Q3 2021 Old Dominion Freight Line Inc Earnings Call
Good morning, and welcome to the old Dominion Freightliner incorporated third quarter 2021 earnings Conference call all participants will be in listen only mode should.
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I would now like to turn the conference over to drew Anderson. Please go ahead.
Thank you Gary Good morning, and welcome to the third quarter 2021 conference call for old Dominion freight line today's call is being recorded and will be available for replay beginning today and through November 32021 by dialing 877344.
Seven five to nine access code 10160197.
A 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 dominions expected financial and operating performance for this purpose any statements made during this call that are not statements at historic.
In 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 that are 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 under.
Takes 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 ask in fairness to all that you limit yourselves to just to a couple of questions at a time before returning to the queue. Thank you in advance 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 Gantt. Please go ahead Sir.
Okay.
Good morning, and welcome to our third quarter Conference call with me on the call today is Adam Satterfield, our CFO. After some brief remarks, we'll be glad to take your questions.
During the third quarter the old Dominion to produce strong profitable growth that included New company records for quarterly revenue and profitability.
Third quarter of 2021 was our third straight quarter with double digit revenue growth and the fifth straight quarter of double digit growth in earnings per diluted share.
While our revenue results reflect the unprecedented demand for our best in class service, our ability to grow with these impressive rates is the result of our long term commitment to consistently invest in capacity.
We continue to have available network capacity as well as best in class service, both of which are qualities that differentiate us within our industry and provide a distinct competitive advantage for old Dominion. These qualities have also supported our ability to win market share and produce.
Profitable growth over the long term.
With continuing strength in the macro economic environment and.
And limited industry capacity, we believe demand for transportation services will continue through the fourth quarter of this year and into 2022 as a result, we expect that our business level momentum that began in the third quarter of 2020, we will also continue.
To take advantage of these opportunities and produce further profitable growth. We believe that it will be important for us to continue to execute on the long term strategic plan that we have operated under for many years there.
This strategy focuses on delivering a value proposition of superior service at a fair price to our customers, which generally creates the capital for us to further invest in the capacity and technology to support our customer supply chain needs.
Our most important investment however will continue to be in the <unk> family of employees or people are critical to our success as they work tirelessly each day to provide service value to our customers.
We added over 1000, new full time employees between June and September of this year.
These additions resulted in a 29% increase in our average full time head count as compared to the third quarter of 2020.
While we have grown the O D family. This year the capacity of our people continues to be our biggest need to support future growth.
As a result, we expect they will that we will.
To add new fulltime employees to our team during the fourth quarter and next year.
We believe further additions will be necessary to prepare for anticipated growth.
And to also reduce the use of third party purchase transportation.
We expect to use third party purchase transportation during the fourth quarter at levels similar to the third quarter.
While we would like to reduce this level of utilization, we must continue to supplement the capacity of our people and our fleet and support of our topline revenue performance.
We hold a third parties that we work with the same standards of excellence and our team remains fully committed to providing best in class service to our customers.
Our customers expectation for excellence do not change regardless of how we move their freight and given the supply chain challenges that many of them are currently facing we want them to have complete confidence in our ability to deliver.
Old Dominion's sets the standard in our industry with our ability to provide superior service and service center capacity to support our customers' growth as a result, we believe we are in a better position than any other carrier to win additional market share.
And further increase shareholder value over the long term.
Thank you for joining us this morning, and now Adam will discuss our third quarter financial results in greater detail.
Thank you, Greg and good morning old Dominion's revenue grew 32, 3% in the third quarter to $1 $4 billion and our operating ratio improved to 72, 6%.
The combination of these changes led to a 44, 4% increase in earnings per diluted share to $2 47 for the quarter.
Our revenue growth was balanced between <unk> volumes and yield both of which were supported by the strong domestic economy and capacity issues within the industry.
Our NPL funds increased 13, 7% and <unk> revenue per hundredweight increased 15, 7%, which also reflects the impact on our fuel surcharge program from the increase in diesel fuel prices.
Excluding fuel surcharges <unk> revenue per hundred weight increased 10, 1% as a result of the continued success with our yield improvement initiatives as well as changes in the mix of our freight.
On a sequential basis third quarter <unk> shipments per day increased three 2% over the second quarter of 2021 as compared to a 10 year average sequential increase of two 9%.
<unk> tons per day increased 1.0% is compared to a 10 year average sequential increase of one 9%.
These 10 year average trends exclude our 2020 metrics for a more normalized comparison.
At this point in October with only a few workdays remaining in the months our revenue per day has increased by approximately 33% to 35% when compared to October of 2020.
We will provide the actual revenue related details for October in our third quarter Form 10-Q.
The operating ratio for the third quarter improved 190 basis points to 72, 6%.
Result of the operating leverage created by our revenue growth as well as our continued focus on operating efficiencies.
Many of our cost categories improved as a percent of revenue during the quarter, although our operating supplies and expenses increased 200 basis points due primarily to the rising cost of diesel fuel and other petroleum based products.
As a percent of revenue salaries wages and benefits improved 320 basis points between the periods compared.
Our productive labor cost within this expense category improved 200 basis points, which more than offset the 130 basis point increase in purchase transportation.
Old dominion's cash flow from operations totaled $364 $3 million and $872 6 million for the third quarter and first nine months of 2021, respectively.
While capital expenditures were $178 $6 million and $384 $7 million for the same periods.
We noted in our release this morning that our capital expenditures are now estimated to be $565 million for this year.
