Q2 2022 Old Dominion Freight Line Inc Earnings Call
Yeah.
Okay.
Good day and welcome to the old thumb.
[music].
Good day and welcome to the old Dominion freight line second quarter 2022 earnings conference call.
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Please note. This event is being recorded I would now like to turn the conference over to drew Anderson. Please go ahead.
Thank you good morning, and welcome to the second quarter 2022 conference call for old Dominion freight line.
Today's call is being recorded and will be available for replay beginning today and through August 3rd 2022 by dialing 187734475 to nine access code 7163281.
The replay of the webcast may also be accessed for 30 days at the company's website.
This conference call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Cleaning statements among others regarding old dominions 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 statement, whether as a result of new information future events or otherwise.
As a final note before we begin we welcome your questions today, but we do ask in fairness to all that you limit yourself to just a few questions at a time before returning to the queue. Thank you for your cooperation.
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.
Good morning.
Welcome to our second quarter conference call with me all the call today is Adam Satterfield, our CFO .
Some brief remarks, we'll be glad to take your questions.
I am pleased to report that the Audi team delivered strong profitable growth during the second quarter, which resulted in new company records for revenue and profitability.
Our revenue increased 26, 4% to one 7 billion while earnings per diluted share increased 42.9% to $3 36.
We also improved our operating ratio by 280 basis points to 69 five.
5%.
This is the first time in our company's history that we have produced a sub 70% quarterly operating ratios.
We achieved these results by continuing to execute on our long term strategic plan.
Which has guided us for many years and throughout many economic cycles.
Disciplined execution of the business fundamentals that formed this plan has supported our ability to does it double our market share over the past 10 years.
We are confident that continued execution all this plan positions us to win additional market share over the next 10 years.
The foundation for our ability to win market share as our relentless focus on providing superior service at a fair price.
Our on time service performance was 99% in the second quarter, while our cargo claims ratio improved cause 0.1%.
The service metrics reflect the efforts of our <unk> family of employees, who maintain a steadfast commitment to delivering value to our customers each and every day.
It appears that service quality is becoming even more important to customers when selecting a carrier which is why demand for our services has remained strong.
This is a trend that began to develop with the economic recovery during the second half of 2020 and it continues today.
<unk> are still struggling with supply chain issues.
As a result, we believe our customer relationships have strengthened as we do our part to help our manufacturing customers keep their facilities running smoothly.
Our retail customers keep products, all the shale and available for sale.
Our value proposition also includes having.
Having sufficient capacity to support our customers when they need it the most.
We currently have approximately 15% to 20% excess capacity within our service Center network and we expect to open multiple new facilities during the second half of this year.
These new facilities as well as various other expansion projects that we expect to complete.
Should increase the amount of our excess capacity towards our longer term target of 25%.
We remain committed to the ongoing expansion of our service Center network, which we believe is important regardless of the short term macroeconomic outlook.
Expanding service center capacity can take a significant amount of time, which is why we have historically been proactive with respect to our expansion efforts.
This unique strategy has created the capacity advantage for us in the marketplace, which becomes more apparent to shippers and Todd environments like we have seen in the past couple of years.
With over 700 million of year to date revenue growth through June we are on pace to exceed $1 billion of revenue growth for the second year in a row.
We simply could not have achieved these types of numbers without the consistent investment in our service center capacity as well as the continued investment in our fleet technology and training and education of our <unk> family of employees.
Our team has shown tremendous flexibility over the past couple of years in response to significant changes in our business levels.
I am confident that this team will continue to build on its success.
We have continued we have created one of the strongest records for long term growth and profitability in the L. P. L industry by executing on our long term strategic plan.
By providing superior service at a fair price and having the capacity to stay ahead of our growth curve. We believe we are better positioned than any other carrier to produce long term profitable growth, while increasing shareholder value.
Thank you for joining us this morning, and now Adam will discuss our second quarter financial results in greater detail.
Thank you Greg and good morning, ultimately means revenue growth was 26, 4% in the second quarter was driven by the 22, 6% increase in <unk> revenue per hundredweight, and two 8% increase in <unk> tons per day.
Demand for our superior service remained strong during the quarter, which helped support the steady trend with their volumes and consistent yield improvement.
On a sequential basis revenue per day for the second quarter increased 11, 4% when compared to the first quarter of 2022.
<unk> tons per day, increasing 7% and <unk> shipments per day, increasing one 7%.
For comparison, the 10 year average sequential change for these metrics includes an increase of nine 6% and revenue per day, an increase of seven 4% in tons per day, and an increase of seven 8% in shipments per day.
At this point in July our revenue per day has increased by approximately 18% when compared to July 2021, which continues to exceed our long term average growth rate.
As usual, we will provide the actual revenue related details for July in our second quarter Form 10-Q.
Our second quarter operating ratio improved to 69, 5% with improvements in both our direct operating cost and overhead cost as a percent of revenue.
Within our direct operating cost improvement in salaries wages and benefits as well as purchased transportation costs as a percent of revenue.
Secondly, offset the increase in our operating supplies and expenses.
The increase in operating supplies and expenses as a percent of revenue was primarily due to the increase in the cost of diesel fuel and other petroleum based products.
We improved our overhead cost as a percent of revenue during the second quarter, primarily by leveraging our quality revenue growth and controlling discretionary spending.
As we move into the second half of 2022, we have areas of opportunity to drive further improvement in our financial results.
We will continue to focus on obtaining the yield increases necessary to improve the profitability of each customer account.
We will also maintain disciplined control over costs to keep our cost inflation on a per shipment basis to a minimum.
Our team is now appropriately sized and most of our service centers to support our anticipated shipment trends.
As a result, we believe we should start seeing improved productivity throughout our operations.
The stability of our workforce has also allowed us to reduce our utilization of third party purchase transportation and move closer to the fully in source line haul operation that we prefer.
We believe this is one of many key factors, creating a service advantage we have in our industry.
All of which comes back to helping us win long term market share.
