Q2 2020 Old Dominion Freight Line Inc Earnings Call
[music].
Please standby.
Good morning, and welcome to the second quarter 2020 conference call for old Dominion Freightliner today's call is being recorded and will be available for replay beginning today and through August 7th 2020 by dialing seven Onenine four or 570 820 the replay.
Passcode is 1718368.
A replay of the webcast may also be access 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, and new information future events or otherwise.
As a final note before we begin today, we welcome your questions, but we ask in fairness to all that you limit yourselves to just a couple of questions at a time before returning to the Q.
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., Greg Dan. Please go ahead Sir.
Good morning, and welcome to our second quarter Conference call.
With me on the call today is out of Satterfield, our CFO.
After some brief remarks, we'll be glad to take your question.
You know do team delivered solid financial and operating results for the second quarter spot the operating challenges we faced with the economy.
Although our revenue declined 15.5% we were pleased to improve our operating ratios.
Quarterly record of 77.8%.
We accomplish this by focusing on improving our yield.
Managing our variable cost and controlling discretionary spending.
Our yield management process to strengthen the quality of our revenue and profitability over the long term.
Through this process, we managed profitability all account by account basis.
We believe this approach is consistent and fair for customers.
It is also supportive of our ongoing investments in capacity and technology.
Oh, helping offset cost inflation.
We believe customers appreciate the consistency of this approach.
But he knows what to expect from us each year.
Providing superior service at a fair price is our value proposition, which is critical to our long term customer relationships.
Our team is relentless and its commitment to providing the very best level service to our customers regardless of the economic environment.
Well, we contended with many operating challenges in the second quarter.
Limiting to 16.6% decrease in shipments per day.
We produced a new company quarterly claims ratio of 0.1%, while also improving productivity.
There are many components of our industry leading service.
And based on customer feedback, we believe the gap between us and our competition has widened in the current environment.
It is historically become one common practice in our industry to focus primarily on cost and a recessionary environment.
This is narrow focus generally leaves customer service failures, which is why we're so committed to the service standards that support our revenue quality.
We have long believed that this creates a competitive advantage for us in our industry.
It is especially critical mental because the importance of high quality and dependable service.
Seems to have recently increase for many of our customers.
As evidence to this trend we have been awarded new business in the past few months from customers. If you have historically provided.
Lower rates rather than overall value. This trend not only leads us to believe that many of our competitors remaining relatively disciplined with their pricing.
It is also encouraging for future market share opportunities.
Well the quality of our revenue is critical to our operating way should.
Appropriately managing our cost is just as important.
Minimizing their cost inflation on a per shipment basis is an ongoing process based largely on the productivity of our employees a salaries wages and benefits represent our largest expense.
As a result of operating efficiencies and improved productivity, we're able to improve our direct cost as a percent of revenue during the second quarter.
Yeah unfortunate reality of the sudden significant reduction in revenue that occurred in April.
2020 was an adjustment to our workforce the balance our employee count with available work.
Believing that the economy could recover quickly we implemented an employee from a program that initially resulted in 15.5% year over year decrease in our full time employees in April.
While the economy is still recovering our volumes increased sequentially in May and June and we're cautiously optimistic this that this accelerating trend can continue.
Many of our furloughed employees have been able to return to work as result of this improvement.
We took various other measures to reduce operating expenses, while also controlling discretionary spending to reduced overhead cost.
In addition circumstances associated with the code would not teen environment.
Creating certain cost savings that are expected to diminish in future periods.
Such as a reduction in group health and dental claims travel and customer entertainment.
Second quarter of 2020 was one of the most difficult periods I have.
Changes to supply chains that should create opportunities for the LTL industry.
With our industry leading service.
Our unmatched long term investments in service center capacity and the dedication of our OTI family of employees.
I'm confident that we are in a better positioned than any other carrier in the industry to respond to increase customer needs for LTL services.
As a result, I'm also confident in our ability to continue our long term are producing profitable growth, while increasing shareholder value.
Thank you for joining us this morning, and now Adam will discuss our.
Core financial results in greater detail.
Thank you, Greg and good morning.
Ultimately means revenue for the second quarter 2020 was 896.2 million, which was a 15.5% decrease from the prior year.
Our operating ratio improved 10 basis points to 77.8%, which contributed to our earnings per diluted share of $1.25 for the quarter.
Our revenue results for the second quarter reflect the 12.1% decrease in LTL tons, and a 3.8% decrease in LTL revenue per 100 way.
The decrease in the average price of diesel fuel reduced our fuel surcharges, which had an impact on our topline revenue as well as our yield excluding fuel surcharges LTL revenue per hundred weight decreased 2.5% due primarily to the significant increase in weight per shipment.
Multiple factors can have a significant impact on revenue per hundredweight, most notably being the average length of haul and weight per shipment.
Changes in revenue per hundred weight or also not linear with respect to changes in our mix.
As a result revenue per hundredweight is a tough measure to evaluate when the mix of our business changes so significantly like it did during the second quarter.
While the change in revenue per hundred weight might suggest otherwise we continue to negotiate rate increases during the second quarter and believe underlying pricing trends remained relatively consistent.
We believe revenue per shipment as a better measurement as we focus internally on maintaining a positive spread between our revenue and cost per shipment.