<unk> $40 million decrease from our prior estimate is mainly due to the timing on large real estate projects that will be pushed into next year.
We will provide further details about our 2022 capital expenditure plan with our fourth quarter earnings release, but at this time, we expect to increase our expenditures to support our ongoing market share initiatives and to reduce the average age of our fleet.
We continued to return capital to shareholders during the third quarter through our dividend and share repurchase programs, including the $250 million accelerated share repurchase agreement that will expire no later than March of 2022.
For the first nine months of this year the cash utilized for share return programs included $599 million for share repurchases and $69 $4 million of cash dividends.
Our effective tax rate for the third quarter of 2021 was 25, 2% as compared to 24, 8% in the third quarter of 2020, we currently anticipate our effective tax rate to be 25, 8% for the fourth quarter.
This concludes our prepared remarks. This morning, operator, we will be happy to open the floor for questions at this time.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Our first question today comes from Chris Wetherbee with Citigroup. Please go ahead.
Yeah, Hey, thanks, good morning, guys.
Maybe you can start off tonnage trends, Adam you mentioned the tonnage trends in the quarter I think there were a little bit below sequentially what is normal.
We saw a little bit of a deceleration August before it seems like September picked back up. So can you talk a little bit about sort of business conditions in the quarter and maybe what we saw intra quarter and kind of how thats played out as we move here into early October.
Sure one of the things driving the change in shipments versus tonnage as well to point out first is the fact that we continue to have a little bit lower revenue our weight per shipment rather not.
That's the change that we've talked about in recent quarters as we've continued to focus on more traditional LPL shipments and tried to work out some of these <unk>.
Larger harder to handle type of shipments that are more transactional in nature generally.
Within our system, so that that had a little bit of an impact overall in that discrepancy if you will between.
The tons and shipments.
When we look at shipments they were on a sequential.
Rental basis, just above what.
What the 10 year trends would have been.
At three 2% versus the $2 nine so there's little discrepancy there but back to the point of your question. When we looked at really the volumes in general both tonnage and shipments as we work through the quarter. We were right in line with normal sequential trends in July.
Versus June, but then had a pretty big step back in August our tons per day in August decreased one 6% from July.
The 10 year average changes of <unk>, 5% increase there and a big reason for that was the fact that we started seeing the across the.
Countries the rise in Covid cases, and just the ongoing labor issues that are affecting many customers in warehouses throughout the country that certainly had an effect on our business directly and indirectly really so that was an issue that caused us in some cases the.
And not be able to pick up right when we couldnt be able to deliberate and.
So there was certainly a ripple effect.
Throughout the economy.
And reflected in our business results as well as cases started to improve and.
Some of that pickup back in the Labour partition participation rates, we saw a significant recovery really began towards the end of August, but but really accelerated through the month of September.
Such that our tons per day in September were up five 2% overall August versus the 10 year average change of three 7% so.
Certainly made up for that and then some as we accelerated through the end of the quarter.
Okay, that's very helpful.
Like revenue per day in October would suggest that maybe that trend has continued to kind of curious about that but as a follow up you know kind of wanted to get a sense of.
With the context of tonnage and obviously with very strong pricing environment, but obviously youre hiring at a rapid clip I would imagine there is some inflation on that side, how do we think about the normal sequential cadence of operating ratio as we look into the fourth quarter.
Sure.
As Gregg mentioned in our prepared remarks, we will continue to.
Focus on <unk>.
Bringing on new employees as we go through the fourth quarter and it's something that frankly, we've been doing all year. If you look at kind of the change in our.
Our volumes in change and people, we've exceeded what our normal sequential trends have been and I think for five straight quarters. So.
That's something that we think we will continue given the strength of the demand environment that.
We certainly feel very confident that that will extend into 2022. So it's important for us to continue.
To really build up all the elements of capacity that we need in our business and that's people fleet and the service center side to be able to accommodate our customers' expectations for growth in and being able to continue to deliver best in class service to them with that said I still feel good about.
The performance in the third quarter, we were pretty much right in line. The sequential operating ratio performance was right in line with normal trends.
Think that we should be able to be in that range. While we'll have some some costs continuing to come at us.
Both in relation to the investment in new employees.
We are still taken delivery on some equipment. So we've got some cost pressures there, but we've still got incredible topline revenue performance is helping to.
To offset those and certainly yield performance.
<unk> continued to be strong, but as you alluded to with the change.
And those are.
Our volumes and overall revenue for October.
We are performing well above what the normal sequential trend what would otherwise be on the volume side and pricing strength certainly continue as well.
Great. That's very helpful. Thanks for the time appreciate it.
The next question is from Jordan <unk> with Goldman Sachs. Please go ahead.
Yeah, Hi, just just a follow up I guess on some of the head count related things. When you think about volume growth whatever the expectations are in the head count need should should roughly track once we get past this year head count in volumes or or do you.
Need less head count relative to the volume growth. Thanks.
Yes, Jordan I think it will continue to track to some extent, but you got to remember we've been really chasing it for the most part.
All years, our growth has accelerated we've continued to chase our needs and continued to play catch up to some degree so but I do think that will start to moderate and level back out to more mobile type.
Going forward at least that's what we hope.
Okay, and then I assume as other as you're saying.
In order to get the people you've had good success, obviously and need to push up the the wage per employer.
Cost per employee I really want to look at it.
Yeah, I mean, we.
We have done the same thing this year that we've done in years past we gave.
