Old Dominion Freight Line Q2 2023 Earnings Call Transcript

Presentation

[Operator]

Hello, and welcome to the Old Dominion Freight Line Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded.

And now I would like to turn the conference over to your host today, Drew Andersen. Please go ahead.

[Drew Andersen, Operations Clerk at Old Dominion Freight Line]

Good morning, and welcome to the second quarter 2023 conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through August 2, 2023 by dialing 1-(877)-344-7529, access code 7609314. 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. 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 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 one question at a time before returning to the queue. Thank you for your cooperation.

At this time, for opening remarks, I would like to turn the conference over to the company's President and Chief Executive Officer, Mr. Marty Freeman. Please go ahead, sir.

[Kevin Freeeman, President and Chief Executive Officer at Old Dominion Freight Line]

Good morning, and welcome to our second quarter conference call. With me on the call today is Adam Satterfield, our CFO. And after some brief remarks, we will be glad to take your questions.

The OD team delivered solid financial results for the second-quarter, considering the operating challenges associated with the continued softness in the domestic economy and a decrease in our volumes. With a 15.2% decrease in revenue during the quarter, our team is focused on improving our yield, managing our variable costs and controlling our discretionary spending. As a result, we were pleased to produce a 72.3% operating ratio and earnings per diluted share of $2.65.

We achieved these results by continuing to execute our long-term strategic plan which has guided us for many years throughout many economic cycles. The plan is centered on our ability to deliver superior service at a fair price, which included on-time service performance of 99% and cargo claims ratio of 0.1% during that second quarter. Providing this level of superior service strengthens both our value proposition and our relationships with our customers.

Delivering superior service also supports our ongoing yield management initiatives. We have improved the quality of our revenue over long term by offering a consistent approach to pricing, which is designed to offset our cost inflation and support our ongoing investments in service center capacity and technology. We believe that our ability to consistently offer network capacity differentiates us from the others in our industry, which is an additional element of our value proposition that we believe will support our long-term market share initiatives.

Our market share remained relatively consistent during the second quarter despite an environment where overall freight demand was subdued. The year-over-year decrease in our volumes, however, resulted in a loss of operating density. We believe that our long-term improvement in our operating ratio requires consistent increases in both density and yield, both of which generally require a favorable macroeconomic environment.

With our commitment to providing superior service as our first priority for our customers, it becomes a challenge to maintain, much less improve our productivity during the periods with reduced density. As evidence of this fact, our land haul latent load factor decreased 3.1% during the second quarter. We were pleased, however, that our platform shipments per hour increased 6.6% and P&D shipments per hour increased 0.5%. These improvements, as well as other efforts by our team to manage cost helped us maintain our direct operating cost as a percent of revenue.

Our overhead cost, on the other hand, increased as a percent of revenue during the quarter as most of these cost categories are fixed. We also believe in increase in aggregate depreciation expense due to the ongoing execution of our capital expenditure plan. We believe it is critically important to continue to execute on this plan regardless of the short-term economic outlook. We currently have approximately 30% excess capacity within our service center network, which is a little higher than our target range of 25%. We are comfortable with the amount of excess capacity as we remain confident in our ability to win market share over the long-term.

Finding land and building service centers in the right locations can take considerable time, therefore we make every effort to stay ahead of our growth curve with these investments. We could not have doubled our market share over the past 10 years without our consistent investment in service center capacity as well as our regular investments in our fleet, our technology and training, education and benefits for our OD family of employees. Our proactive approach to managing all elements of capacity has created a strategic advantage for us in the marketplace, which typically becomes most apparent to shippers in tight capacity environments.

We do not always know when an inflection point in the demand environment is going to occur, but we believe we are well-positioned to respond to any acceleration in volumes when it happens. Through the disciplined execution of our long-term strategic plan, our team has created one of the strongest records for long-term growth and profitability in the LTL industry. We remain committed to providing superior service at a fair price and maintaining the necessary capacity to support growth and 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 second quarter financial results in greater detail.

[Adam N. Satterfield, Executive Vice President of Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Thank you, Marty, and good morning. Old Dominion's revenue results for the second quarter reflects a 14.1% decrease in LTL tons per day and 1.1% decrease in LTL revenue per hundredweight. Our yield metrics were affected by the significant decrease in the price of diesel fuel during the quarter as LTL revenue per hundredweight, excluding fuel surcharges, increased 7.6% reflecting our consistent approach to managing yield. On a sequential basis, revenue per day for the second quarter decreased 2.0% when compared to the first quarter 2023 with LTL tons per day decreasing 1.8% and LTL shipments per day decreasing 0.3%.

For comparison, the 10-year average sequential change for these metrics includes an increase of 9.8% in revenue per day, an increase of 6.8% in tons per day and an increase of 7.2% in shipments per day.

Our shipments per day, on average, have been relatively consistent since December of last year. We had previously communicated our expectation for volumes to remain consistent through the second quarter despite the sequential growth that we have historically achieved in this period. Our baseline thinking was for volumes to remain consistent through the third quarter as well, although we have noticed an incremental increase in revenue over the past few work days. The change in our revenue on a week-by-week basis so far in July has been relatively consistent with historical averages. As a result, it appears that sequential change in both revenue and shipments per day for July will be the first time this year where we're more closely aligned with our 10-year average sequential change.

While there are still a few work days remaining in July, our revenue per day has decreased by approximately 15% to 16% when compared to July of 2022, although the timing of the July 4th holiday has skewed this number slightly. If the trend that we've seen over the past few work days hold steady through the end of the month, we expect revenue per day to finish down approximately 14% to 14.5% and LTL tons per day to finish down approximately 11.5 to 12%. Our LTL revenue per hundredweight is currently down approximately 3% to 3.5% as this metric continues to be affected by the significant decrease in the price of diesel fuel. LTL revenue per hundredweight, excluding fuel surcharges, has increased approximately 6.5% to 7%. As usual, we will provide the actual revenue-related details for July in our second quarter Form 10-Q.

