Old Dominion Freight Line Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2022

There are 16 speakers on the call.

Operator

Good day and welcome to the Old Dominion Freight Line Second Quarter 2022 Earnings Conference Call. All participants will be in a listen only mode. Please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. Call.

Operator

Please note this event is being recorded. I would now like to turn the conference over to Drew Anderson. Please go ahead.

Speaker 1

Thank you. Good morning and welcome to the Q2 2022 Conference Call for Old Dominion Freight Line. Call. Today's call is being recorded and will be available for replay beginning today and through August 3, 2022 by dialing 1-eight seventy seven-three forty four-seven thousand five hundred and twenty nine, access code 7,163,281. Call.

Speaker 1

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 may be deemed to be forward looking statements. 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.

Speaker 1

And consequently, actual operations and results may differ materially from the results discussed in the forward looking statements. Call. The company undertakes no obligation to publicly update any forward looking statements, whether as a result of new information, future events or otherwise. As a final note before we begin, we welcome your questions today, but we do ask in fairness to all that you limit yourself to 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. Please go ahead, sir.

Speaker 2

Good morning and welcome to our Q2 conference call. With me on the call today is Adam Satterfield, our CFO. After some brief remarks, we will be glad to take your questions. I am pleased to report that the OD team delivered strong Profitable Growth During the Second Quarter, which resulted in new company records for revenue and profitability. Our revenue increased 26.4 percent to $1,700,000,000 while earnings per diluted share increased 42.9 Percent TO 3 $0.30 We also improved our operating ratio by 280 basis points to 69.5%.

Speaker 2

This is the first time in our company's history that we have produced a sub-seventy percent Quarterly Operating Ratio. We achieved these results by continuing to execute on our long term strategic plan, which has guided us for many years and throughout many economic cycles. The disciplined execution of the business fundamentals that form this plan have supported our ability to double our market share over the past 10 years. We are confident that continued execution on this plan positions us to win additional market share over the next 10 years. The foundation for our ability to win market share is our relentless focus on providing superior service at a fair price.

Speaker 2

Our on time service performance was 99% in the 2nd quarter, while our cargo claims ratio improved to 0.1%. These service metrics reflect the efforts of our OD family of employees to maintain a steadfast commitment to delivering value to our customers each and every day. It appears that service quality is becoming even more important to customers when selecting a carrier, which is why demand for our service has remained Trail. This is a trend that began to develop with the economic recovery during the second half of twenty twenty and it continues today as many shippers are still struggling with supply chain issues. As a result, we believe our Customer relationships have strengthened as we do our part to help our manufacturing customers keep their facilities running smoothly, while helping our retail customers keep products on the shelf and available for sale.

Speaker 2

Our value proposition also includes Having sufficient capacity to support our customers when they need it the most. We currently have approximately 15% to 20% Test capacity within our service center network and we expect to open multiple new facilities during the second half of this year. These new facilities as well as various other expansion projects that we expect to complete should increase the amount of our excess capacity towards our longer term target of 25%. We remain committed to the ongoing expansion of our service center network, which we believe is important regardless of the short term macroeconomic outlook. Expanding service center capacity can take 2nd quarter.

Speaker 2

A significant amount of time, which is why we have historically been proactive with respect to our expansion efforts. This unique strategy has created a capacity advantage for us in the marketplace, which becomes more apparent to shippers in tight environments like we have segment we've seen in the past couple of years. With over $700,000,000 of year to date revenue growth through June, we are on pace to numbers without the consistent investment in our service center capacity as well as the continued investment in our fleet, Technology and the training and education of our OD family of employees. Our team has shown tremendous stability over the past couple of years in response to significant changes in our business levels. And I am confident that this team will continue to build on its success.

Speaker 2

We have continued we have created one of the strongest records for long term growth and profitability in the LTL industry by executing on our long term strategic plan, By providing superior service at a fair price and having the capacity to stay ahead of our growth curve, We believe we are better positioned than any other carrier to produce long term profitable growth, while increasing shareholder value. Thank you for joining us this morning. And now Adam will discuss our Q2 financial results in greater detail.

Speaker 3

Thank you, Greg, and good morning. Old Dominion's revenue growth of 26.4% in the 2nd quarter was driven by the 22 point 6% increase in LTL revenue per hundredweight and 2.8% increase in LTL tons per day. Demand for our superior service remained strong during the quarter, which helped support the steady trend with our volumes and consistent yield improvement. On a sequential basis, revenue per day for the 2nd quarter increased 11.4% when compared to the Q1 of 2022, With LTL tons per day increasing 0.7% and LTL shipments per day increasing 1.7%. For comparison, the 10 year average sequential change for these metrics includes an increase of 9.6% in revenue per day, an increase of 7.4% in tons per day and an increase of 7.8% in shipments per day.

Speaker 3

At this point in July, our revenue per day has increased by approximately 18% when compared to July 2021, which continues to exceed our long term average growth rate. As usual, we will provide the actual revenue related details for July in our 2nd quarter 7Q. Our 2nd quarter operating ratio improved to 69.5% with improvements in both our direct operating cost and Overhead Cost as a Percent of Revenue. Within our direct operating costs, improvement in salaries, wages and benefits, as well as purchase transportation costs as a percent of revenue, effectively offset the increase in our operating supplies and expenses. The increase in operating supplies and expenses as a percent of revenue was primarily due to the increase in the cost of diesel fuel and other petroleum based products.

Speaker 3

We improved our overhead cost as a percent of revenue during the Q2, primarily by leveraging our quality revenue growth and Controlling Discretionary Spending. As we move into the second half of twenty twenty two, we have areas of opportunity to drive further improvement in our financial results. We will continue to focus on obtaining the yield increases necessary to improve the profitability of each customer account. We will also maintain disciplined control over costs to keep our cost inflation on a per shipment basis to a minimum. Our team is now appropriately sized in most of our service centers to support our anticipated shipment trends.

