奧多明尼昂貨運 (ODFL) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Second Quarter 2017 Conference Call for Old Dominion Freight Line.

Today's call is being recorded and will be available for replay beginning today and through August 4 by dialing (719) 457-0820.

The replay passcode is 9007431.

The replay may also be accessed through August 27 at the company's website.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Old Dominion's expected financial and operating performance.

For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements.

Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements.

You're hereby cautioned that these statements may be affected by the important factors, among others, set forth in the 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 update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

(Operator Instructions) At this time, for opening remarks, I'd like to turn the conference over to the company's' Vice Chairman and Chief Executive Officer, Mr. David Congdon.

Please go ahead, sir.

Good morning, and thank you for joining us today for our second quarter conference Call.

With me on the call today is Adam Satterfield, our Chief Financial Officer.

After some brief remarks, we'll be glad to take your questions.

I'll point out that I'm off-site today, so if we're not totally smooth with taking your questions and doing the responses, please forgive us.

So Old Dominion's operating momentum accelerated during the second quarter as strong growth in tons in revenue per hundredweight generated company records for revenue, EPS and operating ratio.

The 11.2% increase in revenue and 21.4% increase in diluted earnings per share are the best growth rates for these metrics we have had in over 2 years.

Our growth for the quarter, again, validated the strength and soundness of our long-term business model, which we've discussed with you for many years now.

The 6.1% growth in tons for the quarter produced better freight density and improvement in our yield as reflected in the 3.8% increase in revenue per hundredweight, excluding fuel surcharge.

The combination of density -- increased density and yield, along with incremental improvements in productivity for the quarter drove the 140 basis point improvement in our operating ratio to an 80.9%.

The success of our business model is no surprise to us or anyone who has studied our historical results over the economic cycles of the past 20 years, but that success is not automatic and requires significant effort and commitment.

First and foremost, our success is dependent on the consistent long-term and high-quality execution by each of our outstanding employees.

The commitment and hard work of our team is reflected in our industry-leading service with on-time deliveries in excess of 99% and a cargo claim ratio that has improved to a new company record of less than 2/10 of 1%.

In addition, we strongly support our team's ability to deliver superior service through our long-term capital expenditure strategy, which is designed to create operating capacity that can absorb anticipated gains and market share.

This investment is not only for tractors, trailers and service centers, but also includes substantial expenditures on technology infrastructure to enhance both our pickup and delivery visibility for our customers and our internal operating efficiencies.

Looking ahead, we remain cautiously optimistic about the economy and other industry dynamics that could affect supply and demand.

While we will continue to be prudent with our approach to managing labor and equipment capacity, we believe Old Dominion is in the best position -- Old Dominion is the best positioned company in the LTL industry to benefit from an improving economy.

We've consistently demonstrated our ability to win market share by continuing to deliver a value proposition of superior on-time claim-free service at a fair price.

We are confident that continued execution, combined with our financial strength and available capacity will produce additional long-term growth and shareholder value.

Thanks for your time this morning.

And now, Adam will discuss the second quarter financial results in greater detail.

Thank you, David, and good morning.

The second quarter of 2017 turned out to be a record quarter in many ways for Old Dominion.

We set new company records for revenue, operating ratio and earnings per diluted share.

Our revenue increased 11.2% to $839.9 million and our operating ratio improved 140 basis points to 80.9%.

The combination of these factors allowed us to increase earnings per diluted share by 21.4% to $1.19.

We believe our results for the quarter were due to continued improvement in the domestic economy as well as the consistent execution of our long-term strategic plan.

Three basic elements of superior service, fair price and network capacity, all worked in harmony to produce profitable growth.

Our revenue increase for the second quarter reflects an increase of both LTL tons per day and yield.

LTL revenue per hundredweight increased 5.1% and increased 3.8% when excluding fuel surcharges.

LTL tons per day increased 6.1% as compared to the second quarter of 2016 with LTL shipments per day increasing 5.6% and LTL weight per shipment increasing 0.5%.

We were pleased with the strength of our volumes as we finished the quarter as June LTL tons per day increased 7.8% as compared to June of 2016.

This was higher than our year-over-year growth rates for April and May, primarily due to a 1.2% increase in LTL weight per shipment for June.

Our revenue growth in July had continued at a double-digit pace, although it is slightly below the overall pace of growth for the second quarter.