Our second quarter operating ratio increased to 72.3% as our overhead cost increased as a percent of revenue due primarily to the deleveraging effect associated with the decrease in revenue. We were able to effectively manage our direct operating cost during the quarter as these costs remained consistent as a percent of revenue with the second quarter of 2022. Within our direct operating costs, our operating supplies and expenses improved 250 basis points, due primarily to the significant decrease in the price of diesel fuel and our purchased transportation costs improved 60 basis points. These changes more than offset the increase in salaries, wages and benefits as a percent of revenue for our drivers, platform employees and fleet technicians that are included in our direct costs.

Old Dominion's cash flow from operations totaled $287.8 million and $703.2 million for the second quarter and first half of 2023, respectively, while capital expenditures were $244.7 million and $479.4 million for those same periods. We utilized $160.5 million and $302.2 million of cash for our share repurchase program during the second quarter and first half of 2023, respectively, while cash dividends totaled $43.8 million and $87.8 million for the same periods.

We announced this morning that our Board has approved a new share repurchase program that provides us with the authorization to repurchase up to $3 billion of our outstanding stock. This program will begin after the completion of our existing $2 billion repurchase program that was announced in July of 2021. While we intend to continue our focus of returning excess capital to our shareholders, our first priority for capital spending will continue to be the strategic investments and capital expenditures to support the long-term profitable growth of our business.

Our effective tax rate was 25.4% and 26.0% for the second quarter of 2023 and 2022, respectively. We currently expect our annual effective tax rate to be 25.6% for the third quarter of 2023.

This concludes our prepared remarks this morning. Operator, we're happy to open the floor for questions at this time.

Questions and Answers

[Operator]

Yes, thank you. [Operator Instructions] And the first question comes from Jordan Alliger with Goldman Sachs.

[Jordan Alliger, Analyst at The Goldman Sachs Group]

Hi, good morning. Sorry for that. With -- obviously, there's a lot of noise in the background now with one of the major competitors out there. Can you maybe touch a little bit on, what if, anything you're seeing or expecting either from a diversion -- I guess from a diversion perspective now? Thanks.

[Adam N. Satterfield, Executive Vice President of Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Sure. We don't want to make any comments specifically on one carrier or another, but like I mentioned, we have seen an uptick in business over the past few days, in particular. But really, I think that over the past few weeks, we've started to start seeing a little bit better trend, if you will. And it goes back to maybe beyond that. I think we're at the end of a long slow cycle and we've stayed in front of our customers over the last year, year and a half, as things have been slower, I guess, really going back to April of last year. And typically when we get to the end of this kind of cycle, we start hearing comments about service issues with other carriers and the need for shippers to start reusing Old Dominion within their supply chain.

And so we've started increasingly having those types of conversations and certainly some of that has intensified here over the last few weeks. But when we look at things, we look at our success measured over the period of years and over the long-term as the way that we continue to try to manage our business. And we've doubled our market share over the last 10 years and I think when we think about the next 10 years of opportunity, we've got a long runway for growth ahead and we want to keep winning market share in the right way for us. So we'll continue to stay in front of customers for sure, and talk about the Old Dominion value proposition and how we can deliver value to their supply chain.

So it has driven a little incremental increase. We had been running at about 47,000 shipments a day. We talked a lot about that on last earning call last quarter. And we typically see a little bit of an increase in way from beginning of the month to the end of the month. But we've been, the last few days, running closer to 50,000 shipments a day. It's hard to say one factor versus another, what's driving that higher, but it has been a little bit higher than what I had initially forecast probably a month ago. So maybe it's picked up, at this point, a 1,000, 1,500, 2,000 shipments per day more so than what we had initially been forecasting for.

But I would expect that -- we feel like we're getting towards the end of the slow cycle and would expect to start seeing business levels start to return to us at the end of the year and certainly as we get into the early part of 2024. It feels like -- underlying demand takes supply in the industry out of the equation, but it feels like demand is starting to improve a little bit and we're having good conversations with customers, just like we've been having all year long. But, yeah, certainly it feels like things are starting to turn a little bit.

[Jordan Alliger, Analyst at The Goldman Sachs Group]

If I could just ask a follow-up, I think you had mentioned you have about 30% excess capacity in your network now whether it be demand or competitive problems. I think you also said, normally you like about 25%, but would you push that excess capacity lower? I mean would you run with just 20% or 15% excess capacity or is it a relatively firm line? Thanks.

[Adam N. Satterfield, Executive Vice President of Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Yeah, certainly, that 25% is just a target and we go through periods where when you look at the system on average, it's been below that, 2021 is a good example, where we had significant sequential growth that year due to the strength of the economy. And we look -- and you look back at our trend, we were one of two carriers that had a double-digit sequential increase -- at least public carriers, from the first to the second quarter of 2021 and then we were the only carrier that followed that up with another increase -- sequential increase from the second to the third quarter. So we've proven in the past that if you've got the right strategies, that we can take on business and pretty significant increases in business because of the way that we try to plan for the long-term and build capacity into the system. And certainly, you've always got to be thinking, in our case, we try to think several years ahead and stay ahead of our growth curve.

But that -- the service center capacity is one element of the overall capacity equation. There's still the people component of it and the equipment piece as well, but we try to stay further ahead of the curve with service centers and certain markets, we try to stay even further ahead, if you will. But that's always a number that flexes up and down and each service center is different. We've got some service centers that have got more capacity than others and -- but that's generally about where we try to stay just from an overall system average.

[Jordan Alliger, Analyst at The Goldman Sachs Group]

Thank you.

[Operator]

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

[James Monigan, Analyst at Wells Fargo & Company]

Hey guys, James Monigan on for Allison. Just wanted to ask about sort of how we should think about OR in the third quarter, like are you getting some volume, better pricing trends, presumably as well? How should we think about sort of the potential improvement? And should we essentially see sort of something, maybe even above seasonality, given the latent operating leverage?