Speaker 3

And as a result, we believe we should start seeing improved productivity throughout our operations. The stability of our workforce has also allowed us to reduce our utilization of 3rd party purchased transportation and move closer to the fully in source Linehaul Operation that we prefer. We believe this is one of many key factors creating the service advantage we have in our industry, all of which comes back to helping us win long term market share. Old Dominion's cash flow from operations totaled $427,300,000 $816,100,000 for the 2nd quarter and first half of twenty twenty two, respectively, Capital expenditures were $229,400,000 $323,100,000 for those same periods. We utilized $293,500,000 $731,900,000 of cash for our share repurchase program during the second and First Half of twenty twenty two, respectively, while cash dividends totaled $33,800,000 $68,000,000 for the same periods.

Speaker 3

Our effective tax rate was 26.0 percent for the Q2 of 2022 2021. We currently expect our annual effective tax rate to be 26.0 percent for the Q3 of 2022. This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.

Operator

2019. The first question today comes from Jordan Alliger with Goldman Sachs. Please go ahead.

Speaker 4

Yes. Hi, good morning. I was wondering if you could talk a little bit about the price environment. Obviously, there are some concerns out there about more than some concerns about moderation in demand and volumes and Some of your rates of growth have probably slowed as well on that front. Can you maybe talk about ex fuel sort of the core price thoughts as you move through the balance of this year and if you had discussions with shippers or if they come to you and start to talk about things as they approach their next contracts.

Speaker 4

Thanks.

Speaker 2

Yes. Jordan, so far, we haven't seen Much of any at all of any customers asking for cheaper rates or Any kind of exception pricing or anything such as that. I think from what we can tell, the industry is extremely disciplined. I think Over our history, we've been more than extremely disciplined and I think that will continue to be our focus. And Right now, that's what we're seeing throughout the industry.

Speaker 2

So I think that's good for all of us. So we'll see, but 2. So far, very, very positive from that standpoint.

Speaker 4

And then just a follow-up on fuel and Fuel Surcharges. I know the mechanisms are supposed to work as it pass through. Obviously, fuel surcharges Generally ramped up for the industry pretty quickly, maybe even faster than the cost of diesel. Can you talk about the impact on P and L from the rising fuel environment? Thanks.

Speaker 3

Jordan, the way our program is designed, we really want it to be neutral to the bottom line as fuel goes up and down. Certainly, as contracts come up Each period and they come up in every quarter for us. But as they come up, we look at what the current fuel price environment looks like and then we try to stress test both up and down to see what that individual customer's overall revenue contributions might look like and then the same for what their costing looks like. And so we try to do the best we can each individual customer account will come out positive whichever way the fuel might trend. So I think that Our surcharge has certainly been affected with offsetting the increased cost of diesel fuel and certainly that's having a direct effect on other petroleum based Products, but there's also a lot of indirect effect as well.

Speaker 3

That's why we continue to see our costs going up and that's why we've got to continue to be disciplined with our yield management program. Thank you.

Operator

The next question comes from Jon Chappell with Evercore ISI. Please go ahead.

Speaker 5

Thank you. Good morning. Greg, there's been this thought that as trucking capacity truckload capacity starts to loosen and especially as we've seen some Major Retail pre announcements that LTL has been this massive beneficiary with the only capacity in town. Can you kind of detail your book of business a little bit and how much you would consider that's on your network today being non traditional LTL freight? And have you seen any shift In your market share either up or down, let's call it since mid May when this whole retail fear started to really emerge?

Speaker 2

Yes. John, I'm going to let Adam address that. But obviously, there's business that moves back and forth It's extremely hard to measure, but I think Adam's got a better handle on those specifics details than I do.

Speaker 3

John, just to give a little bit of detail, certainly as those announcements came out last quarter from Certain retailers. We've been addressing that question, but we've got many customers that ship and receive that are beyond those 2 big box retailers. But nevertheless, our book of business is still 55% to 60% industrial. And I think the industrial related customers and when you look at certain macroeconomic factors in that industrial economy, they're continuing to We probably got a little bit more growth out of our industrial related customers in this most recent quarter than on the retail side. But Retail, which is 25% to 30%, continues to perform strongly as well.

Speaker 3

It's just a little bit below the company average, but we're still seeing Nice growth there. So it's something that we'll continue to work through though and we believe we've got opportunities With each of those pieces of our business overall, we don't have a lot of truffle spillover type business in our network. We worked incredibly hard last year to make sure when capacity was Incredibly hard last year to make sure when capacity was at a premium that we were allocating capacity more so to traditional LTL shipment and customers that were tendering those to us for the sense that whenever the truckload environment Freed up a little bit that we wouldn't have this swing of freight going back into that market. And traditionally, you More of those shipments would be in our spot quote network. That used to be about 5% of our overall revenue.

Speaker 3

It's probably about 1.5% at this point. And those are shipments generally that existing customers have and that they're Asking for something different from us, so to speak. But we feel good about demand. We've talked about that. We've had a lot of customer engagement in recent months and we're hearing good things from our customers.

Speaker 3

They continue to demand service quality. We've worked really hard for multiple years on improving and strengthening our value proposition, And I think we're seeing that come through with the strength in customer relationships that we have right now. And so as a result, we're not losing business. The volumes are a little bit continuing to work and manage through to where the volumes are currently trending as we try to manage all elements of capacity within our business.

Speaker 5

That's helpful, Adam. Just for my follow-up to Greg. Obviously, the economy has changed a little bit since the start of the year. You mentioned you already have you still have 15% to 20% spare capacity today and still have the ambitions to grow the network as you Back in January. Have you thought at all about tempering some of that door growth in the back half of this year as the economy becomes a bit more murky?

Speaker 5

Or is this really your time to shine and invest when others have to scale back and that kind of just helps with the longer term market share?

Speaker 2

Yes, absolutely. It's the latter, John, for sure. Sometimes our opportunities are a little better when it slows down 2. And sometimes you just have better opportunities when it's like it is today. So we can't I've talked about it before how difficult it is to expand your network, how long it takes, how lengthy the process is in certain locations, 2.