Month-to-date, our LTL tons per day have increased 6.7%.

As a reminder, the third quarter of 2017 has 63 workdays, which is 1 less than the third quarter of 2016.

Our second quarter operating ratio improved 140 basis points to 80.9%, primarily due to the improvement on variable operating costs.

Salaries, wages and benefit cost as a percent of revenue improved 150 basis points when compared to the second quarter of 2016.

We were extremely pleased with the efforts of our team members to manage this volume growth, while also maintaining superior service.

As stated in our release this morning, we do intend to hire additional employees in the third quarter in anticipation of continued growth, while we note that there could be a short-term negative impact on productivity metrics as a result.

While most of our operating costs improved as a percent of revenue, general supplies and expenses increased 40 basis points when compared to the second quarter of 2016.

Among other things, the 24% increase in these costs reflects additional advertising and marketing-related costs that were mentioned in our first quarter earnings call.

We expect the similar level of general supplies and expenses for the third quarter.

Old Dominion's cash flow from operations totaled $127.7 million for the second quarter and $238.5 million for the first half of 2017.

Capital expenditures were $131.3 million for the quarter and $188.3 million for the first 6 months of 2017.

Due to our current volume trends and increased confidence for further growth, we increased our capital expenditure plan for 2017 by $15 million to purchase additional revenue equipment.

As a result, we now expect total capital expenditures of approximately $400 million for this year.

We returned $15.3 million of capital to our shareholders during the second quarter and $23.6 million for the first half of the year.

We have $192.8 million still available for stock repurchases under our current $250 million stock repurchase program.

Our effective tax rate for the second quarter is 38.6% as compared to 38.4% for the second quarter of 2016.

We currently expect our effective tax rate to be 38.6% in the third quarter of 2017.

This concludes our prepared remarks this morning.

Operator, we'll be happy to open the floor at this time for questions.

(Operator Instructions) We will take our first question from Todd Fowler with KeyBanc Capital Markets.

Adam, your comment about the additional investments into the third quarter.

Can you give us an order of magnitude either what you're thinking about from headcount or maybe the impact on the OR sequentially that the potential investments that you have to make going forward could have?

Yes, sure, Todd, this is Adam.

And right now, when you look at where we were in the second quarter, our shipments were up 5.5% to say, 5.6% and our average number of full-time employees is only up 1%.

So we're somewhat lagging from a headcount standpoint with shipment growth when typically we like to lead with headcount growth to make sure that we've got people in place and trained because the most important thing for us is to make sure we don't have any sacrifice in service.

So we certainly had employees working hard during the second quarter to manage the volume growth that we had and we actually had to use a little bit of purchase transportation as well.

So we've got a little -- we did some hiring.

We actually the -- actual headcount growth at the end of June was up about 280 employees over March.

But we've got to catch up a little bit with where we are.

So we're thinking somewhere in the magnitude of probably a couple 100 employees, maybe a 2% to 3% increase, somewhat it's just a measure of continuing to manage our labor with our volume growth.

And we always do a good job with managing labor to revenue, but we may have got a little bit behind the curve, a little bit on our hiring.

Okay.

That helps and that makes sense.

And I guess, maybe just to quantify if the third quarter OR versus the second quarter OR is typically down, let's call it 50 basis points or so, would the expectation be then that because of that catch up, maybe something different than the historical trend?

It could be a little bit.

And going back to what happened in the second quarter, obviously, with managing the additional volumes that we had with our people, we leveraged up hours, and we didn't have to incur the -- that fringe benefit cost.

But going into the third quarter, we mentioned, we are going to have to buy some additional equipment and that was primarily on the trailer side, and we had to do some rentals last quarter.

And so we're making up for some of that.

But as we add people, achieving the normal 50 basis point increase going into the third quarter could be a little difficult.

But as -- I think, we've said many times before, it always comes back to volume growth, which drives density and yield performance in terms of what we can do on the overall operating ratio, and I think that we performed very well in the second quarter.

And we've got some good growth trends happening thus far into the third.

We do -- this is a little bit of an anomaly with only 63 days in the third quarter.

So we will have 1 less day of revenue as well.

Okay.

And then maybe just for my last one.

David, if you have any comments just on contract renewals and industry pricing here in the quarter.

Obviously, it's a good quarter from a yield perspective.