The 4.9% increase in revenue per shipment, excluding fuel surcharges for the second quarter was relatively consistent with the change in the first quarter of 2020 as well as our long term trends.
With respect to our revenue trend during the second quarter revenue per day on a year over year basis was down 19.3% in April, but then sequentially improved in the remaining months as the quarter.
Average revenue per day in June for example was down 11.4% as compared to June 2019.
Our changes in our change in volumes also followed a similar pattern.
On a sequential basis LTL shipments per day decreased 15.7% in April as compared to March 2020.
Shipments per day been increased 9.7% from April to May and increased 7.1% from May to June.
The sequential acceleration and shipments and revenue has continued into July.
With only a couple of days remaining in the month, our current revenue per day is trending down approximately 3% plus or minus.
As usual, we will provide the actual revenue related details for July in our second quarter form 10-Q.
Our operating ratio improved 10 basis points to 77.8%, which was a record for us despite the significant decline in revenue.
More than two thirds of our cost are variable or semi variable and our team was effective in matching these costs with the change in revenue while also controlling our discretionary spending.
Our operations team also didnt outstanding job with improving efficiencies during the quarter.
We have historically improved productivity during recessionary environments and from experience. We believe we can maintain much of this productivity once we returned to a growth environment.
While the loss of revenue certainly had a deleveraging effect on our fixed cost the improvement in our direct cost as a percent of revenue more than offset the increase in overhead cost as a percent of revenue.
Ultimatums cash flow from operations totaled $312.2 million and 516.2 million for the second quarter and first six months of 2020, respectively, while capital expenditures were $67.9 million and $120.1 million for the same period.
We returned $146.1 million of capital to our shareholders during the second quarter and $342.7 million for the first half of the year for the year to date period. This total included $306.8 million of share repurchases and 34 $35.9 million in cash dividends.
Our effective tax rate for the second quarter, 2020 was 25.7% as compared to 26.1% in the second quarter 2019, we currently expect our effective tax rate to be 26.0% for the third quarter 2020.
This concludes our prepared remarks. This morning, operator, we'll be happy to open the floor for questions at this time.
Yes, Sir Thank you and if you ask your question. Please.
Sorry.
Telephone keypad MPR using games Speakerphone. Please make sure your mute function is turned off to a liar signals from sorry.
Okay that is star one if you would like to ask a question.
Well take our first question from Jack Atkins with Stephens.
Hey, guys good morning, and congrats on a great quarter. Thanks for taking my questions.
Thank you so.
Adam if I could maybe start going back to your commentary on on the pricing accounted for a moment because I think in your prepared comments you said that the pricing of our remains relatively consistent with what you've been seeing over the past several.
Several quarters with regard to the second quarter you know we've have heard some anecdotes on public conference call to your though over the last couple of days that.
Maybe there's been little bit of an acceleration in pricing in the third quarter and I'm. Just curious if you could maybe talk about.
Have you noticed a shift in tone around pricing in discussions with your customers over the past several weeks maybe couple of months.
No that we've heard a shift in tongue.
At any point recently has certainly our approach is always one of consistency and I think thats, what our customers appreciate.
They know what to expect out of us and and we're pretty disciplined in that respect the focus on what our cost inflation is every year in and the pricing on the operating ratio on an account by account basis that we try to target with our customer accounts as well so for US we just continuing on with our consistent approach.
Roche and we've been getting increases all year long.
And in some cases in the early part of this quarter.
That may have impacted some of our volumes as well, but like we mentioned earlier, we are starting to see some volumes coming back to us.
Thats been an encouraging trend and some of the business that we may have lost.
Back in April so some of that business coming back to US just based on the service that they received.
From the other carrier that they might have switch to.
And when they look and think about the total value equation. They didnt feel like they were getting the value there and and they came back to us. So that's what we'll continue to focus on is just our consistent long term type of approach to offset cost inflation thats workforce and thats, what we intend to continue.
Okay, great that that makes sense and then I guess for my follow up question.
Just kind of thinking about the operating ratio here I guess normal seasonality twoq to Threeq, you would would call for some modest deterioration, but your commentary around revenue trends per day in July which would indicate that maybe revenues trending better sequentially.
But there maybe there's some temporary costs that are getting layer back in that business stabilizing. So Adam can you maybe help us kind of think do those puts and takes and how that relates to or progression as we move into the third quarter.
Sure Yes. It typically is about a 50 basis point.
Deterioration from the second to the third but in a normal environment, which clearly we are in.
We would have seen the second quarter revenue.
Up about 10% over the first quarter and.
And then third quarter increases slightly typically from the second quarter. So you get historically speaking most of your operating ratio improvement there in the second quarter on a sequential basis that is and so in this environment. If we can keep this.
Accelerating revenue trend then some the leverage that we lost particularly in overhead.
And within that overhead category on the depreciation.
We lost quite a few basis points there from the first to the second quarter. So.
We can continue this revenue trend in revenue can can meet or exceed.
Where we were in the first quarter, then certainly that depreciation in particular on warnings and there should be some other calls that that will unwind along with that and and we fully expect to to try to maintain the productivity.
That should continue certainly there will be some costs that will be coming back online in the third quarter, but.
Given all those factors, we certainly think that we should definitely be able to be what that long term deterioration is.