Speaker 2

Some certainly way worse than others. So we can't quit. We want to continue to grow that share We know we've got to continue our efforts on a consistent basis to have that tight capacity when things get tight like they have been in the last

Operator

The next question comes from Jack Atkins with Stephens. Please go ahead.

Speaker 6

Okay, great. Good morning and thank you for taking my questions. So I guess maybe to kind of go back to the June July commentary, could you talk about what June tons per day were on a year over year basis. Could you maybe give us that number? And then Adam, I know we're going to wait until the Q comes out to get Full details on July, but any sort of sense for or any sort of commentary you can share about how July tonnage is maybe trending versus normal seasonal patterns?

Speaker 6

I think that would be helpful for folks.

Speaker 3

Sure. On June, our tons per day were flat basically with where we were last year. And so on a sequential basis, it was pretty flat as well. And With respect to shipments, let's see, we actually the Shipments per day for June were on a year over year basis were down 0.7%. On a sequential basis, we were up 0.6% versus May.

Speaker 3

And as it relates to July, We are trending up. Our revenue overall was up about 18%. And looking at the yield component of that, we don't I'd like to give the full details. We used to and if things move 10 basis points off what we had said, the story could take a different turn One way or the other, but our yield trends right now, if you look at revenue per 100weight in July, it's up about 7.5%. So you 2nd quarter.

Speaker 3

And kind of get into what the volume trends will look like. And to point out before anything is written about yield that's a little bit below where we were for the Q2, but we're going to see some changes in the mix of our freight As we compare to the Q3 of last year, that was the lowest point for our weight per shipment. We were seeing sequential decreases there and in the Q3, the overall average was £1538 there. So we're still trending at about 15.60 or so pounds in July. It was right at 15.70 in the second Quarter.

Speaker 3

So as we start to see more of an increase in that weight per shipment, certainly that's usually Lower revenue per hundredweight. So that will have a little bit of an effect there.

Speaker 6

Okay. And that's 7.5% is ex fuel, correct?

Speaker 7

Correct,

Speaker 6

yes. Okay. Just want to And then I guess for my follow-up, I guess this was for you as well, Adam. But just is there a way to maybe think about operating ratio trends sequentially into the Q3. I think typically there's a little bit of degradation, just seasonally 2Q to 3Q.

Speaker 6

As we've been talking about for the last 2 years, it doesn't feel like anything's following normal seasonal patterns anymore though. But would just be curious to kind of get your sense for How we should be thinking about operating ratio trends sequentially, if there's sort of any puts and takes to maybe think about there?

Speaker 3

Sure. Yes. So it's normally about a 50 basis point increase from the second to the third quarter. We've got some different things going on this year. And one thing in particular is General Supplies and Expenses.

Speaker 3

We've got some we don't want to necessarily say what they are at this point, but we've got some exciting new things that we're doing from marketing standpoint, where we'll see more cost in the 3rd quarter, the 3rd and the 4th quarters than what we saw in the 2nd quarter. So there's expecting about a 40 to 50 basis point increase in those costs as a percent of revenue from the second to the third quarter, Just mainly due to the timing of some of these programs. But so that would kind of take normalized up to about 100 basis points. Much like we talked about at the end of the Q1 call, our miscellaneous expenses have been trending below what that normal average rate, that's Usually about 0.5 point. So I might see that revert back to average.

Speaker 3

That's kind of what I've been anticipating. So somewhere in that Probably 100 basis point to 150 basis point range. I feel like it's kind of just a normalized target for us. And that is off 2. A base of 69.5 percent, just to make sure everyone saw that.

Speaker 6

Absolutely. We definitely saw

Operator

The next question comes from Ravi Shanker with Morgan Stanley. Please go ahead.

Speaker 8

I'll just kick off with that comment. Congratulations on the margins guys. That was a pretty incredible achievement. Maybe to just start off with a big picture question related to that. How do you run the business?

Speaker 8

Do you run it for Top line growth, EBIT growth, do you have a margin target? Do you have an incremental margin target? Kind of what's your North Star, if you will, and how you run the business?

Speaker 3

All of the above.

Speaker 8

That's easy.

Speaker 3

No, I mean, certainly, we've got just some broad measures that we look at. For one, any dollar that we invest needs to have an appropriate return with it. But as we talk with our customers, we look and we think about what our long term market share Opportunities Are. And then that dictates the investments that we need to make. Certainly, when you look at our strategic plan, it starts with giving good service and to give good service that supports our yield management, which then produces the cash flow that we can reinvest in capacity and to reinvest back in our employee base.

Speaker 3

That's really what drives the service products. But we don't want to just grow for growth sake. We feel like we want to produce profitable growth. And that's the reason why we talk about the long term margin improvement that we feel like we can continue to generate. And we laid out an annual operating ratio goal of Below a 70 when we finished the Q4 last year and certainly doing it for 1 quarter shows that it can't be done, 2.

Speaker 3

But we've just got to continue to work at it. And there's nothing magic that will make that happen. It'll 2Q. Continued disciplined execution of our plan and a focus on continuous improvement cycle that we have. And It takes every employee coming in every day, thinking about what they can do to make this company better, whether it's improving our service and revenue Trying to take cost out of the equation as well.

Speaker 3

So we want to continue to produce profitable growth. We've got a good track record of doing it. We think When we look out over the next 10 years, we've got tremendous opportunity there and that too should create increased shareholder value for us.

Speaker 8

Understood and if it were easy, we wouldn't be doing it. Maybe second question on the macro, obviously a lot of red flags out there on inventory levels. What are your customers telling you about what their inventory levels look like and what do you think is potential risk And maybe if you can distinguish that between industrial and consumer end markets, that would be helpful.

Speaker 3

Yes. Like Like what I was saying before, we feel good about what we're hearing from our customers, if you will. And it's Really things are playing out exactly like we thought they would. For the last couple of quarters, we've talked about The fact that customers were telling us good things that supported the demand trends that we were seeing and what we were hearing from customers and that we felt like that if consumption did slow and it had the effect For slowing overall GDP, that freight demand could remain strong. And certainly, we feel like that's what we're seeing and what we continue to hear from our customers.