But it looks like a little bit of benefit from a shorter length of haul.

So can you speak a little bit to what you're seeing with your contract renewals and just some general comments on -- your thoughts on industry pricing, I think that would be helpful?

We generally -- our contracts achieved 3% to 4%, pretty much tied to inflation and cost.

That's -- part of our formula is be fair and equitable with our customers.

So there was no real major change there.

But the industry pricing dynamics, I think, we're still in a very disciplined environment right now.

We don't see any major irrational pricings with the exception of the occasional irrational behavior you might see just -- I mean, it's very spotty and usually when you see a competitor put in a price that's drastically cheaper than ours, I just don't know the handling characteristics or I think they're shooting in the dark.

But there is no irrational players out there at this moment.

We're happy about that.

We will go next to Allison Landry at Crédit Suisse.

I wanted to ask about e-commerce and the broader trends that we are seeing sort of in the retail supply chain, whereby sort of moving away from a traditional supply chain to one where you have more fulfillment centers and distribution centers that are closer to the end consumer, more inventory, faster turns.

So as you think about that, for the secular trend, the longer term, do you think that ultimately, LTL benefits from like a modal shift away potentially from long-haul trucking.

Are you seeing that now?

Or is that something that you would expect to happen over time?

We think it will happen to some degree over time.

If a shipper goes from 2 major distribution centers, 1 in the east, 1 in the west to 15 or 20 fulfillment centers more closely located to their customers, they're not going to need as many full truckloads into those multiple fulfillment centers.

And you would think there would be a shift toward more LTL as a consequence.

And second part of that is that our value proposition -- our 99% on-time service, very fast transit times and regional, inter-regional long-haul lanes, our cargo claim ratio, all of that, I think, plays into the LTL that moves into both DCs and fulfillment centers because whoever's product it is, they certainly want it on the shelf quickly, and they don't want damages.

And that's where we shine.

Are you seeing any customers whether it's an e-tailer or a brick-and-mortar, are you seeing any customers approach you to sort of figure out ways outside of using small package, for example?

Have you seen any of that.

And what are you hearing sort of from customers in this respect?

Yes, not so much on really small package side, Allison, but certainly, we are, every day, talking with customers and as they continue to transform their businesses and supply chains, we're dealing with that, where we've got packages going into the distribution centers and fulfillment centers, as David mentioned.

And we're getting some good growth in those next-day and second-day lanes as evidenced by the decrease in our length of haul.

The other piece of this is on the middle mile side as well, where you've got the goods going from a fulfillment center closer to a final delivery agent for those larger bulky-type items and that's usually a sold good.

So as David mentioned earlier, service is going to be critically important.

So we feel good in that regard in terms of the service product that we have and the available network capacity.

The critical piece though is just ensuring that you are getting paid appropriately for committing that level of capacity to the customers.

Right.

And then just one last question on this.

As FedEx has talked about using, I think, 24-foot trucks in their LTL division so that it is easier to actually deliver some of those larger items to residents.

Is that something that you guys would be able to participate in as well?

Right now, we've talked about home deliveries and so forth in the past as part of our strategic planning process and we still evaluate it.

And there are certain customers that may demand that we have an option.

And if you recall, we had a white glove service offering years ago and we ended up -- we were using agents, and it wasn't at the same level of service offering that our normal LTL product is.

So we moved away from it.

But I think there is other opportunities for us in terms of committing capacity.

We're making some residential deliveries today that's less than 2% of shipments and there are add-on fees that go along with that and certainly it can be difficult haul in a 48-foot van through a residential neighborhood.

But as we continue to look in terms of that final mile delivery into homes, it's just what are the profit potentials there in terms of the rate that can be charged, what the handling characteristics and density (inaudible) and ultimately we've had a profitable business or not to add on to our existing suite of services.

We will go next to Scott Group at Wolfe Research.

It's actually [Rob Salmon] on for Scott.

I was curious if you could give us a little bit more color in terms of the July update.

Could you talk to the impact of the fourth and just sequentially June to July.

How that's compared to your historical trends that you've seen over the years?

Sure.

Yes, I mean, certainly, that first week, the way the days fell for this -- really for June and for the rest of the year, it set up nicely to finish June on a strong note and then we started out that first week of July a little bit softer.

So we've been seeing nice growth as we move through the month of July, though.