[Adam N. Satterfield, Executive Vice President of Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Well, I think the top line is going to be the determining factor here and when it comes to the top line, obviously, we've shared a little bit about where we are with July and we'll continue to give our mid-quarter update, so August will be out there as well. But from a baseline standpoint, what I initially was thinking and I may try to address this in a slightly different manner than what we have in the past, typically we see about a 50 basis point increase in the operating ratio from the second to the third quarter. And I would expect this third quarter, we are going to have some increase in some of our overhead -- from an aggregate dollar standpoint, in some of the overhead categories. I feel like our total overhead expenses are going to -- dollars-wise, are going to be higher than where we were. Some of that will be depreciation. We expect our miscellaneous expenses to be a bit higher and our general supplies and expenses as well.

So it will depend on where that top line comes in. I think that we can manage -- continue to manage our direct operating costs, which are more variable in nature, consistent as a percent of revenue. And so we would look to try to keep those costs consistent with where we were last year, and that would be a slight improvement, but fairly constant with where we were in the second quarter. And then it just becomes the leverage that we get on the overheads. So if we've got some dollars higher, if the top line and if the volume environment were to stay flatter, like what our base case scenario previously was, then obviously, we would lose a little bit more leverage there. But if we get some incremental improvement and further growth from where we are now, I think that's going to be really the slide, if you will, in terms of where the OR might end up.

That baseline thinking, though, because of the increase in overhead expenses, I was thinking that we would be slightly worse than the normal seasonality, somewhere between 50 to a 100 basis points of an increase over what we just did in the second quarter. So a lot is just going to depend on how those overhead costs as a percent of revenue move around really depending on what the top line is doing.

[James Monigan, Analyst at Wells Fargo & Company]

Thank you.

[Operator]

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

[Jack Atkins, Analyst at Stephens]

Okay. Great. Thanks and good morning. I guess, I would like to ask a question on the pricing environment. And I guess more specifically, if you go back three months ago, there was an -- it seemed like there was incremental competition around some of the transactional freight in the marketplace. Have you seen anything change there, whether it's over the course of the last few months or in recent weeks, that would give you some more confidence about the trajectory of pricing in the marketplace? Just any sort of comments around that, I think, would be helpful.

[Kevin Freeeman, President and Chief Executive Officer at Old Dominion Freight Line]

Yeah. There has been no major changes in the pricing environment. I mean, we're still getting increases from our contract carriers and there's not anything really crazy going on out there, so which is a pleasant surprise in a slower environment. But again, we're not seeing any changes from the first quarter and we're still getting increases when we need them.

[Jack Atkins, Analyst at Stephens]

But I guess, just a quick follow-up on that, Marty, if I could. I mean, are you seeing maybe -- just given all the shifting dynamics in the marketplace, maybe a little bit less of a competitive situation going on with the transactional part of the market? Are you seeing some firming in pricing there I guess was what I was trying to get at.

[Kevin Freeeman, President and Chief Executive Officer at Old Dominion Freight Line]

Yeah. I haven't really seen any changes at all, whatsoever from a transactional basis. But it's -- it's just -- I mean, we -- if we needed -- as you know, as I've said before on the last call, we're a cost-plus costing model, that's what we base our pricing on and when we go in to discuss pricing, we basically show our customer what our cost is and they understand why we need to increase. We're not having any issues getting it. But no, I'm not seeing any crazy pricing adjustments out there since the first quarter.

[Jack Atkins, Analyst at Stephens]

Okay, all right, thank you very much.

[Kevin Freeeman, President and Chief Executive Officer at Old Dominion Freight Line]

Thank you, Jack.

[Operator]

Thank you. And the next question comes from Jonathan Chappell with Evercore ISI.

[Jonathan Chappell, Analyst at Evercore ISI]

Thank you. Good morning. Sticking with that transactional theme, Adam, last quarter you kind of flagged the 3PL business losses as being a bit more outsized. Has that basically run its course where there's not much more 3PL business to lose? And as you talked about this kind of recent uptick in the last few work days, has that been more kind of transactional volume as well, maybe getting some of that 3PL back or are you actually seeing core LTL freight pick up substantially over the last week or so?

[Adam N. Satterfield, Executive Vice President of Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Yeah, it's more of the core and I would say looking through our top 50 customers, the 3PL piece of the business really just performed in line with the company average really in the second quarter. We still had better performance with our core contract business, those that have direct contracts with us. But with revenue down 15%, everyone was pretty much down. A lot of that, obviously, there is a big decrease in fuel surcharge revenue, that had an impact on the second quarter, with the average price of fuel being down close to 30%. So that was certainly a headwind that we had to contend with. But that's -- we go back to -- we've had consistent conversations with customers really over the last year and I think we've been pleased with the trends that we've seen and certainly we'd rather be talking about growth and see pure growth going on.

So it's been tough to kind of go through the last year or so, but I think that we've had good customer relationships, we've got long-term customer relationships. People that have gone through supply chain challenges realize the value of Old Dominion and are continuing to increase their business with us. And the demand environment overall with the state of the domestic economy and that has certainly had an impact on our customers' businesses as well. And so many accounts that we've got the contract have been awarded the same types of lanes. Customers may just not have the same amount of business that they've had before and that's kind of what I was alluding to earlier, where I feel like we're getting to the end of that kind of process where it feels like we're seeing stabilization.

And I go back to just underlying demand for LTL transportation, I felt like things were kind of getting to the point where we were seeing stabilization. We've had stable trends all year, but I felt like we were getting back to the point where we might start to see more market share. It's been relatively consistent this year. It's been down slightly, but I felt like we were kind of getting to that end where things are going to start turning back in our favor and some of that just goes to some of the conversations we've had about others in the industry. We're hearing more service failures and that's generally when the business starts coming back to us. So I feel good about kind of those underlying trends and getting through the back half of this year and being ready for 2024.