Speaker 3

And so we've had a lot of engagement, like I mentioned, with them over the last few months. And We're still hearing overall that generally inventories are lower than what they need to be. Many of our customers are still Dealing with record numbers of back orders that they've got to figure out how to get labor and other fixing other Supply Chain Issues to make sure they've got all the parts and pieces to produce finished product to fulfill those orders. And so for that reason, it's something that we think freight demand can continue to remain steady and support stating this with volumes as we continue to move through this year. But A lot of people have just got issues they've got to continue to work through and we want to be there to continue to help them And make sure that if it is one of our manufacturing customers, we're continuing to help them and taking supply chain issues off Their platform and if it's a product that needs to be available for sale, certainly if you're selecting a carrier with 99% on time and claims ratio of 0.1%.

Speaker 3

We certainly are going to provide the service that our customers are demanding.

Speaker 8

Got it. Adam, just one very last follow-up on fuel. I know you said earlier that you're looking for fuel to be net neutral to EBIT, But I think you're doing a nearly 50% incremental margin on fuel surcharge revenues. I'm just trying to better understand this. Is it just a timing thing?

Speaker 8

Is it something that's going to just from a modeling perspective, how do we think about fuel with the volatility here and kind of maybe moderating in the back half And what that does to your overall incremental margins?

Speaker 3

Well, I think that it's who knows what's going to happen with the price Fuel, but we're certainly in the camp that we hope it tracks down for the overall health of the economy. And I think you've got to look back if we get into a declining fuel rate environment, The impact that that might have, when you look back in 2015, 2016 was kind of the last period where we saw some Pretty big decreases there in the fuel rates. And just like I mentioned before, if we get in that declining rate environment, we'll be looking at contracts as they and looking at lower fuel surcharge contributions that lower fuel cost as well. And I know everyone likes to try to take the fuel out of both the revenue and on the cost side, but the reality It's in the revenue that we're trying to collect and it's in our expenses as we pay our payables. And so It's something that we've got to account for.

Speaker 3

And it's why when we talk about our long term yield management philosophy, we include Fuel in both the revenue per shipment and the cost per shipment. And if you look over the last 10 or 15 years, With fuel being moderately higher or moderately lower when you look on an average basis over that period, We've been able to exceed our cost per shipment inflation between 100 and 150 basis points. And So in some individual quarters that may look a little different than others, but we've got a lot of long term customers and And that's how you got to look at things from a customer relationship standpoint is overall what are those inputs on the revenue Call side and how can we continue to create some positive delta there to help us continue to reinvest in the capacity back in our business Because no one else is investing in service center capacity like we are. And that's part of the value proposition, so we can help our customers grow.

Speaker 8

Great. Thank you so much.

Operator

The next question comes from Todd Weitz with UBS. Please go ahead.

Speaker 7

Yes. Good morning. It's Tom Wadewitz. I think Adam you talked about headcount and you said you kind of have the resource you need and can probably be steady for a while. I think When you've added a lot of people in a short period of time, there's opportunity for them to kind of learn the system And get better at what they do.

Speaker 7

So how do you how should we think about the potential impact to your margin Order different cost buckets if we have kind of a stable tonnage backdrop in a stable headcount framework for you the next couple of quarters. How might that productivity affect margin and which cost lines might improve?

Speaker 2

Yes. Todd, I'm going to try to answer that for you. But I'll say this, we've been through a tough time, not Just OD, but the entire LTL industry with the growth that we've experienced in the last year and a half, two years since the fall 2020. It's been a handful for all of us to respond to our customer needs and people requirements, Equipment and all those kind of things. We've hired an awful lot of people, somewhere in the 6,000 plus range when you look at all across all employees, dock, drivers and everything else, but it's an awful lot of additional headcount.

Speaker 2

And in that comes an awful lot of inexperienced folks that we've had to deal with over the last couple of years. So Well, I don't think anybody would say they really want things to slow down. Certainly, I don't. I mean, it's fun when you're busy and you've got Challenges trying to accomplish all the things you want to accomplish. But at the same time, when we get into these leaner times and we start to flatten out like 2.

Speaker 2

It's not all bad. You can step back and start to refine some of your processes. You end up with certainly better trained employees and whatnot. They understand what to do, how to do it. You're not adding to the list of folks like you were back in the last couple of years.

Speaker 2

So it's not bad by any stretch. Certainly, our platform productivity, our P and D productivity, maybe some of the aspects of line haul load factor and Those are included as well, but we can improve in all of those areas. It also gives you some time to look at your clerical processes and whatnot, what's good, what's bad, is there some technology out there that Can help you with those kind of things. So there's just an awful lot of advantages to not being so crazy busy like we've been. So Definitely positive from that standpoint.

Speaker 2

Again, nobody wants to see it slow down, but certainly, we look at the positive What we can accomplish while it's this way and be better when we come out of it on the other side, certainly.

Speaker 7

Okay. I guess the second question is really just A clarification, I know you talked a bit about July, you had a couple of questions on that. Is the tonnage implied in that something around flat or does it imply down a little bit? I know you don't want to Give us the precise numbers because they can change a bit as you have the full month, but is the backing into kind of a flattish Tonnage number about right, what you've seen so far in July?

Speaker 3

It's down slightly, Tom. And when we look at so it's down slightly on a year over year basis. Similar to what we've 2. We've seen in the prior couple of quarters, the 1st month of the quarter and then the Q1 this year, the 2nd quarter as well, was well below normal seasonal trends. And I would say that we're a little bit below our normal seasonality.