Our annual raise in September and in some cases, we've had to increase starting wages than we have.
Had some places where we've had referral bonuses and those kind of things. So we've had lockup mentioned in quarters past.
We're able we're having success. We're just we just have to work a little harder at it and.
Do things a little bit differently, whatever it takes to get the folks onboard but.
We're having success.
I expect we'll continue to do so.
Thank you.
The next question is from Ravi Shanker with Morgan Stanley. Please go ahead.
Thanks, Good morning all.
So maybe the first question is kind of along that similar trend going up you guys are well known to keep you at 25% excess capacity how does that trend over the next several quarters do you think.
B.
Is now the right time to build that buffer given the higher cost of building capacity in the current environment.
And also kind of what are your competitors doing are they battening, the hatches and trying to get price or everybody in the industry, while trying to grow capacity.
Ravi where we are.
Still at about 15% to 20% excess capacity and that's in the service Center network, which is the most important in the <unk> business I mean, it certainly takes people in trucks, but that's the longest term form of capacity in the hardest to put in place and we've been certainly consistent with with our investments over the years.
And we will continue on that front as we finish out this year and then transition into next year, but that's about the same point that we were when we finished last quarter as well. So despite the strong sequential volume performance that we had in <unk>.
Been able to keep that excess capacity level at about the same spot so.
We're going to keep after it and keep adding to.
Those capacity levels and certainly as Greg mentioned, we've got to really continue to be focus.
In the short term.
On continuing to add people into the mix and that's probably been our biggest need all year as we work through the balance of the year, but it really takes all three forms.
We came into this year, we don't really know exactly what our competitors' strategies are but we came into this year, believing that we had more capacity than any one and that really goes back to our 10 year.
The investment that we've made we've expanded our door count by over 50% over the last 10 years and we've seen very little investment firm from some of the others and maybe a service center here and there, but nothing at any major scale and so that has created an environment for us to be able to win more market share than they need.
Certainly we believe we've still got best in class service.
So we've got a service advantage in the marketplace and we've got more capacity than that.
Anyone else and that gives us a capacity advantage in the marketplace.
That usually produces pretty phenomenal results when we get into these strong demand periods like we've been in this year on what we expect to see for next year as well. So it gives us a lot of confidence to say, we're the best positioned carrier to continue to produce profitable growth and increase shareholder value even from the levels from which we're currently at.
Operator.
Got it that's great detail, maybe just one follow up on the capacity thing just on new trucks do you feel like you're going to get all the trucks that you would need in 2022 or does that look like something that happens in 'twenty 'twenty, three or maybe even 24.
No we think we're going to get what we.
What we've asked for.
At this point in time, there is no indication that we will not.
So will we.
We will have to wait and see obviously, but so far the outlook from a truck standpoint is good.
Very good thank you.
Excuse me. The next question is from Jon Chapell with Evercore ISI. Please go ahead. Thank.
Thank you good morning.
Greg in the last call you mentioned.
Hopes for maybe nine new terminals by the end of this year, although acknowledging that some will definitely slip into 'twenty. Two can you give us an update on.
The pace for the for the remainder of this year. What you have line of sight on for early 'twenty, two and if we can even take a step further and think about holistically. The next 12 months, what's your kind of ideal additional capacity as it relates to either terminal count or door count.
Yeah, but the terminal count John.
I think we've got another three or four that we expect to open in this calendar year and we have numerous others that we're working on for next year.
I can't give you an exact number but I'm going to say we're in about eight.
Eight to 10 range for next year, something like that so we've got a lot of projects that were.
That we're in the middle of and then we've got an awful lot on the list to start as we go forward but.
Just remember.
A lot of those things they take time.
Well, it's like colon piece, if you will in some cases, but we're working on.
Locations, where we need help and where we think we could be capacity constrained. So we're on it.
And hope to continue to be able to accomplish whatever wherever our needs are.
Okay and my follow up will be along the same lines I think some people here capacity expansion of terminal expansion their immediate thought goes to startup costs and potentially weighing on the aggregate margin given the size of your network. Today is there just better scale of Onboarding, a new terminal.
So that the immediate tonnage impact from that.
It has a pretty de minimis impact on the aggregate operating ratio of the entire firm.
Yes, we certainly start out I mean, we're covering all markets today. So when we open a new facility. It already starts with a good book of business. If you will.
And it's pretty much profitable.
Immediately and so.
That also frees up some capacity in the existing service center that we moved ZIP codes and freight out of into the new location.
So that's that's been part of our expansion process over the years.
Certainly we've invested a lot of dollars in it.
Expanding our network in that 50% increase in door count.
Talked about earlier, but.
That kind of all goes into it and it's why when we talk about our yield management philosophy that we focus on getting in the increase every year in our revenue per shipment to exceed what our cost per shipment inflation will be but also to support the continued investment in our service Center network.
Our supply chain has become more sophisticated customers are leveraging our network to their benefit as we're processing through our network of about 250 service centers today.
Today, So it's something that we're effectively purchasing real estate capacity on behalf of our customers and we're one of the only.
That's really making the type of material investment that we have so.
It's important for us to continue to keep that within the context of yield management.
So that we can afford these service centers that are becoming more and more expensive.
As we're competing with different parties to go out and find.
The real estate to continue to support our growth, but certainly we've had great success in the past we've got a good team that's out.
Always trying to stay ahead of the growth curve and at the levels, where we are we feel like we've got is probably stay a little bit further.