[Jonathan Chappell, Analyst at Evercore ISI]

Great. Thank you, Adam.

[Operator]

Thank you. And the next question comes from Chris Wetherbee of Citigroup.

[Chris Wetherbee, Analyst at Smith Barney Citigroup]

Hey, thanks, good morning guys. Maybe want to come back to pricing for a minute, maybe kind of big picture. If we think about the potential for capacity event in the industry where we see capacity materially tighten, I think when we've looked at these in the past, we've seen meaningful pricing opportunities for the carriers in this space. I guess, conceptually how do you think about that? If we were to see some degree of capacity event, given the strength in pricing over this last cycle, is there still material upside as you think about that? I know volume multiple, it will come back, but wanted to get a sense of what you think about the potential future pricing opportunities are as capacity potentially gets tighter in the industry.

[Adam N. Satterfield, Executive Vice President of Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Well, I think, for us, it's all about having a consistent process and we talk about that a lot. We're trying to have -- as Marty mentioned earlier, we have a cost-based process and we talk about our cost inflation with customers and the need to have a price increase that it's a 100 to a 150 basis points above our cost inflation every year to support the significant investments that we're making in service center capacity and technologies. And so I think that's generally understood and it kind of makes sense if you sit across the table and have that conversation. And obviously, a lot goes into that for us, managing our cost and trying to keep cost inflation in check. And I was pleased that we're starting to see some of the cost per shipment numbers, they are moderating. If you take fuel out of the equation, just our core price inflation is starting to trend back to -- closer to what our expectations were for this year. So I feel like our team has done a phenomenal job with managing our costs and keeping that inflation in check as best we can in a low volume environment.

I mean, to produce 72.3% in the second quarter with a 14% decrease in tonnage is pretty remarkable in my opinion. But I think that we just got to stay consistent with our approach. And I think other carriers, if they start making similar to what was going on in 2021, and if other carriers are closing the pricing gap and are trying to use the environment to take even bigger increases then I think that bodes well for our market share opportunities. We're typically a little bit more expensive than the other carriers on average. And so we'd be pleased to see that gap close and that will certainly help support our own pricing initiatives as well. But the key for us is to focus on us and what we're doing, having those conversations with customers, demonstrating the value that we can add relative to the industry and just looking at what our needs would be to keep driving the cash from operations and the strength of our balance sheet even stronger to support further investments to keep growing the company.

[Chris Wetherbee, Analyst at Smith Barney Citigroup]

Okay, that's helpful. I appreciate it. Thank you.

[Operator]

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

[Amit Mehrotra, Analyst at Deutsche Bank Aktiengesellschaft]

Hey, thanks. Hi, everyone. Adam, on the 47,000 to 50,000 uplift in shipments, are there any mix changes there? Because if it is coming from some diversion obviously, Yellow have significantly lower weight per shipment and I don't know if there's any mix observations that may bifurcate shipments from tonnage. And then if we take this kind of new elevated tonnage number for the last couple of days here and we assume kind of it holds, what does August look like from a year-over-year perspective? And then the last question, three-parter but one question. Yellow is very different than OD and obviously, Yellow -- I know you don't want to address Yellow specifically, but they are the third-largest LTL company and they seem to be on the brink of going out of business. And so the question is, if Yellow customers are looking to divert, do you think OD is the natural relief out there because you are kind of the most expensive service company out there? I'm just trying to understand, are you the right barometer for that or maybe you see some of it, but a lot of it goes elsewhere?

[Adam N. Satterfield, Executive Vice President of Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Yeah, I'll see if I can try to address those in some sense of order. But to answer your first question, from a mix standpoint, not a lot has changed with mix. Our weight per shipment dropped a little bit. We've gotten down to about -- we've dropped about 10 pound. We've gotten down to about 1,525 [Phonetic] pound average or so and it's dropped about 10 pounds or so here recently, but not a lot has changed and I think some of that is we are seemingly -- seems to be picking up some more of the smaller tariff-based customers that generally got a little bit lower weight per shipment. So that's been good to see, if you will, overall. And whether or not that continues remains to be seen. And obviously, this is all just kind of developing.

But don't want to get into if we hold this trend steady or you hold that trend steady. I mean generally August sequentially is up about 0.5% or our shipments per day are up about 0.5% over July. And we'd expect that some of this recent trend, it's possible that if things continue to hold steady like they have, I talked about the impact of July for that, but obviously that could carry forward a little bit stronger, but we'll just take it one step at a time and keep giving the updates out there, as they are. But we were -- last year in August, we were at about an average of 51,000 shipments per day. So it starts closing the gap, if you will, if we can hold 50,000 steady.

But keep in mind, and that's what I was alluding to earlier, that there is a natural progression that happens from the beginning of the month to the end of the month. And we were already starting to see some trends. So I don't know that you can't just take that gap from where we've been averaging 47,000 shipments a day really since December of last year and just say, okay, there is this immediate incremental change. There has been change that's been developing and you can't just point to one specific player to say, this is the reason why. It's been a developing trend and it's the way history has played out for us. When we get to the end of the cycle, we start winning business from different carriers.

And so, with that said, I think that there may be direct freight opportunities, but indirect freight opportunities as well that may come out of, if there is an industry event and I think that's still an if, and we don't know any more than anybody else, but we just are staying engaged with our customers, making sure that they understand the capacity that we have and I think everyone knows the service that we can offer and no different than I think 2021, as an example, where freight was obviously coming to us very quickly that year and we stepped up in a very big way through the second and third quarters and a lot of the conversations that we had with shippers then will be similar conversations that we have now. We protect our existing customers' capacity for them. And that's how we would manage through if we get into another period where the freight opportunity is accelerating significantly.

[Amit Mehrotra, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you very much. Appreciate it.

