Old Dominion Freight Line Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2022

There are 17 speakers on the call.

Operator

Hello, and welcome to the Old Dominion Freight Line Inc. 1st Quarter 2022 Earnings Conference Call. All participants will be in listen only mode. Please note, today's event is being recorded. I'd now like to turn the conference over to Drew Anderson.

Operator

Ms. Anderson, please go ahead.

Speaker 1

Thank you. Good morning, and welcome to the Q1 2022 conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through May 4, 2022, By dialing 1-eight seventy seven-three forty four-seven thousand five hundred and twenty nine, access code 8,164,8 The replay of the webcast may also be accessed for 30 days at the company's website. This conference call may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, Regarding Old Dominion's expected financial and operating performance. For this purpose, any statements made during this call that are not statements of historical fact Maybe deemed to be forward looking statements.

Speaker 1

Without limiting the foregoing, the words believes, anticipates, plans, expects And similar expressions are intended to identify forward looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Old Dominion's filings with the Securities and Exchange Commission and in this morning's news release. And consequently, actual operations and results may differ materially from the results discussed in the forward looking statements. The company undertakes no obligation to publicly update any forward looking statements, whether as a result of new information, future events As a final note, before we begin, we welcome your questions today, but we do ask in fairness to all that you limit yourselves Just a few questions at a time before returning to the queue. Thank you for your cooperation.

Speaker 1

At this time, for opening remarks, I would like to turn the conference over to the company's President and Chief Executive Officer, Mr. Greg Gantt.

Speaker 2

Call today is Adam Satterfield, our CFO. After some brief remarks, we will be glad to take your questions. The OD team successfully launched another year by delivering 1st quarter results that included new company records For both revenue and earnings per diluted share, we began the year with significant momentum in our business and expected That we would continue to win market share in 2022. This expectation has already become reality As the 32.9% increase in revenue was the 5th straight quarter where we recorded double digit revenue growth. We also improved our operating ratio to a 1st quarter company record of 72.9%, which drove our 7th straight quarter of double digit growth in earnings per diluted share.

Speaker 2

Our revenue growth for the quarter included a 17.4% increase in LTL revenue per 100weight And a 12% increase in LTL tons per day. The improvements in both freight density and yield Created operating leverage that allowed us to improve our cost categories as a percent of revenue, To long term improvement in our operating ratio and both generally require the support of a favorable domestic economy, We expect to further improve each of these two elements as we work through 2022. Demand for our superior service has remained consistently strong, and we do not see that changing In the foreseeable future based on recent conversations with both our customers and our sales team. We continue to receive feedback regarding the general lack of capacity within the LTL industry. This feedback is not unexpected Given that the LTL industry has seen a net decrease in the number of service centers over the past 10 years, At least for the public group, excluding OD.

Speaker 2

Customers also appear to be dealing with lower inventory balances than they Would prefer, which can result in missed revenue opportunities for them. We have unfortunately heard similar stories from our suppliers And have seen little improvement with their inventories this year. We believe these issues are driving many new customers and increase shipments from existing customers to OD. Despite all of the general industry and supply chain challenges, Old Dominion has continued to maintain our service center capacity to support our customers' growth. This Has been and remains an integral piece of our value proposition and we are well positioned to benefit from the continued Currently have approximately 15% to 20% excess capacity.

Speaker 2

These additions were part of our 2022 expansion plan That targets an additional 5 to 7 new facilities this year. While our service center network is in good shape, We are continuing to work on the other two pieces of the overall capacity equation. We increased our average number of full time employees By 18.5% during the Q1, and we expect to continue hiring additional employees During the Q2 to support our anticipated growth. As the capacity of the OD team increases, We would like to reduce our reliance on purchased transportation. To accomplish this, however, we will need to increase the capacity of our fleet.

Speaker 2

While our 2022 capital expenditure plan includes approximately $485,000,000 for equipment. We are experiencing delays with the delivery of new equipment. These delays were anticipated And limit our ability to effectively match the receipt of new equipment with the expected seasonal increase in our volumes. As a result, and similar to 2021, we will operate existing equipment that would have otherwise been replaced And use purchase transportation as needed to support our growth. As part of our effort to deliver best in class service for our customers, We remain committed to ensuring that each element of capacity is in place to support our ability to win long term market share.

Speaker 2

As we continue to manage through the short term challenges within the current freight market, we will also maintain our focus on long term opportunities for our business by continuing to execute on our long term strategic plan. This plan has helped us achieve a 10 year compound average growth rate in revenue and earnings per diluted share of approximately 11% And 24%, respectively. As part of this plan, we have consistently invested significant resources To support the doubling of our market share over the past 10 years. This has included a significant investment in our OD family of employees To help ensure that each employee is motivated and rewarded for providing superior service to our customers, We believe that consistently providing customers with superior service at a fair price and regularly investing in our people, equipment Network capacity. To stay ahead of anticipated volume growth will support our long term growth initiatives.

Speaker 2

As a result, we are confident in our ability to continue to produce further profitable growth and increase shareholder value. Thanks for joining us this morning. And now Adam will discuss our Q1 financial results in greater detail.

Speaker 3

Thank you, Greg, and good morning. Old Dominion's revenue for the Q1 of 2022 increased 32.9 to a company record of $1,500,000,000 while our operating ratio improved 320 basis points to 72.9%. The combination of these factors resulted in a 52.9 percent increase in earnings per diluted share to $2.60 for the quarter. Our revenue per day increased 30.8% as the Q1 of this year included one extra workday. This growth was balanced between increases in our volumes and yield, both of which continue to be supported by a favorable domestic economy.

Speaker 3

We continue to win a significant amount of market share as demand for our superior service and available network capacity remained consistently strong during the quarter. As a result, the strong during the quarter. As a result, the year over year growth in our revenue and volumes continued to trend above our longer term averages. LTL tons per day increased 12% and our LTL revenue per hundredweight increased 17.4%. While changes in our freight mix contributed to the increases in this yield metric, the 10% increase in our LTL revenue per hundredweight, excluding fuel surcharges, Reflects the success of our long term pricing strategy.