Yes, when going back to June, the normal sequential increase from May to June on the weight side is 2.1%, we were actually up 4.3%.

Now part of that was shipments were above what the normal sequential trend would have been as well.

Shipment, the 10-year average is a 1.4% increase over May, we were up 2.3%.

So what we saw was a nice increase in weight per shipment as we finished June.

And I think that as you've seen from truckload reports for the second quarter that things are probably getting a little bit tighter out there.

Our weight per shipment so far into July has cycled back down a little bit closer to where we were in April and May.

And so some of that is we're managing some of these volume flows in those business moves that are coming in to make sure they are not disrupting our other LTL business and many of these moves that we're doing are for existing LTL customers and they are just heavier weighted LTL shipments.

But anyways, we would have expected with that 4.3% sequential increase into June that July would be below trend.

So normally July is 2.1% decrease, and we're having a little bit more decrease on the weight side, but a piece of that is related to, as I mentioned, that weight per shipment is below where we were in June.

That's really helpful.

I guess, if we're thinking about kind of incrementals, they were very strong in the quarter in excess of 30%.

If I'm kind of aggregating the impact of 1 fewer working day as well as the expected headcount growth, how should we be thinking about incrementals this quarter in relationship to the performance in Q2?

That's a good question, Rob.

And we've certainly had quarters in the past, especially when you are in accelerating type of environment where we've had around 30% incremental margins.

And -- over the long run, we say that we are more focused on 20%.

Now going into the third quarter, we've got to see will these volume trends continue to hold and show nice acceleration that will be a big piece of it.

Certainly, those other factors, will we keep it at that 30%, that might be a big ask.

Will it be as low as 20% in 1 quarter's time, I wouldn't expect.

So somewhere probably in the middle.

Yes my comment to that, Rob, would be that we are experiencing just solid, yet moderate and very manageable growth right now.

It's kind of putting this in a sweet spot.

And when you combine the quality of the revenue that we do handle with the cost structure that we have against that revenue, continued slight improvements in productivity.

And the headcount is less than -- is probably 2.5% maybe.

Overall, we're anticipating less than 3% anyway.

And with the shipments increasing at a -- shipments and tonnage at probably a greater rate than the headcount, I would hope that you'll continue to see -- I expect that we will continue to see some pretty strong incremental margin.

So things feel really good right now.

We will go next to Amit Mehrotra at Deutsche Bank.

So just wanted a follow-up on the comment you just made about things looking really good right now.

On one side in the quarter, we did finally see some pull on industrial production and truckload capacity is -- finally appears to be tightening.

But kind of on the other hand, there is a lot of like industrial activity, energy sector activity growth in the quarter that may be kind of driving growth in excess of maybe what you would see normally.

And that piece of it doesn't necessarily look like it's sustainable at least in the current oil price environment.

So I just wanted to get your thoughts on -- you guys are ready to start ramping up labor and investing in fixed asset, but you have kind of all the stars that are aligned in the second quarter that may not necessarily be extrapolated into the back half.

So just wanted to get your thoughts on the -- as it relates to industrial production and then also the energy economy?

Yes, I will take that one.

We -- I was just reading a pretty detailed report this morning, for example, that GDP is expected to be 2.2% in '17 and grow to 2.4% in '18, manufacturing from 1.7% in '17 to 2.4% in '18, TL capacity in terms of tractor count is all about -- a little less than 6%, which means the capacity is tightening there.

Housing start have gotten back up to an average level.

The ISM at 57.8% appears as strong as it was in the positive cycles of 2010 and 2014.

Construction spending is up.

Retail sales is up.

All that sales sounds good to me.

But -- so I'm -- as we said in the release, we're cautiously optimistic that the economy will continue to behave nicely.

And with that combined with rational behavior of the industry and from a pricing standpoint, I think we are set up right now to have a good year this year and a good year going into '18.

Yes, I certainly hope that's the case.

And just maybe for our own help, if you could help -- Adam, could you help us with trying to understand, if you look at the business as a whole, whether it's shipments or revenue, in terms how much of that is exposed to rig counts completion derivative effects on that?

And how much is exposed to a lot of the just broader stuff that you just talked about and which obviously is signaling at least positive growth over the next 1.5 years?

Just to help us sort of sensitize ourselves to maybe the exposure there would be helpful?