[Operator]

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

[Tom Wadewitz, Analyst at UBS Group]

Yeah. Good morning. Wanted to go back to your comment on the capacity in the network, you referred to the 30% being above what your target is. I guess, if you kind of juxtapose that with, there may be opportunity for terminals, related to the discussion we've been having about the big industry participants that's under pressure. So I'm wondering would you consider being opportunistic and say, hey, we've got maybe more capacity than we need in the network, but there is an opportunity to kind of bring in a bunch of additional terminals that maybe fit well. Or just how do you think about that and the pace of terminal additions if you look at, I don't know, next two years, something like that?

[Adam N. Satterfield, Executive Vice President of Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Yeah, Tom, we're always looking for opportunities and that's why we try to stay so far ahead of the growth curve. We generally are looking at each service center in each region and projecting out five years of potential growth to know where we're going to have facilities that start hitting capacity. And those are the ones that go on our target list for kind of a -- we rollout internally a two year capital expenditure plan to expand service center capacity where we need it.

So sometimes an opportunity presents itself that maybe we don't need this particular location, but in year-four, for example, but if it's a good facility, then we would go ahead and take advantage of it. And again, it gets back to, we've got our long-term market share initiatives and what we think we can achieve over a longer period of time. And so, we know we're going to keep growing this network. We've been one of a few carriers that have been expanding. Many talk about it, but when you look over the last 10 years and you look at the capacity additions that we've made, the public carriers in total were actually down in terms of the number of service centers in the industry.

So we're going to continue to say, that's a big part of our value proposition is we're consistently investing dollars to be able to support our customers' growth and make sure that we can be there when our customers need us the most, and when they've got growth potential, but they need an LTL carrier to be able to respond and not just be able to respond in the middle of the month when things aren't as busy, but at the end of the month when they're trying to get freight moved off the dock and deliver to their customers. That's when they know they can rely on OD. So we'll certainly continue to look for opportunities and we would be opportunistic in adding facilities if it makes sense within the long-term vision for the network.

[Tom Wadewitz, Analyst at UBS Group]

Okay. Great. Thank you.

[Operator]

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

[Ken Hoexter, Analyst at Bank of America]

Hey, great. Good morning, Marty, Adam. I guess, if we look back on the scale of an industry shift like this, right, where I guess Consolidated Freightways back in '02 were doing the MotorFreight, right, where you've had big and quick historical rapid change. Maybe talk a little bit about -- you talked about customer discussions accelerating. Are these kind of existing customers? Adam, I think you threw out there the top 50 customers, their business was down also. But are you seeing that mainly from internal? Are you having new discussions? I presume, not that many, just given, I guess, any user of Yellow was maybe looking for lower cost versus higher quality.

And then maybe secondary is your thought on headcount, right? As you make this shift, I know you've got the 30% excess capacity on the facilities. What's your thoughts on headcount and capacity there as well? Thanks.

[Kevin Freeeman, President and Chief Executive Officer at Old Dominion Freight Line]

Yeah. We currently talk to new customers every week. We have over 500 salespeople and part of their job is to bring on new business. So they're out there having discussions about onboarding new customers every week, but -- and as well as existing customers and if the customers have questions about capacity, of course, we answer those. We show them where we have capacity, our terminal network and so forth. So that -- those are just ongoing discussions.

But as far as labor, we have the labor covered. We have a driver training school, where we have -- we call them combo drivers. If we're not utilizing them during slow periods, they go on the dock. And then we can bring them back onto a truck as our tonnage and shipments increase. So we feel like we are pretty covered on labor and for any increases that might come our way. So I feel confident we can take on whatever comes our way.

[Ken Hoexter, Analyst at Bank of America]

And then just, I guess to clarify, Marty, do you -- if I may, just a follow-up here. I know you said, Adam or -- Adam said, there was a slow kind of grind here, but I just want to understand, in the last 48 hours, has this not been a massive shift? I guess, I understand they stopped picking up freight last night, I just want to understand the speed and scale with which we're talking about here.

[Kevin Freeeman, President and Chief Executive Officer at Old Dominion Freight Line]

Yeah. We're reading the same thing as you are. So we really don't know what's going on. But we're talking about it within our senior management team, everyday and how we're going to forge our plan to handle additional business, but we're not really seeing any major business coming out of that. And just like you, we don't know how that's going to end up. So we don't want to speculate at this time.

[Ken Hoexter, Analyst at Bank of America]

Wonderful. Appreciate the thoughts, Marty. Thank you.

[Operator]

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

[Bruce Chan, Analyst at Stifel Nicolaus]

Hey, thanks and good morning, everyone. Adam and Marty, I'm not sure if this got captured in some of the previous answers, but I wanted to ask it maybe a little bit more directly. If you think about the potential share wins from this, I guess, impending competitor exit, would you expect to see outsized share gains, given your capacity expansion or maybe slower share gains, given at a more disciplined yield approach and what you mentioned was a higher average price than the market?

[Kevin Freeeman, President and Chief Executive Officer at Old Dominion Freight Line]

As you know, we're very disciplined on price and we're not going to do anything to trash our service by taking on too much freight. So we expect, if something were to happen, that we would remain disciplined in that manner, and like Adam said, we'd look after our existing customers. And we cost out every piece of business that comes through this truck and if it doesn't have the yield that we expect, we just won't take it on. But we also expect if there is a major event happens, that we will gain business probably from other carriers that weren't participating in that event because they may take on too much revenue and trash their service and we'll benefit from that as well. So we've experienced that before and ready for it again.

[Bruce Chan, Analyst at Stifel Nicolaus]

Okay, great, that's helpful. I'll hop back in the queue.

[Operator]

Thank you. And the next question comes from Eric Morgan with Barclays.

[Eric Morgan, Analyst at Barclays]

Hey, thanks for taking my question. I just had a follow-up on the headcount comment. Marty, you mentioned you're confident from a labor perspective, that you can handle some of this incremental freight. Are you saying that you think you can handle the surge with limited headcount increases from here? Or are you just more confident that you'll be able to ramp up your labor force accordingly if you do see volume pick up? And then I was also just curious on cost per employee. Any thoughts there? I know it's been kind of trending roughly flattish, up a little, down a little over the last few quarters. Just curious how this could affect that metric?