Speaker 3

Typically July is always a month It typically decreases about 3% as compared to June. We are a little bit below that, but I know some of you are looking to it from a year over year standpoint comparing this year back to 2019, At least what we're seeing is kind of similar somewhat similar trend in July versus June looking at it from that perspective as well. So we'll see how the rest of the Q3 continues to play out. Typically, September is our busiest month of the year. And so we'll look to see if volumes if we get some sequential acceleration to get through the remainder of this quarter, but it's just something we'll continue to stay engaged with our customers on and Try to continue to manage from a call standpoint and make sure we've got everyone and everything in place to deal with the volumes that

Operator

The next question comes from Chris Wetherbee with Citigroup. Please go ahead.

Speaker 9

Hey, thanks. Good morning. I guess I just wanted to touch on sort of the commentary around the pace of demand and not to be 2 nitpicky, but I guess I just want to sort of maybe understand it seems like tonnage is maybe performing a little bit Less Than Typical Seasonality. So I guess I'm curious, do you think there is a sort of demand deceleration that's Kind of becoming more clear within the numbers. It sounds like customers are still relatively optimistic about what the pace of volume might look like as the year progresses.

Speaker 9

But is there a bit of a disconnect between what you're hearing from them and what's actually coming through from a tonnage perspective?

Speaker 3

I don't know that it's I mean, this is really something we've had to address all year and really trying to bifurcate the demand That we're seeing and hearing from our customers versus the actual tonnage trends. And we have, like I just mentioned, we have Underperformed Normal Seasonality, but we have to somewhat keep in mind too that our 10 year average trends That includes our market share doubling over that time period. So we have continued to win market share. I think When you look at our numbers versus the industry, the last 2 or 3 quarters, I think, if you take the public carriers, The tons have been negative overall for that group, while you've seen obviously tremendous growth from us. And I still think that Based on the feedback and conversations with customers that you'll continue to see our volume numbers outperforming At least that public group that we compare against.

Speaker 3

And so the conversation around demand is the demand for our service. 2. Certainly, our customers, they may not have the same type of volumes. So we're still picking up. We haven't lost any customer accounts.

Speaker 3

We're still making pickups every day, but it may just be they don't have the same number shipments to give us because some of the demand for their product has decreased. But I think the positive takeaway from this is how strong we continue to see, 1, the strength of our pricing programs, but just those customer conversations and no customer defections And the conversation about the need for service and how important that is becoming to our customers. We've certainly proven Our value proposition over years and how we may be a little bit more expensive up Front. But when you look at the total cost of transportation, whether it's delivering and meeting the on time in full requirements that some of

Speaker 9

And you guys have been through obviously many cycles and have been pretty successful navigating through those cycles. You just mentioned the sort of resiliency and the So if we think about Sort of a normal recession, whatever that may be in your definition. How do you think sort of operating ratio and maybe earnings power assuming that maybe the back half or some point in 2023, we're seeing more sustained negative volumes for the industry. Is positive profit, something that we can kind of continue to look for from the model. Just kind of curious how you think about that resiliency in a downturn.

Speaker 2

Chris, I think all of us are going to have to see where this thing goes. I mean, I don't think we're in a recession yet, at least I haven't heard that. We'll have to see where it goes. But at the same time, you got to remember, we're up against some tremendous numbers from last year. And we're still at a very, very decent level of business where we can turn a pretty good profit, I think.

Speaker 2

I mean, we've I think we've proven that, right? Certainly, the Q2 bears that out. But I think we're still in a pretty good spot. Again, We can't control the economy and some of the things that the government does that drive some of it and whatnot, but I think we're still in a good spot today and let's hope we don't see further deterioration in the things going on From an economic standpoint.

Speaker 9

Okay. No, that's very helpful. Certainly, we can see the strength of the numbers. There's no doubt about that. Thanks for the time.

Speaker 9

I appreciate Sure.

Operator

The next question comes from Scott Group with Wolfe Research. Please go ahead.

Speaker 10

Hey, thanks. Good morning. I just wanted to follow-up on the headcount question. So if I look back at some of the past periods where tonnage has gone negative, Headcount usually follows and comes down 2%. If I just take flat headcount from here in Q3, it's still up about 10%.

Speaker 10

Do you see opportunities if tonnage stays negative to reduce headcount? Or are you going to be potentially More reluctant to do that this time around just given the problems that everybody had hiring people.

Speaker 2

I think maybe you're pretty perceptive of how our industry has been the last couple of years with that 2. No question. I mean, we certainly don't want to get in a situation where we have to Start making cuts and that kind of thing. That's extremely hard to do. We always hate to do that.

Speaker 2

I mean, obviously, we've got to try to match revenue and or the shipment levels to labor. I mean, that's what we've done for many, many years and we have to continue to do that. In some cases, attrition helps to take care of our situation. So we always have a little bit of that, Probably much less here than most places, but we obviously we sit on hiring. We're not Actively hiring hardly anywhere now, maybe specific needs and replacements and that kind of thing, but we're certainly not adding Anybody on top of what we've got.

Speaker 2

So yes, I can promise you any reductions we would make, we would look at those very, very carefully before we execute it, if that makes sense.

Speaker 10

Okay. But it does sound like if we're not sort of Hiring more, will there be some sort of natural attrition that could take the headcount down a little bit from here?

Speaker 2

Certainly. Absolutely.

Speaker 10

Okay. And so maybe just to tie that with that last question. So in an environment where Right. Tonnage stays negative for a little bit. Do you think you could still improve the operating ratio or maintain the operating ratio as you've done in like 15 out of 16 years or something like that?

Speaker 2

Well, that would obviously would be our objective to continue to maintain and Certainly improved. I think we've proven it over the course of time and we'll just have to wait and See, I don't want to get into all of that at this point in time. My crystal ball is not completely crystal clear. So we'll just have to see where it goes, but 2. We'll certainly continue to do the right things day to day.

Speaker 2

We'll continue to execute from a service standpoint and whatnot, Keep our people focused on doing the right things and those are the things that drive the bottom line, sometimes the top and the bottom line, We'll continue to do those things well and we'll see where it goes.

Speaker 10

Thank you for the time guys. Appreciate it.

Operator

The next question comes from Todd Fowler with KeyBanc Capital Markets. Please go ahead.