Simply if nothing else just the improvement that we should have the leverage on the depreciation.
Okay, great. Thanks for the time.
That.
Well now take our next question from it.
With Keybanc capital markets.
Great Thanks, and good morning.
Craig in your prepared remarks, when you talked about the quality of revenue and kind of improving that here in this quarter.
I would think that that's maybe a little bit more challenging in a negative tonnage environments and maybe the stronger tonnage environment, where you can pick and choose the freight that you want it's a little bit easier. So can you expand on that comment and essentially what you're focused on it and what you're able to do from a quality of revenue standpoint.
Right now.
Sure Tom.
No doubt in this.
Deteriorating environment that we just came through we did see customers.
More likely to put out bids and rebid the freight and that kind of thing and that was definitely a challenge for us.
As Adam mentioned some of that.
Some of our we did lose some business in that process, but we gained some from others and Fortunately in other cases, we are gaining back some revenue that we lost earlier because of.
That could meet the service same service standards that they had with us.
It's a ITSM ever a challenge.
That's our business and the other is always you win some you lose some but fortunately at the end of the day you hope that your service out shines and the value out Shannon's your competitors. So.
So far so good where we are regaining some of the business that we lost that's a good thing we've taken on some new additional business of lights I.
I think there have been some opportunities that did open up for us as the quarter went on and as we.
Role in the third quarter, so far the month of Gilat definitely looking stronger.
Okay. So.
Greg is kind of comment that yes, it's some of the business that you lost early in the quarter, maybe was more some some price sensitive business and you know it does it fit as well and network or what does that is profitable and so it's okay to see that go away, but you're starting to see some of that come back now.
We are coming back at our price.
Gotcha, Okay that makes tank at our price, we obviously lost it to to a lower price, but that doesn't mean, the customer got a greater value and it came back because of the value we provide.
Understood. Okay, and then just for my follow up Adam do you have any color or anything you can share on the increase in the weight per shipments the up 5% in kind of the level that you're out right. Now is that something that you think is sustainable do you see that as you know a shift in the business that you're handling or is that indication as.
You improvement in underlying economic activity. Thanks.
Sure the the weight per shipment.
Certainly been a wild swings sense.
The trend that we had back in January and February.
Right when when things started changing.
Our weight per shipment increased above 1600 pounds in March.
Reached a peak of 1600 77 pounds in April and then has started working its way back to sort of a more of a average that we've seen over the longer term about 1600 pounds that was right at 1600 pounds in June and much of that was.
In the early stages that somebody's stay at home orders.
We had more national account business that remained open national account business typically has a higher weight per shipment in our smaller.
Mom and pop type of accounts and so now some of those smaller accounts are starting to come back online, but we're still getting I would say more business from our national accounts.
They continue to be strong when you think about some of the companies that are performing well in this environment and that have increased demand.
It's a lot of those those bigger on the retail side some of those bigger retailers and their weight per shipment just continues to be much heavier so it's a little bit different mix.
But but we're happy to see it kind of coming back to the 1600 pound range and nobody expects. It is more of the smaller accounts come back online that it could drift down a little bit lower but that's 1600 pound range is continued into July at this point.
So if we can see that stay around that that sort of level for the time being that'd be a good trends and.
Contributor to.
To the overall revenue per shipment that we're seeing.
Got it okay that makes sense thanks for the time.
Our next question will come from.
Chris Wetherbee with Citi.
Okay, great. Thanks, and good morning, guys.
Maybe Adam I could hit back on on pricing a little bit can you give us you know maybe a little bit more specific sort of commentary where contracts are kind of being reset is you get through the quarter I don't know how much activity was actually happening in twoq, but can you give us your sort of a rough sense sounds like it's been consistent what you've seen but kind of curious if there's incremental color you can add.
Yeah, you know, we kind of stopped talking about the.
Our average contract renewals and in some of that we hear others kind of give the same commentary and be it average.
Increases in contracts of general rate increases.
Never seem to fully reconcile to even factoring in changes in weight per shipment.
To to what some of the others might report is is there.
Revenue per hundred weight, and so I would just say that looking at revenue.
Revenue per shipment and how that's trended that's more in line with with what we've been able to achieve with with the increase is kind of on average and typically thats been between 4% to 5%.
Thats somewhat falls in alignment as well we have the general rate increase that went into effect earlier this year.
That was at 4.9% and and that's generally the target that we have for our contracts as well. So you know in that ballpark is really what our long term trend has been it's what we continue to target and it's what we've been able to to achieve.
This year, so that it's been a good thing obviously the long term success with that program managing our cost where there is a positive delta between our revenue per shipment in our cost per shipment.
Managing those two factors has really been a key contributor to our long term operating ratio improvement.
Okay. Okay. That's helpful. I appreciate that.
And then we wouldn't what do you think about.
Volume opportunities and just sort of how you want to manage your network in the context of potentially sort of tightening truckload cycle.
He needs in the past or spin spill over into the LTL market you guys have always been disciplined about what kind of business you want to take on and those kinds of tight markets because maybe not all of it is is what you're really to one of the network, but I don't know if it's too early to see any indication for that or maybe talk a bit about how youre thinking about handling that as you move forward, but just.
Curious.