Old dominion's cash flow from operations totaled $427 $3 million and $816 1 million for the second quarter and first half of 2022, respectively. While capital expenditures were $229 4 million and $323 1 million for those same periods.
Okay.
We utilized $293 $5 million and $731 9 million of cash for our share repurchase program during the second quarter and first half of 2022, respectively, while cash dividends totaled $33 8 million and $68 million for the same periods.
Our effective tax rate was 26.0% for the second quarter of 2022 and 2021.
Currently expect our annual effective tax rate to be 26 zero percent for the third quarter of 2022.
This concludes our prepared remarks. This morning, operator will be happy to open the floor for questions at this time.
Okay.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Okay.
The first question today comes from Jordan Alegar with Goldman Sachs. Please go ahead.
Yes, hi, good morning.
Wonder if you could talk.
A little bit about.
The price environment, you know obviously there is some concerns out there about.
More than some concerns about moderation.
And demand and volumes in some.
Some of your rates of growth probably slowed as well on that front can you maybe talk about ex fuel is sort of the core price thoughts as you move through the balance of this year and have you had discussions with shippers or if they come to you and started to talk about things is.
As they approach their next contracts. Thanks.
Yes, Jordan, so far we haven't seen.
Much of any at all.
Any customers asking for cheaper rates or.
Any kind of exception pricing or anything such as that I think.
From what we can tell the industry is extremely disciplined I think you've noted over our history, we've been <unk>.
More of an extremely disciplined.
That will continue to be our focus.
Right now that's what we're seeing throughout the industry. So I think that's good for all of us.
So we'll see but so.
So far very very positive from that standpoint.
And then just a follow up on fuel and fuel.
Fuel surcharges I know the mechanisms are supposed to work as a pass through obviously.
Fuel surcharges have generally ramped up for the industry pretty quickly maybe even faster than the cost of diesel can you talk about the impact on on P&L from the rising fuel environment. Thanks.
Jordan the way our program is designed we really want it to be neutral to the bottom line as fuel goes up and down.
Certainly.
As contracts come up.
Each period.
Come up in every quarter for us.
But as they come up we look at what the current fuel price environment looks like and then we tried to stress tests.
Both up and down.
To see what that individual customers overall revenue contributions might look like and then the same for what they're costing looks like and so we.
Tried to do the best we can.
To make sure that.
That customer's individual account profitability understanding all of the costs that go into the model for each individual customer accounts.
We'll come out positive whichever way the fuel might trend. So I think that our surcharges certainly been affected with offsetting the increased cost of diesel fuel and certainly that's having a direct effect on other petroleum based products, but there's also a lot of indirect effect as well.
That's why we continue to see our cost going up and it's why we've got to continue to be disciplined.
With our yield management program.
Thank you.
Yes.
The next question comes from Jon Chappell with Evercore ISI. Please go ahead.
Thank you good morning.
Greg there's been this thought that.
Talking capacity truckload capacity starts to loosen and especially if you've seen some major retail pre announcements that <unk> been this massive beneficiary the only capacity in town could you kind of detail your book of business, a little bit and how much you would consider design your network today be non traditional LDL freight.
And have you seen any shift in your and your market share either up or down let's call. It since mid may when this whole retail.
So you started to really emerge.
Yeah, John I'm going to let Adam address that but obviously there is business that moves back and forth.
Extremely hard to measure, but I think Adam has got a better handle on dose.
So details than I do.
John just to give them a little bit of detail.
Certainly as those announcements came out last quarter from from certain retailers.
We've been addressing that question, but we've got many customers there.
Ship and receive that are beyond those two big big box retailers, but but nevertheless, our book of business is still 55% to 60% industrial.
I think the industrial related customers and when you look at certain macroeconomic factors in the industrial economy.
As they are continuing to expand and we probably got a little bit more growth out of our industrial related cut.
Customers in this most recent quarter than on the retail side, but our retail which is 25% to 30% continues to perform.
Strongly as well, it's just a little bit below the company average, but we're still seeing nice growth. There. So it's something that we'll continue to work through those and.
We believe we've got opportunities.
With each of those pieces of our business overall, we don't have a lot of.
Truckload spillover type business in our network, we work incredibly hard last year to make sure when capacity was at a premium that we were allocating capacity.
More so to traditional LPL shipment.
And customers that we're tendering those to us for the sense that whenever the truckload environment freed up a little bit that we wouldn't have.
This swing.
Going back into that market and traditionally you see more of those shipments would be in our spot quote network that used to be about 5% of our overall revenue, it's probably about one 5%.
At this point and those are shipments generally that existing customers have and that they are asking for something different from us so to speak but we feel good about demand we've talked about that we've had a lot of customer engagement in recent months.
And we're hearing good things from our customers. They continue to demand service quality, we've worked really hard for multiple years on improving and strengthening our value proposition.
We're seeing that come through with the strengthened customer relationships that we have right now and so as a result, we're not losing business. The volumes are a little bit flatter, but I think you can just look in some of that may be demand for existing.
Customers products. So we feel good about everything our customers are telling us and just continuing to work in.
And manage through to where the volumes are currently trading as we try to manage all elements of capacity within our business.
That's helpful. Adam.
For my follow up to Greg.
Obviously, the economy has changed a little bit.
Since the start of the year, you mentioned, you already have or still have 15%, 20% spare capacity today and still have the ambition to grow the network as you set out back in January have you thought at all about tempering some of that door growth in the back half of this year as the economy becomes a bit more murky or is this really your time to shine and.
When others have to scale back in that kind of just helps with the longer term longer term market share.
Yes, absolutely.
The latter John for sure.
Sometimes our opportunities are a little better when it slows down.
<unk>.
Sometimes you just have better opportunities when it's when it's like it is today. So we can't we can't stop I've talked about it before how difficult. It is to expand your network how long it takes how lengthy processes in certain locations.
Certainly way worse than others, So we can't quit.