Speaker 11

Hey, great. Thanks and good morning. So Adam, in your prepared comments, you had some commentary about cost inflation into the back half of the year. And I'm guessing or I think that traditionally you put through employee wage increase at some point in the Q3. And it sounds like you're also getting some benefit from Improving productivity from the workforce standpoint.

Speaker 11

So I guess my question is, are your comments that wage or that cost inflation on a per shipment basis, is that going to increase or accelerate in the back half of the year or does that start to level off? I guess I'm just kind of curious what your expectations are on the cost inflation side moving forward?

Speaker 3

Yes. We do always give a wage increase at the beginning of September each year. And so that's Pretty standard in terms of it's in our numbers and it's part of the reason why the 3rd quarter operating ratio is generally higher than the second. But from an overall inflation standpoint, when we started the year, we expected higher inflation in the first half. And really, we started seeing cost increasing about this point in time last year.

Speaker 3

And so our costs were going up and that's 2. You can really start seeing when we looked at contracts that were turning over in those periods, we had to get arger increases then. So we felt like we were going to see some moderation with our cost in the back half of this year, But certainly didn't foresee the sustained increase in fuel prices and them continue to Accelerate like they have this year and that's having a follow on effect both directly and indirectly with other 2 pieces of our cost structure. So at this point, I don't expect to see that moderation like we had initially Talked About, but don't necessarily see it accelerating either from this point. I just think that We're going to continue to see maybe that core inflation number kind of in that 7% to 9% range like we have.

Speaker 3

And When you back, if you take our look at our costs and back the operating supplies and expenses out, which includes fuel, They were up about 10% in the 2nd quarter on a first shipment basis. And so it's certainly That's higher than where we thought it would be. And but we do have some opportunities, like Greg mentioned. We certainly want to continue to focus on improving the productivity of all areas of our operation. I think that can help Some of that cost per shipment inflation, we were able to reduce our purchase transportation in the second quarter.

Speaker 3

There's still a little bit of miles we were outsourcing in the Q2. So we're back in that 2% to 2.5% range number with that line item, but There may be a little bit more out of that number where we can see some decreases. But otherwise, it's just trying to manage each and every line item on the income statement that we can and look for areas with discretionary spending that we may can pull back on and just look For any area that we can ultimately save some dollars.

Speaker 11

Perfect. Okay, good. That's helpful and that makes a lot of sense. I guess just to follow-up and it's a little bit of a tricky question to ask, but from a bigger picture standpoint, it sounds like a lot of your competitors, their approach to the LTL market now is a lot more like your approach, adding some more terminals, focusing more on service. I guess as you think about the competitive landscape, does that change your ability to win share in the marketplace going Forward or have you seen any differences in customer responses due to some of the things that your competitors have been doing over the last, let's call it, 2 to 6 quarters.

Speaker 2

I don't think so, Todd. I mean, we'll continue to execute and Do the things that we know best how to do. I think we've had a pretty steady run up on our share And I would expect that to continue.

Speaker 11

Yes, it makes sense. I know it's a tricky question to ask, Just was curious your thoughts on it. So thanks for the time this morning. I'll turn it over.

Operator

The next question comes from Ken Hoexter with Bank of America. Please go ahead.

Speaker 12

Great. Good morning. Greg and Adam, congrats on breaking 70, a tremendous group leadership there. Just a few I guess you had a few questions on the downturn or potential The impacts on the operating ratio, but maybe just if July is starting to see larger negative tonnage trends versus June and maybe a little bit more than seasonality. Can you talk about a normal cycle?

Speaker 12

How does that bleed into pricing pressure? I know you don't typically change your pricing given the quality of service, but for the group, how long does it take to see those negative trends kick in and start showing Up on the pricing side, especially in what's happened with the truckload side.

Speaker 3

Yes. Again, I think that 3 quarters or so, where volumes have been negative and, or at least flat And going back to last year, so it's the environment has continued to the pricing environment that is, has continued to remain Positive and we haven't heard anything any different really in that regard. So I think that We know what our strategies are and what we're going to continue to do. A big piece of our yield management strategy is making sure that we're trying to cover the cost inflation we see in our business, but an even bigger element is making sure that we're generating the returns that will help us continue to invest dollars in the real estate network. And I think when you look over the last 10 years, we've invested about $2,000,000,000 in expanding the capacity of our network.

Speaker 3

And when you look at The expansion of our door capacity is about a little over 50% over that 10 year time frame and at least the number of service centers in the industry is actually down A few percent. So regardless if you see some additions here and there, we have been adding really at customer's request and our customers are leveraging our network, especially in the retail side. Some of this e commerce freight comes and transitions from the truckload world into LTL. That's the power of our network. It helps Our customers with managing their supply chains and ultimately, we think helping them save money overall.

Speaker 3

So that's why we've got to continue to work at it, but it's still an environment where we've got positive revenue growth 2. Our revenue growth of 18% includes that slight decrease in July For tons that we're seeing, but we're still producing revenue growth that's above our long term average revenue growth rate when you look over the last 10 years. And so we're just going to continue to look at leveraging that to the bottom line. And certainly, kind of what we talked The operating ratio moving into the Q3 that would still produce some pretty good improvement there on the next quarter's OR.

Speaker 12

Adam, just to clarify that, you talked about the last couple of quarters seeing the industry in the past, Have you seen a more immediate impact to industry pricing or even your pricing in a down tonnage environment or does it take about 3 quarters or whatever to start seeing some pressure on. I'm just trying to see if this time really is different because of the industry moves or If this is more historically normal on a delayed pricing impact.

Speaker 3

Well, I think if you look back, 2019 is a good example where The environment was softer and I think that the industry was pretty disciplined with pricing during that period. So Yes. We certainly expect that our own pricing will continue to be positive. And again, we haven't really heard anything from any other carriers. We'll continue to see maybe what they're saying publicly as well.

