Landstar System Inc

NASDAQ:LSTR

Earnings Call Analysis

Landstar Q4 2023 Earnings Show Revenue Dip

In Q4 2023, Landstar System Inc. reported revenues of $1.204 billion, falling slightly below the guided range of $1.225 to $1.275 billion. Earnings per share achieved $1.62, within the forecasted $1.60 to $1.70 range. Year-over-year, revenues decreased: van equipment by 29%, unsided platform equipment by 20%, power only by 51%, and less-than-truckload by 26%. Truckload volume dropped an estimated 19% compared to Q4 2022, influenced by soft consumer demand and a slow manufacturing sector. The year-end BCO truck count fell 13%, with turnover reaching 41%, higher than the pre-pandemic rate of 36%. The operation cost of trucks has risen approximately 20% since 2019, outpacing the rate increases, asserting pressure on profitability and indicating that spot market rates may remain above 2019 levels.

Financial Performance and Profit Margins

The fourth quarter of 2023 witnessed a subtle decline in gross profit margin, which stood at 10.3% of revenue compared to 10.7% in the same quarter of the previous year. However, there was an improved variable contribution margin, up from 14% in Q4 2022 to 14.8% in Q4 2023. This rise was mainly due to a greater share of revenue coming from BCO independent contractors, known for yielding higher margins. Despite this, the quarter also saw a spike in other operating costs, primarily trailing equipment maintenance expenses, and a drop in income from the sale of used equipment, contributing to higher costs of $13.2 million, up from $10.3 million in 2022.

Tax Rate and Cash Position

A slight reduction in the effective income tax rate from 24.7% in Q4 2022 to 24.1% in Q4 2023 benefited the company, owing to positive state tax developments. By the end of the quarter, the company bolstered its cash and short-term investments to $541 million. The cash flow from operations was robust at $394 million, while the capital expenditures remained quite contained, amounting to $26 million.

Freight Environment and Revenue Outlook

The company entered 2023 amid challenging conditions in the freight market, following a down cycle and subdued year-over-year performance compared to a record-setting 2022. Predictions about revenue movements suggest that the start of an upturn in the freight cycle may occur around midyear 2024, following a prolonged downturn lasting six quarters. The first quarter of 2024 is expected to align with seasonal norms, projecting revenues between $1.1 billion and $1.15 billion with diluted earnings per share estimated to be between $1.25 and $1.35. However, these figures are not indicative of the entire fiscal year's expectations as a shift in industry dynamics is foreseen.

Anticipation for 2024 Amid Previous Achievements

Looking at the company's trajectory, the free cash flow for fiscal year 2023 stood at $368 million, strengthening the balance sheet significantly. Despite the ongoing soft freight environment, the outlook for 2024 remains positive. The company anticipates navigating through these conditions successfully, with the expectation that 2024 will be an exceptional year by standards predating the pandemic.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, and welcome to Landstar Systems, Inc. Year-end 2023 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 Jim Gattoni, President and CEO; Jim Todd, Vice President and CFO; Joe Beacom, Vice President and Chief Safety and Operations Officer.

Now I would like to turn the call over to Mr. Jim Gattoni. Sir, you may begin.

[Jim Gattoni, executive]

Thank you, Bill. Good morning, and welcome to Landstar's 2023 Fourth 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 or forward-looking statements.

During this conference call, we may make statements that contain forward-looking information that relates to Landstar's business objectives, plans, strategies and expectations. Such information, by nature, is subject to uncertainties and risks included, but not limited to, the operational, financial and legal risk detailed in Landstar's Form 10-K for the 2022 fiscal year described in the section Risk Factors and other SEC filings from time to time. These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking information, and Landstar undertakes no obligation to publicly update or revise any forward-looking information.

The freight environment throughout the 2023 fourth quarter reflected soft demand and readily available truck capacity. These freight market conditions were consistent with what Landstar experienced during the first 3 quarters of 2023.

The 2023 fourth quarter also included an abnormally soft peak season by historical standards. Nevertheless, even with a weak peak season, Landstar performed mostly in line with the 2023 fourth quarter guidance we issued in our third quarter earnings release on October 25.

We provided revenue guidance of $1.225 billion to $1.275 billion. Actual revenue came in at $1.204 billion, about 2% below the low end of our guidance. We also issued earnings per share guidance of $1.60 to $1.70. Actual earnings per share in the 2023 fourth quarter was $1.62, slightly above the low end of the guidance.

It is worth noting again that the 2023 performance continues to significantly outpace prepandemic levels. 2023 fourth quarter revenue was 21% over the 2019 fourth quarter revenue, and earnings per share exceeded the 2019 fourth quarter by approximately 28%.

Before diving into further detail on Landstar's performance in the 2023 fourth quarter, please note I will make mention of normal seasonal patterns or normal trends. For the purpose of today's conference call, normal seasonal patterns and normal trends refer to Landstar sequential revenue, load count, pricing or other trends for monthly or quarterly periods from 2015 to 2019, and excludes our historical results from 2020, 2021 and 2022, due to the highly unusual dynamics reflected in those metrics during the pandemic-driven freight cycle.

Overall truck revenue was $1.85 billion in the 2023 fourth quarter, 29% below the 2022 fourth quarter, a 22% decrease in load volume and a 10% decrease in revenue per load. It should be noted that the 2022 fourth quarter included 14 weeks, whereas the 2023 fourth quarter included 13 weeks. Excluding the estimated truckload volume from the extra week in the 2022 fourth quarter, truckload volume decreased an estimated 19% in the 2023 fourth quarter compared to the 2022 fourth quarter.

As we entered the 2023 fourth quarter, the number of loads hauled via truck in early October was trending below normal seasonal patterns. The below normal trend in the number of loads hauled via truck started in the 2022 second quarter, as each sequential quarter-to-quarter change in truckload count from the 2022 second quarter through the 2022 fourth quarter was below normal seasonal patterns, due to the soft consumer demand for the types of freight we hauled and a slow U.S. manufacturing sector.