We want to continue to grow that share and we know we've got to continue our efforts on a consistent basis to have that capacity when things get tight like they have been in the last year and a half two years.
Great. Thanks, Greg Thanks, Adam.
The next question comes from Jack Atkins with Stephens. Please go ahead.
Hey, great. Good morning, and thank you for taking my questions.
So I guess, maybe to kind of go back to the June and July commentary could you talk about what June .
Tons per day were on a year over year basis could you maybe give us that number and then Adam I know, we're going to wait until the Q comes out to get full details on July , but any sort of sense for or any sort of commentary you could share about how July tonnage is maybe trending versus normal seasonal patterns.
I think that'd be helpful for folks.
Sure.
On June our tons per day were flat basically with where we were last year.
On a sequential basis.
It was pretty flat as well.
With respect to shipments.
Let's see we actually the shipments per day for June were on a year over year basis were down 7%.
Okay.
Sequential basis, we were up.
6% versus May.
And as it relates to the July we're training up our revenue overall was up about.
18%.
Looking at the yield component of that we don't like to give the full details we used to.
Things move 10 basis points off what we had said that the story could take a different turn one.
One way or the other but but our yield trends right. Now if you look at revenue per hundred weight in July it's up about seven 5%. So you can kind of get into.
What the volume trends will look like and to point out.
Before anything is written about yield that's a little bit below where we were for the second quarter.
But we're going to see some changes in the mix of our freight as we.
Compared to the third quarter of last year that was the lowest point for our weight per shipment, we were seeing sequential decreases there and in the third quarter. The overall average was 500.
38 pounds there.
So we're still trending at about 560 <unk>.
So pounds in July it was <unk>.
Right at 15, 7% in the second quarter. So as we start to see more of an increase in that weight per shipment.
Certainly thats, usually a lower revenue per hundredweight, so they'll have a little bit of an effect there. Okay. That's helpful.
Ex fuel correct correct, yes, okay. Okay. I just wanted to clarify that and then I guess for my for my follow up I guess this one's for you as well Adam but.
Is there a way to maybe think about operating ratio trends sequentially into the third quarter. I think you know typically there's a little bit of degradation just seasonally <unk>.
As we've been talking about for the last two years. It doesn't feel like anything is following normal seasonal patterns anymore, though but would just be curious to kind of get your sense for.
How we should be thinking about operating ratio trend sequentially.
There's sort of any puts and takes so maybe think about.
Sir.
Sure Yeah. So it's normally about a 50 basis point increase from the second to the third quarter.
We've got some different things going on that.
This year.
One thing in particular, and our general supplies and expenses.
We've got some we don't want to necessarily say what they are at this point, but we've got some exciting new things that we're doing from a.
Marketing standpoint.
Where we will see more cost in the third quarter, the third and the fourth quarters than what we saw in the second quarter. So there is expecting about a 40% to 50 basis point increase in those costs.
As a percent of revenue from the second to the third quarter.
Just mainly due to the timing of some of these programs but.
So that would kind of take a normalized up to about 100 basis points.
Much like when you talked about at the end of the first quarter call. Our miscellaneous expenses have been trending below what that normal average rate, that's usually about half a point.
So I might see that revert back to average.
What ive been anticipating.
So somewhere in that probably 100 to 150 basis point range I feel like it's kind of just a normalized.
Target for us and that is off a base of a 69, 5%.
Just to make sure everyone saw that.
Absolutely we definitely saw it thanks.
Thanks, very much for the Colorado really appreciate it and I'll hand it over.
The next question comes from Ravi Shanker with Morgan Stanley . Please go ahead.
I'll just kick off with that comment congratulations on the margin guidance that was a pretty incredible achievement.
Maybe just start off with a big picture question related to that.
How do you run the business do you run it for <unk>.
Top line growth EBIT growth do you have a margin target do you have an incremental margin target kind of what's your north star. If you will in how we run the business.
All of the above.
Hmm.
It's easy.
No I mean, certainly we've got just some broad measures that we look at for one any dollar that we invest.
Need to have an appropriate return with it but as.
As we talk with our customers.
Look can we think about what our long term market share opportunities are and then that dictates the investments that we need to make.
Certainly when you look at our strategic plan.
It starts with giving good service and.
And to give good service that supports our yield management, which then produces the cash flows that we can reinvest in.
And capacity and reinvest back in our employee base, that's really what drives the service products, but.
But we don't want to just grow for growth's sake, we feel like we want to produce profitable growth.
That's the reason why we talk about the long term margin improvement that we feel like we can continue to generate.
We laid out an annual operating ratio goal of below a 70%. When we finished the fourth quarter of last year and certainly doing it for one quarter shows that it can be done, but we've just got to continue to work at it and yes. There is.
Theres nothing magic.
That will make that happen. It will just be continued disciplined execution of our plan and a focus on continuous improvement cycle that we have and it takes every employee coming in everyday thinking about what they can do to make this company better whether it's improving our service and revenue opportunities are trying to.
Take cost out of the equation as well so we want to continue to produce profitable growth. We've got a good track record of doing it we think when we look out over the next 10 years, we've got tremendous opportunity there.
Two should create increased shareholder value for us.
Understood and if it were easy or we wouldn't be doing it.
Maybe second question is on the macro although he has a lot of red flags out there on inventory levels.
What are your customers, telling you about what their inventory levels. It looks like and what do you think is this potential risk of the cycle in the back half and maybe if you can distinguish that between industrial and consumer end markets that'd be helpful.
Yes, like what I was saying before we feel good about what we're hearing from our customers. If you will.
It's really things are playing out exactly like we thought they would.
For the last couple of quarters, we've talked about.
Fact that customers were telling us good things that supported the demand trends that we were seeing and what we.
We were hearing from customers.
Customers and that we felt like that if consumption did slow and it had the effect for slowing overall GDP.
Freight demand could remain strong and certainly we feel like that's what we're seeing and what we continue to hear from our customers and so we've had a lot of engagement like I mentioned with him over the last few months and we're still hearing overall, but generally inventories are lower than what they need to be.