What your expectations are potentially around that truckload opportunity as things kind of move and so maybe it would be kind of larger LTL smaller keel type of opportunities going forward.
Yeah, I mean, certainly that creates some opportunities for us and it really just gets back to our sales team their discussions and ongoing conversations with our customers what their customer needs are and.
They've got freight that that needs to be moved and we can help out.
Finally volumes are all.
For us even though there they are getting better theres still down on a year over year basis. So we've got capacity and are ready to help our customers. When we can you know if that's a heavier weighted shipment that might have moved by truckload. There's no such thing is as bad freight theirs is poorly priced right. So if we understand all the shipment characteristics.
And.
I have got good pricing practices in place, which I believe we do.
Then certainly we're willing to handle about.
The shipment that a customer would want us to add to the best thing that we would see.
The changing trends in the truckload world would be that if the truckload rates continued to increase typically that has the effect of increasing many of our competitors.
Cost structure, many of our competitors use outsource truckload for purchase transportation. So if our competitors now has got some unexpected cost inflation, that's going to put.
More rate pressure for themselves to go back and increase their rates.
Typically that that has the effect to of moving.
Normal LTL business our way so.
Multiple opportunities I think both from a direct and indirect basis for the truckload world improving.
Okay. That's helpful. I appreciate the time as Mark Thank you.
Our next question will be from Allison Landry with credit Suisse.
[laughter].
Sorry about that.
As quickly could you give us.
How much the lower group health and medical expenses.
During Q2, I know you said, yeah. Some of that my may come back.
Three in Q4.
So just wondering if there's any any color you can.
Provide data how that modeling.
Yeah, I mean, certainly that was a benefit.
Our overall fringe rate, though in the second quarter was 33.6% and yeah, we typically target.
About 34% to think that the beginning of year that was something that we've talked about and so just the change and we were at 34%.
In the second quarter of last year. So those numbers are pretty comparable from period to period, but probably resulted I would just say fringes overall.
A couple of million dollars $1 million to $2 million of savings.
Comparing what we had this quarter versus the what the fringe rate was in Twoq of 19, So little things. There you know, there's always sort of puts and takes.
In that fringe type of number certainly we were fortunate I guess, if you will to see that group health and dental was down in some of the others were up and.
And on a sequential basis simply having more income in the second quarter than the first you know that drives things like our four one k. match that we give to our employees and.
Things like that continuously improving our benefits overall and giving more paid time off and doing some of these things that that continued to motivate our employees and we think helps drive the bottomline success as well they they understand.
The success they drive for the company they get rewarded for so we think that's been a very motivational tools over the years for employees and helping our culture.
Okay. That's helpful and then.
Sorry, if I missed this earlier in my remarks that could you give us the productivity metrics in the quarter. I think you said sort out they improved across the board, but from a specific KP eyes.
And then if you could give us a sense out.
Where are you are with for loud and just your overall view on how to think about headcount levels in the second thank you.
Sure.
Yeah, we didn't give the specifics on the productivity but.
So really strong performance our platform shipments per hour.
For the quarter improved 7.1%.
Our PND shipments per hour improved 4.2%.
Even our line haul laden load average it improved 0.8% and we talked about before that not all cost are variable and running this line haul network that we have serving 238 service centers.
There is a fixed element of running that costs, but I was really pleased with with all the level of productivity that we had and.
As such when you look at our productive labor cost on a per shipment basis. So again getting things back to you know how they are per shipment overall they were right at about 3%.
Cost inflation and that's pretty much in line with the wage increase that we gave last year. So we had.
Proved that we don't give this level of detail, but our PD in or dot calls per shipment, where essentially both flats and then we had a little inflation.
Overall in line haul, but but that would be expected based on that trend and.
I'd say an update on on the head count overall in June we were down the full time employees were down 10.5% I just comparing June of this year to June of last year.
So we brought many people back from the the Furloughed program, if you look and compare.
Equal.
The June.
The head count is up about 4.5% overall, but if you compare kind of where we are today.
So where we were in March were down about 1400 positions overall, which is about 7% and based on on where we are our shipments per day should be higher.
In July than than they were.
Back in March so.
That was kind of what we've talked about in the prepared remarks that is unfortunately, when we go through an environment like this.
We've made adjustments like we have but you find areas and productivity when each department leader I was going through evaluating their costing calls don't say themselves. It takes action in a plant.
We've gone through and we figured out ways to be able to do more with less than I think that's what we're seeing now but.
Our accelerating trends continue we certainly will have to.
Continue does to bring back some more employees.
Fully expect and would like that because they'd go hand in hand, with the increase in volumes, but but I think overall when you look at sort of the level of head count with the volumes.
Those should come back in alignment and eventually showed some improvement there.
Hi, awesome. Thanks for all that Clark please yet.
Our next question will come from Jason <unk> with Cowen.
Thanks, operator, good morning, gentlemen, thanks for the time.
Wanted to talk a little bit about the residential deliveries what are your competitors basically said they saw an uptick it's almost a doubling in the percentage, it's still tick down a little bit for them, but.
Definitely above the prior year can you talk a little bit about your experience with the residential market. How you see the margins there for OTI.
Jason we do not measure the number of residential deliveries that we had.
And I didn't anecdotally here.