Based on normal seasonal patterns, truckload volume typically increases slightly from the third quarter to the fourth quarter in a given year. From the 2022 third quarter to the 2023 fourth quarter, truckload volume decreased 6%, a significant underperformance compared to normal seasonal patterns.

As to pricing, truck revenue per load is trending reasonably in line with normal seasonal patterns through mid-October, However, revenue per load on loads hauled via truck softened after the first few weeks of October, and trended seasonally below normal patterns from September to October, October to November and November to December.

We attribute that negative pattern primarily to the abnormally soft peak season.

We look at BCO revenue per mile as a barometer of the rate environment, as this metric mostly excludes the impact of rising and falling fuel costs. During the 2023 fourth quarter, revenue per mile on BCO van equipment remained fairly stable from October to December, whereas revenue per mile on BCO unsided platform equipment softened through the quarter.

BCO revenue per mile on van equipment and unsided equipment, which in both cases, excludes fuel surcharges, were 17% and 14% higher in December 2023 compared to the December 2019, respectively. However, based on industry data from ATRI, the cost to operate a truck excluding fuel cost was approximately 20% greater in 2022 than in 2019.

In other words, the increase in rates since December 2019 likely has not kept up over that period, with the increase in cost to operate a truck. We continue to believe that rates in the spot market will stay relatively higher than 2019 levels, given the significant amount of additional cost to operate a truck today.

In terms of revenue by equipment type in the 2023 fourth quarter, revenue hauled via van equipment, unsided platform equipment, power only and Less-than-truckload revenue, all experienced revenue declines from the 2022 fourth quarter.

Revenue hauled via van equipment was 29% below the 2022 fourth quarter, mostly on soft demand on the consumer freight we hauled. Revenue hauled via unsided platform equipment was 20% below the 2022 fourth quarter, mostly due to a slow U.S. manufacturing sector.

Other truck transportation revenue, which is primarily comprised of power only revenue, was significantly favorably impacted by increased demand for substitute line haul services during the pandemic, and without 51% compared to the 2022 fourth quarter.

Unsurprisingly, demand for substitute line haul services was significantly softer throughout 2023 compared to 2022.

Less-than-truckload revenue decreased 26% compared to the 2022 fourth quarter and a 15% decrease in load volume, a 13% decrease in pricing.

Our rail, air and ocean services revenue in the 2023 fourth quarter was 23% or $26 million below the 2022 fourth quarter. Non-truck transportation revenue generated in the 2023 fourth quarter was, however, consistent with the revenue these services generated in the 2023 third quarter.

Total network loadings in the 2023 fourth quarter were 21% below the 2022 fourth quarter. Total low volume is somewhat influenced by customer mix. For example, Landstar provides truck capacity to other trucking companies, 3PLs and truck brokers, where volumes tend to vary more widely period-to-period, with changes in the levels of freight demand. Revenue hauled on behalf of other truck transportation companies was 15% and 19% of transportation revenue in the 2023 and 2022 fourth quarters, respectively.

During periods of tight truck capacity, other trucking companies, 3PLs and truck brokers reach out to Landstar to provide truck capacity more often than during times of readily available truck capacity. The freight hauled by Landstar on behalf of other truck transportation companies includes almost all of our commodity groupings.

Overall, the revenue hauled on behalf of other truck transportation companies in the 2023 fourth quarter was 42% below the 2022 fourth quarter, contributing 28% of the overall $470 million decrease in quarter over prior year quarter revenue.

Year-end 2023 BCO truck count was approximately 13% below the 2022 year-end truck count. Fiscal 2023 BCO truck turnover was 41%, which is higher than the 36% turnover rate Landstar experienced in 2019, during the most recent relatively comparable soft rate environment.

We believe the increase in the turnover rate compared to the comparable 2019 period was due to the significance of the decrease in rates, the duration of the negative trend in month-to-month revenue per load and the increased cost to operate a truck today compared to pre-pandemic periods.

I will now pass to Jim Todd to comment on other additional P&L metrics rerouting the 2023 fourth quarter performance.

Jim?

[James Todd, executive]

Thanks, Jim. Jim G. has covered certain information on our 2023 fourth quarter, so I will cover various other fourth quarter financial information included in the press release.

In the 2023 13-week fourth quarter, gross profit was $124.6 million compared to gross profit of $180 million in the 2022 14-week fourth quarter.

Gross profit margin was 10.3% of revenue in the 2023 fourth quarter, as compared to gross profit margin of 10.7% in the corresponding period of 2022.

In the 2023 fourth quarter, variable contribution was $178.1 million compared to $234 million in the 2022 fourth quarter. Variable contribution margin was 14.8% of revenue in the 2023 fourth quarter compared to 14% in the same period last year. The increase in variable contribution margin compared to the 2022 fourth quarter was primarily attributable to mix, as an increased percentage of revenue was generated by BCO independent contractors, which typically has a higher barrier to contribution margin than revenue generated by other modes of transportation, and an increased variable contribution margin on revenue generated by BCO independent contractors.

Other operating costs were $13.2 million in the 2023 fourth quarter compared to $10.3 million in 2022. This increase was primarily due to increased trailing equipment maintenance costs and decreased gains on sale of used trailing equipment.

Insurance and claims costs were $27.3 million in the 2023 fourth quarter compared to $29.6 million in 2022. Total insurance and claims costs were 6% of BCO revenue in 2023 period and 5% of BCO revenue in the 2022 period.

The decrease in insurance and claims costs as compared to 2022 was primarily attributable to decreased net unfavorable development of prior year claim estimates, partially offset by increased premium expense primarily for commercial auto and excess liability coverage.

During the 2023 and 2022 fourth quarters, insurance and claims costs included $900,000 and $3.8 million, respectively, of net unfavorable adjustments to prior year claim estimates.