Many of our customers are still dealing with record numbers of back orders.
<unk> got to figure out how to get labor and other fixing other supply chain issues to make sure they've got all the parts and pieces.
Produce finished product.
To fulfill those orders and so.
For that reason.
Something that we think freight demand can continue to remain steady and support a steadiness with volumes as we continue to move through this year, but.
Lot of people are just got issues they've got to continue to work through.
And we want to be there to continue to help them and make sure that it is one of our manufacturing customers, where we're continuing to help them and taken supply chain issues off their plate for him and if it's.
A product that needs to be available for sale.
Certainly if you are selecting a carrier with 99% on time claims ratio of <unk>, 1%. We certainly are going to provide the service that our customers are demanding.
Got it.
Just one very last follow up on fuel I know you said earlier that you are looking for fuel to be a net neutral to EBIT.
But I think youre doing a nearly 50% incremental margin on fuel surcharge revenues.
I'm just trying to better understand is it just a timing thing.
Is it something thats going to just from a modeling perspective, how do we think about.
See relative volatility here and kind of maybe moderating in the back half and what that does your overall incremental margins.
Well I think that.
Who knows what's going to happen with the price of fuel, but we're certainly in the camp that we hope it would.
Tracks down.
The overall health of the economy.
I think you've got to look back if we get into a declining.
Full rate environment, the impact that that might have and look back in 2015 2016 was kind of the last.
Period, where we saw some pretty big decreases there in the fuel rates and then just like I mentioned before.
Given that declining rate environment, we'll be looking at contracts as they.
Come due and looking at lower fuel surcharge contribution, but lower fuel cost as well.
Everyone likes to try to take.
The fuel out of both the revenue and the.
On the cost side, but the reality is it's in the revenue that were trying to collect and it's in our expenses.
We pay our payables and so.
It's something that we've got to account for and it's why when we talk about our long term yield.
Management philosophy, we include fuel in both the revenue per shipment and the cost per shipment.
If you look over the last 10 or 15 years.
With fuel being.
Moderately higher a moderately lower when you look on an average basis over that period.
We've been able to exceed our cost per shipment inflation between 100 150 basis points.
So in some individual quarters that may look a little different than others, but we've got a lot of long term customers and Thats. How you got to look at things from a customer relationship standpoint is as overall water are those inputs on the revenue and cost side and how can we continue.
To create some positive delta there to help us continue to reinvest in the capacity back in our business because everyone else is investing in service center capacity like we are and Thats part of the value proposition. So we can help our customers grow.
Great. Thank you so much.
The next question comes from Todd <unk> with UBS. Please go ahead.
Yeah, Hi, good morning, its Tom Waterworks.
What.
I think Adam you talked about.
Head Count and you said you kind of have the resource you need and can probably be steady for a while.
I think.
When you've added a lot of people in a short period of time, there's opportunity for them to kind of learn the system and get better at what they do so how do you how should we think about the potential impact to your margin or the different cost buckets, if we have kind of a.
Stable tonnage backdrop.
And a stable head count frame.
Framework for you. The next couple of quarters, how about that productivity affect margin.
Which cost lines might improve.
Yes, Todd I'm going to try to answer that for you.
I'll say this.
We've been through a tough time not just the.
The entire <unk> industry with the growth that we've experienced in the last year and a half two years since the fall of.
2020, it's been a handful for all of us to respond to our customer needs and people requirements equipment and all those kind of things.
We've hired an awful lot of people.
Somewhere in the 6000 plus range.
You look at it all in all across all employees Doc drivers and everything else, but it's an awful lot of additional head count.
And that.
Comes an awful lot of inexperienced folks that we've had to deal with over the last couple of years. So.
While I don't think anybody would say they really want things to slow down and certainly Idaho, it's funny when.
When you're busy and you've got challenges trying to accomplish all the things you want to accomplish but at the same time.
When we get into these leaner times and we start to flatten out like we are now.
It's not all bad you can step back and start to refine some of your processes.
We ended up with certainly better trained employees and.
And what month, they understand what to do how to do it youre not adding to the list of folks like you were back.
In the last couple of years, so it's not bad by any stretch and certainly our platform productivity <unk> productivity.
Maybe some of the aspects of line haul load factor and whatnot. Those are included as well, but we can improve in all of those areas.
It also gives you some time to look at your clerical processes and whatnot.
What's good what's bad.
Is there some technology out there that can help you with those kind of things. So there is.
Just an awful lot of advantages to not being so crazy busy luckily been so yes.
<unk> positive from that standpoint, again, nobody wants to see it slow down.
Certainly we look at the positive aspect of it and what we can accomplish.
Wallace this way and.
Be better when we come out of it but on the other side certainly.
Yes.
Okay.
Yeah.
I guess the second question is really just kind of a clarification I know you talked a bit.
About July you had a couple of questions on that.
Is that the tonnage implied in that something around flat or does it imply down a little bit I know I know you don't want to give us a precise numbers because they can change a bit as you have the full full month, but is the backing into kind of a flattish tonnage number about right what you've seen so far in July .
It is down slightly.
Tom.
And when we look at.
It was down slightly on a year over year basis.
Similar to what we've seen in the prior couple of quarters, the first month of the quarter.
The first quarter this year, the second quarter as well.
Was well below normal seasonal trends.
Let's say that we're a little bit below our normal seasonality typically July is always a month the decreases typically decreases.
<unk>, 3% as compared to June .
We are a little bit below that but.
And as some of you are looking to it from a year over year standpoint comparing.
This year back to 2019.
What we're seeing is kind of similar somewhat similar trend in July versus June looking at it from that perspective as well. So we'll see how the rest of the third quarter continues to play out typically September is our busiest months of the year.
So we will look to see if volumes, if we get some sequential acceleration to get through the remainder of this quarter, but.
It's just something we will continue to stay engaged with our customers on and try to continue to manage from a cost standpoint and make sure we've got.