Speaker 3

Our consistent strategy is designed to offset cost inflation, while also supporting Further investments in capacity are focusing on the individual profitability of each customer account. On a sequential basis, revenue per day for the Q1 increased 1.2% as compared to the Q4 of 2021, With LTL tons per day decreasing 1.4% and LTL shipments per day decreasing 2.2%. Our revenue per day performance during the Q1, both with and without fuel surcharges, exceeded our 10 year average sequential trends, Although our volumes were below our 10 year trends. It is important to remember, however, that our 10 year average trends include the doubling of our market share. As a result, there may be quarterly periods where sequential performance may be below our 10 year trends despite solid year over year performance.

Speaker 3

The Q1 is a good example as we believe we won a significant amount of market share and produced solid profitable growth as a result. The monthly sequential changes in LTL tons per day during the Q1 were as follows: January decreased 5.8% as compared with December February increased 5.1% versus January, and March increased 3.6% as compared to February. The 10 year average change for the respective months are an increase of 1.6% in January, an increase of 1.7% in February And an increase of 5.6% in March. While there are still a few workdays that remain in April, our revenue growth continues to be very strong It reflects the favorable demand environment described earlier by Greg. Our month to date revenue per day has increased by approximately 28% When compared to April of 2021, we will provide the actual revenue related details for April in our Q1 Form 10 Q.

Speaker 3

Our Q1 operating ratio improved to 72.9 percent with improvements in both our direct operating costs and overhead costs as a percent of revenue. Within our direct operating costs, improvement in our salaries, wages and benefit cost as a percent of revenue of revenue was primarily due to the increase in the cost of diesel fuel and other petroleum based products. We improved our overhead cost as a percent of revenue during the Q1, primarily by leveraging our revenue growth and controlling discretionary spending. As mentioned on our Q4 call, we expect our core inflation, excluding fuel, to be between 4.5% to 5% for the year, with higher in the first half of the year is expected to moderate in the back half. We believe our fuel surcharge program is effectively offsetting the increased cost of our fuel, Our yield management strategy is effectively offsetting cost increases in other areas.

Speaker 3

As we continue to experience cost increases related to our real estate network As well as with our equipment, parts and repairs, it will be critical to maintain our focus on productivity, while continuing to control discretionary spending minimize the overall effect on our cost per shipment. Old Dominion's cash flow from operations totaled $388,700,000 for the Q1 Capital expenditures were $93,700,000 We currently anticipate our capital expenditures to be approximately $825,000,000 this year, Which includes $300,000,000 to expand the capacity of our service center network. We utilized $438,400,000 of cash for our share repurchase program and paid $34,200,000 in dividends during the Q1. The total amount for share repurchases includes a the Q1 of 20222021, we currently expect our annual effective tax rate to be 26.0 percent for the 2nd This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.

Operator

And the first question today comes from Jon Chappell with Evercore.

Speaker 4

Thank you. Good morning, everyone.

Speaker 5

Good morning.

Speaker 4

Adam, if I could start with you, I mean, the last few quarters, you can kind of throw all of your historical seasonal OR trends Out the window, just very robust pricing environment, you're doing much better than 10 year trends. As you start to anniversary some of these Big pricing and tonnage moves over the last several quarters. Do you envision a return to kind of the long term trend margin seasonality? Or some of these Vast market share gains that you're making are going to continue to make those trends in a more favorable momentum?

Speaker 3

Well, I think that certainly some of the quarters those trends are very consistent. We've talked before about the first quarter And the 4th quarters can be a little bit more movement versus the average, just given the variability at times with revenue Trends in those periods and certain costs that trend in various ways in those periods as well. I think we've certainly performed very well the last couple of years and produced a lot of operating ratio improvement. I think regardless of the seasonal sequential changes from quarter to quarter, we always talk about the Over the long term that we generally expect, we've seen and would expect to continue to see 100 basis points to 150 basis points of operating ratio improvement. And a lot of that gets back to our focus with our pricing philosophy.

Speaker 3

We try to achieve Revenue per shipment growth of 100 to 150 basis points above our cost per shipment inflation. And when you look over the last 10, 15 years, Including fuel in both of those metrics, that's what we've been able to achieve. So certainly, some years when we've got significant revenue growth like we Saw last year and certainly in the environment that we're in right now, where we're growing revenue at about 30% In the Q1, a little over that. Certainly, it's a good environment to keep driving improvement in the ratio may be above those longer term averages, but over time, that's certainly part of the focus is to continue with that Same type of mentality with our yield management philosophy.

Speaker 4

Got it. Thanks, Adam. Follow-up Greg, last quarter you specifically called out some of the issues you've had with some of your suppliers being unable to get the equipment that you would have liked to have To grow and maybe some of the elevated maintenance expense associated with that, but given how light your CapEx was in 1Q visavis your full year number, Are you expecting some of these supplier constraints to kind of lift, so you'd have a very back end loaded spend and get the equipment that you're looking for by the end of the year?

Speaker 2

Yes, I'm not sure it's going to get a whole lot better. I mean, the equipment that we had planned to receive this year was planned to be delivered later in the year than we would normally take it. Typically, we would start taking trucks, especially Late in the Q1 on through the early fall and then the delivery would pretty much deliveries would pretty much be over. We would have what we had purchased for that calendar particular calendar year. And this year, it's just it's a later build From the get go, that's what we were told.

Speaker 2

So that's the difference. It's just coming a little bit later. We're getting a little bit

Speaker 4

Thank you, Greg. Thanks, Adam.

Operator

Thank you. And the next question comes from Jack Atkins with Stephens.

Speaker 6

Okay, great. Good morning, Greg. Good morning, Adam. Thanks for taking my questions.

Speaker 7

Hey, Jack. Good morning, Jack.

Speaker 6

So I guess maybe to start, Adam, if we could go back To your April commentary for a moment, obviously there are a lot of changes taking place in the freight markets kind of broadly. I was just maybe curious if you could April, because you kind of were kind of going into the month or just relative to normal seasonality, just sort of curious if you could maybe kind of give us an update there, how the month is trended versus plan?

Speaker 3

Yes. It's, I mean, a continuation of strong revenue growth. 28% is about where we are, Continuing to see strong yield performance, which that has certainly continued throughout the first Quarter and same types of trends into April for sure. So it's a reflection of our ability We continue to win market share. We talked about it earlier that as we continue to have conversations with our customers And with our sales team, we continue to get positive feedback as it relates to demand for our service.