Selling, general and administrative costs were $52.7 million in the 2023 fourth quarter compared to $56.1 million in 2022. The decrease in selling, general and administrative costs was primarily attributable to a decreased provision for incentive and equity compensation under our variable compensation programs, partially offset by increased employee benefit costs.

In the 2023 fourth quarter, the provision for compensation under variable programs was $100,000 compared to $5.3 million in the 2022 fourth quarter.

Depreciation and amortization was $13.7 million in the 2023 fourth quarter compared to $14.8 million in 2022. This decrease was primarily due to decreased depreciation on the company's trailer fleet, partially offset by increased depreciation on software applications, resulting from continued investment in new and upgraded tools for use by agents and third-party capacity providers.

The effective income tax rate of 24.1% in the 2023 fourth quarter was 60 basis points lower than the effective income tax rate of 24.7% in the 2022 fourth quarter, as the effective income tax rate in the 2023 fourth quarter was favorably impacted by certain positive state tax developments.

In addition, the effective tax rate in the 2022 fourth quarter was unfavorably impacted by the impairment and deferred tax assets related to employee equity compensation arrangements, as a result of performance conditions being attained as of year-end.

Looking at our balance sheet, we ended the quarter with cash and short-term investments of $541 million. Cash flow from operations for 2023 was $394 million and cash capital expenditures of $26 million.

Back to you, Jim.

[Jim Gattoni, executive]

Thanks, Jim. We entered 2023 with a challenging freight environment and very difficult year-over-year comparisons coming off of record 2022.

Landstar's revenue performance through the freight cycles that occurred over the past 4 years ultimately set the stage for where we are today.

From the 2022 second quarter at the start of the pandemic, to the record revenue Landstar achieved in the 2022 second quarter, sequential quarter-to-quarter revenue trends were above seasonal norms. That revenue up cycle lasted 7 quarters.

Through the 2023 fourth quarter, quarter-to-quarter revenue has now decreased below historical seasonal trends for 6 consecutive quarters from the record revenue set in the 2022 second quarter. Generally, in the ordinary course of our business, we experienced down cycles that drive revenue from peak to trough as well as up cycles that drive revenue from trough to peak, with each peak and trough being higher than the last.

In the case of either down cycles or up cycles, freight cycles tend to move from peak to trough or trough to peak over 6 to 8 quarters. These cycles are typically driven by 3 main factors: the level of industry demand for freight services, the level of availed truck capacity and the differential between industry-wide contract and spot pricing at any given point in time.

Given we have been in a down cycle for 6 consecutive quarters, we expect to begin to see above normal seasonal revenue growth around midyear 2024.

Currently, we expect first quarter 2024 revenue per truck load and number of loads hauled via truck to track in line with seasonal norms following the 2023 fourth quarter. This expectation is driven by the trends in revenue per truckload and truckload volume in the first several weeks of January, and the weaker-than-normal peak season in the 2023 fourth quarter.

Given those expectations, we anticipate revenue in the 2024 first quarter to be in a range of $1.1 billion to $1.15 billion and diluted earnings per share to be in the range of $1.25 to $1.35. This earnings estimate anticipates variable contribution margin ranging from 14.5% to 14.7%.

Please note that the variable contribution margin in the first quarter is most often the highest variable contribution margin of any quarter during a given year. This is typically attributable in large part to mix, as BCO revenue, which is a higher variable contribution margin than other modes, often contributes a higher percentage of revenue in the first quarter.

Higher variable contribution margin on third-party truck brokerage revenue in the first quarter compared to the following 3 quarters also may contribute to historical seasonal trend, as the first quarter is typically seasonally softer than the following 3 quarters.

The expectation of a cycle upturn midyear suggests Landstar could experience increasing demand, a shift in mix towards truck brokerage and somewhat of a tighter truck capacity market as we move through to 2024. As such, the first quarter variable contribution margin included in the first quarter guidance is not representative of what we expect for the full year.

Based on current assumptions for 2024, we expect variable contribution margin for the full year '24 fiscal year to be below the first quarter by 50 to 100 basis points. As previously mentioned, the macro freight environment softened significantly throughout 2023 as compared to the dynamic driven demand that continue to drive freight markets in the early part of fiscal year 2022.

Regards to a less robust freight environment and inflationary pressure of Landstar of labor, equipment and insurance costs, the resiliency of Landstar's variable cost business model continues to generate significant free cash flow and financial returns. Last our achieved free cash flow of $368 million in fiscal year 2023 and ended the year with a stronger balance sheet than ever before.

2024 has its work cut out for it, due to continuing soft conditions in the freight environment. Nevertheless, we have been through many business cycles before, and we still expect nothing less than 2024 being a terrific year by prepandemic standards.

Before I open the questions, I want to put a little more color around the first quarter guidance. We often refer to seasonal patterns as it relates to short-term trends quarter-to-quarter. And the seasonal patterns, when you look at the more inputs to a financial metric, the more volatile that season pattern would be.

For example, when we look at truck revenue, we relate to seasonal patterns. There's only 2 inputs to truck revenue. It's revenue per load and it's the number of loads hauled. So it tends to, in the short term, be less volatile and things like EPS.

When we look at EPS, there are more inputs for EPS, whether it's the change in variable contribution margin from one quarter or our changes is in what tends to be the most volatile numbers in our P&L below the variable contribution line, which is insurance and our variable compensation programs.

So when we look at our trends and we look at the first quarter guidance and compared to the fourth quarter, we're kind of in line with the revenue trends seasonally. And again, seasonally from 2015 to 2019. But some of the trends somewhat when you look at EPS, and that's generally attributable to one is we're looking at a variable contribution margin in the first quarter that's slightly below the fourth quarter, and it's really driven by the fact that we are looking at the BCO revenue in the first quarter to be the same as the fourth quarter, where typically is higher in the first quarter than the fourth quarter. And that's due to a drop off in the fourth quarter of BCO.