As a whole lot of commentary about additional Residentials I know, we had a few more in one segment of our of our own business, but.
I don't think we saw significant up tick in residential Saddam.
Okay would you say that the is.
The margins on your residential deliveries are equal to or better than the regular margins.
We we Jason as all of our accounts, we price them based on the call split those accounts require and we price them. Accordingly, we price in the residential stop there isn't a fee for that as you know.
We we priced them accordingly based on the cost so.
I think that's an account by account basis.
But they are not necessarily better or worse than than the other business.
That makes sense and Mike My follow up is gonna be on on any potential acquisitions any outlook I know in the past you mentioned your desire to potentially at some you know I guess business lines. It would be complementary to your LTL operations. We've also been here in the marketplace.
He appetite for acquisitions as pick back up a little bit from sort of the start of coated wondering what your thoughts on that going forward or.
At this point in time, Jason you know, we May do we have somewhat of an appetite for an acquisition I just I don't know who that is exactly what that is.
This point, we're not we're we're not looking at anything currently well, we almost always have opportunities across the desk and you know we evaluate those as as they come along but currently at this time, we're not looking at anything in particular.
Okay. Appreciate the time as always gentlemen.
Yes.
Well now take a question from Scott Group Wolfe Research.
Hey, Thanks morning, guys. So Adam just I'm not the 3% drop in Rev per day in July I Miss It. If you said, so but directionally can you talk about sort of the tonnage Wade and yield trends within that just directionally.
Yeah, a lot of that is.
You know, it's mainly on the tonnage.
And so you got some of the the yield if you will sequentially.
This is moving up a little bit, but yeah, we're continuing to see acceleration.
Centrally on the shipments.
And at times.
And our yields continue to perform as well but.
But overall, it's it's good to see.
You know, obviously that coming back closer to kind of where we were last year.
After going through the.
Second quarter, and you know revenue being down double digits, and certainly feels a lot easier to manage and should produce lot more opportunities once when get back to revenue being.
Flats, and eventually get back to a growth environment, which is what we're more used to.
Okay, and then I just wanted to ask a bigger picture question. So.
You are seeing the biggest revenue drop in a decade, and you put up record margins and by the way. It's not just few we've seen this from some of the other trucking companies. This quarter I'm just trying to understand how this is happening you mentioned a little bit of that that health care cost do you think there's.
Anything else unusual from a cost standpoint, either fuel or lack of congestion or something else. I guess, you ultimately what I'm trying to figure out its next year, we're going to have.
Good volume and revenue growth hopefully so should we be thinking about strong incremental margins next year in getting to a mid seventys operating ratio or is next year year, we get the revenue, but maybe we don't get the incremental margin because there was something that was just unusual helping in this environment.
I guess, that's the question.
Got let me say this there were certainly some things that worked in our favor not just hours, but probably the entire industry. Obviously the traffic congestion was a lot less than than it has been in the past we did save some money on the degree payoffs and.
I had less spend on the custom entertainment some marketing areas in marketing were were down from what we normally see so there were some some things that did say some short term tight cost but.
I'll say this when this thing first started you know we sat down as a management team and we made a plan and you know the one thing that I made very clear was we had to execute on that plan.
We didn't a daily Dally, we executed and thank you everybody took it very serious what they had to do.
Our our big concern was continue to give the type service that our customers are used to we didnt cut anything from that standpoint, we are very pointed and determined in our efforts to continue this all the different service.
Measures that we have and to continue to improve on those we did it. Thank you saw it in reduced claims and.
Our and our own time percentage was was still above 99%. So we did not slack off in in any way shape or form from that standpoint, I think our customers excepted.
While we may have solve some business swap for price early in the quarter. It started to come back later in the quarter as they realize they weren't getting what they were used to would be.
Yes, there were some areas, where we did save some money, but you know we did a lot of the things that we had to do to help ourselves from a productivity standpoint said.
Yes, some good certainly we made a lot of things happened.
But we're very proud at this point in time.
As far as next year, certainly we think that there is an opportunity to to continue to.
I have the same type productivity.
Levels of improvement that we hadn't second quarter. You can you can measure from there. We certainly expect our revenue growth to come back not exactly sure where that's going on at this point in time, who knows where the economy is going to go we we were facing a lot of things.
Later, this year and you know own into next year with the election year and all that.
But a lot of challenges ahead, but we do definitely think if we have some growth that we can drive the yellow or lower.
I don't think there's any doubt about it and you know as we've said before we think we can manage through good times and the bad I think we've proven that in the past and I don't think Disney that we will continue to prove that into the future.
Okay. Thank you guys.
Well take our next question from David Ross with Stifel.
Yes, good morning, gentlemen, just to follow up on that a little bit.
Specifically as it relates to fuel seem to be a tailwind for lot of carriers in the quarter.
What was the impact that some of the sharp drop that we saw from March to April and fuel was it a good guy in the quarter.
Significant.
Dave We've we've tried to structure, our fuel tables to really where they don't really impact us on the bottom line.
Too much one way or the other yeah, we got hurt a little bit a few years ago back in 16, and really didn't have the lower end of our table.
Where it needs to be but but we address that throughout the year in and then fully addressed it when the next year I came about.
Net net.
We try to do some back of the outlook pipes calculations and believe it was.