Speaker 3

But I think it takes a lot to run-in an LTL company. Certainly, there's a network effect that has to be managed there and that's the big difference between us and the truckload environment. I think that it seems to us from what we've heard that there's not many LTL carriers, at least the public that have taken on a lot of truckload spillover freight. So I don't think you're going to see this vacuum effect as truckload has loosened a little bit of freight spilling back into that mode, like we may have seen in prior cycles as well either. So To me, that would lend itself to seeing a little bit more stability, maybe with volumes, even though, like I mentioned, They're down for the other carriers or have been for the last few quarters.

Speaker 3

We'll continue to watch that. But I think we would expect To see the continuation of a disciplined approach much like we did in 2019.

Speaker 12

And can I just get a clarification on one of the Prior questions on you talked about stalling hiring now? If we see, I guess, those volumes staying at these levels, is that something you then The attrition to overtake your hiring and so you expect that to come in? I just wanted to clarify kind of your comments on the employee levels.

Speaker 3

Well, the hiring practices, that's something that each one of our 255 service center managers Are responsible for. They have to stay engaged with their customers at the local level to know what Freight demand within their facility is going to look like to then make sure that they've got the right people capacity in place to be able to respond and give the service that our customers demand from us. So that's something that we let them manage. It's not just the number of people they have in place. There's always managing the hours worked up and down 2, based on changes with the volumes as well.

Speaker 3

So we just got to continue to watch overall how 2. The volumes trend and we feel good about our numbers right now and we feel good about our overall level of headcount as well. But ultimately, we'll continue to let our service centers manage that. And individually, you may be seeing some that are making additions Because they're growing and we're seeing in some facilities really strong double digit outbound type of revenue and volume growth. And then The others, if they've got some weakness in their facility for whatever reason, specific customer type of issue, then they've got to manage on the other side.

Speaker 3

But it's a coordinated effort that's really we give that responsibility with oversight, obviously, but our service center managers

Operator

2019. The next question comes from Amit Mehrotra with Deutsche Bank. Please go ahead.

Speaker 13

Thanks. I'll try to just ask one question to balance out the 3 questions that some other people asked. I think 3 or 4 years ago, Greg and Adam, you kind of started the call mentioning Some deteriorating pricing power in the industry. And on follow-up, you kind of talked about Just bringing attention to some indiscipline that you're seeing in certain lanes. I think part of the motivation was to kind of nip it in the bud early.

Speaker 13

It It seems like we're kind of at that part in the cycle where we could start to see that a little bit. I'd love for you guys to comment on that. Are you seeing any players, any large national players because of weaker service levels or whatever that may be seeing a little bit more deterioration in demand start to be a little bit more in discipline on pricing, if you can comment on that?

Speaker 2

No, we have not seen that 2nd quarter. Certainly not to my knowledge, I haven't heard that. Like Adam had mentioned earlier, we've had an awful lot of customer interaction So far this year with customers coming here, some of the things we're doing out in the field from a customer standpoint, we have not seen that, Have not gotten that type feedback from our sales department. So I think that's all positive. And I think if you look at our We're all healthier than we've been for the most part.

Speaker 2

I think the bottom lines have improved across I think I can say that without putting a whole lot of thought into it. But I think everybody has To see the benefit of being price disciplined surely. So I think it's benefited the industry in general. So Yes, let's hope that continues.

Operator

2019. The next question comes from Bruce Chan with Stifel. Please go ahead.

Speaker 4

Great. Thanks Greg, just want to follow-up on those pricing comments really quick. We've heard from a few others out there that there's been a little bit of a pickup in inbound RFPs and RFQs, maybe especially from the larger national account side. Are you all seeing any signs of that?

Speaker 2

I don't think so. I haven't heard that. I mean, most of our bigger national accounts, they're all we have annual renewals and whatnot. Some may be on 2 or 3 year type renewals, but most everybody is on an annual renewal. 2.

Speaker 2

I haven't heard that there's any huge pickup with that at all. So, no, at this point, not. But we'll see. We'll certainly have to wait and see, but so far so good from our standpoint.

Speaker 3

Okay, great. Appreciate the time.

Operator

The next question comes from Ari Rosa with Credit Suisse. Please go ahead.

Speaker 14

Hey, good morning, Greg, Adam. Thanks for squeezing me in here. So you guys talked about investing 2. In the network to take share through the cycle or preparing for the next cycle. And it's certainly a formula that's worked very well for OD in the past.

Speaker 14

I wanted to get your sense for kind of how you're thinking about that in terms of the longevity of what a down cycle might look Like and kind of the risk that you might be sitting on idle capacity for an extended period of time, If demand deteriorates and it seems like there's kind of 2 different schools of thought. On one level, it seems like the LTL industry has been pretty tight on capacity and pretty disciplined about the way it's invested and maybe that means there hasn't been as much froth that's developed on the supply side. At the same time, obviously, what we've seen in terms of consumer spending and durable goods orders has been pretty anomalous over the last kind of 18 months to 24 months given COVID and maybe there's some concern That those conditions that have existed over the past 18 months or so aren't really sustainable from a demand perspective. So I just wanted to The risk that you might be sitting on idle capacity for maybe a longer period of time than you might hope for.

Speaker 3

I think we're always sitting on idle capacity and that's really what we want to have in place. We generally target having 20% to 25% excess capacity at all times. And the reason for that is, as quickly As demand can change, you can't put service center capacity in place quick enough. And it takes doors in an LTL network To really process freight and be able to grow, certainly, you got to have equipment and people as well, but the doors Really, what takes the most time to get in place. And it's why when we see these positive inflections and the domestic economy that you see the rate of market share growth for us increase significantly where we're out Performing the rest of the group by double digits, if you will.

Speaker 3

And so it's you've got to put it in place, you've got Have a consistent investment process and just continuing to work at it, knowing where things are tighter and where you might be tight in a couple of years' time if volume comes back to you in a big way. Yes, we're used to carrying that extra cost, but that's part of our strategy and it is different. We like to keep that excess capacity in place. Most of the industry, It seems operates closer to full utilization within the network and but that creates a lot of volume opportunities like We saw in 2020 in the back half as the recovery began and certainly through 2021 with the rate of growth that we had 2. And so far, through the first half of this year.