So we're anticipating a slightly lower variable contribution margin in the first quarter compared to fourth quarter, which is not a norm. And then you're also dealing with some -- the variable compensation programs in the first quarter, along with a little bit of CEO transition cost that wasn't necessarily in the fourth quarter.

And then when I Look at it and I look at EPS falling off from the fourth quarter to the first quarter, it's more in line with 2015, 2016, 2017, because the seasonal pattern in 2018, if you recall, it was really driven by the ELD mandate when actually the fourth quarter of 2017 compared to 2018 was at abnormal. The 2018 was above expected performance. And in 2019, we just had -- we're coming off a very high set of compensation in 2018 and there was making the comp there, the 2019 comp to the fourth quarter much easier.

So that's where we're looking at the EPS. We're looking at about a 20% decline from the fourth quarter to the first or to the midpoint, which is really more representative of what we're anticipating and things other than the top line.

And with that, I will open to questions.

[Operator]

[Operator Instructions] And the first question is coming from the line of Brian Ossenbeck of JPMorgan.

[Brian Ossenbeck, analyst]

Jim, maybe you can just give us some color on the trends in BCO? You mentioned the turnover and a couple of reasons behind that and why it was up. Where do you see that sort of bottoming out? Is there a risk that the longer this lasts maybe into that 8 quarter plus range that they just don't seem to come back as quickly or maybe come back with a lag? Really trying to understand that as it relates to just the leverage and the ability to grow in the model, that would be helpful.

[Joseph Beacom, executive]

Brian, this is Joe. I'll answer that question. So yes, so we've seen the BCO count decline at a pretty good clip. And I think as Jim mentioned in his prepared comments, a lot of that is just the duration of the down -- trending down. And also the fact that costs are up perhaps more than the rates are able to support.

And that's kind of what we've seen over the course of the last 4 quarters, and it continues into the first quarter.

If we go back, we've seen some quarters whereby it's gone up pretty substantially as well. So I think the comp can be reactive, but the fundamentals have to be there.

If I take you back to '17, we were up 250 -- up -- over 900 in 2018, up 750 in 2020, up 873 in 2021. So I think it speaks to the fact that the BCO capacity will come back into the model, but the fundamentals have to be there. And right now, I just don't think the fundamentals are all that compelling.

And if you look at some of the reasons for the departures, I think that helps us kind of put some color around that.

The single biggest reason for departure in full year 2023 was maintenance costs, inability to make repairs. So if your financial viability is questionable or you're marginally profitable as a BCO and you have a significant maintenance expense, you just can't cover it. So you go to the sidelines. And that's a full 20% of our terminations in 2020.

So I think that [ speaks ] 2 things. One, I think the difficulty in the environment for BCOs, but also the fact that when some of those things improve, I think the model can be resilient and grow as we have in the past.

So I don't think it's anything that's systemic going forward. The interest to come on at Landstar is still there. I just think it's really a reaction to capacity leaving the market overall as it is. Small carriers across the landscape or leaving the market in rapid fashion. We're not immune to that. And so that's happening. I just think they'll continue to look for opportunities to come back in when the freight market improves, and we kind of move our way out of this freight recession.

[Brian Ossenbeck, analyst]

Great. Maybe, Jim Gattoni, congrats on retirement. Best luck in the next phase. Maybe you can just give us a sense of the transition costs you mentioned there. It seemed like it was an impact worth calling out in the first quarter.

[James Todd, executive]

Brian. This is Jim Todd. So from a sequential standpoint, just related to SG&A, when you look at the reset of the variable compensation programs that Jim spoke to, coupled with the CEO transition costs, it's about a $5.9 million sequential headwind or about $0.12.

[Brian Ossenbeck, analyst]

Okay. I appreciate it...

[Operator]

We have the next question coming from the line of Bruce Chan of Stifel.

[J. Bruce Chan, analyst]

Jim, congrats on the retirement there. I just want to ask a question on the substitute line haul. Jim, you talked about the weak peak this year and the impact on this end market relative to some of the others. But I just wanted to get your sense of whether this is a temporary thing related to this particular down cycle or whether this might be more of a structural issue, since we've heard of some big line-haul consolidation initiatives that some of the big traditional customers during this period. So any commentary there on the cyclicality versus structural weakness of substitute line haul?

[Jim Gattoni, executive]

If you look pre-pandemic, I wouldn't call it structurally weaker. It is weaker, but not to the degree it sounds because we're coming off a tremendous 2 years of substitute line haul, where those parcel carriers really needed us to jump in. There was so much stuff coming through the network.

So -- for us, I don't necessarily think it's structural. I think it's just a downturn at peak season. And I think I would anticipate that you're going to see a little bit of improvement going into the fourth quarter next year, because it's -- I've been here for quite a long time, and it's about the most abnormal peak season I've ever seen with the softness. So it's -- I don't believe it's structural.

[J. Bruce Chan, analyst]

Okay. Great. Appreciate that. And just a quick follow-up here around your comments on unsided rates. I don't know what your sense is of what's going on there. Is that just industrial lagging the recovery in some of the other segments of the market? And then is there anything you're seeing with regard to a big consolidation in the space that was recently announced?

[Jim Gattoni, executive]

Look, I think it's more demand than it is a consolidation or ending changing in the marketplace right now. We see -- one of the things I talked about is the revenue per mile on the flatbed, dropping as we move through the quarter. And it was just -- for us, it was softness in some of our customers, but I think it's just an industry-wide thing.

I think if you look at what happened in industrial production and manufacturing production in December, it was actually a positive for the first time in about 12 months. And I just think that hasn't transpired into the freight dynamic yet. We do expect that to continue to be relatively soft at least through the first quarter.

But again, it has nothing to do with competition or changes in the industry dynamic. It's all just a little bit of softness coming through the flatbed market with 12 -- yes, 12 months of consecutive decreases in manufacturing.

[Operator]

We will now move to the next question coming from the line of Scott Group of Wolfe Research.