Fairly minimal.
On a net basis, maybe overall I'm slightly good but you know the hard thing to try to negotiate can do these back of the envelope type of calculations as the simple fact that fuel is just another element that's a pricing is negotiated with our customers. So.
If you got somebody that that wants to make the in this environment look like there their base rates were better that they didnt take an increase but we got an overall improvement in our fuel contribution.
Or some other type of element that really gives us the same level of revenue a than that just becomes a total to negotiate with so it's really hard to try to make that comparison, but I'll say that the change.
On the call side and the obviously it is.
Hit as hard on the topline.
Then on the cost side, you see the change.
And the improvement and the operating supplies in expenses, a big driver that not all of it but a big driver that was the decrease in view.
Typically when fuel changes so significantly like that in a period you'd see the corresponding increase in your labor cost yeah, I think that hit kind of mask.
The overall improvement.
If you will just to keep our labor costs.
You know essentially flat like we did in this environment with the surcharge revenue being down so much.
You know it was really impressive to me and I thought.
That was the biggest driver in our ability to improve the operating ratio was what we were able to accomplish.
With all of those labor cost as a percent of revenue.
And then another thing oppressive has been the insurance and claims line item.
It's been remarkably low and steady.
In a tough insurance market.
For a long time can you.
Talk a little bit more either at a more Greg about what really makes it a non issue for you guys and not something that investors had to worry about on the.
Expense surprise side.
Oh for.
Theres two elements that go into that insurance and claims line, that's our auto accidents, we call or be I P. D.
The bodily injury and property damage in the cargo claims and.
Fortunately for us our cargo claims is consistently improved and.
Almost nonexistent at a a record 0.1% for for this.
Most recent quarters, so that element has come a long ways you go back to the recession when I feel like we really differentiated ourselves the great recession above nine when we really differentiated ourselves from our competition and we're above 1% and we believe that that's where the the industry average is likely still.
Our north of 1% from the data that we get and feedback from customers. So that's a good thing that we've consistently driven that that claims ratio down.
On the although a side, it's certainly this year and it's in the second quarter.
Like most of the other carriers were facing significant inflation.
With our insurance rates, but we've been very fortunate and the fact that all the investment in new equipment and safety systems and training and so forth that we've made over the years.
Those all have accident mitigation.
Type of tools with them in our tractors now and then just continuous training on the dock and other places and.
That we've done and so there's an element that goes into this line there's an element.
And our salaries wages and benefits.
And that goes hand in hand, with those safety programs and we continue to see workers comp which is into the benefit line.
Improvement there and so I think it's just the its been a focus of our company does have the the.
Half safety programs in place and to always be trying to continuously improve those and I think we've seen a.
Big benefit the insurance line is one, but but there's a hidden within the the fringe benefit line on the workers comp. It goes hand in hand, so if we can just keep our accident frequency ratios low those continuously improving and and try to keep severity low as well in some of that mitigated by the investment in technology.
On the tractors.
Hopefully we can keep that line item consistent like it has been in that 1% to 1.2% type of range.
Great. Thank you.
Our next question will come from Ari Rosa with Bank of America.
Great. Good morning, guys. So Greg you mentioned in your opening remarks, some lasting changes to supply chains as a result of the pandemic, which you think could benefit LTL carriers.
I was just hoping you could elaborate on that a little bit and getting to some details and then maybe in the process touch on.
What kind of ecommerce volumes, you're seeing on this.
Are you seeing a big uptick in demand on that front and how it might impact your business.
We did see increases on loose E commerce type accounts.
We did see some big.
Revenue jumps with those particular accounts on the inbound side for us, particularly.
Thank you know we don't.
Participating in a lot of home deliveries and that kind of thing, but there's.
Another end of that so we did see some upticks on those accounts, which is a good thing and that was really what those comments were pointed towards I.
I think we'll continue to see those type customers.
In the space is a growth so I think that that's a good thing for us.
Generally speaking.
And does do the characteristics of that business from either pricing or or kind of wait a standpoint very in terms of how it impacts your costs I mean, I imagine you're still going to be pricing appropriately as you kind of hammer home for years, but how does that business.
Sorry in terms of its characteristics.
Those accounts several they they have practically everything they you know they they have a very very wide variety of products Oh, yes.
Each account that goes into those is vastly different but they're all priced accordingly, but.
I don't think there's anything different generally speaking then with a lot of our other accounts, but.
We will price some accordingly, regardless of the product.
Yeah, I'll just add it you know.
Thanks [laughter] thing.
This is going to add that we've seen growth over the last couple of years in our retail related business you know it's.
Close to 30% of our overall revenues that were still.
Closely aligned with.
The industrial sector, but but nevertheless that business has been growing. So you know this has been a trend that's been a evolving but certainly accelerating in this environment and things are going to completely change overnight in terms of.
Supply chains and whatnot, but you know certainly we feel like that that more fulfillment centers.
Things of that nature as they continue to be built around the landscape and.
Much of the freight that will be in bound to those filament centers.
We'll be more conducive to the LTL type quantity shipments and so we certainly believe that we've already been winning business in that area and can continue because it's so to be able to to maintain.
And manage inventory quantities in the number of skews that they want to have in those facilities you got to have tight inventory controls and that requires a confidence in your carrier to deliver on time and without damage and certainly I think we've proven that.