Speaker 3

Many of these conversations center on the lack of general capacity within LTL. And LTL is different from truckload, and I think a lot of shippers have seen the value of LTL and certainly the e commerce effect on supply chains. There's been movement of freight within LTL that we believe will stay and we believe will continue to see tailwinds Over time for the industry, and we think we can be the biggest participant in winning share as that industry continues to grow Much like we've been the biggest share winner over the last 10 years. So certainly, that's our plan is to keep investing ahead of growth And keep delivering service value that's better than anyone else in our industry. We've got an unmatched value proposition and our customers continue to respond to that.

Speaker 3

And So that will be our focus is to continue delivering best in class service and making sure we've got the capacity to support our customers' growth.

Speaker 6

Okay. No, that makes sense and that's great to hear on April. So I guess maybe for my follow-up question, just kind of going back to John's Point on operating ratio and sort of thinking about seasonality into the Q2. Typically over the last couple of years, you guys have Between 350 basis points to 400 basis points of sequential improvement 1Q to 2Q. Adam, is there anything to kind of keep in mind as we sort of think about this year in

Speaker 3

Sure. Certainly, in the Q1, when you look at some of the sequential changes that we had from 4Q, We outperformed what the normal seasonality was and what we had talked about our target was going to be coming into the Q1 rather from the 4th. And some of the benefits that we saw really a variance From the 10 year trend, we're in our miscellaneous expenses. Those costs were lower. Those normally are about 0.5%.

Speaker 3

They were lower and we got some benefit. You normally see an increase there. General supplies and expenses also were favorable to our longer term trend. And Some of those reflect control over discretionary spending like we talked about. And then some other things were just there's times where you get Some favorability and especially in those miscellaneous expenses and other times where it could go the other way, it's usually 0.5% plus or minus.

Speaker 3

We'd expect some of these items that potentially could increase. And I would just say, if you kind of go back to the 4th quarter And look at seasonality from 4th to 1st and then second, that would have put our operating ratio just above 70. But I can tell you, we'd be pleased with that, but we're really focused on being able to see an OR that starts with a 6. So Anything that starts with a 6 is going to be good by us.

Speaker 6

No, I think that makes a lot of sense. Okay. Thanks so much for the time guys. Really appreciate it.

Speaker 2

Thanks.

Operator

Thank you. And the next question comes from Allison Polakyeck with Wells Fargo.

Speaker 8

Hi, guys. James on for Allison. Actually, just to clarify on the previous question, you expect both those to normalize moving forward and Not necessarily was a reset in this quarter in terms of those expense levels?

Speaker 3

Are you talking about the general supplies and expenses and the miscellaneous expenses?

Speaker 8

Correct.

Speaker 3

Well, like I said, the miscellaneous generally is around 0.5% and it was at 0.2 Of revenue in the Q1. So we would expect that to move back to where it's historically trended. Now again, it's not to say that some of the favorable trends that we saw in the Q1 couldn't repeat. There's a lot of elements that go into that miscellaneous Expense, but it's more normalized around that 0.5%. And then certainly in some of the things in the general supplies and expenses, We could continue to see some increases there as well.

Speaker 3

But no specific Guidance, if you will, to say what that's going to be, but wouldn't be unexpected to see that increase, if you will.

Speaker 8

Got it. Just wanted to clarify. And you'd called out that you had 15% to 20% capacity in terms of service centers and you also had issues with the equipment deliveries, but overall, how much capacity do you think you do have in your network at the moment across Sort of the 3 metrics you've tracked or you've encouraged us to track around employees, trucks and service centers. Do you actually have Capacity to take on incremental volume from here?

Speaker 3

Certainly, that's our expectation is to continue to produce growth. And The piece of the capacity equation that you always have to look at is on the service center side. It takes doors to process freight within LTL. And so that is the more determinant figure in terms of how much From the levels where we currently are that we can continue to grow, and we generally like to have somewhere 20% to 25% excess capacity. So Our CapEx plan this year includes about $300,000,000 to further expand the capacity of our overall service center network.

Speaker 3

We've opened the 3 facilities so far this year, and we've got more that are slated as we proceed through the year to keep expanding. The number of service centers and some of those dollars are increasing doors at existing locations as well. Now when it comes to the people side of the equation and the fleet, much like you've seen in our numbers over the last couple of years, The lever that we pull there is we have to use purchase transportation if we need to supplement 1 or the other of those pieces of the capacity equation. Certainly, we've stepped up the increased use of purchase transportation. Were actually pleased to see that the outsource miles that we had in the Q1 have actually trended down versus where we were In just the Q4 of last year.

Speaker 3

So we're continuing to make progress there as we continue to add people to our OD family. We had an 18.5% increase in the number of full time employees. So we're continuing to be successful there In attracting new people to our business and retaining those that we already have and then we're continuing to balance the capacity of Our fleet, as Greg mentioned in prepared comments, there's multiple ways to do that. We're having to hang on to some of the older equipment. We will get some relief later in the year, we hope, with deliveries of what's been ordered, if you will.

Speaker 3

But again, we can use Purchase transportation is needed to supplement there. So I think we've got those pieces covered and we're continuing to give 99% on time Service performance with the claims ratio between 0.1% and 0.2%. So it's best in class service despite The significant volume of growth and processing, significant growth on top of the growth that we had last year.

Operator

And the next question comes from Chris Wetherbee with Citigroup.

Speaker 5

Hey, thanks. Good morning. So Adam, maybe we could talk a little bit about yields and sort of how you maybe see that playing out Over the next couple of quarters, I think we're starting to hit some of the tougher comps when we look at revenue per 100 with ex fuel starting in the second quarter. I guess maybe two questions here. First, is the step up of the comps kind of happened immediately in April?

Speaker 5

So is that sort of the trigger as you move from 1Q to 2Q? We're already beginning to lap those sort of more challenging comps. And I guess the second part, bigger picture piece of the question would be just how you think about sort of the pricing environment, your ability to sort of Continue to get price, you talked about inflation being 4.5% to 5%. So presumably, you're sort of targeting somewhere in that, call it 6% to 6.5%, maybe 7% range. Can you just talk a little bit about Yes.

