and his team are doing on the recruiting front and shrinking the time to qualify. Obviously, the rate environment is helpful to push more leads our way. But I think it is both the cycle, but I also think it's some of the structural things that Matt and his team are working on that.

Yes. I would say we're encouraged by what we're seeing, 68 trucks higher in the first quarter of -- I'm sorry, in the second quarter of 2026, that net truck count result in the quarter since the first quarter of '22. And it was the best second quarter result since 2021 and brings us to a positive net truck adds for the year. The net truck count trends improved in each month in the second quarter, and we saw continued growth in net truck count during the most recent 4-week period of July, where we added a net 49 trucks. During the quarter, gross truck adds were up 4.2% sequentially, demonstrating growing interest on the ad side. And then during the quarter, gross truck cancels were down 13.6% sequentially, demonstrating that those that are in the network are finding success. And then I would say that this is the 10th consecutive quarter of turnover improvement. The high watermark was 41% in the fourth quarter of '23. We finished the quarter at 28.3%, that's beneath our long-term average. And then I would just say the variable pay model is incredibly compelling for those that are interested in finding a home in this environment. And you don't have to look further than 2018, we added plus 900 trucks, 2020 plus 750, '21 plus 870. Typically, the improvement in cancellations leads the improvement in adds, and we're beginning to see that improvement in adds.

Our next question comes from the line of Jonathan Chappell from Evercore ISI.

Jim or Frank, I recognize the reluctance to give guidance. But if we look at Slide 16 here, and you provided some year-over-year context. And historical trends that clearly we are not tracking to right now. Is there any way through the first 4 weeks of the quarter to take these year-over-year magnitudes and kind of help frame out what the -- how the 3Q is shaking out relative to those historical trends a little bit more than slight or slight above typical, any type of magnitude would be helpful.

John, yes, I'm happy to. I would just start on the demand side. And really, since March, we have been kind of plus or minus trailing 15-year averages on demand. One month will be slightly better, 1 month will be slightly worse. You saw the outcome for the second quarter, where I think we're about, maybe a little under 100 basis points better than typical 1Q to 2Q trends. We are 60 basis points better on a loads per workday June into July. So again, that dovetails with Frank's slightly better. But again, you've got probably 4 or 5 months now of demand kind of reconnecting to normal. On pricing, I think on the April deck, we had significantly outperformed was the word we used on the slide, and that's because pricing was 640 basis points better than it typically is in April. We were nearly 400 basis points better in May, nearly 400 basis points better in June. We're holding about 150 basis points better than normal in July. John, hopefully, that helps with the model.

Super helpful. Jim, and then just a super quick follow-up. Obviously, there's a big narrative around AI, data center infrastructure, et cetera. Sometimes that's favorable. Sometimes it's unfavorable. Your heavy hauls continue to do very strong. Is there any kind of end market exposure that you can point to there that either kind of prove or disprove this narrative that maybe the data center or infrastructure-related construction may be slowing from kind of peak spend?

John, it's Frank. And then Jim Applegate will pick up after my lead; here. But we're continuing to see strength in the data center business. We look at it like an ecosystem rather than specific to the hyperscalers. Obviously, there's energy-related items in there and then you got all the cooling as well. So we're looking at it from the broader ecosystem perspective. When you look at the commodity breakdown in the deck and the commentary that JT provided, you're going to see building products has got a piece of it, energy has got a piece of it, machinery got a piece of it. There's a lot of different areas that have data center exposure. We continue to see strong demand especially from one of our largest customers, strong demand in that space and a continuing need for additional capacity. So we feel quite bullish about the things that are happening in the data center space and have not felt any pull back or suggested pullback in that space, certainly not in the last 3 or 4 months when we've all read the same articles that you're alluding to.

Yes. Jonathan, just to piggyback on what Frank's comments were. From a customer perspective, we're seeing a lot of new customers pop into our top customer list this year and a pipeline that's looking very strong and new customers that are starting to come through the woodwork here that we really, frankly, didn't anticipate that would be kind of jumping into the game. So with the existing customers that seem to have a continual appetite to invest and then kind of it's spreading across other providers and us getting exposure to these new customers. I see a strong pipeline, not only here for the remainder of the year, but heading into 2027.