[Adam N. Satterfield, Executive Vice President of Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Yeah. This is Adam. But we've had a decrease in headcount or reduced sequentially through the second quarter and we've seen attrition really going back into last year through our business. But I think that, like I mentioned, there is three elements of capacity and we certainly -- we've got plenty. We talk mostly about our service center piece, but we've got equipment capacity to respond to the acceleration in business levels. And from a people standpoint, we can do the same. We've shown that type of flex in our workforce in the past. I mean we've got people that I think we can call back as well. Marty mentioned our internal truck driving school, that's created about a third of our drivers. And sometimes drivers come out of that school but continue to work on the platform until demand is such that we put them into a full-time driving job. So there is multiple opportunities.

The other lever that we can pull and we did, yes, going back to looking at those 2021 sequential trends, but as business accelerated really through the second half of 2020, continuing through 2021, as needed, we don't like to do this, but we can use purchase transportation to supplement the capacity of our workforce or our fleet. And so that just kind of depends on the pace at which volume comes on, that we had those big quarter-after-quarter sequential increases during those periods back in the end and that was kind of the final lever to pull.

And so we certainly can have that. We would rather move our linehaul, a 100% of our fleet, and with our people. But as necessary, we sometimes have to supplement and that's kind of the source that we could go to on a very short-term basis. It would always be with the idea that we get it back 100% insourced as soon as possible if we had to go that route.

[Eric Morgan, Analyst at Barclays]

Thank you.

[Operator]

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

[Scott Group, Analyst at Wolfe Research]

Hey, thanks. Good morning. Adam, you mentioned a couple times just like the interim month's seasonality of shipments that obviously we just don't know. I wouldn't normally ask, it's like a short-term question, but it's obviously an unusual time. Maybe if it's possible, can you just like just share like year-over-year tonnage in the last couple of days, like what that's trending? I just -- we just want to get a sense of like run-rate very recently. And then the -- I think yield is down 3% or so in July. Any sense what yield, ex-fuel, is doing in July? Thank you.

[Adam N. Satterfield, Executive Vice President of Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Yes, and that we had already talked about in the prepared comments, but it's somewhere 6.5% to 7%, the revenue per hundredweight excluding the fuel surcharge. And obviously, right now we're getting -- continuing to see fuel, if it's down, I think July should be the worst. At this point, we continue to average where we are. Fuel will be down about 30% again, but it -- the third quarter of last year was when fuel prices started declining and then that continued on. So that will be less of a headwind as we go through the second half of this year. But we're continuing to get core increases, as Marty mentioned earlier, and the key will be to continue to look at whether it's us or others, is there a sequential increase there. That's what we strive every day, we've got contracts that are turning over and we're going through those contracts and able to negotiate increases and if mix is relatively constant, you should see sequential increases in those yield metrics.

But like I mentioned, the last few days, we've been right at around 50,000 shipments per day. Some of that is just the natural growth that happens towards the end of the month. And whether it accelerates from there kind of remains to be seen. And I held that 50,000, the numbers that I gave this morning, assume that we kind of held that 50,000 constant for the remaining work days today through Friday and then Monday of next week. So if those numbers that when we put them in our queue, that are different from what we talked about today, then you can sort of judge from there where things came in. July of last year was a little over -- between 51,000 and 52,000 shipments per day, and I mentioned August was 50,000 to 51,000. So we're back to where our shipments per day, if this kind of 50,000 were to hold constant and I'm not saying that it does, to where we're closer from a volume standpoint to where we were last year.

And then just sort of getting back to the -- keep trying to bring this back to the big picture, I think that success ain't going to be defined by what we can do next week and next month or next quarter, it's what's the market share potential over the long term, and we still feel confident about what our long-term market share potential can be, because we still win business by the quality of our service. Our value proposition is delivering superior service at a fair price and always maintaining network capacity to support our customers' growth, and I think we continue to win share because of the service and capacity advantages that we have in the marketplace and that will extend beyond what may be happening over the next few weeks.

[Scott Group, Analyst at Wolfe Research]

But -- so Adam, your point there is that others may get maybe a little bit more of the volume day-one, but to the extent that they struggle with this big surge in volume, you'll then get it on a derivative basis, maybe it's not day-one, but it's weeks or months from now. Is that kind of what you're trying to say?

[Adam N. Satterfield, Executive Vice President of Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Exactly. Slow and steady generally wins the race and we want to be patient with things, and certainly we're looking and having conversations with customers and want to help where we can. But just like in 2021, you got to be careful about opportunities. You don't want to take on so much so fast that you end up not being able to deliver on the service value that we offer with 99% on-time and claims ratio of 0.1%. So we want to be methodical about the way we go through this and make sure that we're protecting service and capacity for our existing shippers without taking on too much of what opportunity may be out there. And so I think when you go back and you look in prior trends, like I said, we stepped up in the second quarter more so than anyone else, when you look at 2021, when you look at that sequential acceleration, and then we continued to follow on from there where others didn't. So it's always just making sure that you don't overextend yourself in the short-term and just keep that eye on the ball for the long-term vision.

[Scott Group, Analyst at Wolfe Research]

Thank you, guys.

[Operator]

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

[Ravi Shanker, Analyst at Morgan Stanley]

Thanks, everyone. Sorry to stay on this topic, but I just wanted to kind of maybe clean up the commentary on this call, which is, the uptick in volume that you see in the last few days, how much of that is because of a cyclical improvement versus flow-through from what's going on at your competitor? Like is it one of the two of them? Is it both and kind of can you tell the two of those apart?