Speaker 3

Certainly, the increases that we need in the first half of this year Are going to be higher, just like we talked about the expectations on our inflation. We started seeing really inflation pick up in The middle of last year and so as contracts were maturing in, we were having to start asking for more. Yes. We look at the current environment as those mature and what we're seeing and what we We're always making predictions for multiple things, what our volumes are going to be as well as our cost and what our customer needs are. But certainly started seeing acceleration in some of those renewals in the back half of last year, and those need to continue as we move through the first half.

Speaker 3

We are starting to get some normalization on some of the weight per shipment trends. At this point, our weight shipment is flat with where we were last year. We've seen a decreased weight per shipment over the last year or so, As well as increase in the length of haul. So both of those changes in mix have been supporting that overall reported yield number And making it look stronger than just the core increases that we're getting. But we continue to target cost plus.

Speaker 3

That's been our long term pricing philosophy. It's been consistent and one that our customers know and can understand, and And we'll continue to execute on that same type of philosophy as we progress through the year. But with some of those mix metrics normalizing, When you just look at kind of normalized trends, it would, if you look at kind of normal seasonality, if you will, just Sequential increases from this point forward, it starts coming down the year over year, it starts getting to the higher single digits, They're kind of mid single digits and eventually normalizing, if you will. But certainly, right now, we're able to get increases that are Covering our cost inflation, and I think you can see that in our numbers.

Speaker 4

Okay. Okay. That's very helpful.

Speaker 5

I appreciate that. And you mentioned that the weight per shipment has been ticking up sequentially here after I think bottoming kind of in the Q3. Should we likely to be sort of up on a year over year basis

Speaker 2

as we move forward?

Speaker 3

Well, right now, like I said, we're flat. So as we progress through the Q2, then we could if things just sort of hold Steady, if you will, from a mix standpoint, then certainly, we would start seeing some increase. And that's kind of the point of You might start seeing the reverse of what we did last year where the mix change puts a little bit of pressure on that reported Revenue per hundredweight. Certainly, in the Q3, that was our low watermark. I think we were at £1538 on average In the Q3 of last year, right now, we're trending somewhere in the 1575, So between £1500,000,000 and £1600, but it's been a little bit heavier on that scale over the last few months.

Operator

And the next question comes from Scott Group with Wolfe Research.

Speaker 9

Hey, thanks. Good morning. Adam, I just want to clarify just a couple of things. The 28% increase in revenue in April, is there Anyway, just directionally to break that down between fuel and tonnage and sort of underlying yields? And then was also just a little confused about your commentary around the Q2 OR about normal seasonality is a 70 something, but You're hoping for 60 something?

Speaker 9

I just I wasn't I was a little confused. So if you can help there.

Speaker 3

All right. I'll try to clarify that first. I'll just talk about Our revenue growth and we don't want to necessarily give the details. We'll wait and let the month settle out. But like I kind of referenced earlier, in March, we saw revenue per 100 Wave, excluding the fuel that was up about 9%, and that's about the same Year over year change that we're seeing from a fuel, we never really get into the breaking down fuel contributions, but the average Price per gallon in March is about the same in April.

Speaker 3

And so it's averaging about A little over 5 about $5.11 $5.12 So it's about a 62% increase in that DOE price per gallon In March, the same type of increase that we're seeing in April. So we'll have similar contributions, If you will there. So their overall yield continues to show considerable strength. And we the comparison start looking a little bit If you will, on the volume side, when you look at last year and what the revenue growth was, we had Total revenue growth of about 16% in the Q1 of last year and it was 47% in the 2nd quarter. So those We'll certainly change as we progress through the Q2.

Speaker 3

The comparisons get a little bit tougher, which is why we're extremely pleased to see The strong revenue growth at 28% in April, but we'll continue to see contributions like that. The yield is certainly Driving a lot of that revenue growth for us right now, but seeing very solid volume performance as well. In terms of the operating ratio, I don't want to give specific guidance per se, but my Point was, we certainly had some favorability in the Q1. I mentioned the general supplies and expenses and the miscellaneous And that those could revert back. So there certainly could be some pressure on that normal sequential change that we see from the 1st to second quarter.

Speaker 3

One other thing that was beneficial was we had lower fringe cost in the Q1 than what I expected For the year is and that's fringe cost as a percent of our salaries and wages. So I would expect that To kind of normalize back to where I thought it would be for the year. So there may be a little bit of pressure on a couple of those items. Time will tell and we'll see. But my point was, if you just took normal seasonality from the 4th quarter, Certainly, we had big outperformance in 1Q.

Speaker 3

But if you took normal seasonality from the 4th quarter And ran it through to the second, that would have put our operating ratio right in 70.2. And We'll see that would imply less seasonal improvement than what we normally expect. And What the point of the matter was, if we operate anywhere that starts with a 6, if it's a 69.9, We will certainly be very excited to see that kind of number. We're sitting here like Burt and Jerry Reed trying to do something that they said couldn't be done, and we think that we can get it done. But certainly, If it comes out that it's 70.1 or 70.2, that's producing very strong profitable growth as well.

Speaker 3

But nevertheless, not throwing necessarily a specific target out there, but just saying what could be done with some of the numbers and how they might normally train it.

Speaker 9

Okay. Yes, most of the others get excited about starting with an 8. You made a comment about LTL is different than truckload. So I'm guessing the LTL is very different than spot truckload, but There's a lot of focus on spot rates right now. What how does slowing Following spot rates impact in any way your tonnage outlook, your pricing outlook?

Speaker 3

Well, from a tonnage standpoint, that was the point we wanted to make Was that what's going on in truckload right now, we already last year had taken a lot of the Heavier weighted shipments that might be considered spillover freight in prior periods and had worked those out of our system. So We don't have those same pressures, and I don't think many of the other LTL carriers do either. Just looking at some of the statistics, I think freight demand had been so solid and influx of freight into the LTL world that many carriers LTL freight, not something that might be more transactional here today going tomorrow type of thing if truckload capacity loosened up. So We're not seeing the same type of pressures and not really hearing about it from an overall competitive landscape either That there is some movement of freight going back into the truckload world. But certainly something that we'll continue to pay attention to And we're talking very frequently with customers and our sales team.