Speaker 3

And again, as we said earlier, we produced over $700,000,000 of Revenue Growth. Last year was a record at $1,200,000,000 for us and we're on a good pace to have another $1,000,000,000 plus type of revenue growth year, but it certainly takes making those investments. And When you look and trying to go back into some of these prior years when there has been a down cycle, you can look at our operating ratio in 2016. In 2019, we're able to manage all of our variable costs well and try to take advantage of productivity opportunities. But generally, the only change in the operating ratio you might see Is with respect to that depreciation line item and that's where we are making those investments.

Speaker 3

Those depreciation costs will increase as a percent of But we try to manage all of the other costs flat or with some improvement if we can to minimize any type of negative impact on the operating ratio until we get that volume flow coming through again. We've said it takes density and yield to produce long term margin improvement and that will continue into the future as well. But you certainly to get that density factor, it takes a continuous investment in capacity.

Speaker 14

Got it. Understood. Okay. Thank you for the time.

Operator

The next question comes from Bascome Majors with Susquehanna. Please go ahead.

Speaker 15

Adam, in the last 6 months, you guys have bought considerably more stock than you bought any prior full year. Can You talk a little bit about the pace you feel comfortable with in the second half and will you consider adding a little leverage to take advantage of the share price or Historically, you've been within your free cash flow as far as total shareholder returns. Is that a good kind of bookend to think about as we think about where share repurchase 2Q. Thanks.

Speaker 3

Well, certainly the repurchase program, we typically look at our cash from operations and At the beginning of every year, we know what our CapEx is going to be and then we've got the fixed return element through the dividend program. And then we typically take the balance and try to put that into the share repurchase program. But Yes, we have said in prior periods when we think the opportunity is right, we'll put more dollars Into that program and certainly that's how we have felt this year. In the Q1, we did have a $400,000,000 accelerated share repurchase program. In the Q2, it was more strategic and just day to day buying on a more of a 10b5 type of basis.

Speaker 3

And Yes, we'll continue to look at all options as we move forward. But certainly, when the share price is at the level where it's It's certainly down from where we finished last year and we're going to continue to buy more shares And use the cash that's on the balance sheet for starters and you just got to continue to look at it on a day to day basis. In the past, we've said we don't necessarily want to directly borrow to go out to buy stock, but we've always just got to look at Kind of where the price is trending and what we think the best use of cash is and then just trying to take Longer term view of it as well.

Speaker 15

So it sounds like Leverage to buy stock is not plan A, but opportunism can make that possible depending on Your view of the market versus your stock price?

Speaker 3

Correct. Thank you.

Operator

2019. The next question comes from James Monaghan with Wells Fargo. Please go ahead.

Speaker 4

Hey, guys. Thank you. Just wanted to actually touch on or follow-up on something you had mentioned around the spread between pricing cost and just the pricing environment overall. Just wanted So to get your sense on sort of the amount of sort of cost pressure maybe some of your competitors are under and if you think that might keep discipline Fairly higher on pricing and also just maybe sort of thinking about like the outlook for that spread moving forward just given the fact that You guys own more of your assets and therefore might have a cost advantage.

Speaker 3

Yes, I don't know that we can comment on our Competitors' Call Structures. But certainly for us, we obviously feel like we've got Opportunity to continue to, 1, to try to reduce some of our costs through But that's again kind of going back to our continuous improvement cycle and then trying to price above cost. It's not always on a quarter by quarter basis. Again, it's not always going to be that we've got that 100 to 150 basis points delta in our revenue per shipment and cost per shipment performance and you got to look at that on a Tier 1st quarter. On more of a core basis, but we just look at it over a longer term time horizon.

Speaker 3

But that's the yield improvements, One big element for the long term margin improvement opportunities that we think we have. And obviously, a lot goes into that. It's easy to sit here and say that we need yield above cost, but a lot go into both of those metrics. And certainly, you got to have the service to support the yield. And then we've got to continue to look at ways that we can save on the cost side as well to make Sure that our pricing is still in alignment with the market.

Speaker 3

And we do believe we can get a price premium in the market based on the quality of our service. We study our Maschio quality results closely each year to look at how we compare against sales and how we compare against the rest of the industry to make sure that we're staying on top of changes, we're staying ahead of the market. We're continuing to give our customers what they're asking for as well, be it through capacity in markets, Be it capacity of our trailer pool, technologies, pricing programs, new changes there, You name it, we're always trying to stay ahead of the curve and we feel confident that we've got a lot of market share opportunities in front of us and We just want to keep our focus on execution to make sure we take advantage of those opportunities and again to make sure that it's not just growth, it's good profitable growth.

Speaker 4

Got it. Actually, just given how much cost of run up, do you think that There's a repricing opportunity or a need to reprice moving forward on a larger portion of your business than normal? No.

Speaker 3

And again, that's part of our continuous improvement cycle. Our contracts in our business come up every day. It's why you generally see comes up for renewal. We're going to ask for an increase and to improve the yield on an account, It's not always through a price increase either. It's looking at other areas of opportunity in ways that we can help Customers save money and that may be an operational change.

Speaker 3

It could be a number of things And that's why it's so important for our sales team to stay engaged with the customers to understand what their needs are, our pricing team as well, So that we can work together and create win win situations, because we're not here to just have a customer for this quarter and the next quarter. We've got customers that have been in place for many, many years and any new customer that's coming on board, We want them to be in place for the long term as well. So it's all about creating those win win situations. And whether it's, again, through an operational change, we've recently announced a new pricing program as well that we've got And so those are the ways that we're going to continue to stay engaged with our customer base and

Operator

2019. This concludes our question and answer session. I would like to turn the conference back over to Greg Gantt for any closing remarks.

Speaker 2

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

Speaker 3

hope you have a great day.

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Earnings Conference Call
Old Dominion Freight Line Q2 2022
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