<unk> the curve than we have in years past, but but we've got a good plan. We've got a list of about 35 to 40 service centers that we think we want to add to the network in due time.
Probably won't stop there we feel like we've got a very long runway for growth ahead of us given what our expectations for growth in the industry.
Given the consolidation in the industry and general lack of investment by <unk>.
Other carriers, it's certainly a great spot for us to be.
And to continue to be in a good position to win market share.
Absolutely. Thanks, so much at them very helpful. Thanks, Greg.
Sure.
The next question is from Tom <unk> with UBS. Please go ahead.
Yeah. Good morning, So I.
I wanted to ask you first maybe just on kind of broader supply chain constraints and how do you. How do you think they affect you or perhaps they just don't but.
Obviously, there's a lot of discussion around the ports and it's pretty clear their truckload is constrained drayage is constrained so intermodal as well is there any effect of the year.
Kind of a year of business and when they get to get some spillover freight, but just how do you think that some of the broader labor constraints in the supply chain noise.
Affect you is there some tonnage constraint or limitation. Some cost pressure are you are you pretty much immune to it.
Yes.
I don't know if we're immune to anything thats going on in the marketplace, but.
Tom We do see continued strength off the west coast I mean, obviously, there's a lot of stuff sitting out there on the water in and as it continues to get into the warehouses and whatnot.
We're seeing and feeling that strength.
In those markets.
But certainly we're not immune to anything and any any.
Change or any.
Change of strategy or whatever by our suppliers or our customers worldwide.
Some of the things that we have to do and possibly where the freight comes to goes from whatever.
But.
Right now we adjust as as is necessary.
Necessary and so far I would say the impact has been somewhat minimal if you will.
Again, not immune to anything that's going on but.
Not a huge impact.
Yeah, Okay I appreciate it that's a pretty high level question.
And then what about <unk>.
<unk> growth that gets you you talked about.
Revenue per day in October I don't know, if you want to comment a little bit more about tonnage, but how do you think about you know the ballpark of tonnage growth might be in fourth quarter.
And what it potentially could be in 2022 is kind of you know.
If you go back to like mid single digits or high single digits next year, how do you broadly think about the framework for tonnage growth in <unk> and you know I know it will be high level, but next year.
We don't know.
We want to give any specific guidance per se, but.
The balance of the revenue growth.
And October is pretty consistent pretty split evenly between yield.
And tonnage like it was in the third quarter, those two numbers, where we're pretty close on.
On the yield side, obviously recently fuel prices have continued to increase.
So that overall revenue per hundredweight metric will continue to reflect that number, but but again, we're still seeing considerable strength on the volume side as well.
Certainly as we go through the period and you think about the comparisons the comparisons certainly get a little bit tougher each month as we.
Work through the fourth quarter. It was last year volumes were accelerating month after month and such.
As such the third quarter was the fifth.
But really strong outperformance versus what our normal trends.
Ben typically.
We see strong performance in.
For five or six quarters like that.
And then kind of revert to normal sequential trends, which by the way reflect a whole lot of market share gain.
Over the past 10 years.
When you think about our shipments per day.
Are averaging about a 50% increase versus where we were 10 years ago.
So there's a lot of market share gains that are in those numbers.
But overall I think if you just were to say that we.
Operated on a normal sequential trends.
Puts us with some pretty strong.
The numbers on the volume side next year and.
We don't want to say, that's what the forecast vehicles right now we haven't seen any let down.
With respect to demand so it's hard to call that.
That we're going to see any slowdown in certainly based on customer conversations.
And everything that we see and read we feel like this unprecedented level of demand that we've seen this year that will continue into next year, especially if the.
Other carriers are continuing to be capacity constrained. It certainly could continue to just push more and more volumes are way and so we just got to be in.
Our position to continue to bring it on board and make sure. We're focused on profitable growth, which is what our long term focus has been and.
And continue to take care of our customers and offering them solutions.
And the various ways be handling all of their LTE shipments using our truckload brokerage division.
To help them out with any <unk>.
Truckload moves as best we can and then.
The Drayage division that we have and are non <unk> as well, which is mainly focused in the southeast has seen a lot of strength there. So.
Comes back to building the relationship with your customer and trying to continuing to serve them as best you can.
We're going to continue with that focus as we transition into 2022, but not keeping our eye off the ball with respect to the fourth quarter as well, we still got a lot of work to do to finish out this year with strength.
Yes.
It sounds like your resource editions. Your head count you are that seems like you're planning for for a pretty good growth next year as well just what you're doing on head count is that fair.
Fair.
Yes, Sir yes, because we've still got to try to reduce this purchase transportation, we'd like to get back to managing the business completely in sourced on our line haul standpoint.
That's what we've done in the past.
Using it to supplement the team right now again, just getting back to being able to serve our customers.
But certainly that's the focus and it will take our head count exceeding our shipment count over the long term those two numbers are really.
<unk> the change in head count the change in shipments but.
<unk> got to catch back up with.
With things and we've been under the shipment growth. If you will for the past year year, and a half and so it's going to take a period of sort of regain that to.
To not only catch up with where our business levels are but really to be in.
<unk> the growth that we're likely to see next year.
Okay. Thanks for the time I appreciate it.
The next question is from Scott Group with Wolfe Research. Please go ahead.
Hey, Thanks, good morning, guys.
You guys are clearly be sub 75 on an operating ratio for the calendar year I can't imagine you want to put a timeline on it but do you feel like you've got line of sight to getting to that 70 or sub 70 or over the next several years.