Speaker 3

But again, that's consistent feedback that we're receiving from all parties is that Demand continues to be solid. And certainly, numbers are what they are. And part of the conversation in our prepared remarks, talking about 10 year trends and so forth, we've doubled our market share over the last 10 years, and that doesn't always come in a linear fashion. So We might have a month where volumes underperform for our monthly period, our 10 year average trends and that's just certainly not something to get overly concerned about. And we saw some of that in the Q1.

Speaker 3

We underperformed. If you just look purely from a 10 year average sequential standpoint on the volume side, but we produced a lot of revenue growth and good profit growth as a result. So we continue to be encouraged by the overall environment and the feedback that we're hearing from customers and our sales team and want to continue To do what it takes to take advantage of the volume flows that may come our way this year.

Speaker 9

Thank you, guys. Appreciate it.

Operator

Thank you. And the next question comes from Jordan Alliger with Goldman Sachs.

Speaker 4

Yes. Hi. Curious, realizing that things are very strong today, if we do or were to go into a slower economic Situation later this year into next year, maybe negative growth. Given the headcount increases you've had and Obviously, wage increases across the sector. I mean, how flexible or nimble do you think you guys would be sort of in the other direction In terms of pulling things back and can you with wage increases and headcount?

Speaker 4

Thanks.

Speaker 2

Jordan, we've done this in the past. I mean, I don't think anybody likes to manage through A downturn or a recession or whatever you want to call it, but we've done it in the past. It's surely not a lot fun and you have to make hard decisions at times, but we've managed through the worst recession ever in 2,009, at least in my Pretty lengthy career. It's probably the worst ever. We managed through that fairly well.

Speaker 2

Then we did it again in In 'sixteen and through a flat year in 'nineteen. So we've geared up, then we gear down and In gear back up, and this business is up and down. It always has been. But If we have to manage in a downturn, I've got all the confidence in the world we can manage through that. As Adam mentioned, so far so good this year.

Speaker 2

Our trends are good. Our feedback from customers are It's very strong. We've had 2 of our top 10 accounts in the building in the last couple of weeks and they're both very positive Their business and their customers and these were logistics companies, by the way. They're huge and they manage an awful lot of dollars and their outlook is very strong at this point in time. I think our standing with these particular accounts and with our accounts in general, our standing is Better than ever.

Speaker 2

And at this point in time, we're not thinking about a downturn. If we have to, we will, but That's not where we are today.

Speaker 4

Thank you for your perspective.

Operator

Thank you. And the next question comes from Todd Fowler with KeyBanc Capital Markets.

Speaker 10

Hey, great. Thanks and good morning. So I wanted to ask on where you think you're at from a headcount growth standpoint. I know you've had success in adding headcount, but it's been Above tonnage and shipment growth now for the past couple of quarters. You had some comments in the release about continuing to add headcounts in 2Q.

Speaker 10

Do you think you're getting to the point where headcounts caught up with where your tonnage levels are? How do you think about continued headcount growth into the back half of the year?

Speaker 5

Yes, Todd,

Speaker 2

I think we are. I think we have pretty much caught up. We still have Some needs in some places, but we're much closer than we've been, probably in the best shape we've been in over a year. So happy with that, happy with where we are. And we'll just have to see how the volume trends continue.

Speaker 2

If we continue on our current Growth trajectory, then we will have to continue to add some as our seasonality dictates. But I think those needs will be fewer Certainly than they were in the last year or so. But, yes, we're in a better spot And feel pretty good about our standing today. And that wouldn't be a bad thing to see that continue to level off a little bit.

Speaker 10

Yes. No, understood. That's a good comment. That's helpful there. And then Greg, just a follow-up on your prepared remarks, you had a lot of comments around Shippers really realizing the value of the LTL service proposition.

Speaker 10

I guess I'm curious, are you seeing any shift in your mix As far as kind of your core customer base and I know it would just be around the edges, not a big wholesale Shift, but kind of different shippers using LTL relative to where you've been historically. And when you think about the tonnage growth that you've been Do you think that most of that's because of your available capacity? Is there something else within the industry that's driving that? Thanks.

Speaker 2

No, Todd, not that I know of, not at all. I think it's continued growth from existing accounts. Certainly, we continue to take on new business. We have a very significant Group of sales folks working out there every day. So we do continue to gain some new business from the reports that I'm seeing, But no, normal growth from existing customers.

Speaker 2

I think just the continued confidence that they have in us And the service performance that we've given them in the past, and they like it. Their customers need that. Their Supply chains, as Adam mentioned, supply chains are challenged and putting that product on the shelf is More important now than probably ever.

Speaker 10

Thanks for the time.

Speaker 2

Sure.

Operator

Thank you. And the next question comes from Ravi Shanker with Morgan Stanley. Thanks.

Speaker 11

Good morning, everyone. A couple of follow ups, one to the kind of Downturn planning question. I'm sure you guys are aware that most of your peers and I've been trying to figure out what your secret sauce has been for years and why there isn't one answer. I think one of the big elements is your continued Almost irrespective of the cycle, but I just wanted to get a sense of what benchmarks you guys would look at in terms of Turning the wick up or down on the incremental growth plans. A, if there is a downturn, are you going to put your foot down and actually investments or again, what are some of the metrics you'd look at to start pulling back?

Speaker 3

Well, I mean, I think you've got to look at past performance to a degree to see how we react. And as Greg mentioned earlier, We've taken the opportunity in the past in some of those slower periods, like you mentioned, We like being at sort of 20% to 25% on average, and we're a little bit behind that target range given the significant volume growth that we've had. So we look through a longer term lens, if you will, and try to project out where we think our market And our volumes might be in the next 5 to 10 years. It's not just always in the here and now, because certainly, You can't execute when it comes to real estate investments in a very short period of time. Oftentimes, and we didn't necessarily see this in the last Slow cycle in 'nineteen like we thought we might have, but in prior periods and downturns, we've seen some opportunities come our way That were attractive investments from land opportunities, existing service center opportunities.

Speaker 3

So certainly, if something becomes available in an area that's on our long term road map for where we want to go, then Yes, we would take advantage of something like that. But it's just always sort of looking at what's in front of you, If you will, from an opportunity standpoint and then us thinking about the longer term opportunity, where we want to be, where we think we need to have capacity To support the continued growth within our network and to be able to keep our service metrics where they are today.