And John, just real quick, while the heavy hauled service offering has certainly been helped out from some AI data center type demand. We had 22 customers in that vertical grow their volumes, their heavy hauled volumes of Landstar by at least 50 loads in the quarter. And besides data center, you've got aerospace, you've got defense. You heard Frank talk about power and energy. So it really is broad-based. It's not just 1 or 2 customers driving the bus there.

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

This is Paul Stoddard on for Jordan Alliger. I guess my question is seeing that the brokerage volumes are still running negative year-over-year. Is this largely because we're not seeing a firming up of the volume? And are we seeing agents direct more volumes towards the BCOs?

Paul, I'll give you my take, and this is JT. So remember, the agents are going out to market to grow transportation volumes, and they are certainly constrained by customer preferences. But for the most part, they're trying to just serve their customer and [ access ] capacity. And then we run a non-force dispatch operation here at Landstar. So utilization, if you just take BCO utilization second quarter year-to-date and annualize it, we'd be at 101.9 BCO loadings. That is about 5 loads better than the previous all-time high. So I think the decline in brokerage, while there are certainly some probably customer preference there, given the elevated fraud in the supply chain. It's been going on since 2022, 2023. I think the BCOs are just more active in -- coming out of the longest down cycle from a rate side, they're hauling more loads. And as such, there's less freight to lay off to third-party carriers.

Got it. And then I guess as a follow-up to that question. Is it potential that since volumes are not growing at a meaningful amount compared to revenue per load. Are we going to see less compression on VC margin because we're seeing more of those loads come through BCO rather than brokerage?

It's a great question. So BCO mix, if you just look at BCO revenue as a percentage of total from first quarter to second quarter, it did dip sequentially. So you've got -- and that's not abnormal in the second quarter, especially when you have a 7% or 8% sequential uptick in loadings. And the other factor there was, Paul, and mainly, that's brokerage and diesel, which is having a tailwind to revenue per load on brokerage that it's not necessarily on BCO but it is a tighter capacity environment. And as a result, I think you heard Frank mention our net revenue margin on brokers business compressed 129 basis points. Some of that is also fuel that your mark up on fuel surcharge is not as much as a line haul.

Our next question comes from the line of Brandon Oglenski from Barclays.

I think, Jim, maybe you mentioned that your insurance costs, you held pretty much flat or maybe up slightly even in the post-Montgomery world. I mean is this something that we should expect on a go-forward basis? Or is it just like everyone needs to experience what the claims are actually going to be like post-Montgomery and maybe we could see a big reset there in the future?

Brandon, it's Frank first, and then JT and Matt may fill in some gaps here. I think the important thing in any insurance renewal is how your company performs on the most important measures not the least of which is going to be safety and certainly the claims history. Then you've got the market phenomenon, which is obviously, if you have some catastrophic issues that impact particular carriers who may be shared across the environment, that's going to impact the overall renewal market. Now walking into the renewal in the April, May time frame, I mean, we felt like we had a pretty good case for a strong renewal. Even though the market has shown us some trends that we're maybe working against the industry, but we're able to point to all of the BCO demographics, we're able to point to the balance sheet, we're able to point to the safety measures. We're able to point to the things that the underwriters look at and say, "Okay, this is a company that I want to underwrite." Matt?

Yes. No, I would agree with you, Frank. And I think a lot depends. I mean there's a lot to happen over the coming months and years. And certainly, we have a renewal in June 1 of next year. there's an opportunity for FMCSA to do some things on the regulatory front. And then there's a variety of things that could happen in sort of litigation that may come out, contrary to what we saw more recently. So I think there's a lot that can happen between now and then. So it's really tough to see.

And gentlemen, I appreciate that response. And I guess, Frank, are you trying to lay the case here that maybe not all is created equal. I mean, is this going to be a larger issue for smaller brokerages?