I think thats something that we just got to continue to work at.
When you look over the past two years the improvement that we've had.
The operating ratio that two year performance really has only been exceeded by the two year performance back in 2010, and 2011 coming out of the depths of the recession.
So we're really proud of what we've achieved over the last few years and we feel confident to say that we know we've got room for further improvement.
I think we'll wait until we get to the fourth quarter to really start talking about kind of what are next.
Target will be.
But again, if you look over the long term, we've averaged 100 to 150 basis point improvement in the operating ratio each year and that sort of gets back to that delta between our revenue and cost per shipment. So lot go into each of those two numbers.
Thus managing our cost and continuing to focus on productivity and offsetting all of the costs that go along with expanding our model.
And that creates some short term cost headwind, but when you look at the long term performance for.
For what we've done over the past 10 years, producing an average of 10% to 11%.
<unk> and revenue each year and about a 25% average annual increase in our EPS, that's driven considerable share value over that 10 year period.
We want to continue to do that as we look out into the next 10 year horizon as well so.
A lot of opportunity, but a lot of hard work and focus on execution on our part to make it happen.
Okay, and then I wanted to ask on the labor side I know, we've touched on head count, but do you feel I guess two things do you feel the need for wages or comp per employee to to increase more than the normal given inflation and then just any thoughts on vaccine mandate and.
What your expectations are there how youre planning for do you think it's going to happen carve outs and things like that.
Yeah.
Scott as I mentioned before we've had to do some things a little bit different from a pay and benefits standpoint paid mainly.
We look at benefits every year and see where we can make improvements and we've done that over the course of time.
But I don't think we've got to do anything drastically different from a pace standpoint, we did give an annual increase again this past September.
As we've done in years past and again, we have had to do referral balances and hiring bonuses than most.
Locations, where we are really challenged to find folks but.
I don't think it would be significantly different going forward, what we have to do.
Like I've said before and I've said over and over the years.
We can still get people, we just have to work harder at doing it and I think we will we will.
We will continue with that focus we're always looking for ways of different avenues to accomplish whatever the hiring needs that we have are so it will.
We'll continue to do that.
What was that last question you ask about just your thoughts on vaccine mandate and what Youre doing a plan for it.
[laughter].
Wow.
Yes, we would.
We'd love to have some some clear line of sight as to exactly what's coming down the line.
<unk> heard the same thing we've heard there was a mandate supposedly coming but.
I'm not exactly sure where that is right now.
I think you also know that we actually back.
About four months ago, we offered our employees an incentive to get vaccinated and we've had some success with that.
Far as a mandate goes.
That would be extremely difficult in my opinion, it's either.
Vaccinated.
The testing.
We're still working on that and trying to figure out how we can accomplish testing the numbers of folks that we would have to test on a weekly basis.
Extremely extremely difficult to accomplish I don't want to say impossible, but there are some challenges there that.
I think are going to be very difficult.
It comes to that and.
Got help our industry if it does.
If you think we got supply chain issues now across the country.
That could really throw it into.
Some kind of a crazy tail spin, but we'll see where it goes but hopefully.
Clear heads will prevail at some point.
Are you hearing that you have confidence that everyone says the same thing it would be a disaster or are you confident that the government gets that.
Confident that the government gets that.
No not at all sure.
Hope.
At some point in time, I think common sense has to prevail I know the.
There is there are some forces in the Washington, Thank the Ata's working on a couple of different things.
Hopefully we will have some success with that exempting truckers.
Whatever.
Strategy might be but.
At some point in time, I think common fantastic.
<unk>.
There is a place for that.
I'm not sure we've used a whole lot of it to this point, but.
Certainly there is a place for that.
As it relates to vaccines and mandates and whatnot.
The other thing is fortunately the numbers, we're seeing are moving in the right direction as far as Covid goes there really dropping.
I think I saw something on the news this morning, where we're down to a 4% positivity rate maybe that was just for the state of North Carolina Im not sure, but the numbers do look a lot better than they did back several months ago. So.
Again.
If you take that into account, where we are as far as the numbers of cases in those kind of things.
Shirley at some point.
Common sense will prevail.
Thank you guys appreciate it.
The next question is from Amit Mehrotra with Deutsche Bank. Please go ahead.
Thanks, very much I wanted to follow up on the long term margin question.
Adam Adam.
You've kind of Incrementals.
Incrementals.
25%, obviously, it's been much better than that.
Just given how much shipment growth has outpaced.
Hence growth, but obviously thats reversing a little bit in incrementals seem to kind of be coming down settling in maybe in the low 30% level and those types of incrementals, obviously imply kind of about 70, or that's really sort of a plateau for the company.
Versus kind of the very low Seventy's youre doing now is there anything Adam.
That kind of framework that you would disagree with do you think.
Actual incrementals.
Moved off relative to where you saw them a few years ago, just talk about kind of.
How you see that framework.
Sure.
One we've said this before but we don't manage the company to the incremental margin.
It's just a calculation of all the work that.
That we do in sort of building now.
The balancing revenue growth and margin improvement opportunities, we had used that long term target of 25 really.
As an inverse to say we were working towards a 75 operating ratio goal.
That's really more of what we talk about within the company for where we think we can take the operating ratio.
So I think we will give a little bit more color on that when we get to our fourth quarter call obviously.
Based on kind of what.
Mentioned earlier about the target for the fourth.