Speaker 11

Got it. That's good color. And just a follow-up on the topic of keeping an eye on the long term and growth investments. There have been a number of important developments And the kind of past the commercialization of autonomous trucks and obviously the pressure on most companies to kind of And maybe kind of the what the rollout path looks like, especially if you're going to invest in a downturn?

Speaker 3

Well, we certainly have 1, we've just recently disclosed Our first ESG sustainability report, so we were proud to get that out. And I think that Was a means to show some of the long term improvements that we've made over time with operating efficiencies and overall improvements in our miles per gallon and so And we'll continue to track towards some of the goals that we have internally to continue to improve those metrics. And Yes. One of the key pillars of our foundation for success is continuous improvement, and that means multiple things, continuous improvement in multiple areas. But As it relates specifically to electric vehicles and autonomous and so forth, we'll continue to stay engaged with manufacturers To see what's coming down the line, we would like to try to test some of the equipment.

Speaker 3

And we actually ordered Some equipment, but we're still waiting on the delivery of the truck. And so I think that goes to some of the pressures that the OEMs Paths in terms of what actually is being produced and is planned to be produced in the near term. We're still from all the feedback we get from specs and capabilities, don't believe that electric trucks As they exist today, really fit the operating model of an LTL network, at least how we run our business. But we felt like we Wanted to have a seat at the table, and that was why we put an order in to get something and actually put it in place to operate and to be able to give true Feedback in terms of what the limitations may or may not be. So but we'll continue to stay engaged with all of Our suppliers in that regard to see as things change and where it may make sense to try to integrate Some of that technology into our network as it makes sense or not.

Speaker 11

Understood. Thank you for the color.

Operator

Thank you. And the next question comes from Amit Mehrotra with Deutsche Bank.

Speaker 7

Great. Thanks. Appreciate it. So I just had a couple of questions. Adam, just a clarification, did you give April tonnage sequentially from March Versus seasonality and year over year in April, could you give that if you haven't already?

Speaker 3

No. We haven't provided the detail consistent with what we've done in the As we'll give it with our 10 Q, but just gave where we're trending from an overall revenue standpoint and then Gave a little extra color on kind of what our yield trends are doing.

Speaker 7

Okay, fine. And then I guess bigger picture question, you guys are knocking the cover off the ball on many metrics. Your stock is down 25% this year. I don't want to make too big of a deal of near term or mid term stock movements, but everybody is debating right now what the peak to trough Earnings declined to look like in a very tough macro scenario. And I think part of that reflects the trough The peak has been such so robust for OD and many other companies as well.

Speaker 7

So I guess the question is, if I look at the industry, the industry has Done a tremendous job of understanding its cost structure a little bit, pricing rationally relative To that, those investments they've made and understanding their cost structure. So do you think that the industry from a pricing discipline perspective is It's better than it's ever been because of some of those specific investments. And do you think the price there's risk in a downturn that the industry pricing discipline Just talk about how the pricing discipline for the industry is today versus how it's been kind of at any time in the past?

Speaker 3

Well, certainly, I think it's been more disciplined, and you can go back to 2019, in particular, the Q2 of 2020 As well, I mean, that was a pretty steep drop for everyone from a revenue standpoint, and no one knew how long of a drop we were going to be in, but I think that there was a lot of discipline that was shown. And I think it gets back to There's certainly a lot of value that an LTL carrier can offer and there's a lot of expense to running and to expanding On LTL carriers network and we certainly have seen that over the years. We talk a lot about the cost of expanding our real Prohibitively expensive, but something I thought that way about a couple of years ago may now look like a bargain. So it's one of those things where we've got to continue To build that type of cost escalation into our pricing plan. And I think we'll continue to Certainly, see our numbers and our philosophy, no change with respect to the cost plus pricing that we've displayed Over the years, and I think that it's likely that we'll continue to we've seen discipline from the other carriers and wouldn't expect Any change in that regard?

Speaker 3

And the industry now, a lot certainly been written lately about what's going on in truckload, but You've got almost 70% of the LTL revenue that's in publicly traded companies now. And It doesn't take long to see what everyone is seeing and doing. And certainly, probably more important to see what Actually, it's going on for management teams versus just reading reports off of the Internet that's sensationalized maybe a little bit more. But I don't think you can all necessarily extrapolate what you're seeing in some of those reports to the LTL world.

Speaker 7

Right. Okay, very good. Thank you very much.

Operator

Thank you. And the next question comes from Ken Hoexter with Bank of America.

Speaker 12

Hey, great. Good morning. Greg or Adam, can you maybe thoughts on the impact of purchased on quality controls expense and what is now outsourced as you talked about maybe growing a bit, although I think Adam you mentioned it was Down in Q1 versus Q4, but it sounds like you were you needed to scale that to meet your growth targets going forward?

Speaker 3

Yes. Certainly, we were able to use the purchased transportation in an increasing manner as we went through Mainly 2021, started stepping it up a little bit in response to the acceleration in volumes that we saw in the back half of 2020, and I'm speaking of sequential accelerations, just to be able to keep pace with the growth and expectations from our customers. We've got good carriers that we've used to supplement mainly within our line haul operation. And it's Overall, still pretty minimal in terms of the outsourced miles. Certainly, we saw the cost Increasing, if you will, was that rate environment was increasing.

Speaker 3

But we were able to work Those 3rd parties into our network and keep our service metrics high, while responding to significant volume growth from customers last year. And We saw maybe a slight uptick in our claims ratio. That was probably more or somewhat reflective Using 3rd party truckload carriers versus our twin 28 foot POP operation and all the claims prevention tools that we have. But when I Say it uptick from a 0.1 something to 0.16 that Just round it to a point 2, so we're talking very minimal increase there. And that's part

Speaker 2

of the overall value that

Speaker 3

we provide To our customers, and Greg mentioned it earlier in his prepared comments that part of our value proposition is having capacity. When you look through prior cycles, Look, through 2017 2018, we are able to grow with our customers right now. And when you look at the Other carriers, at least public carriers in the back half of last year, were pretty flattish from a volume standpoint. So we're able to come in and

Speaker 4

demonstrate value, not only with the service

Speaker 3

quality that we offer, but Great value, not only with the service quality that we offer, but being able to provide capacity when no one else can. And That takes investment. It takes investment in the real estate, the fleets and our people to make sure we've got Flex capacity and certainly we always try to stay ahead of the game as best we can in that regard, but certainly pleased that We're able to deliver that for our customers.