Everyone and everything in place to deal with the volumes that we're seeing.
Right Okay.
Great. Thanks, Adam Thanks, Greg.
The next question comes from Chris Wetherbee with Citigroup. Please go ahead.
Hey, Thanks, good morning.
I guess I just wanted to touch on sort of the commentary around the pace of demand and not to be too nitpicky, but I guess I just wanted to maybe understand it seems like tonnage is maybe performing a little bit.
Less than typical seasonality.
So I guess I'm curious do you think there is.
Demand deceleration that that's kind of becoming more clear within the numbers.
It sounds like customers are still relatively optimistic about what the peso.
Although you might look like as the year progresses, but is there a bit of a disconnect between what youre hearing from them and what's actually coming through from a tonnage perspective.
Yes, I don't know that its.
This is really something we've had to address all year and really trying to bifurcate the demand.
That we're seeing and hearing from from our customers versus the actual tonnage trends.
We have like I, just mentioned we have underperformed.
Normal seasonality, but we have to somewhat keep in mind too that our 10 year average trends that includes our market share doubling over that time period. So.
We have continued to win market share I think when you look at our numbers versus the industry. The last two or three quarters I think if you take the public carriers the tons of had been negative.
Overall for that group, while you've seen obviously tremendous growth from us.
Still think that based on the feedback and conversations with customers that youll continue to see our volume numbers outperforming.
Lease that public group that we compare against and so.
The conversation around demand.
As the demand for our service and certainly our customers.
They may not have the same type of volumes. So we're still picking up we haven't lost any customer accounts, we're still making pickups everyday but it may just be they don't have the same number of shipments to give us because.
Some of the demand for their product as decrease but.
I think the positive takeaway from this is how strong we continue.
To see.
One that the strength of our pricing programs.
But just.
Just those those customer conversations and no customer defections.
The conversation about the need for service and how important that is becoming to our customers. We have certainly proven.
Our value proposition over years and.
How we may be a little bit more expensive upfront, but when you look at the total cost of transportation.
Whether it's delivering.
In meeting the on time in full requirements that some of the retailers have in place we can ultimately help our customers save money and.
So those are the things that continue to drive these positive customer conversations that we're having.
Okay. That's very helpful. I appreciate that color that makes sense.
And you guys have been through obviously, many cycles and so <unk> been pretty successful navigating through those cycles. You just mentioned this a resiliency and the pricing you're able to get in this market, even if maybe demand at your customers is beginning to fall a little bit. So if we think about it.
Sort of a normal recession, whatever that may be in your definition, how do you think sort of operating ratio and maybe earnings tower progresses, assuming that maybe the back half or at some point in 2023, we're seeing more sustained negative volumes for the industry as positive profit something that we can kind of continue to look for from the model just kind of curious how you.
Think about that resiliency in a downturn.
Yes, I think.
All of us are going to have to see where this thing goes I mean, I don't think we're in a recession yet at least that have it.
Heard that.
We'll have to see where it goes but at the same time, you've got to remember.
We're up against some tremendous numbers from last year and we're still at.
Very very decent level of business, where we can.
We're in a pretty good profit I think.
I think we've proven that right.
And certainly the second quarter bears that out, but I think we're still in a pretty good spot.
Again.
We can't control the economy and some of the things that the government does that drives some of it and whatnot, but.
I think we're still in a good spot today and.
Let's hope, we don't see further deterioration and things going on.
And economic standpoint.
Okay. No that's very helpful and certainly we can see the strength of the numbers, there's no doubt about that thanks for the time I appreciate it.
Sure.
The next question comes from Scott Group with Wolfe Research. Please go ahead.
Hey, Thanks, Good morning, I just wanted to follow up on the head count question. So if I look back at some of the past periods, where tonnage has got negative head count usually follows and it comes down to it.
I'd just take flat head count from here in Q3, it's still up about 10% do you do you see opportunities if tonnage stays negative to reduce head count or are you going to be potentially <unk>.
More reluctant to do that this time around just given.
The problems that everybody had hiring people.
I think maybe a year pretty perceptive.
How our industry has.
It's been the last couple of years with that question Scott, but no question I mean, we certainly don't want to get into situations, where we have to start making cuts in that kind of thing thats extremely hard to do we always hate to do that I mean, obviously, we've got to try to match revenue.
Shipment levels to labor I mean, that's what we've done for many many years and we have to continue to do that.
In some cases attrition helps to take care of our situations.
Always have a little bit of that probably much less here than most places, but we obviously, we sit on hiring and we're not <unk>.
<unk> hiring hardly anywhere now maybe specific maintenance and replacement from that kind of thing, but we're certainly not adding anybody over on top of what we've got so.
Yes, I can promise you any any reductions we would make we would.
Look at those very very carefully before we execute if that makes sense.
Okay, but it does sound like if we're not sort of hiring more will there will be some sort of natural attrition that could take the head count down a little bit from here.
Certainly absolutely.
And so maybe just to tie that with that last question. So in an environment where.
Tonnage stays negative for a little bit do you think you could still.
Improve the operating ratio or maintain the operating ratios as you've done.
15 out of 16 years or something like that.
Well.
That would obviously would be our objective to continue to maintain and certainly improve I think we've proven it over the course of time.
We'll just have to wait and see I don't know I don't want to get into all of that at this point in time.
My Crystal ball is not completely crystal clear. So we'll just have to see where it goes but we will certainly continue to do the right things day to day will continue to execute from a service standpoint whatnot keep our people focused on doing the right things and those are the things that drive the bottom line.
Sometimes the top and the bottom line, but we will continue to do those things well.
We'll see where it goes.
Thank you for the time guys I appreciate it.
The next question comes from Todd Fowler with Keybanc capital markets. Please go ahead.
Hey, great Thanks, and good morning.
Adam in your prepared comments you had some commentary about cost inflation in the back half of the year end.