Yes, about 60% of our revenue is industrial related, and we don't have a tremendous amount of exposure to rig counts and really the energy industry.

And I mean there is an element of it that's there.

I think just to tag on to what David was saying though was that we've started seeing improvement in ISM numbers, and we were kind of waiting around for it to see when it is going to really be translated into our numbers and especially you go back into last year, it just seemed like the economy was so choppy, we couldn't get any sustained momentum really with the economy, nor could we get it in our own volume trends.

And I think we're finally starting to see some things at least from a sustainability standpoint.

Our volume trends staying in line with where we'd expect they would be.

I think the other thing is just as some freight is potentially coming back into the LTL environment that you're seeing some volume increases with some of the other carriers.

And as a result, rates are going up.

And over the last 1.5 years, we talked about the fact that, and we were questioned often about our market share gains, and we said if you look along the price and service continuum that maybe shippers were weighing price more than they were service.

And I think now that some of the other carriers are increasing rates that you're seeing a shift maybe back to equilibrium.

And so -- and I think when pricing is more in line, we feel that, that we have a service advantage and that's demonstrated in our 99% on-time and claims are less than [0.10%] and we certainly have got available network capacity.

So we're back in the sweet spot of growth of -- we built up all the network capacity.

We're able to grow into it.

We're getting more and more customer feedback of coming back to us for service.

And so we feel good about just the industry dynamics and, as a result, our positioning for some continued growth.

Certainly, we're not going to go out.

I mean, we increased our CapEx by $15 million for equipment.

And equipment capacity is a little easier to get.

We long have a long-term plan of investing in our real estate network and maintaining excess network capacity.

We can get the equipment capacity, now the final piece is making sure that we've got the people in place to be able to continuously pickup and deliver our freight on time to make sure that (inaudible) jeopardized in any way, and that's what we're addressing right now.

And we will go next to David Ross with Stifel.

So ABF came out with a cubic minimum charge, which we think is opening the door for similar dimensional pricing in the LTL system.

What are you guys thinking on changing the rate structure, pricing structure and the potential for going to an all DIM pricing model sooner rather than later?

Yes, we created and have a density tariff that we've had for, gosh, little over 5 or 6 years ago, maybe even longer.

And we've just not seen that much demand for that particular tariff, but I mean, logic says that we can't keep raising base rates and raising discounts, and it makes no sense to have 90% discount.

So at some point in time, there's either got to be a reset of the rate structures to bring the discount levels down or some move toward dimensional pricing.

So we're prepared for it and can accommodate dimensional pricing now.

I think it's not really a demand issue.

Shippers weren't demanding that UPS and FedEx change their DIM divisor or that they change their fuel surcharge programs.

It's just a matter of, I guess, willingness on the carrier side to make the pricing change.

Adam, you want to take a shot at that.

Yes.

I think it's just going to come back to you when you've got so many shippers, especially the -- your smaller mom and pops that just don't have the systems in place and in many cases, may not even have scales.

And so it will just be an added element of complexity, perhaps and we're not sure that the shipper community is ready for.

We've been talking about it for probably a decade and trying to get ready for.

Somewhat we've managed to it by having the dimensioners in our facilities and costing to make sure that we are accounting for the cube space in our trailers.

It's just going to be a matter of, if anyone and others in the industry elect to push for it, I don't think that we would be out there to push and demand and say, this is the only way to account for it.

But the way we try to account for it is measuring the weight and density and audits and inspections of the freight that we are handling and then going back to our customers and saying this may not be the type of freight we that agreed to from a pricing standpoint and making adjustments in real time.

I think we've been pretty successful with that.

And that's why we've had such good yield performance.

But we're probably not there to necessarily go out and draw that for the industry.

We will go next to Chris Wetherbee of Citi.

I wanted to ask a little bit about sort of the cost cadence, again, as we think about, but specifically on sort of the advertising, I think it's sort of a seasonal dynamic that's going to run through into the fall.

But give us a little bit sense of how we should be thinking about -- I don't know, if you can give us a specific number from 2Q, but maybe how we should think about that lapping or maybe falling off in 3Q?

Or does it stick around and then go away in 4Q?

Just trying to get a sense of maybe how that specifically plays out.

Yes.

And in my comments this morning, I mentioned that in general supplies and expenses, we had about a 24% increase compared to the second quarter of last year.