We do that better than anyone and nothing that we'll be able to continue to participate.
And that element of a business continuing to give us a little market share.
Got it that's really helpful color.
And then I just wanted to touch for my last question on.
On the operating ratio and I know this is obviously you guys are addressed this a bit but really impressive on the cost front.
Is it appropriate for us to be thinking about a sub 80 operating ratio is kind of the new plateau and it would it be a surprise to.
See that kick back up if you know congestion returns the highways and that sort of thing and then in the past few youve occasionally provided a view on where you expect incremental margins to be I could you kind of talked about something in the 25% range should we be looking for kind of a step up based on based on this quarter, a and just the and.
Thomas you're able to deliver.
I mean, you know certainly there'll be some cost that that will come back into the business and we'll be prepared for those but we will there should be.
Other cost savings opportunities and keep in mind with the big drop in revenue that we saw it typically when you look.
Long term. It's the density the revenue per service Center factors is that has increased the operating ratio has improved and when we look at individual service centers and regions around the country. We know that we've gotten ongoing opportunity to improve our operating ratio and it really is driven down.
On to the service center level, when you look and think about all the dollars that we've invested over the years and expanding our door capacity.
And then the individual opportunity to improve the service centers ratios.
All those 238 service centers roll up into the company average and you might have some that we just expanded it may be hurt the operating ratio.
But you've got a much larger group.
We are leveraging all the fixed cost there because we own or most of our facilities and so it gives us confidence that we can continue to drive this operating ratio lower.
Once the density factors come back, but it's the density.
In the yield and both of those generally require a positive economic backdrop to support each of those are the two key factors really to drive long term operating ratio improvement and we're going to continue to focus on those you know, it's a matter of managing revenue quality and cost.
And we've got a consistently do both we've got a continued to look for ways that we can keep our cost inflation load.
Well continue into the also gives the service to our customers that provides value and allows us to to get the consistent rate increases that we need as well and so this just continues to build on itself and it also allows us to do the most important thing and that's taking care of our employees and keeping them motivated.
Keep in them engaged to continue to give service to be productive.
That employee and our family culture that we have is really what's been driving our long term success. When we want to make sure that we don't Miss out on that element as well.
Great. That's really helpful. Thanks for the time.
Next question will come from <unk>.
With Deutsche Bank.
Thanks, Hi, everybody.
All the good questions have been answered asked to answer so I guess I'll have to ask a couple bad ones to forgive me I'm just trying to think about the sequential I mean, I know ours kind of an output of various moving parts and as I think about the sequential movement from Twoq to Threeq you I just wonder why the output.
I would actually be more challenge, especially given what's happening on the weight per shipment side because.
Correct me, if I'm wrong out I mean mentioned that weight per shipment kind of was volatile, but then maybe.
Went down towards the ended the quarter.
So as shipments are going up weight per shipments coming down you're adding resources just to serve the shipments wouldn't that represent I mean, maybe overly simplistic, but does not represent maybe an incremental headwind on the o. or as we think about kind of moving parts you talked about that.
[noise], Yeah, I mean, certainly there there are a lot of moving parts right now yeah, as we work our way through this environment and and so yes sequentially the weight per shipment is coming down but it's it's.
On a year over year basis more weight per shipment was pretty low.
Last year and the third quarter.
But I think that that will continue to keep our focus on on maintaining our revenue quality and if we can keep a that revenue per shipment hi.
Which will we have no intent.
To change anything related to our pricing philosophy, a little bit lower weight per shipment.
Then certainly can if you've got the same cost per shipment to handle the net can put a little compression on that individual shipments margin, but again getting the leverage from the revenue growth like we talked earlier you know that's if you disorder run out for the quarter kind of this this trend that we're seeing in July.
Hi.
You will have significant in improvement sequentially in revenue and so.
The leverage that can come from that.
Is significant and should offset by any other type of challenge that we have typically our overhead cost.
Average, 20% to 25% of our revenue and the second quarter. They were about 24%, it's appeared with revenue weakness and even though.
The the aggregate cost absolute calls for lower on a year over year basis in the second quarter and they were lower in the second quarter than the first that some of the action.
That we could we obviously saw a lot of the increase in those cost as a percent of revenue due to the revenue weakness, but sequentially. If we can show that improvement there and not increase as overhead costs, you're going to get a lot of leverage there and and we'd expect to be able to work that 24%.
Back down closer to the lower into the range certainly it would be the idea and then we just got to keep the focus and I can assure you we will on maintaining all of our labored or revenue statistics.
All of our productivity across all areas of the operations. That's the biggest cost element that we have.
But again when density comes back into the network as we were talking about our line all cost earlier.
That should improve that line all cost that is more semi variable says you know the density coming back in the revenue.
Certainly that that should give us much more opportunity than any other pressures related to a little bit lower weight per shipment should present.
Yeah.
Okay, and then I don't if I missed it did you talk about you're on your tonnage June July I wasn't sure. If you had mentioned that or not.
Well I just generally said.
Cool July is not done and yeah, we got out of the the habit of giving.
The number in the middle and even though we've got two days left but.
Given an intra month exact number and then.
The comparison that that created and sometimes panic or sometimes exuberance that may be neither was warranted of.