[Scott Group, analyst]

Best of luck to Jim. So you made a comment that you think that 2024 will be something like a really good year relative to pre-pandemic standards. When I look at the guidance for Q1, you've got revenue still above 2019 levels, but now the earnings below and the margins, like at the lowest in like over a decade. So is Q1 a unique quarter in that the earnings and the margins are so far below? Or I just want to understand what you said on the prepared comments relative to the guidance.

[Jim Gattoni, executive]

Yes. I think if you look at 2019 pre inflation, if we didn't have inflation, would be sitting on the same margins. But especially when you look at insurance. If you remember what happened to us in insurance, we renew May 1 of every year our basically auto trucking liability policy, which gives us the coverage on trucking accidents.

If you go pre-May 1 of '19, our premiums on that were about $8 million to cover us up to pretty significant, very, very good coverages. And as you know, the nuclear verdicts has blown up that market. We are now probably above $30 million for that coverage. So you're looking at significant inflation on the insurance line compared to pre-pandemic levels.

There's also inflationary stuff in almost every line item. I don't want to sit here and talk about inflation too much. But cost of trailers, maintenance, stuff like that at 15% to 20%, you've got wages up more than historically over the last 2 or 3 years. So I think there's inflation in there, and this organization is going to try and bottle back to get to that to get back to that 50% margin.

I mean I think that's clearly going to be -- I would guess it's going to be a goal of the organization to get back there.

The other thing we got to is, we went through this tech modernization and upgrades to everything we possibly could do here to provide value to the agents and the capacity out there. So there's been some tech spending over the last 5 years has been a little higher than normal. So there's also that.

So there's -- if you look at those costs, there's a little bit more cost in the organization to offset this year as compared to 2019.

[Scott Group, analyst]

Okay. And then it strikes me that everyone has been saying, we're in this really, really bad market, but the capacity is taking longer to come out than we would have thought, and maybe that's why the market hasn't tightened up at all yet. But your specific model is seeing something different in that your BCO count is now below where it was before the cycle started. And I don't know that we've seen a cycle where that's happened where your trough is -- on BCO is below the prior trough. So why do you think your specific model is seeing something more extreme in terms of capacity reductions relative to the overall market?

[Joseph Beacom, executive]

Yes, Scott, this is Joe. That's a great question. I think one of the things -- and it kind of is embedded in that 20% of our turnover as it relates to major repairs to equipment. We run -- we tend to run older equipment here. And I think that the fact that repairs have been very, very challenging and very, very expensive has made that number pretty significant and perhaps we're a little bit different in that regard. So I think when those things happen, it hits us a little bit harder. That is probably the single biggest explanation for that, just based on why people are leaving.

And I just -- the broader market, I find it hard to read the broader market and to get an accurate assessment to know whether we're down more. I think we're down below where we were in 2019. I completely agree with that.

Yes, it's a little bit puzzling because the age of the fleet as far as BCOs is about the same. It's really -- maybe they're on the leading edge, maybe that are on the leading edge of coming back to, we hope so.

It's -- the relationships that we have when they depart are not bad. We don't believe, as I mentioned on the prior question, I don't think they're leaving, maybe for long term. There's only a small -- I think it was around -- I think it's like 14% of those that left actually were getting out of trucking. So I think they're there to come back. I just think they're taking the opportunity. If they can't make a reasonable living and they can't -- and they've got other options, which perhaps they do. They're sitting on the sidelines waiting for a more compelling case to come back.

[Scott Group, analyst]

Yes. I mean I would just -- I'm just thinking about it this way. Like your BCO count is, again, now well below where it was in '19. Your approved and active brokerage carriers are still well above, right? So it just feels like you're seeing the brunt a bit more than the overall market.

[Jim Gattoni, executive]

I think one of the things you got to look at too is the type of freight we hauled. We are heavy spot business. And if you heard -- I talked about that 3PL nontrucks up being at 42%. So you got to look at kind of what they're hauling in our network, too. And some of that -- when you look at that overflow type business that irregular nonroutine nonrepetitive type freight, that market clearly is a little bit softer than you do on the contract world.

So the contract trucks stay around a little bit longer than these guys, because we're dealing with a drop-off in that type of freight. I think that has a little bit to do with it.

[Scott Group, analyst]

Okay. And if I could just ask one last thing. Like this recent improvement in spot just to start the year. What's your view? Is this just weather? Is it sustainable in any way? How are you thinking about that?

[Jim Gattoni, executive]

I'd like to believe at the beginning of that 6 to 8 cycle turn, right? One thing I would point out is -- and this isn't quite a green shoot, but we'll give you a little bit of a -- we had record truck brokerage spreads at the beginning of last year, right? So that means -- that meant the capacity environment was very, very loose.

Starting after the second quarter, coming into the third and fourth quarter, we saw that compress a little bit. We're still seeing -- so I think that would tell you that there's a little bit of pressure coming from the trucks to us to pay them a little bit more.

So in that environment, that -- it kind of holds to say if they're pushing us more on rate from the truck side that spot rates, that's not, it's not a weather thing. It's the beginning of maybe flattening or maybe what we're seeing is normal seasonal upticks coming in the second -- mid-2024. So I look at that the spreads on the third-party truck pay.

[Scott Group, analyst]

Best of luck, Jim.

[Jim Gattoni, executive]

Thank you.

[Operator]

We will move to the next question coming from the line of Jack Atkins of Stephens.

[Jack Atkins, analyst]

Okay. Great. And Jim, I'll echo everyone's [ sentiment ] at. Hopefully, now you'll have time to focus on your golf game. But I guess kind of shifting gears here, I would maybe just like to kind of think about some of the inflationary pressures in the business this year. And so maybe this is a question for Jim Todd. But I guess as you sort of think about incentive compensation accruals, can you maybe help quantify that for us a bit? And then elsewhere, could you maybe talk about the cost inflation that you may be seeing in '24 versus 23, just so we can kind of have the full year calibrated correctly on an expense perspective?