On the brokerage side, for sure. You have, let's say, you move 100 loads and you have 1 or 2 that go bad as a small broker, as JT pointed out in answer to one of the earlier questions, you're going to have litigation costs that you never had before. If you're in an F4A jurisdiction that was in effect previously but not in effect now because of Montgomery. So now you're going to be paying legal fees as a reformed lawyer. I know that those aren't cheap. And then you have the possibility of a more extended litigation environment and potentially a verdict or a settlement. And as you know, margins in our industry are thin. And so there's only so many punches to the stomach you can take as a smaller player. So I do think back to the point we talked about earlier on being attractive to small and medium-sized brokers like we think we offer a very compelling value proposition under the Landstar umbrella. And so we're beginning to see some traction there. As I mentioned, the one Midwestern independent broker that signed on as a new Landstar agent in the $18 million annualized range. That's a big deal for us. I mean we'd love to attract folks like that who are out there every day and believe in the safety, security and service proposition that we offer and we expect from the new agents that come on board.

Our next question comes from the line of Tom Wadewitz from UBS.

I wanted to just, I guess, ask -- you've had a lot of questions on this, but I want to get a little more sense of how you look at things. So I guess in terms of the carrier selection, how have you changed your criteria? You mentioned the move down to 64,000 carriers. Is that for broker carriers, do you think that continues to go down? And how do you look at it to say, okay, what would we tighten up or what would we view differently just in terms of how we define a safe carrier that we would work with. So that's one. And then I just had one follow-up, too.

Yes. For sure. Tom, nice to hear your voice. I think on the carrier selection, we've always taken carrier selection very, very seriously. We've always look to evolve that over time as new sources of information become available. And honestly, as different carriers have different track records of success. And in what they do out there, moving every single day. Matt and his team do a really nice job of understanding exactly what those criteria are. And when things become safety related, obviously, we have to have to move folks to the unapproved category and not use them anymore. So like those are things that Matt and his team are working on. Customers are beginning to ask for at least at a high level, what our carrier vetting standards are. And so we're beginning to have some really good conversations with direct customers. I do think a point that Matt made earlier, and I mentioned in my prepared remarks, is going to be really important, and that is having some sort of minimum federal selection standards, vetting standards is going to be really, really important. Otherwise, we're going to be subject to 50 different states. And if you counted every county that has a court, it's going to be hundreds, if not thousands of different interpretations of what reasonable care or ordinary care is in the selection of carriers. Matt?

Yes. I think going from, as you highlighted, the 100,000 carriers down to 64,000 carriers. That all started with cargo fraud, right? And the investment in technology and the available technology that became available to us out of the advent of fraud helped us begin to drive further vetting standards within our organization and driving down those overall approved carriers in the network. That sort of dovetails with the safety parameters that we have as well, folks that are not necessarily operating above board from a theft standpoint or likely not necessarily operating above board from a safety standpoint. And so we've been able to drive that down into Frank's point earlier, as information technology or an opportunity presents itself, we're going to continue to press that safety, security and service emphasis.

Okay. Great. And then I guess just a second kind of related question. So Frank, you mentioned it would be helpful to get something from FMCSA that defines maybe parameters. Can you give a little more of a sense of what you would want to see from them? And then also just kind of what would you want to see from the courts that would maybe provide some precedence that would give you a little more clear look to say, okay, $600 million verdict against C.H. or whatever broker just doesn't make sense because they did this and that, right? Just some kind of thoughts on what would be helpful to kind of think about how the risk -- legal risk could become more better looking forward?

Yes. I think on the second point, Tom, I think the courts are going to -- every decision, every verdict that comes out is going to set some level of new law and flesh out what is reasonable care in those situations. So that's just going to take a fairly long period of time to develop. And I think as it develops, we'll see the balance set between, let's call it, the plaintiffs and the defendants, as JT mentioned earlier, right now, there's a little bit of buoyancy in the plaintiff bar and looking at cases that are [ tending ] toward broker liability issues. I think on the FMCSA side, as we talk to folks who are inside the beltway, so to speak, looking at minimum insurance standards for carriers is going to be important. That hasn't been touched in nearly 40 or 45 years or something like that. Thinking about minimum insurance standards for brokers in addition to carriers, looking at literally kind of a 10 bullet checklist of, did you check FMCSA? Did you check the technology tools that were available? Did you check their various records? And things like that. We've got to have something where we can go through our standards relative to a federal minimum and say, "Look, we exercised ordinary care." We were in compliance with the federal minimum standards, and I think that will help reset the balance between plaintiffs and defendants as well. And so I think there's going to be some time for this all to shake out. Right now, the best thing we can do is run the safest possible network we can.

Do you think that's coming soon from FMCSA, or is that just kind of indefinite?