And it was a pretty good step-up in pace from where we were in the first quarter.

And we expected that.

I mean, it's in line with the seasonal build of freight and so some of the things that we were doing were targeted in that regard.

So -- and I would expect our general supplies and expenses to be in a similar type of range in the third quarter as they were in the second.

And then you should have some cycling down as we go into the fourth, similar to a bell curve with lower cost in the first and fourth quarters and little bit higher cost in the second and third.

Some of those costs that are in those -- that line item are variable in nature.

So there is certainly some natural fluctuation that's going up and down with our volume trends there as well.

Okay.

That's helpful.

And when you talked about them last quarter, I think there was some expectation that there could be some revenue attached to it and obviously, tonnage growth was solid in the quarter and this is getting, I guess, maybe a bit too granular, but trying to get a sense of maybe what your initial impressions have been with the sort of push higher on the advertising side, noticed mostly on the MLB side, but -- how the revenue sort of uptake or results have been from this push in advertising?

It's hard though -- that's -- measuring the return on marketing expense is one of the most difficult calculations you can try to make.

And we are really still very new into our relationship with MLB, and we plan to have a long-term relationship there too.

So we watch our marking budget every year and it's just an expense item that's on the -- makes a part of our cost structure.

But we think it's a very necessary thing to continue to build our brand awareness and build customer loyalty.

So we remain committed to marketing.

Okay.

And so from market share perspective, what we see in the quarter on performance has been, you probably call, consistent with your typical ability to gain share within the market.

I think we haven't seen all of the results for the second quarter of our competitors.

So it will be interesting to see how our growth rates stack up.

But going back to my comments a little bit ago, the good news is that we are bringing on the truck line, is -- it's solid, well priced.

It's in our cost structure and is generating incremental margins.

So others might grow equal to us or maybe a little bit faster.

But you were not seeing the growth come with solid growth in yield and solid growth in tonnage.

And we've got both.

We will go next to Ravi Shanker at Morgan Stanley.

A few follow-ups here to some of the prior comments.

First, on the kind of e-commerce collections.

When you're going to look at with your business and gets LTL as a whole, just how much of revenue do you think comes from, I know just filling inventories for retail stores or doing the FC to store move.

And kind of why should that change over time from being, what I believe, today is more of a TL business to be more of an LTL business?

Scott (sic) [Ravi], at this point, retail for us is somewhere in the 25% of our revenue ballpark.

And we're not doing as much of the fulfillment center to store and so forth that you mentioned.

But I think for -- in terms of the general big picture of why it may move from truckload into LTL, I think David hit at it earlier, when you think about the increased number of fulfillment centers versus larger scale distribution centers covering the region, these fulfillment centers are managing a significant number of SKUs, and they are not going to be bringing in multiple or large quantity of goods.

It's going to be more of increased number of SKUs, rapid inventory replenishment.

We think that really bodes well for us and our service capabilities.

But naturally unless there is change in dynamics within the truckload industry would shift to lower weighted goods in the LTL industry, we just think that that's going to be a continued change in dynamic.

Now in terms of whether or not we stay so focused on that, it's certainly an opportunity and again, it's an LTL opportunity.

But lot of things will come back to industry capacity and where other carriers are, what carriers focus on some of those retail growth.

We anticipate there will be continued growth within the industrial segment of the business.

And so that may free up and other opportunities with existing customers and new customers across other elements and businesses.

So until you see any measurable increase in capacity by the other carriers, we see opportunity across multiple fronts.

Got it.

That makes sense.

Second, on ELDs, I think you mentioned that you're obviously looking forward to truck capacity tightening later this year.

Do you think that the kind of spillover of the pricing impact from TL to LTL is concurrent?

Or do you think there is a little bit of either?

There probably was a little bit of some spillover in our numbers in June and I mentioned, our weight per shipment going up.

And that's something that we've got to manage and control here.

I think, I mentioned earlier that some of these volume loads that we handled were with existing LTL customer accounts and perhaps that we're struggling to find a suitable capacity in the TL sector.

Some of this too may have been, and we talked about this the last few quarters, that we think that there is a fringe element of truckload carriers that were out looking for 10,000, 15,000-pound shipments that normally would move by LTL and especially in the 3PL segment, they were able to secure capacity at a lower rate on the TL carrier.