[James Todd, executive]

Jack, I'd be happy to. With respect to full year expectations, the stock of computation under variable programs, you guys have heard me talk about hypothetical $12 million reset, '24 versus bare case '23. Based on where we closed out fourth quarter of '23 and adding on the impact of some CEO transition, my current base case for G&A there is a $17 million headwind year-over-year. And that $17 million is pre any other, what I would call, normal wage or benefit inflation.

If we look at other operating costs in 2023, we had a tough year there, a very challenging year. Our contractor bad debt provision, which is one of the lumpiest line items in there was a record, and it was about 4.3 million over trailing 7-year trend.

So with a cycle inflection midyear and hopefully, that truck turnover rate mean reverting, you could have a $3 million to $4 million tailwind there, and we should bring the register on hopefully $2 million more a gain. So that's $5 million of tailwinds on that line. Plus we should have a smaller average size of the trailer fleet and the lower average age. So that could be a little bit of M&T good guys, partially offset by some software development rollout. So that could be some tailwinds there.

And then finally, on depreciation, we were very disciplined in 2023 on the CapEx side, but we're starting to take deliveries again of new van trailers. And the cost per trailer headwind there is probably about 20% to 22% as compared to prepandemic. So you'll start to see that ramp up sequentially prior second quarter.

[Jack Atkins, analyst]

Okay. No, that's helpful, Jim. And I guess maybe kind of taking a step back, when -- if you guys think about it, there's been a lot of inflation in the business, Jim, to your point. And then as we kind of think about whether it's insurance, just structurally higher cost there, the technology investments that you've made, cargo theft is becoming a much bigger issue, to your point, Jim Todd.

So I guess, do you feel like that the sort of the traditional revenue splits and that it's been sort of embedded in Landstar's business for years, are still kind of the right way to kind of split the revenue moving forward? Or do you think there needs to be some changes there, just given you're bearing a lot more cost today in terms of overhead to support your agents and your BCOs than you've had to do in the past.

[Jim Gattoni, executive]

No. I wouldn't imagine we're going to change splits. Our role here is to support and add value to the agent community and the BCOs that are out there. And we always rely on the truck -- the price to rise with cost rising. And we still anticipate that's going to happen.

Now those costs clearly are squeezing us today. But over time, every trucking company out there is dealing with the same stuff we're dealing with, and eventually it's going to drive rates up to cover those costs.

I just -- we're in a we're in this -- I don't want to call it a trough, because who knows where the future brings over the next 6 or 8 months. But we've always seen it. We've seen the turns, right? I've been here for 27 years, and the pricing on truck generally catches up to the cost inflation over a year or 2. So we expect that to happen. And there's no thought from this guy sitting here on his last call that we would adjust any of the splits to either the trucks or to the agents. It's our business model. It's what we do. Those costs are what we do to support the network.

[Jack Atkins, analyst]

Okay. Maybe just following up on that really briefly, though. I mean, would you think about -- historically, I thought about the incremental margins in terms of incremental gross profit dollars falling to the operating income line as being about 70%, 7-0. Would there be any reason why that would be different in the next up cycle, Jim?

[Jim Gattoni, executive]

I don't believe so because unless you have inflationary pressures or to do it what they did over the last 2 years, that put a lot of pressure on that 70%. But if we get back to a normalized 2% inflation and all that type of stuff, I would think that 70% would still be a valid goal in the organization.

This infrastructure is built. But clearly, over the last 5 or 6 years, my goal was to modernize the technology and give them better tools. And they're pretty far down the path there. So I would think that, that 70% goal would be a nice goal for 2025, given more reasonable inflationary pressures in the organization.

[Jack Atkins, analyst]

Jim, congratulations.

[Jim Gattoni, executive]

Thanks, Jack.

[Operator]

We will move to the next question coming from Ravi Shanker of Morgan Stanley.

[Ravi Shanker, analyst]

So, there's been a lot of questions on the BCO. So maybe you can just shift gears a little bit. Let's talk about insurance. I think you've seen a number of companies across the industry kind of point to huge inflation in that area for next year. Seems like an ongoing structural issue. You guys mentioned in your remarks. I would love to get a little more detail here. I think if you're exposed to that kind of more than a few others, it's gone up to 5.5%. What's the long-term future of that business? Anything that you guys can do or the industry needs to do to get that under control?

[Jim Gattoni, executive]

Yes, to get it under control. We still have to stop [ platelets ] lawyers from coming up with reasons to take money from us. I mean, clearly, we accept liability in the event that our accident -- sometimes you end up tangled up in something that's not your fault. But we feel we're very fair in settling our accident claims.

But we've been dealing with the 2019, May 1, as I said, May 1, 2019, and those premiums are actually after the 2019 renewal when I think the premiums went up almost 200%. We still see a little bit of creep in it. But I don't -- I'm not sure I understand why there's various carriers out there that are just talking about it today and why they're getting hit with these big claims.

The Landstar has been dealing with this nuclear verdicts for 5 or 7 years. We dealt with the premium increase in 2019. So we're -- it's kind of built into the model now. Clearly, we could have a nuclear verdict hit us that would create more volatility in the line. But the instability of that line that we've experienced over the last 5 years is -- I don't want to say it's going to stabilize. It's still difficult getting insurance companies to carry trucking companies starting -- we got a renewal coming up May 1.

But from an -- I think we've dealt with the majority of the inflationary pressure on the insurance line. Are we going to still have some? But I think most of it's behind us, might it still be 5% to 10% a year? Yes, it could be. But the big hit was '19, '20 and '21 is really where we saw it.

What we do here is if we have an accident in a quarter, we put that accident up, and we try and get it -- from an accounting standpoint, we try and get the quarters to the number that we think it should be. And clearly, we have unfavorable development, in some cases, and that carries over, and you can see that in our financials.