The fourth quarter.
<unk> set an annual operating ratio somewhere around a 74% so.
We certainly looks like we will be able to beat.
That 75 award target this year.
Is it as it comes down to incremental margins.
This will go down as our biggest incremental margin year.
In our history and when we've talked about the cost structure with you before.
We've laid out kind of the cost structure is balanced between our variable and fixed cost and how we can operate at a 35% to 40 incremental margin in.
In a particular quarter in the short period of time, but we don't want to get overly fixated on the incremental margins because again, we're focusing on the investments that are required to drive long term growth. We don't measure the success of our business based on how strong and incremental can be it's really some of those longer.
Term numbers that I referenced earlier.
We want to be able to repeat that because we think there is a lot of growth opportunity.
Left with within our business and so that's going to be the focus but it requires investment and that can create some short term headwinds and if thats. The only lens that you look at things through you Miss out on a ton of opportunity to drive shareholder value and so we're going to keep that that long term focus continue to make the necessary investments in.
That drives the incremental down a little bit.
<unk> I'm pretty pleased with a 33 I don't think thats anything to sneeze that for the quarter.
And producing a very strong $72 six operating ratio.
But.
Based on.
The operating ratio meaningfully lower.
We'll continue to whenever we get to whatever that next threshold.
<unk> threshold might be we will continue to look at managing the business and how the algorithm works.
Not to say that whatever the next stopping point will be the final stopping point.
We think that there is a lot of opportunity left here. So we'll just we'll keep marching forward. The the algorithms certainly as workforce in the past and we think can continue to work for us into the future.
Sure Yeah that makes sense. Thank you and just as a quick follow up.
You were helpful in providing tonnage.
Over at least kind of it.
At a high level, but obviously.
Construct tonnage weight has been a decent drag.
Tonnage when do you think that cycles through because obviously that has implications for.
Head count relative to shipment growth.
When do you think like the cycling through of the weight per shipment drag happens and it's a little bit more of a neutral to the tonnage.
Yes.
If you go back to the first quarter of this year, we were still at sort of a 600 pound range average that dropped to <unk> 70.
In the second quarter, and so I feel like we're probably likely to settle in this 550.
Pound range kind of plus or minus 20 pounds.
So.
And so we'll still have a little bit of a drag if you want to call. It that with the first quarter comparison, but by <unk> you should start to see that.
Next year, more normalize and see the shipment and tonnage performance.
More comparable with one another.
Okay. Thank you very much appreciate it.
The next question is from Jack Atkins with Stephens. Please go ahead, okay, great. Good morning, and thank you for taking my questions.
I guess just to kind of think about pricing and yield momentum here for a moment just based on the commentary that you guys have around the momentum in the business from a demand perspective, and the expectation for that to continue into 2022 can you maybe speak to the pricing momentum that youre seeing maybe in the second half of the year versus the first.
Half of the year.
And as you sort of look out into 2022 with truckload carriers talking about potentially double digit contractual rate increases.
Should we be thinking about maybe the core price increases in the LDL market more broadly not speaking specifically.
Specifically, but just kind of thinking about.
The potential for yield further yield.
Celebration in 2022.
Well I think for the industry, if we continue to see the supply and demand in balance.
In the past.
Many of the carriers that are out of capacity certainly used the environment to push.
Rice's meaningfully higher and try to take advantage and improve their margin.
So certainly that type of environment is supportive of our pricing initiatives for us.
More of a long term consistent approach and one that we think is fair, but equitable.
It's one that we can sit down with our customers and talk about what our cost inflation.
He is and what our needs are in terms of reinvesting in the business to <unk>.
Improved customer service or investing in ways that ultimately are going to reduce cost.
It's a win win situation for both us and our customers and so we try to target our cost inflation and then some and we've been pretty successful with that.
And so that will continue to be the focus but with that said, we're always focusing on individual account profitability and so when you're in these types of environments.
There are some accounts that they're operating ratios are not as good as others and those are the types of accounts that.
It really over the last couple of years.
We've had to address some issues and there's different ways to improved yield it's not always through price.
And so that's where you sit down and you build on your relationship together and work through different initiatives that ultimately can create the same result of yield improvement there. So certainly given the expectation that demand trends will remain very strong in.
Given the lack of capacity that we believe is in the industry and that's mainly grounded in the feedback that we're getting from from customers. We certainly expect there to be a strong.
Pricing environment for the industry next year.
For which we will be able to benefit.
Okay, that's great and I guess, just maybe following up.
Greg kind of going back to a comment that you had in the press release around length of haul extending out on a year over year basis could you could you maybe talk a little bit about what what's driving that is that a function of you know.
Comps is that a function of maybe some changes too.
Your own business mix.
Just would be curious if you could maybe expand a little bit on that comment and if that's maybe more of a structural change for you.
Jack as I mentioned before I think we're seeing an awful lot of strength right now off of the West coast.
Obviously, all those containers sitting out there that freights got to move inland at some point and I think that's why we're seeing the increase the small increase in our length of haul.
I know that theres anything else that would contribute to that okay, alright that makes sense. Thanks again for the time.
The next question is from Todd Fowler with Keybanc capital markets. Please go ahead.
Great Thanks, and good morning.
Adam to the comments on the progression in the fourth quarter I guess, its pretty encouraging that the expectation is to be in the historical range because it seems like that maybe head count growth would be a little bit higher than what you typically have seen in purchase transportation is going to be elevated. So what are the things that are helping you stay within the normal range. Despite maybe adding a few more heads than you typically wouldn't.