And you may find a TL that was willing to handle multiple stops and doing some different things that may have been outside of their sweet spot, absent other volume.

So some of those dynamics come back into the play where normal shipments that will move LTL moved by LTL and TL stays in its world and that bodes well for everyone.

We've just got to be careful and I mentioned this earlier that we're not taking on volume loads at the expense of other LTL shipments such that it may impact service in any way for us and any volume loads that we are taking on have got to be priced accordingly for the capacity that we're taking up.

Understood.

Very helpful.

And just lastly, I think you mentioned earlier a 6.7% tonnage growth in July, which was a bit of a deceleration sequentially.

Can you just confirm that, that is not adjusted for the 4th of July holiday?

Yes, that -- we don't do adjusted.

So that's just the rate of growth where we are.

And certainly, that first week I mentioned was a little bit slower and that plays into the month-to-date average.

But that's just where we are and keep in mind too what I mentioned about the fact that weight per shipment is down a little bit.

So -- and our shipment growth in July is slightly below, but there is multiple factors that come into play with these things.

The shipment is -- right now is up a little over 5.5%.

Shipment growth in June was up 6.5%.

So it is a slight deceleration, but all-in, I mentioned that our revenue is growing.

It's just slightly below the pace.

The revenue in July is slightly below the pace that we had for all of the second quarter.

So you've got the volumes and the yield components coming into play.

And on the yield side, there will be some compression in terms of fuel surcharge revenue in the third quarter as well as fuel is more normalized where it was increasing last year and it's -- actually the last few weeks been decreasing.

We will go next to Brad Delco with Stephens.

This is actually Scott Schoenhaus on for Brad.

I just wanted to follow-up on the pricing environment.

Some of your peers recently put in GRIs.

Just wanted to see how you're thinking about rates to noncontractual customers.

And as a follow-up, do you think we're set up as of right now for another round of GRIs in early 2018, particularly if we do get that TL spillover that seems to be already happening or setting up to be happening in a tightening capacity?

Yes, Scott, we haven't made any announcements at this point.

If you remember, our GRI last year went into effect on September 26, and we're normally on a 10- to 11-month cycle.

So we've had discussions along those lines and certainly, we've got cost increases that one would expect to have an increase, but we haven't made any announcement in terms of that as of yet.

And second part of your question, whether or not some of the other carriers tried to go after the second rate increase or not, if you look kind of over the long run, the yield performance and kind of where industry margins are, we maintained all of last year that we felt like industry pricing would stay stable because of the fact of industry consolidation and where industry margins are and so I think some of the other carriers will continue to have a need to push for price.

And certainly, as other carriers do that, we look at our ourselves, what we need to cover our cost inflation and that could bode well for us from a volume standpoint, if we don't need as much price as perhaps some of our competitors do.

That's very helpful.

I guess, my last question is on driver pay.

I think, you usually do an increase around September or October, usually around 3% to 3.5%.

How should we think about this for this year, similar timing, similar rates?

Or is it going to be a little bit more given it seems to be the LTL environment is more competitive?

Yes, we typically have an increase in the -- at the 1st of September.

We haven't announced anything to our employees as of yet.

We normally don't give the rate, but certainly, the factors that go into play when we make those decisions are how the company is performing, where we are at.

And we take those into play.

They've averaged 3% or so and I think that's what the increase was last year.

And so we will make that announcement on the fourth quarter call, at least to the investment community once we go out and announce our plans to our employees.

And we will go next to Ariel Rosa at Bank of America Merrill Lynch.

So just to start with, I was hoping you could address where some of the strength is that you're seeing?

And what are some of the kind of regional differences across the country?

So is it gaining share in the markets where you're strong?

Or is it really kind of increasing penetration in some of the markets where you have less of a presence, that's really driving this -- the strong growth?

It has been pretty balanced actually, which is what we would want and expect.

We're probably -- we're getting some really good growth in the midwest region of the country.

If you think about it, that's where we've added some capacity.

Our Gulf Coast region, that's also seen a nice growth.

We did just recently open our fourth terminal in the Chicagoland area.

And it seems that as we continue to add capacity really around the country, there is demand there for our service product, and we are able to increase growth.

And we've talked about that's part of our long-term plan for market share growth and we're continuing to look and evaluate real estate opportunities.

We've got a far good list of about 35 to 40 service centers or so.

And we continue to keep our eyes open to the demand for real estate.