I am guessing or I think that traditionally you put through an employee wage increase at some point in the third quarter.
And it sounds like you're also getting some benefit from improve.
Improving productivity from the workforce standpoint, So I guess my question is are your comments that region or that.
Cost inflation on a per shipment basis is that going to increase or accelerate in the back half of the year or does that start to level off I guess I'm just kind of curious what your expectations are on the cost inflation side moving forward.
Yes.
We do always give a wage increase at the beginning of September each year.
So thats pretty standard in terms of its in our numbers and it is part of the reason why the third quarter operating ratio was generally.
Higher than the second but.
From an overall inflation standpoint, when we started the year, we expected higher inflation in the first half and really we started seeing cost increasing about this point in time last year.
So our costs are going up and Thats when you can really start seeing.
When we looked at contracts that returning over in those periods, we had to get larger increases in so we felt like we were going to see some moderation.
With our cost in the back half of this year, but certainly didn't foresee the sustained increase in fuel prices.
NIM continued to accelerate accelerate like they have this.
This year and Thats, having a follow on effect.
Both directly indirectly indirectly with other pieces pieces of our cost structure. So.
At this point.
I don't expect to see that moderation like we had initially.
Talked about but don't necessarily see it accelerating either from this point.
I, just think that we're going to continue to see.
That core inflation number kind of in that 7% to 9% range like we have.
And when you back.
Take a look at our cost.
And back to the operating supplies and expenses out which includes fuel they were up about 10% on a in the second quarter.
The first shipment basis and so.
Certainly that's higher.
Then where we thought it would be.
But we do have some opportunities like Greg mentioned.
We certainly want to continue to focus on.
Proving the productivity of all areas of our operations I think that can help some of that cost per shipment inflation, we were able to reduce our purchase transportation.
In the second quarter, there is still a little bit of miles that we were outsourcing in the second quarter.
So we're back in that two to two 5% range number what that line item, but there may be a little bit more out of that number where we can see some decreases but.
But otherwise, it's just trying to manage each and every.
Line item on the income statement that we can and look for areas with discretionary spending that we make and can pull back on in and just look.
For any area that we can ultimately save some dollars.
Perfect. Okay. Good that's.
Helpful and that makes a lot of sense.
I guess just to follow up.
It's a little bit of a tricky question to ask but from a bigger picture standpoint.
It sounds like a lot of your competitors their approach to the <unk> market now is a lot more like your approach, adding some more terminals.
Focusing more on service I guess as you think about the competitive landscape does that change your ability to win share in the marketplace going forward or have you seen any differences in customer responses due to some of the things that your competitors have been doing over the last let's call. It four to six quarters.
I don't think so Todd I mean, we'll continue to execute and do the things that we know.
How to do it I think we've had a pretty steady run of phone or our share and I would expect that to continue.
Yes, it makes sense I know, it's a tricky question to ask but just was curious your thoughts on it and so on.
Thanks for the time this morning, I'll turn it over.
The next question comes from Ken <unk> with Bank of America. Please go ahead.
Great Good morning, Greg and Adam Congrats on breaking 70, a tremendous shot group leadership there.
A few.
You had a few questions on the downturn or potential impacts on the operating ratio, but maybe just if July is starting to see larger negative tonnage trends versus June and maybe a little bit more than seasonality can you talk about a normal cycle.
How does that bleed into pricing pressure I know you don't typically change your pricing given given the quality of service, but but for the group.
How long does it take to see those negative trends kick in and start showing up on the pricing side.
Especially given what's happened with the truckload side.
Yes, again, I think that when you look at the rest of the group excluding us.
I think overall, there's been at least the past three quarters or so where volumes have been.
Negative and or at least flat.
And going back to last year, and so thats. The environment has continued to the pricing environment that has continued to remain.
Positive.
We haven't heard anything any different really in that regard so.
I think that we know what our strategies are and what we're going to continue to do.
A big piece of our yield management strat.
Strategy is making sure that we're trying to cover the cost inflation, we see in our business, but an even bigger element is making sure that we are generating the returns that we.
It will help us continue to invest dollars in our real estate network.
I think when you look over the last 10 years, we've invested about $2 billion in expanding the capacity of our network.
When you look at the expansion of our door capacity is about little over 50% over that 10 year timeframe at least the number of service centers and the industry is actually down.
2%.
So regardless if you see some additions here and there.
We have been adding really at our customers' request and our customers are leveraging our network, especially on the retail side.
Some of this e-commerce freight comes and transitions from the truckload world into LCL.
That's the power of our network it helps R.
Our customers with managing their supply chain and ultimately we think helping them save money overall. So so that's why we've got to continue to work at it but.
Is it still an environment.
Where we've got positive revenue growth.
Revenue growth of 18%.
Includes that.
Slight decrease in July .
For tons that were seeing but were still producing revenue growth that's above our long term.
Average revenue growth rate when you look over the last 10 years and so we're just going to continue to look at leveraging that to the bottom line and certainly.
Kind of what we talked about with the operating ratio moving into the third quarter that would still produce some some pretty good improved.
Improvement there.
The next quarters or.
And just to clarify that.
Talked about the last couple of quarters seeing the industry in the past has have you seen a more immediate impact to industry pricing or even your pricing.
In a down tonnage environment or does it take.
Three quarters or whatever.
Start seeing some pressure on <unk> I'm, just trying to see if this time really is different because of the industry.
Moves or if this is more historically normal on a on a delayed pricing impact.
I think if you look back.
In 2019 is a good example, where the environment was softer and I think the industry.
It was pretty disciplined with pricing during that period. So we certainly expect that our own pricing will continue to be positive.
Again, we haven't really heard anything from for many other carriers will continue to.
To see maybe what they are saying publicly as well but.
I think it takes a lot to run in the <unk> company certainly there is a network effect that has to be managed there and that's the big difference between us and the truckload.
The environment I think that.
It seems to us from from what we've heard that there's not many LPL carriers at least the public wounds that have taken on a lot of truckload spillover freight so.