For Q and running a little bit more P T.
Well I think that one.
The top line performance.
Certainly helps offset.
A lot of cost.
We'll see how the rest of the quarter.
<unk> up if you will.
But typically we see a little.
A bit of softness if you will just about half a percent to a 1% drop in our revenue per day performance from <unk>.
<unk>.
So based on the current performance, we're definitely outperforming October if you will so we'll see where.
That puts us for the end of the quarter, but we're doing a lot of things with respect to managing cost we talk a lot about.
The labor cost and that's probably 65% of total calls or salary wages and benefits line. We've seen a lot of productivity this year, especially within our line haul and our pickup delivery operations. We've lost some productivity on the dock.
So I think that the.
Quarter in the first quarter that'll be some opportunity that we continue to focus on it it's not that we haven't been focused on it but.
Think that Thats something that will help.
On the labor front, if we can reduce the levels of purchase transportation.
Managed more freight with our people and our equipment.
Certainly think that that will be beneficial as well given the rates that we're having to pay.
We're using about the same level.
October as we were in the third quarter.
We hope that we'll be able to reduce.
That level of utilization a little bit but at this point the topline trends have dictated all year I think every quarterly call. We've had for the last four quarters, we've talked about.
Wanting to be able to reduce that.
Category, but but the top line trends is really dictated that continued utilization. So we'll see where that balances out, but theres just a lot of cost management.
As here within the business.
We're focused on as well as continuing to.
To see that strong top line performance that will help offset.
Some of this inflation as we're bringing on new people.
We will continue to see our benefit cost in the third quarter were higher.
And expect that that will likely continue as we're continuing to balance out the number of hours worked by our employees as we increase that workforce, there's certainly going to be more incremental benefit costs that will be incurred but but we feel good about all the other contributing factors that help offset.
Some of that cost inflation.
Okay, Yeah that helps them and all of that makes sense can you just for my follow up I know that the timing of equipment deliveries can have an impact on particularly the depreciation side.
This year it looks like depreciation is going to run pretty much flat with last year do you look at 'twenty, two is kind of being a catch up where you see more depreciation come in based on timing of equipment deliveries and I would expect there'd be a little bit of put and take with PT, probably coming down, but just any thoughts about how depreciation trends into 2022, just given the cost kind of tail that that can have.
Yes, it certainly.
You've seen the equipment deliveries delayed a little bit this year.
We haven't finished with completely with the delivery cycle at this point, but we do expect that.
All units ordered will.
He will be delivered to us and we've already had preliminary conversations.
With our OEM, so about next year as well and as Greg mentioned, we believe we will get all of the equipment that we need to be able to manage the growth that we're anticipating so but that has resulted in.
Some depreciation.
It's kind of come in different periods that too will be something that we're only about 80% through September complete with the Capex order on the equipment.
<unk> be some deliveries that were taken here in the fourth quarter that will add to that depreciation base and then that will trend up as we go into 'twenty two but typically it's.
You look at kind of the long term trends are pretty consistent factor of what our capex.
As a percent of that that kind of adds to the depreciation base.
I don't want to get into too many details until we're really ready to rollout with the full capex claim will be but but there will be some carryover into next year from this year's Capex plan and then certainly next year, where we're expecting that will we will spending quite a bit more than this year on total capex.
Okay got it thanks for the time this morning.
The next question is from Ken <unk> with Bank of America. Please go ahead.
Great. Good morning, So Greg and I'm happy to join your call just some clean up questions for me you've covered a lot.
The wage incentives Greg are they accelerating now or are they stabilizing just trying to get an idea on the environment, maybe just thoughts on how it has changed through the year.
Yes, we did some things Ken if you go back earlier and earlier in the year, when we were having issues.
We implemented some.
Couple of different bonus plans.
In finish whatever it took to bring the folks that we needed, but that's moderated to some degree we.
We haven't really increases.
Type bonuses or incentives whatever.
Of late that I'm aware of so I think thats, that's moderated to some degree.
So that's a good sign if you're able to still get get people in your incentives are moderating I guess.
The sequential or commentary are there adjustments you you you worked on to smooth that.
Adam You noted it was a typical 200 to 250 basis points third quarter fourth quarter or are there seasonal surcharges you look to add to.
To maybe smooth that out a bit.
No.
No surcharges or anything like that but the fourth quarter.
You can't be a bit unusual there are a couple of.
Adjustments to our insurance line, we go through an annual actuarial process in the fourth quarter.
Can move that insurance line and Theres some other.
Accrual related items within our benefits program that get looked at by an actuary tier. So there there can be some adjustments in the past for perfect with R. F.
Estimated as we move through the year, then those are pretty minimal and they haven't been overly material in years past.
But for example last year when you look at the fourth quarter.
The insurance and claims line was only <unk>, 9% and it had been at a run rate of about.
About one 1% so little bit of a favorable.
Adjustment, if you will there but but.
Absent those types of things nothing else that really comes in that is different from any other period.
Great and then my last one is just you talked a lot about.
Maybe expansion in terms of service centers, and adding doors anything you want to highlight on on productivity gains in terms of turnover per door or any other room for improvement on expanding capacity with the network or does that is that just doing what youre doing to get the 15%, 20% beyond that you'd need to be Additionally service centers.
We're just.
I don't think really anything different to add to it is just we're building up.
Anticipating what our growth levels are going to be and trying to ensure that we're building up the capacity within the service Center network.