Typically in the markets where we are looking was continuously increasing.

So we certainly will continue to look to add to our network where we can to make sure that the network does not become a limiting factor to our growth in any way.

And there was some chatter about competitors entering markets in the northeast.

Could you maybe address kind of what you're seeing there?

Are you seeing additional pressure in that market?

We're not seeing any pressure as of yet in that market from the expansion of other carriers.

Okay, great.

Very helpful.

Just last one for me, obviously, the share buyback activity was a little bit slow this quarter, at least relative to kind of what we were expecting.

Is that kind of trying to sort the balance sheet and prepare for this increased CapEx spending?

Or is there something else kind of driving the thinking there?

No, I mean, I think our balance sheet is in really good shape.

And with where our debt to cap is, it's just a measure of where the stock price has been and kind of what our thinking has been in the past of buying the stock when it's at a little lower price.

And we bought fewer shares when our prices increase.

So it's stepped up a little bit in terms of comparison to the first quarter, but it's still been light, I guess, in comparison to the pace of repurchase in 2016.

But we will continue to evaluate sort of our strategies around capital return to our shareholders.

We are continuously doing that.

And we will go next to Tyler Brown at Raymond James.

Adam, you made some high-level comments on 3PLs.

But can you talk specifically about the trends there?

Was that segment up in tonnage?

It seems like they have been a bit erratic this year.

Yes, we actually had nice revenue growth in the third quarter -- or second quarter with our 3PLs and I think some of that maybe coming back to just shipper demands, available capacity within the industry and shipper demands for a little bit increased focus on service over price that I mentioned earlier.

So yes, probably a little bit faster rate than the overall revenue growth for the company in the second quarter.

I can't (inaudible) On the 3PLs.

Perfect.

Okay.

That's good color there.

And then just a quick housekeeping item.

But David, you mentioned P&D or linehaul productivity this quarter and how that trended, I assume both were fairly good.

Yes, Adam, do you have those numbers to share?

Our P&D shipments per hour were increased 2.1% in the quarter.

Our linehaul laden load average was up 1%.

On the dock, we -- it was a little mix.

Our shipments per hour were down about 0.6%, but our pounds handled per hour were up 0.6%.

Again, we had an increase in weight per shipment and so forth.

But those were a little mix there.

But -- I think that we continue to be very efficient.

We are hiring new people, and there will be a productivity impact from those new hires, that's something that we anticipated.

It could have a little bit of a dampening effect on the improved productivity that we just saw in the second quarter.

Okay.

No, that's great.

And then just lastly, just a bigger picture question.

But David, I always think of you guys as kind of industry pacesetters.

And I'm just wondering if you've given any real contemplation regarding automation and I'm not talking about necessarily over the road, but do you think that automation could play a role on the dock or in the yard?

And do you think that that's something realistic in the intermediate term?

Well, as far as automation on the dock and in the yard, we already have it.

I think, one of the steps that has been talked about for years, but we've never quite gotten there that could help on the dock might be some kind of RFID tags on each -- a pallet level RFID tag, not carton level, but a pallet level RFID could improve some productivity there.

But -- and for the most part, we've got what it takes to -- we've got everything that's available to the industry right now on our dock and in our yards to manage those activities.

Tyler, just to add a little bit to that, in terms of some of the new technologies that come out, yes, we certainly stay focused on what's available.

I think that we have evaluations of technologies and on the dock in terms of automated forklifts and things that we'll continue to look at it, but in a warehouse environment, it's a little bit different.

I know you are familiar with a freight dock in the middle of the night, especially on a breakbulk location, is pretty hectic.

There ever been a possibility of yard switchers and -- that's something, whether it's the technology for the switchers, whether it's technology in the trucks, and we already have lane departure warning systems and (inaudible) a radar collision mitigation system.

But I think we will continue to see and we will continue to implement safety features on our trucks as they become available and they are viable.

But that's something that we're always focused on.

Certainly, we've got the strength to make the investments in when they are available.

And at this time, we have no further questions in the phone queue.

So I would like to turn the conference back over to Mr. Congdon for any additional or closing remarks.

All right.

Well, thank you all, for participating today.

We appreciate all your questions.

Feel free to give us a call, if you have anything further.

We -- thank you, and have a great day.

This does conclude today's conference.

Thank you for your participation.