But I would say that we still struggle with getting renewals, but the pricing seems okay, and there's still some participating carriers out there. And we're also a very safe organization. We we probably lead the industry on accidents per million miles. We sit at like 2.1, where the average is like 4. So we do get some favorable treatment when it relates to that.

But I would say, based on the long answer was -- I think we'll see more stability in that going forward than looking backwards.

[Ravi Shanker, analyst]

Got it. That's super helpful. Maybe as a follow-up, Jim, congratulations on an amazing career. I'd love to get maybe just broad reflections from you on how the industry has changed, what you've seen over the years, surprises, advice for the future, et cetera?

[Jim Gattoni, executive]

Why the industry changed significantly when I step away? I'm just saying, the whole industry, the entire industry is going to change when I step away.

No, I think insurance was one. That was a big change we saw coming along. I think one of the most interesting things was the digital players who are bragging about Ubering the -- I'm going to be the -- I'm going to Uber the agent base away, I'm going to get rid of all the broker carriers.

We were prepared if that actually happen. We never said it was not a viable business. I still believe that there is some kind of play for technology, only in the industry if you're hauling marbles. But when you're putting expensive freight on a truck, you want someone watching it, right? So we've said that all along.

The other thing we always talk about too is we have the technology everybody was selling. I mean we have an app on the phones where the trucks can access. So that's the one thing that -- it came and went in -- during my career here. Back in the early 2010, 2011, we were going to be Uberized, and now you've seen what's happened in that industry.

So insurance was a big one, as I mentioned. But other than that, it's been a very consistent business for 28 years. We've -- and we've always focused on the core, and we watch the disruptors and we react appropriately to protect our agent base in our network.

But it's been a great ride. And going forward, I see this model is just continue to thrive. I mean, because I think they got -- there's a great management team here, a lot of experience. The depth here is -- everybody's got a 25-year plaque on the wall. So me departing this organization doesn't change a thing. But...

[Ravi Shanker, analyst]

Thanks, Jim. We'll miss you.

[Operator]

We will move now to the next question coming from the line of Bascome Majors of Susquehanna.

[Bascome Majors, analyst]

I wanted to go back to Jack's question on the splits, but from another angle. I think in 2020, you actually increased the incentives that you paid to the BCOs to really kind of keep them intact in a very difficult period for the transactional nature of their business. I mean, is there some incentive or talk or thought about maybe doing that to stem the decline for a temporary period and keeping the network more intact than it has been? Just it's -- as we see the decline in BCO count accelerate, as we get deeper into the cycle, I think people would love to hear more about kind of some of the creative things you're putting together to maybe stem that.

[Jim Gattoni, executive]

Yes. Unfortunately, I can't speak to the next -- for the next CEO about that. We haven't changed our split in -- since I've been here pretty much tweaked them maybe a little bit. So I would probably defer that conversation for at least tomorrow or when you know you can call Frank when he's here in the office and ask his opinion. But that one is tough.

Going back to the 2020 move that we made, it was the suddenness of the drop in freight demand that actually had us react. It wasn't this gradual slowdown in the environment. It wasn't normal economics. So that's why we -- and what we did back then what I believe is we added $50 per load to the BCO, plus $50 per load to the agent to compensate them in an environment that basically the door closed on the freight environment suddenly. So we did that for 3 or 4, maybe 6 months, I don't really remember.

But that was a reaction to a very abnormal environment. This is kind of a trending downwards. And I think it's a great discussion that the management team is going to have with the new CEO coming in. I don't want to say he won't do it, and I'm not saying he will do it, but I think that's a conversation we had later.

[Bascome Majors, analyst]

And thoughts on the stock and your investment in that this year, just kind of where you are in the matrix and what we can expect from a buyback versus special dividend balance from where we sit today?

[James Todd, executive]

Bascome, you know our preference, I think, Gattoni put it best several years back when he said our 2 favorite things to do here are work hard and buy back stock. And based on the conversations I've had with Frank so far and what I've read about him, I think he's going to fit in just fine.

[Jim Gattoni, executive]

One thing to touch on to, is if you looked at the fourth quarter buybacks, we bought -- yes, we bought 239,000 shares back. We probably would have been in more except for the confidential, the insider information about me departing got -- it was coming almost finalized. So we had to kind of get out of the market.

[Operator]

We will move now to the next question coming from the line of Amit Mehrotra of Deutsche Bank.

[Unknown Analyst]

This is [ Ben Moore ] calling in for Amit. I wanted to ask, how do you expect your cost structure to trend in 2024, including incentive costs? It looks like if you apply normal seasonality on loads and revenue per load for the balance of the year, we're getting to 2024 EPS at below $6. Is that the right way to think about it? And can you provide any other color on costs?

[James Todd, executive]

Ben, it's hard enough for us to go 90 days out than a full year out. So the big one that I'd call out is that $17 million discrete headwind on the G&A line and the couple of tailwinds I mentioned on the other operating cost line. Insurance 5.5 is the number we're using. That's our best guess. We'll continue to revisit that each quarter.

[Unknown Analyst]

Okay. Appreciate that. And maybe just as a follow-up. We're seeing -- we're still seeing truck capacity based on DOT registrations, very high with only very minimal exits in the past couple of months and some economists are projecting stimulus cash to last possibly through this year and maybe even into the next year. So we could be in for a very loose capacity for longer. Would you guys agree? And what are you seeing or hearing on this?

[Joseph Beacom, executive]

Yes, Ben, I watched the same net revocation data that you do. And I do think that the decline in the market for capacity it seems slow. But one of the things I don't think it accounts for is, I don't think it necessarily track carriers that have gone from 10 trucks to 3 trucks or 2 trucks. I think maybe there's a little bit more exits than we can count in just the DOT data. But I also agree that it's hanging around longer than I think many and myself included, thought it would, just based on what we said earlier, the duration of the decline and the severity of the decline.