To make sure that not only can we handle the growth that may come at us next year, but still maintain this target of 20% to 25%.
Excess capacity that we like to have.
Our system, it's in the <unk> World. It's the doors that really can control the amount of freight that can be processed through.
Through the system and so we never want our network to be a limiting factor to our growth.
Those those service centers are not easy to add and the additions don't come quick either so you really have to have them out there and it's why it's so important for us to invest.
Even in periods, where.
You might see market softness the investments that we made in 2016 and 2019.
These were critical to be able to accommodate all the growth opportunities that we're seeing in the present. So we just wanted to make sure that we continue to build out that capacity and just habit.
There and ready.
Our customers continue to call on us and want to give us more and more of their freight.
No I wasn't arguing the need for the additional service centers I was just wondering if there's anything more you can do to improve productivity on existing centers to gain additional capacity.
Well I mean, that's just the density and yield breakdown.
If we keep on average that $20 to 25% to say.
Every stick afraid that comes through an average service center.
It's going to drive incremental improvement in the operating ratio did that one particular service center, where we may have expanded it two years ago.
And then certainly the yield performance has got to be there to offset the generalized.
Core cost inflation at that service center level as well, so you build that out and scale. It across 250 facilities, while we may be expanding maybe 15 facilities in any given year.
So you've got a large grouping that have already been expanded incurred net incremental depreciation and now we're driving profit improvement at each service center level. So thats really whats driven the overall model is to continue to invest ahead of growth.
And then that density and yield contribution.
Drives the bottom line growth faster than the top line.
Great Greg.
Thank you.
The next excuse me. The next question is from Vasco majors with Susquehanna. Please go ahead.
Yeah.
You mentioned earlier, you increased your door count by 50%, while I most of the industry was flat or down over the last decade, and clearly that created a lot of value for your customers employees and shareholders.
As we look over the next five to 10 years, though it does feel like more of your competitors, though not all of them are pursuing.
Growth oriented approach to the market.
And then we've had a lot of questions on capacity, but can you frame how big is big enough for O D.
Whether in terms of tonnage or market share or service centers. However, really you want to measure it in and when do we get to the point as you look forward, where that margin will benefit of the growth investments starts to decline more noticeably.
<unk>.
I'll take a shot at the first part of your question Basket I'm not sure that we really look at it.
Like that how big is big enough.
I think it's all based on where we see our needs were.
Or are we.
Where are they and what do.
We need to.
To make sure we can service our customers as we've committed to them to do and.
That's the key.
Where does that take us how big that we become I don't know.
That's not something that we've looked at are focused on.
I don't know that that's extremely productive.
I wouldn't say that we've really looked at it that way, but wherever our needs are we'll continue to address them and down the road, where it takes us I guess, we'll just have to wait and see.
Thank you for the perspective.
The next question is from Bruce Chan with Stifel. Please go ahead.
Hey, good morning, everyone and thanks for squeezing me in here.
I want to come back to the labor side of things quickly in some of the head count increases.
Can you maybe give us a little color on where those new hires are coming in as far as the breakdown between drivers and dock Labor and then just as a follow up Adam you touched on some of the productivity potential, but if you go through that Onboarding process, how long does it typically take for you to.
Those new hires up for both potential thank you.
Yes.
The breakdown, obviously, we've got a.
Both drivers and our platform employees to move the freight.
Pretty consistent bandwidth with our line haul drivers of pickup and delivery drivers, especially as we've added new service centers.
Not only just the general growth that the business has had and then.
The platform employees as well.
Mainly the productive labor employees that are responsible for moving the freight and handling freight for our customers. So that's driving.
The majority of that.
Both in the head count.
It's been something that.
Say youre head Count's up 21% essentially is pretty meaningful, especially given all the conversations about labor shortages around the country. So.
Proud of how successful we've been despite the fact that we said we'd love to continue to hire more if you will.
And it's just the balance on the productivity.
The biggest learning curve happens on the dock.
For us.
Can't get too overly.
Call it up in one particular metric versus another the most important for us is to make sure that each new employee on the dock understands that our number one priority is to use all the tools and techniques that we had in place.
To protect our customers freight and whether thats the dunnage the airbags utilizing the load bars that are in our line haul.
Everything that really drives that overall value proposition. The claims management is a big part of that.
And we continue to have cargo claims ratio with one 2%.
That's something that we're really proud of and more motivated that we make sure our employees understand that that is a part of the value equation.
Part of the piece of our yield management success over the years.
Differentiating factor between us and many of our competitors so.
There may be a six month learning curve.
In place for people to come on to make sure they're effectively.
Preventing claims and also the other piece of it.
Is maximizing our load factor to ensure that they're utilizing the entire cube.
That's our biggest cost element is line haul and so we want to make sure that they are more focused on those.
Key factors, if you will versus just the number of shipments per hour that that we might mean in general in the dark but that gives the opportunity as those new people are now more seasons.
Certainly that's why we're looking at seeing some of that productivity opportunity as we.
Turning the page into 'twenty, two and certainly we'd love to see some improvement as we finish out the balance of the year, but I think that that will be a pretty good opportunity for us to drive some further cost improvement into next year.
Great. Thanks for the color.
This concludes our question and answer session I would like to turn the conference back over to Greg Gantt for any closing remarks.
Well. Thank you all today for your participation. We surely appreciate your questions and please feel free to give us a call. If you have anything further.
So you have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Okay.
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