So I don't think youre going to see this vacuum effect as truckload has loosened a little bit of freights billing back into that mode.
We may have seen in prior cycles as well either said to me that would limit itself to seeing a little bit more stability, maybe with volumes, even though like I mentioned they are down for the other carriers or have been for the last few quarters, we'll continue to watch that but.
I think we would expect to see.
The continuation of a disciplined approach much like we did in 2019.
And can I, just get a clarification on one of the prior questions on you've talked about stalling hiring now.
If we see.
I guess those volume staying at these levels is that something you then expect the attrition to overtake youre hiring and so you expect that to come in I just wanted to clarify kind of your comments on that.
<unk> levels.
So our hiring practices, that's something that each one of our 255 service and our managers are responsible for they have to stay engaged with their customers at the local level.
You know what.
Freight demand within their facility is going to look like.
To then make sure that they've got the right people capacity in place to be able to respond and give the service that our customers demand from us.
That's something that we let them manage it.
Not just the number of people that have in place there is always managing the hours worked up and down.
<unk> on changes with the volumes as well so we just got to continue to watch overall.
The volumes trends and we feel good about our numbers right now and we feel good about our overall level of head count as well.
But ultimately we'll continue to let our service centers manage that individually you may be seeing some that are making additions because they are growing and we're seeing in some facilities really strong.
Double digit outbound type of revenue and volume growth and then the others. If they've got some weakness in their facility for whatever reason specific customer type of issues and they've got the means on the other side, but but it's a coordinated effort.
That's really we give that responsibility with older side, obviously, but our service center managers are handling that on a day to day basis.
Wonderful. Thank you very much Adam Greg I appreciate the time.
The next question comes from Amit Mehrotra with Deutsche Bank. Please go ahead.
Hey, Thanks, I'll try to just ask one question to balance out the three questions with some other people ask.
Well I think three or four years ago, Greg Adam.
You you kind of started the call mentioning.
Some some some deteriorating pricing power in the industry.
And on follow up you kind of talked about.
Okay.
Bringing attention to some in discipline that youre seeing in certain lanes I think part of the the the.
The motivation was to kind of nip it in the Bud early it seems like we're kind of at that part of the cycle, where we could start to see that a little bit I'd love.
You asked to comment on that are you seeing any any players any large national players because of weaker service levels or whatever that may be seeing a little bit more deterioration of demand start to be a little bit more disciplined on pricing. If you can comment on that.
No we have not seen that at all certainly not to my knowledge Havent heard that.
Adam had mentioned earlier, we've had an awful lot of customer interaction. So far this year with customers coming here. Some of the things were doing out in the field from a customer standpoint, we have not seen that have not gotten that feedback from our sales department. So I think that's all positive and I think if you'd look at.
At our <unk> industry, we're all healthier than we've been for the most part I think the bottom lines have improved across the board.
I think I can say that without a whole lot of thought into it but.
I think everybody has to see the benefit of being price disciplined Shirley.
So I think it's benefited the industry in general so.
Yes, let's hope that that continues.
Okay.
That's my one thank you very much appreciate it.
The next question comes from Bruce Chan with Stifel. Please go ahead.
Great. Thanks.
Thanks for the time here, Greg I just wanted to follow up on those pricing comments really quick we've heard from a few others out there that there's been a little bit of a pickup in inbound rfps in RF queues.
Maybe especially from the larger national account side or are you all seeing any signs of that.
I don't think so I havent heard that I mean, most of our bigger national accounts, we have annual renewals and whatnot.
Maybe one two or three year type renewals, but.
Most everybody is on the annual renewal I Havent heard that there is any huge pickup with that at all.
So at this point not.
But we'll see we'll certainly have to wait and see but.
So far so good from our standpoint.
Okay, Great I appreciate the time.
The next question comes from Ari Rosa with Credit Suisse. Please go ahead.
Hey, good morning, Greg Adam Thanks for squeezing me in here.
So you guys talked about investing.
In the network to take share.
Through the cycle or preparing for the next cycle and it's certainly a formula that's worked very well for <unk> in the past.
I wanted to get your sense for kind of how youre thinking about that in terms of the longevity of what a down cycle might look like and kind of the risk that you might be sitting on idle capacity for an extended period of time.
Yes.
If demand deteriorates and it seems like there's kind of two different schools of thought on one level.
It seems like the <unk> industry has been pretty tight on capacity and pretty disciplined about the way, it's invested and maybe that means there hasnt been as much froth that's developed on the supply side at the same time.
Obviously, what we've seen in terms of consumer spending in durable goods orders has been pretty anomalous over the last kind of 18 to 24 months given COVID-19 and maybe there is some concern that that those conditions that have existed over the past 18 months or so.
Arent really sustainable from a demand perspective, so I just wanted to kind of hear your thoughts on as you invest to expand the service center footprint.
How do you perceive the risk that you might be sitting on idle capacity for maybe a longer period of time.
Than you might hope for.
Yes, I think we're always sitting on idle capacity and that's really.
What we want to have in place.
We generally target have in 20% to 25%.
Excess capacity at all times and the reason for that is as quickly as demand can change.
Can't put service center capacity in place quick enough and it takes doors in an LPL network to really process freights and be able to grow certainly you got to have equipment in.
People as well, but but the doors are really what takes the most time to get in place and it's why when we see these positive inflections.
The domestic economy that you see the rate of market share growth for us.
Increased significantly.
We're outperforming the rest of the group buy.
Double digits, if you will and so it's you got to put it in place you've got to have a consistent investment process and just continuing to work at it knowing where things are tighter than where you might be.
Right and a couple of Years' time.
If volume comes back to you in a big way. So we're used to carrying that extra cost, but thats part of our strategy and it is different we we like to keep that excess capacity in place most of the industry.
<unk> operates closer to full utilization.
Within the network and but that creates a lot of volume opportunities like we saw in 2020 in the back half as the recovery began in certainly through two.