But -- so I don't -- I have no crystal ball to know how long it's going to last and people will stick around. It just doesn't seem like with the cost pressures that exist that it could last another year, doesn't seem to make -- doesn't seem to ring true with me. But I guess we'll see.

[James Todd, executive]

Yes. And Ben, I would just add to Jim's comments earlier, with respect to those net revenue spreads on brokerage that we watch, first quarter 2023 was the widest quarter I have on record going back 52 quarters. We compressed gradually 1Q into 2Q, 2Q into 3Q, but ended up compressing 55 basis points third quarter to fourth quarter. So again, that could be an early read that maybe things are starting to firm up a little bit.

[Unknown Analyst]

Great. I appreciate the insights.

[Operator]

We will now move to the next question coming from the line of Elliot Alper of TD Cowen.

[Elliot Alper, analyst]

Great. This is Elliot in for Jason Seidl. Revenue per load, maybe on the ocean side, stepped up 13% sequentially. Curious if this was just some seasonality or if you're seeing some capacity tightness due to the situations in the Red Sea or Suez. If so, would appreciate maybe your thoughts on how this could affect the business going forward or maybe what you're seeing through January?

[James Todd, executive]

Elliot, for us, it's a little bit of a tough read there because our ocean revenue per load, it's not just container costs. Our RevPAR load also includes things like inland transportation to and from the ports, custom fees and duties. So it's niche with respect to the agents to participate in the kind of project stuff that we're working on. So I wouldn't use that as a read through.

[Elliot Alper, analyst]

Got it. Understood. So maybe a follow-up on the LTL side. [indiscernible] down 15% in the quarter. Can you maybe talk about the current LTL environment? Maybe what your expectations are first quarter, first half of the year, maybe what you've seen through January, maybe at some of these new terminals from [indiscernible] come online?

[Jim Gattoni, executive]

Yes. As you know, we don't really own any assets and we don't have any terminals. So we're kind of more of a niche play in there, where we take our truck customers, and we do some LTL for them. So in a market -- the market for us is really tied to some specific customers. So we have a little bit of customer softness in our top 10 customers, and we anticipate that's going to continue on. But being 3% of our business and really specific to maybe 20 of our agents or 30 of our agents doing a bulk of it, it tends to just move more in line with our customer base than with kind of industry dynamics.

It's almost a little like the ocean pricing. Our ocean pricing is in -- is not an indicator of what's going on in the industry. It's more special project type stuff. LTL is a little bit similar to that as we provide a little bit more special hands-on service on the LTL side for certain of our customers.

[Operator]

We will now move to the last caller to ask a question coming from the line of Stephanie Moore of Jefferies.

[Joseph Lawrence Hafling, analyst]

This is Joe Hafling on for Stephanie. I'll echo everyone's comments, congrats to you, Jim.

I guess I just kind of maybe wanted to circle back lastly on the BCO count. We've talked previously about broadly higher highs and higher lows. How do you see that dynamic in the context of sort of the BCO count under pressure now. And we've talked a lot about what's causing that pressure, but I was curious if there was anything that you could add, as it relates to regulatory definition of independent contractors or anything like that, that might be causing maybe a longer-term structural pressure on the BCO count?

[Joseph Beacom, executive]

Yes. Thanks, Joe. So back to the higher highs comment. We're a great place to be for owner operators who want a lot of freedom and independence. And it's a freedom to be successful and it's a freedom to stay, and it's the freedom to leave. And I think we've seen a little bit of that just with the volatility in the market.

I as I said earlier, I don't think there's anything systemic there. There's interest. I think BCO count will rally as the opportunities are here. I think that we're the best model for that.

Now there is pressure on California with AB5 that's kind of sitting with the judge after the trial to try to make some decisions there. There's -- either with the current administration continues to question what's an independent contractor and what's not. And we keep an eye on all that stuff. We think we're very well prepared. In the case of AB5 in California, we were very proactive. We don't think that's going to be any sort of a negative for us.

If that were to spread across the country for some -- in other states, would we have some work to do? Yes, sure. But we really lost very few BCOs as it relates to AB5, and we would hope that we would have come out similarly, if it were to move to some other states that are kind of on that list of where it might expand.

[Operator]

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

[Jim Gattoni, executive]

Well, first off, I'd like to thank everybody for having this be my longest call in 10 years on my last day in as the CEO, President and CEO of Landstar. So that's special.

But before I sign off on my final last earnings conference call, I want to thank all Landstar's agents, BCOs and employees, for your contributions to Landstar's 2023 performance in a very challenging freight environment. The people in Landstar's unique network of agents, capacity providers and employers are what truly sets Landstar apart in our industry and enable success we all achieve together.

It's been my privilege to have worked at Landstar for the past 28-plus years, and the professional honor of a lifetime to serve as a Chief Executive Officer of Landstar over the past decade.

I'm truly grateful for the opportunity to have been a part of this network of agents, capacity providers, employees, customers and shareholders, as well as a Landstar's Board of Directors, who I have had the pleasure of working with over the years.

I'm highly confident in the Landstar business model and its superior management team, and I know I leave the leadership in good hands as Frank Lonegro assumes the role of President and CEO.

I'll now pass it to Frank for some closing comments. Frank?

[Frank Lonegro, executive]

Thanks very much, Jim. On behalf of all of the agents, BCOs, carriers, customers, employees and shareholders, that you've so positively impacted during your career, our heartfelt congratulations on your retirement. We wish you in hand nothing but the best as you embark on this next chapter of life.

I'm both excited and humbled to join Landstar as its next CEO, and appreciate the Landstar Board giving me the opportunity to lead this great company.

Landstar's unique tech-enabled asset-light agent-based model will continue to be the key to our success. And I look forward to working with the Landstar team to support our independent business owners and drive profitable growth and value for our shareholders.

With that, we'll bring this call to a close and look forward to speaking with you on our first quarter call currently scheduled for April 25. Thank you very much.

[Operator]

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