[Adam N. Satterfield, Executive Vice President of Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

It's really hard to try to bifurcate and put your finger on what's driving any type of acceleration there. As I've mentioned, we would expect to see an increase. We're going into the final full week of the month. We would expect to see a normal type of increase and it's a little bit above where I had originally forecast this week to be, at least when I go back to Friday, it was a bit heavier and then Monday and Tuesday have been a little bit heavier than what I had originally looked at. And so, is that just because we've got more business from an existing customer that's having their own end-of-month surge? Yes, that's part of it. Is it freight that's coming in or there has been some freight diversion? Yes, that's a part of it.

So you just can't put your finger on everything when we're doing 50,000 shipments a day, why did we get this one particular shipment. But that's why I wanted to point out that, really I think this goes back to -- for several weeks, I feel like we've seen some pretty nice trends. We closed out the month of June strong. I feel like when we go back, even though our number of shipments per day have been around 47,000, we've had some good end-of-month performance and the trends -- the interim month trends have been pretty good the last couple of months as well. We dropped off some early in the month which -- that's typical too, but maybe dropping off a little bit more so than what a week-by-week average would be. But then, we've made up for it as we've progressed through the month.

So I've been pleased with our performance so far in July and it looks like, at least right now, when we project out and carry that trend forward of shipments per day, that we're still down in comparison to June. Some of that is July, the 20-workday month and the way the July 4th holiday fell, that Monday that we were open was probably half of a normal workday. So,if you kind of adjust for that, we have seen better trends. We have been more in the 48,000 or so shipments per day range kind of through the months before this recent pickup happened.

So it's just not -- you can't put your finger on what completely is driving the change other than if you go back and this is somewhat typical to what we would see at the end of a slow period like we've been in since April of last year and then it's just been accelerated over the last few workdays from there.

[Ravi Shanker, Analyst at Morgan Stanley]

Very helpful. A super quick follow-up. Did you take any short-term cost-savings actions in this quarter that may potentially unwind if tonnage really comes back?

[Adam N. Satterfield, Executive Vice President of Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

We keep our belts tight every day. So we're always looking at managing our variable cost and controlling discretionary spending where we can and where it makes sense, but that's the philosophy that you can't just sort of take it or leave it. It's a mindset that you have to stay in, in good times and in bad. If you don't have that mindset in the good times, you're not going to be able to switch gears when you really need to. So I think that we certainly have been able to trim out some costs and I was pleased when we ended up with a better operating ratio in the second quarter than what we had initially talked about. So that was good to see. And I think that I mentioned earlier, we're going to have some of those overhead cost categories. Overhead costs are about 19.5% to 20% of our revenue in total when you split those out and our direct costs are 52.5% to 53% of revenue.

We're going to have some cost increases. We're continuing to have depreciation dollars that will increase from the second to the third quarter. Our general supplies and expenses should be up in the third quarter over the second. And then I would expect that our miscellaneous expenses would be up as well. So those dollar costs will be there, whether or not we've got some revenue growth to offset them kind of remains to be seen, similar to what we were talking about before. So -- but some of those dollars will be increasing from the second to the third.

[Ravi Shanker, Analyst at Morgan Stanley]

Wonderful. Thank you.

[Operator]

Thank you. And the next question comes from Jason Seidl with TD Cowen.

[Jason Seidl, Analyst at TD Cowen]

Thanks, operator. Hey, Marty. Hey, Adam. Good morning, gentlemen. Wanted to focus again on what's going on with Yellow and look out at pricing. I don't think I heard this, but generally, I wouldn't have expected anybody to try to push the GRI through, excluding what's been happening. But do you think there is a likelihood that this occurs now if there is a bankruptcy in the near future?

[Kevin Freeeman, President and Chief Executive Officer at Old Dominion Freight Line]

As I've said before, I don't want to speculate what's going to happen with YRC, but I will say that we took our GRI in January, and we don't foresee having to take another one this year as it relates to transactional business. I mean we're going to manage the same way we would with them or without them. So I can't speak for the other carriers, but I would say maybe some of them do need to firm up their prices, maybe they'll use that as an opportunity, who knows? But we've got a good handle on our cost and we had that before YRC and we'll have it after. So I don't see us considering a GRI on transactional business.

[Jason Seidl, Analyst at TD Cowen]

Okay, Marty, that makes sense. So you're not expecting, but you wouldn't be surprised if maybe others try because they're not exactly at your level. Wanted to, Adam, jump on something you mentioned with sort of slow and steady wins the race and freight coming back with people not being able to handle it. But even if people handle it, won't there be cases of freight not being what people think and it just needing to find proper homes within the given network?

[Adam N. Satterfield, Executive Vice President of Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Typically, that plays out exactly as you described, where they may find a temporary home. But then ultimately, in some cases, people have just got to get their freight moved and then they go to the next closest carrier from a price standpoint and just to keep their supply chain moving, but ultimately if they want value in their supply chain, that freight will find its home at Old Dominion.

[Jason Seidl, Analyst at TD Cowen]

Fair enough. Gentlemen, appreciate the time, as always.

[Kevin Freeeman, President and Chief Executive Officer at Old Dominion Freight Line]

Thank you.

[Operator]

Thank you. And the next question comes from Stephanie Moore with Jefferies.

[Stephanie Moore, Analyst at Jefferies Financial Group]

Hi, good morning. Thank you.

[Adam N. Satterfield, Executive Vice President of Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Good morning.

[Stephanie Moore, Analyst at Jefferies Financial Group]

Speaker A-Stephanie Moore

I was wondering -- good morning. I was wondering if you could maybe touch on the performance you've seen, if there's been any differentiating trends between maybe your more retail consumer customers and then those that are more maybe industrial-focused. And then same thing, if you're hearing from your customers kind of their expectations as they go into the back half of this year, thoughts on inventory levels, where they stand today. So any kind of bigger-picture color would be helpful. Thank you.