<unk> 21 with the rate of growth that we had then and so far.
Through the first half of this year and again as we said earlier, we've produced over $700 million of.
Revenue growth.
Last year was a record at $1 2 billion for us.
We're on a good pace to have another another billion plus type of revenue growth year, but it certainly takes making.
Those investments and when you look in trying to go back into some of these prior years. When there has been a down cycle you can look at our operating ratio in 2016, and 2019, we're able to manage all of our variable cost.
Well and try to take advantage of productivity opportunities, but generally the only change in the operating ratio you might see.
Is with respect to that depreciation line item and that's where we are making those investments depreciation costs will increase as a percent of revenue, but we try to manage all of the other calls.
Lack or with some improvement if we can.
To minimize any any type of negative impact on the operating ratio until we get that.
Volume flows coming through again.
Said it takes density and yield to produce long term margin improvement and that will continue into the future as well, but you certainly get that density factor. It takes a continuous investment in capacity.
Got it understood. Okay. Thank you for the time.
The next question comes from <unk> majors with Susquehanna. Please go ahead.
Adam in the last six months you guys have bought considerably more stock that you bought at any prior full year can you talk a little bit about the pace you feel comfortable with in the second half.
Would you consider adding a little leverage to take advantage of the share price or historically you have been.
Your free cash flow as far as total shareholder returns is that a good kind of bookend to think about as we think about where share repurchases. Thanks.
Yes.
Well certainly the repurchase program, we typically look at our cash from operations and.
At the beginning of every year, we know what our Capex is going to be and then we've got the fixed return element through the dividend program and then we typically take the balance and try to put that into the share repurchase program, but.
We have said in prior periods.
When we think the opportunity is right we will put more dollars into that program and certainly that is how we have felt this year in the first quarter. We did have a $400 million accelerated share repurchase program in the second quarter. It was more strategic and just day to day buying on a more of a <unk> five.
Type of basis.
We'll continue to look at all options as we move forward, but but certainly.
When the share prices at the level, where it's been.
It's certainly down from where we finished last year and we're going to continue to buy more shares.
And then use the cash that's on the balance sheet.
For starters and you just got to continue to look at it on a day to day basis.
In the past, we've said, we don't necessarily want to do.
Directly borrow to go out buying stock that we've always got to look at kind of where the price is trending.
And what we think the best use of cash is and then just trying to take a longer term.
View of it as well.
Okay. So it sounds like.
Leverage to buy stock is not plan, a but opportunities can can make that possible depending on your view of the market versus your stock price.
Correct.
Yes.
The next question comes from James Monaghan with Wells Fargo. Please go ahead.
Hey, guys. Thank you just wanted to actually touch on or follow up on something you mentioned around the spread between price and cost and just the pricing environment overall I just wanted to sort of.
Get your sense on sort of the.
The amount of sort of cost pressure and maybe some of your competitors are out there and if you think that might.
Disciplined fairly high around pricing and also just maybe sort of thinking about like the outlook for that spread moving forward just given the fact that you guys own more of your.
Assets, and therefore might have a cost advantage.
Yes.
I know that we can comment on her.
Competitors cost structures, but.
Certainly for us.
We obviously feel like we've got.
Opportunity to continue to.
Wanted to try to reduce.
Some of our costs through productivity, but that's that's again kind of going back to our continuous improvement cycle.
And then trying to price above cost.
It's not always.
On a quarter by quarter basis again, it's not always going to be that we've got that 100 to 150 basis points Delta.
Our revenue per shipment.
Cost per shipment performance and you've got to look at that on a more of a core basis, but.
But we.
We just look at it over a longer term time horizon, but that's the yield improvements one big element for the long term margin improvement opportunities that we think we have been.
A lot goes into that it's easy to sit here and say that we need yield above cost, but a lot go into both of those metrics and certainly you got to have the service to support the yields and then we've got to continue to look at ways that we can save on the cost side as well.
To make sure that our pricing is still in alignment with the market and we do believe we can get a price premium in the market based on the quality of our service and we study.
<unk> quality results closely each year to look at how we compare against ourselves and how we compare against the rest of the industry.
To make sure that we're staying on top of changes. We're staying ahead of the market, we're continuing to give our customers what they are asking for as well.
Be it through our capacity in markets be it capacity of our trailer pool technique.
<unk> technologies pricing programs are new changes there.
Name. It we're always trying to stay ahead of the curve and we feel confident that we've got a lot of market share opportunities in front of us and we just want to keep our focus on execution to make sure we take advantage of those opportunities.
And again.
Sure that is not just growth it's good profitable growth.
Got it just given how much cost of runoff do you think that there is a repricing opportunity.
The need to reprice moving forward on a larger portion of your business than normal.
And again that's.
As part of our continuous improvement cycle, our contracts and our business come up.
Every day, it's why you generally see.
On a sequential basis.
<unk> and our yield metrics as we go from quarter to quarter. So as a contract comes up for renew.
We're going to ask for an increase in.
To improve the yield on an account, it's not always through a price increase either it's looking at other areas of opportunity.
And ways that we can help our customers save money.
That may be an operational change.
It could be a number of things and.
And that's why it's so important for our sales team to stay engaged with our customers to understand what their needs are our pricing team as well.
So that we can work together and create win win situations because.
We're not here to just have a customer for <unk>.
This quarter in the next quarter.
We've got customers that have been in place for many many years and any new customers coming on board, we want them to be in place for the long term as well so it's all about.
Creating those win win situations and whether it's.
Again through an operational change.
We've recently announced.
Our new pricing program as well, but we've got some engagement on and some excitement.
That can eliminate the need to have payment audit services for customers and so those are the <unk>.
<unk> that we're going to continue to stay engaged with our customer base and try to do right things right by them.
And keep improving our sales both the top and bottom lines.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Greg case, any closing remarks.
Well. Thank you all for your participation today, we appreciate your questions and please feel free to give us a call. If you have anything further thanks and I hope you have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.