The change between the day of call and then what the actual number was so I kind of talked around I guess, but were down the revenue is down about.
3% sort of plus or minus at this point, we'll see where we end up with these next two days or revenue and and.
The weights somewhat in that the weight per day is somewhat in that same ballpark.
So that's continued to show improvement.
From from where we were in June and July is it's been a really strong month typically July has a month that the revenue falls off a couple of points from June and to see the revenue continued to accelerate and we've actually got revenue per day.
Higher in July.
Certainly that's a that's a big benefits and provides us with a lot of encouragement.
As we go through the third quarter to see to these trends continue because usually July is the weakest month of the third quarter. So we'll continue to see.
How these trends play out, but certainly gives us a lot of encouragement to see Arca customers continued to reopen their business the increased levels of business, there given us and and some of the new wins that we've been able to create a while our sales team hasn't really been out the be able to be out on the street, making sales calls so it's been a.
Coordinated effort and our sales team got to give them a lot of credit for having to change the way they operate how they communicate but the coordination between our sales cost and in pricing team.
And continue to stay engaged and strengthen relationships with our customers I think that's a big piece of not only our long term numbers, but but the improvement that we're starting to see as we go into the third quarter.
Okay, Alright. Thanks, let me ask appreciate it yeah, let me add to that we saw our revenue trends start to improve in June and so far through the month of July they've continued to be very consistent and they look good down the line. When you. If you look at revenue per shipment weight per shipment.
The per hundred and all those different things that we measure from a revenue standpoint, they're all consistent and look very good. So far so we hope that trend will continue but we're encouraged by not not not concerned at all we're very encouraged at this point.
Yes, good stuff. Thanks, so much.
Our next question will come from Jordan <unk> with Goldman Sachs.
Hi, just sat picture question your service standards have always been.
Tremendous party to competitive advantage in the LTL stats and just wondering.
The industry itself.
Yes the competition.
Where is the competition.
Actually up are doing things in the right direction that.
Does that impact the gap between you and the competition or is it still.
Hello, everyone else, it's a competitive advantage generally remains.
Yeah, George Let me say first off you know everybody has service standards and.
Well in a lot of cases, they're very similar carrier to carrier I, you know hours or.
I think are in line with most of our competitors are better but service runs off a lot water damage than just eight a b on time and there's a lot that goes into service and I think that's where odious sales compared to our competitors.
And if you know if you look at all the things that we've done over the years and.
We talk about the low claims ratio, but you know that's a big part of it aid to be on times, a big part in our employees are engaged they know what their role is as it relates to service and they execute on that ROE everyday.
You know, whether it's the dock worker or the person that answers the phone in the office.
And talks to our customers how they deal with our customers.
Making timely pickups, making appointment times you know all those things. There's just an awful lot of elements that go into service and you know I think week.
We measure up a far better than our competitors on the day to day bases and.
That's why I think when we you know, we sometimes lose business over price, but it comes back because of service and at the end of the day, we're we're getting it back and we're getting it back at our price.
There's an awful lot to goes into that we put a lot of work into that over the years then.
That's it's paying off so.
We will continue to focus.
In that area and.
Continue our commitment to our customers. So that's make a difference.
What does that answer to your question, yes very helpful. Thank you.
Our next question will come from Robby.
Morgan Stanley.
Hey, guys Christine on for Robbie Thanks for squeezing me in here, maybe circling back to some of the commentary around E commerce sort of the tangential themes that are you seeing any or get stuck to see any sort of blurring of lines between the LTL into.
Oh operation and moving forward over the next couple of quarters in years and length of haul keep me shortening on the T. outside and then on the LTL side seems like you know the shipments are getting a little bit had the are you guys seeing any again what boring there.
[noise] no not that we can tail to be honest with you know yeah, certainly I think as suppliers try to get closer to their customers.
TL length of haul would get shorter, but we haven't seen that trend at all in our business, our Lisa Holland spin.
Very consistent over the last several years and.
The honest with you if anything we've seen a little bit of an increase of late so.
If there's borrowing at alliance, we can't see it there's still a pretty big distinction there.
Got it Okay. That's helpful. And then many just one follow up sort of bigger picture and just trying to do you have all get on the last couple months around you know electric.
Vehicles, whether that thing you know PND or maybe even shorter haul the shorter haul operations where are you guys.
You know developments that we came from the L.A.M. Noah.
All months here.
Well.
You say this.
I don't think that technology has evolved to the point that it's.
All that useful for us yet.
Theres still lot of issues with it I know you you know, we all here see and read things that sounds good.
But I'm not sure the practicality in our in our particular.
Company, It's just not the technology is not there yet.
We can't make it work as it currently stands today so I.
I think it'll continue to evolve and and I think there will be an application down the road and.
Maybe sooner than later, but we'll just have to wait and see there's still a lot of issues with it at this point and.
Hopefully it'll get there, but it's just not there yet.
Got it understood. Thank every time.
And that does conclude our question and answer session for today I'd like to turn the conference back over to Mr. not for any additional or closing remarks.
Okay. Thank you all for participating today, we appreciate your questions and please feel free to cost. If you have anything further thanks and I hope you all have a great day.
Once again that does conclude today's conference. We thank you all for your participation you may now disconnect.
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