[Adam N. Satterfield, Executive Vice President of Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Yeah, we saw generally consistent performance in the second quarter with the industrial and our retail-related customers and industrial is 55% to 60% of our business overall and historically, you -- we look at ISM and industrial production, which I assume has been below 50% or at or below 50% I think for nine months now. And that generally reconciles with the industry volumes and certainly aligns with the second quarter when we were down 14%.

But overall, we think that some of the conversations that we've had, that we get the sense that the inventory levels are normalizing a bit. That's kind of supported my baseline thinking of getting back to some consistency with volumes going into the second half of this year and that would be back in alignment with what our normal sequential trends are with volumes anyways.

Typically, in the third quarter, our shipments are up about 1.5% to 2% over the second quarter and then we generally have about a 3.5% decrease in the fourth quarter. So we've been -- there has been a pretty wide gap between our sequential -- actual sequential trends relative to the 10-year average for the past few quarters. So I felt like we were -- in a normalized environment, we're going to get back to closer to those 10-year average trends and then hopefully then get back to seeing real growth once we got into 2024.

But -- so it seems like some of the tea leaves and some of the conversations that we've had with customers would suggests this normalization and then freight actually picking up and moving again, which was the positive that we were looking at and thinking about and planning for in terms of the second half of this year and 2024. But then, obviously, we've had some recent developments that accelerated things a little further here over the last week or so.

[Stephanie Moore, Analyst at Jefferies Financial Group]

Great. Really appreciate the color. And I'll leave it at that. Thank you.

[Operator]

Thank you. And the next question comes from Bascome Majors with Susquehanna.

[Bascome Majors, Analyst at Susquehanna Bancshares]

Yeah. As you look back over the last couple of months and -- but inclusive of the last few days, can you talk a little bit about the drivers of getting back to that normal sequential trend? And by that, I mean specifically, the like-for-like shipments from existing customers versus new customer acquisition versus anything else that you'd like to kind of size up directionally in magnitude as you think about filling that excess capacity over the next several quarters. Thank you.

[Adam N. Satterfield, Executive Vice President of Finance, Chief Financial Officer and Assistant Secretary at Old Dominion Freight Line]

Yeah, like I said earlier, and we've talked about this on recent calls, from a core contract customer standpoint, we've actually had good trends and when we look at having a double-digit decrease in volumes, that may seem counter intuitive, but certainly the economy has weighed on many customers and has impacted their trends, but when we look at our national account business and the wins that we've had versus losses, we continue to have the good wins and have not really lost any share to speak of with those larger national accounts, but they just had reduced volumes. We have lost and have talked about our business levels with third-party logistics companies has been down in recent quarters and that was still negative in the second quarter as well.

But that's something where I think that certainly shippers have been looking to save cost and they've been using the 3PLs to find carriers that had a little cheaper price than us maybe and divert some freight away for that reason. But I think now, just like we've seen in prior cycles, service and capacity are coming squarely back into focus for many shippers and so I think that lends itself to how we've won market share over the long-term.

So there's not necessarily any one piece of business that is changing any more than others. We've got a lot of consistency within our largest accounts and these are long-term strong relationships that we have between us and our customers. And so our sales team, our pricing team, they're staying in front of our customers and staying engaged and making sure that they know we're here when they need us. And we're increasingly getting those inbound phone calls and being able to take on some incremental business.

So it's good to see, but we still would like to see the overall macroenvironment improving, we'd love to see the ISCM going back above 50 and really talking about more of a true improvement in the underlying demand environment versus what the supply situation in the industry might be.

[Bascome Majors, Analyst at Susquehanna Bancshares]

Thanks for that, Adam.

[Operator]

Thank you. And the next question comes from Christopher Kuhn with Benchmark.

[Christopher Kuhn, Analyst at Benchmark]

Yeah, hi, good morning. I'm just wondering, the West Coast ports had a bit of a pickup in June. Just wondering, I know some of it is indirect, that benefited some of the volumes that you saw. And then maybe if it picks up as the year progresses, would that help the volumes? Thanks.

[Kevin Freeeman, President and Chief Executive Officer at Old Dominion Freight Line]

Yeah. This is Marty. I read the other day that in June imports from China to the U.S. fell 24%; Taiwan, it fell 23%; Vietnam, 11%; and South Korea, 6%. So we haven't seen a lot of energy coming from those ports. As you know, we have a drayage division on the East Coast ports, and those business levels were down there. So I think the whole global economy is still rather ill. But we're prepared to handle that too if it ticks up, but we're not seeing any of that movement so far this year in an awkward manner.

[Christopher Kuhn, Analyst at Benchmark]

Okay, great, thanks.

[Operator]

Thank you. And this concludes the question-and-answer session. I would like to return the floor to Marty Freeman for any closing comments.

[Kevin Freeeman, President and Chief Executive Officer at Old Dominion Freight Line]

Yes. I want to thank you all today for your participation and we appreciate all the questions. And if you have any further questions, please feel free to call us after the call. And I hope you guys have a great day and good rest of your summer.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Drew Andersen, Operations Clerk
• Kevin Freeeman, President and Chief Executive Officer
• Adam N. Satterfield, Executive Vice President of Finance, Chief Financial Officer and Assistant Secretary

Analysts

• Jordan Alliger, The Goldman Sachs Group, Inc.
• James Monigan, Wells Fargo & Company
• Jack Atkins, Stephens
• Jonathan Chappell, Evercore ISI
• Chris Wetherbee, Smith Barney Citigroup
• Amit Mehrotra, Deutsche Bank Aktiengesellschaft
• Tom Wadewitz, UBS Group AG
• Ken Hoexter, Bank of America Co.
• Bruce Chan, Stifel Nicolaus
• Eric Morgan, Barclays PLC
• Scott Group, Wolfe Research
• Ravi Shanker, Morgan Stanley
• Jason Seidl, TD Cowen
• Stephanie Moore, Jefferies Financial Group Inc.
• Bascome Majors, Susquehanna Bancshares, Inc.
• Christopher Kuhn, Benchmark Co.