Speaker 12

Great. Thanks for that. I guess for my follow-up, let me just start off with the premise. You talked about doubling Your share, but I guess 1 or 2 of your public peers were kind of closing service centers and kind of maybe Shrinking their business and that's kind of changed, right? So most of your peers are now adding service centers and doors.

Speaker 12

Everybody's kind of set new targets out there. Do you still see the LTL market is structurally growing share within the entire trucking market? And then if so, I think a lot of demand questions coming to you now is, Where do you see it first, right? Where do you see when you see a role? Is it the consumer?

Speaker 12

Do you not see it because e commerce growth has changed that within the dynamic that You're still growing and taking share, so you wouldn't see that impact. Maybe just set the stage for the dynamic of what goes on in a market these days relatively within the LTL market?

Speaker 3

Well, we've talked about this before, but our business, the way we try to manage And project out, we always have a baseline forecast for the year and then we have scenarios with growth above that base Line and scenarios where the volumes are below that baseline and we try to have a plan for both. We have that baseline plan and then how we're going to execute in either side of that scenario. And And all we can do is continuously look at our numbers and have continuous conversations with customers. And certainly, we've had years where We've been above and below our baseline scenarios, and you just make operational decisions from that point forward. And Part of that is the way we structure our network.

Speaker 3

We give each of our service center managers has got control In terms of managing their headcount and running their operation as needed in terms of adding to Are pulling back on some of the additions that they're making depending on what the environment is like. But it just takes constant communication between us In our customer base, oftentimes, a lot of that is communication with many of our 3rd party logistics Customers, 6 of our top 10 largest customers are 3PLs and they are a fair amount of our overall business and they generally have a read on What's going on? And if there's mode shifts and other things, and we still get favorable feedback from them with Back to the expectations for volumes this year. And so that kind of goes into our baseline and maybe why some of our conversation and thinking Might seem a little bit different than what others might be talking about with respect to overall transportation this year.

Speaker 12

Great. And your thought would just to wrap that up, the thought within the LTL market, do you still see it structurally taking share within the trucking side?

Speaker 5

We do.

Speaker 12

Just to understand it like yes.

Speaker 3

Yes, we do. I feel like it will continue to grow. We've and right now, we've got, When you look at all the industrial numbers, those are all favorable for sure, and we're seeing good growth. Our revenue growth in the Q1 was Pretty balanced between both our industrial and our retail related business. We're continuing to see consumer spending, but Irrespective of that, there's freight demand for LTL carriers and shippers that This e commerce effect on supply chains that are leveraging the network that we've built out in moving freight, if it's a manufacturer That is moving freight.

Speaker 3

In yesteryear, it may have been one full truckload of goods to a regional distribution center. That may be 10 different fulfillment centers in that same region, and we can fill 1 truckload basically, One full van of goods at that same manufacturer, but they're now leveraging our network as we distribute those goods Throughout our system into that ultimate fulfillment center. And so we think that type of change will continue to drive volumes Into the LTL industry. And I think that given the investments that we've made and the requirements 2, from the big box retailers for their vendors shipping product in, most have on time in full or must arrive by date Type of programs and certainly, it's a focus on the on time deliveries and no damages. And when you've got the best metrics like we do, that's how we can add further value to our customers by making sure that they show well On their vendor scorecards with their customers, and that's been a piece of the market share that we won over the last

Operator

Thank you. And the next question comes from Tim Wadewitz with UBS.

Speaker 13

I guess a little bit of follow-up on that last one. What the kind of consumer goods spending and potential weakness Seems like a key point of concern. So what does your mix look like broad brush? I know sometimes it's hard to be overly precise, but if you say, well, The 2016 cycle when we saw weakness, we had kind of X amount consumer and Y amount industrial. And then maybe in 2019 and today, has it skewed a lot more towards consumer?

Speaker 13

Or how do you think about at a high level That mix of your book that's if you want to put it in industrial and consumer or if you wanted to include other buckets?

Speaker 3

I mean, it's still more weighted to industrial than retail. About 55% to 60 of our revenue is industrial related and 25% to 30% is retail related, but it's that's probably moved up the spectrum Closer to that 30% threshold. And I mentioned that we've seen a lot of good growth in our with our retail customers we have. I mean, that's been a big part of the story. But we continue to see good growth and market share with our industrial as well.

Speaker 3

And there have been periods where that retail was growing a bit faster, but Both are growing for us, and we're still seeing good share there. So it's that retail component has crept up a little But our good industrial business has grown as well and has continued to somewhat keep pace.

Speaker 13

Are you hearing I don't know if this is the type of if you have clear input from customers on this, but Are you hearing a difference in the outlook between those two customer segments? Are the consumer related customers More cautious and the industrial side is more aggressive. And I guess, I think, Greg, you commented on inventories too that you thought inventories were still light. I don't know if there's a difference in kind of urgency for industrial versus consumer.

Speaker 3

No, it's yes, we look at the inventory to sales ratio and that continues to be low and really reconciles with feedback that we're getting From customers, be it on the retail or the industrial side, that inventory balances are lower than what they We have an awful lot of conversation about the number of back orders that many are dealing with and in some cases missed opportunities where They simply haven't had product on the shelf or ready now if it's an online purchase, If you will. And so I think that's something that Greg mentioned earlier that we're seeing and hearing Not only from the customer side, but we're seeing it and feeling it from our supplier side as well. So both kind of go hand in hand, And many of our suppliers are also customers. So we're seeing that across the board, if you will. That's why we think that even I mean, right now, consumer spending continues to be strong.

Speaker 3

I think balance sheets are good and maybe consumer confidence is not as high as it has been, but we still feel like Freight demand can continue for past any type of consumption slowdown, just given the fact that We feel like inventory balances need to be built back up. And we continue to believe that long term, We'll see a higher inventory to sales ratio than perhaps where we were pre pandemic.

Speaker 13

Right. Okay. Makes a lot of sense. Thanks for the time.

Operator

Thank you. And the next question comes from Vasquez with Susquehanna.

Speaker 14

Yes. Thanks for taking my question. Not to beat a dead horse with another hypothetical recession scenario, but And it's clear that you don't think there is a structural change to the investment you've been able to invest in or I'm sorry, to the situation you've been able to And make a tremendous amount of return over the last 10 years. But I'm curious, what As you think about scenarios, not just the kind of scenario analysis you talk about in a single year, but in that 5 to 10 year plan, we are looking where to invest And where to buy land and where to build more capacity. What would it take to maybe change That strategy, is it seeing less discipline in pricing at your peers?

Speaker 14

Is it a consistent run of sub seasonal tonnage versus the share you've gotten historically. I'm just curious what you would have to see to actually make a change in the way that you approach the market price long term? Thank you.

Speaker 2

Yes. Baskin, if again, a big if, and I know it's a hypothetical, but if we saw a major Downturn of some kind and all of a sudden we had excessive capacity, maybe we would look to do something different. But To tell you the truth, as Adam mentioned earlier, sometimes in a downturn, it provides the best opportunity for you to go out and do some things in certain markets that are extremely difficult to get them done. And that may present an opportunity for us and give us that for us and give us that very, very difficult place that we desperately need. I hate to talk too much about hypotheticals, but we'll certainly take advantage of the market if it provides some opportunities We've got to be opportunistic.

Speaker 2

I've talked about it in the past, how difficult it is now to acquire land in Certain parts of the country, how difficult it is to get building started and whatnot. And I think we'd be terribly remiss if we set Back and said, oh, things have really slowed down and we shouldn't do this. And if you could flip the switch and build a facility in 6 months Or even a year, that's one thing. But when we know in some of these markets, it's 2, 3, and 4, 5 years to get something accomplished, You've got to be opportunistic. When those opportunities are there, you've got to strike and you've got to take advantage of them.

Speaker 2

So I'm not sure that anything would drastically change our outlook and our strategy at this point. Think we've had a fair amount of success. I think you'd agree with that, that what we've done, it's worked. And we've continued to put ourselves in a good Position to take share and honestly, I don't see that changing. If we were at 30% share or something crazy, but we're still at a 12% market share.

Speaker 2

So we think there's still a lot of upside For growth from our standpoint, and again, I think it's critical that we take advantage when that opportunity provides.

Speaker 3

Just to add a little bit more color to that too and reinforce the point. If we had not made the decisions to invest In 2016, we wouldn't have been able to take advantage of the revenue opportunities that we had in 2017 2018. And the same is true In 2019, if we had listened to everything that we had read at that point and had pulled back and not continued to

Speaker 4

execute on our CapEx plan,

Speaker 3

then we wouldn't have been able to on our CapEx plan, then we wouldn't have been able to enjoy the growth that we saw last year and what we're seeing today. So It takes investment during those slower times to kind of build up that excess capacity to be able to participate In these really strong market environments. And I think that's why you've seen us Have a little different performance. It's a different strategy. But certainly, we've been able to participate on the upside The market is swinging more so than anyone.

Speaker 3

And so as Greg said, we feel like we've got a really long runway for growth ahead of us, And it's just going to continue to take that continuous investment cycle. Whether we're in the middle of a market upturn or Things are slower. That's just something we've got to maintain our focus on and make sure that we're continuing to expand the network overall.

Speaker 14

Greg, Adam, I really appreciate the helpful answer. Thank you.

Operator

Thank you. And the next question comes from Tyler Brown with Raymond James.

Speaker 7

Hey, good morning, guys. Hi, Tyler.

Speaker 15

Hey. So we've talked to some developers and it sounds like labor, materials, a difficult Zoning environment is actually capping some square footage growth in the broader industrial real estate market. Obviously, you earmarked $300,000,000 in CapEx on real estate. But Greg, you kind of talked about it, but how confident are you that you will actually be able to spend that this year?

Speaker 2

Well, I'll be honest with you, Tyler, I'm maybe a little more concerned we're going to have opportunities and exceed That number, but we'll just have to see. We've got an awful lot of projects in play. So we'll just have to see what opportunities present themselves. I can tell you the price of land nowadays, that we can reach that budget pretty doggone quick. So it's a challenge, but I think we'll get there, honestly.

Speaker 2

I think we'll be all over it.

Speaker 15

Okay. So that actually kind of plays into my second question. It's a difficult question, but I think it's a really important one. But how much would you say the cost to build a like for like door today is versus pre COVID? I mean, how much does that increase just with all the material cost Anything directionally would be helpful.

Speaker 15

Yes.

Speaker 2

It's relatively significant. I'm not talking about properties now. I'm just talking about materials. I did see something from our real estate folks recently, and It's probably in the 20% range, give or take. Some materials are more than that, some less, but the We increased relatively significant in the last year or 2 since the pandemic.

Speaker 2

Everything is up there.

Speaker 15

Okay. That's very helpful. And then Adam, quick question, just clarification. So does the propane that your forklifts Consume qualify for CNG tax credits? And if so, didn't those credits go away year over year?

Speaker 15

And was that OR drag in Q1 or is that non material?

Speaker 3

You're very perceptive asking something like that, But that credit did go away.

Speaker 4

At least for the material, that

Speaker 3

credit Has sort of come and gone at different times. But at this point, I think it's gone. We'll see if it comes back or not.

Speaker 15

Okay. All right. Well, I appreciate the time, guys.

Operator

Thank you. And the next question comes from Bruce Chan with Stifel.

Speaker 16

Good morning, guys. This is Matt on for Bruce. Thank you for squeezing us in here and congrats on the quarter. With respect to China's COVID lockdowns and potential for some increased pork congestion later this summer, Given some CBA negotiations, we were curious if you guys are seeing any customer change in their ordering or perhaps contracting patterns in order to maybe get in front of this?

Speaker 2

Yes. Bruce, I can't comment on that. I have not heard that. I expect that, that will be an issue if it continues. But, yes, what we're hearing from over there, It's not good.

Speaker 2

And if they lock down Beijing and as long as as well as the rest of the port Cities, if they have already. It's definitely going to be an impact, but I have not heard that, not from our sales Folks are our customers to this point.

Operator

Thank you. And this does conclude the question and answer session. I would like to turn the call over to Greg Gant for any closing comments.

Speaker 2

Well, thank you all for your participation today. We appreciate your questions and feel free to give us a call if you have anything further. Thanks and I hope you have a great day.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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Earnings Conference Call
Old Dominion Freight Line Q1 2022
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