奧多明尼昂貨運 (ODFL) 2018 Q2 法說會逐字稿

Good morning, and welcome to the Second Quarter 2018 Conference Call for Old Dominion Freight Line.

Today's call is being recorded and will be available for replay beginning today and through August 3, by dialing (719) 457-0820.

The replay passcode is 5482061.

The replay may also be accessed through August 26 at the company's website.

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

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

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

You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Old Dominion's filings with the Securities and Exchange Commission and in this morning's news release.

And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements.

The company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

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

Please go ahead, sir.

Good morning, and welcome to our second quarter conference call.

With me today are Greg Gantt, our President and CEO; Adam Satterfield, our CFO.

And after brief remarks, we'll be glad to take your questions.

Old Dominion's financial results for the second quarter were exceptional.

We produced strong balanced growth in revenue, which drove substantial profitable growth for the quarter.

Even with our third consecutive quarter of double-digit growth in shipments and a 16% increase in employees, our service metrics remained outstanding, with on-time delivery of 99% and a cargo claim ratio of 0.2%.

We also broke new ground in terms of our operating leverage by delivering an all-time record operating ratio for Old Dominion of 78.7.

The second quarter, we were able to build on the strong operating momentum that we experienced in the first quarter.

Based on trends thus far into the third quarter, we believe conditions are favorable to achieve further profitable growth in the second half of 2018.

The ongoing expansion of the U.S. economy, along with positive metrics across nearly all economic indicators no doubt supports a positive business environment.

Feedback that we have received from our customers about their businesses also remains very encouraging and is reflected in their increasing demand for our services.

The pricing environment also continues to be attractive, in an industry that remains capacity constrained and where carriers increasingly recognize the need for stronger margins to support their capital expenditures.

As a result of our strong first half performance and the continuing positive macroeconomic environment, we are confident in our market position moving into the second half of 2018 and beyond.

In addition, and as expected, the planned transition within our executive management team has gone very well.

Greg has embraced the new responsibilities in his combined role of President and CEO, and our quarterly results under his leadership and that of our entire management team certainly speak for themselves.

Thank you for your interest in Old Dominion.

And now, here is Greg to discuss the second quarter in more detail.

Thanks, David, and good morning to all.

Old Dominion's results for the second quarter are a case study for the power of our business model.

The basic formula of increasing freight density and yield once again help drive significant operating leverage for the quarter.

What our financial results and operating statistics don't show is the tremendous effort by each of our employees to provide the superior service that enables this model to work so well.

I want to recognize everyone in the OD family, and thank them for their innovation, flexibility and commitment to delivering our value proposition of on-time, claims-free service at a fair price.

The effort of our employees over the last 3 quarters has been particularly impressive as the growth in our revenue per day surged in late September of last year and now exceeds 20%.

Our growth in LTL shipments per day has been in the double-digit range over the past 3 quarters as well.

We believe the market share gains inherent in these growth rates reflect an acceleration in demand among existing and new customers for our superior service, which enables shippers to have a high degree of confidence that their freight will be delivered on time and claims-free.

And as we've discussed in previous quarters, we have been steadily adding to our workforce to prepare for this anticipated growth.

Of the almost 3,000 new employees added over the past year, nearly 1/3 of this total were added in the second quarter of 2018.

We believe the culture within our company has allowed us to attract and retain these new team members, who are critical to reaching our goals of increased market share over the long term.

Working to achieve our long-term goals will require the consistent execution of our strategic plan.

We rely on each of our employees, both new and long tenured, to maintain the long-term consistency of our service performance.

I can tell you, that is not as easy as we may make it look to produce the strong on-time and cargo-claims results that David mentioned, especially with double-digit shipment growth.

Although we have lost some productivity in our dock and P&D operations as compared to the second quarter of last year, our linehaul-latent load average actually improved and our operations remained very efficient overall, as evidenced by our operating ratio.

While our #1 priority will continue to be maintaining our superior service and meeting our promises to our customers, I am confident that we will also regain this lost productivity in due time.

In the second quarter, we also continued to support our value proposition through our capital expenditure strategy, which is designed to ensure that we always have the capacity and the people to deliver on our commitments to our customers while also winning market share.

This philosophy and the level of our expenditures differentiate Old Dominion in the LTL industry just as clearly as our superior service and pricing philosophy.

All are key contributors to the long-term nature of our historically successful financial performance.

We have also told you that we believe Old Dominion is uniquely positioned in the LTL industry to continue expanding our market share.

We think that our operating and financial results for the second quarter and the first half of 2018 should add further support to this statement.

We also believe favorable industry dynamics remain in place for our market share growth to continue.

With ongoing execution of our business strategies, we remain confident that Old Dominion is uniquely positioned to capitalize on the opportunities that we have for growth while also increasing shareholder value.

Thanks for being with us this morning and for your interest in Old Dominion.

Now here's Adam to review our second quarter numbers in greater detail.

Thank you, Greg, and good morning.

Old Dominion set many new company records during the second quarter and perhaps one for the industry with respect to our operating ratio.

Our revenue grew 23% to $1 billion, and our operating ratio improved to 78.7%, which is the first quarter that we have ever achieved as sub-80% operating ratio.

Combination of these factors allowed us to increase our income before tax by 38.2%.

Earnings per diluted share also benefited from a lower effective tax rate and increased 67.3% to $1.99.

Revenue growth for the second quarter included increases in both LTL volumes and yield, both of which were supported by the strength of the domestic economy and general tightness in capacity within the transportation industry.

LTL revenue per hundredweight increased 7.4% and increased 4.1% when excluding fuel surcharges.

Our LTL tons per day increased 14.6% as compared to the second quarter of 2017, with LTL shipments per day increasing 11.2% and LTL weight per shipment increasing 3.1%.

On a sequential basis, second quarter LTL shipments increased 9.3% over the first quarter of 2018 as compared to a 10-year average sequential increase of 7.0%.

LTL tons per day increased 8.3%, which is in line with the 10-year average sequential change for this metric.

While LTL shipment growth remained strong, our LTL weight per shipment decreased slightly during the quarter.

We believe this weight per shipment trend was based more on changes with the mix of our freight and should not be interpreted as a negative read on the economy.

As support for this belief, we note that 16 of our top 50 customer accounts had a decrease in weight per shipment during the quarter, but those same accounts had an average increase in revenue of 46%.

Some up-to-date July volumes, as compared to July 2017, currently include an increase in LTL weight per day of between 11% to 11.5%, and an increase in LTL shipments per day of approximately 11%.

This convergence in tonnage and shipment reflect the impact of changes in LTL weight per shipment that I just mentioned as well as other initiatives that we have taken to prevent heavy-weighted items from taking up too much of our capacity.

The good news is that our yield continues to show strength, and as a result, the growth in revenue per day for July is trending in the same range as that of the second quarter.

The operating ratio for the second quarter improved 220 basis points, with improvement in both our direct operating costs and overhead expenses as a percent of revenue.

Overhead-related cost as a percent of revenue, notably our depreciation and general supplies and expenses, improved 160 basis points due to the quality of our revenue growth as well as our focus on controlling cost.

In our direct operating costs, we note that salaries, wages and benefit improved 210 basis points when compared to the second quarter 2017, but our operating supplies and expenses increased to 150 basis points due to the rising cost of diesel fuel and other petroleum-based products.

Old Dominion's cash flow from operations totaled $213.4 million and $424.7 million for the second quarter and first half of 2018, respectively.

Capital expenditures were $191.7 million for the second quarter and $292.3 million for the first half of 2018.

We continue to expect total capital expenditures of approximately $555 million for the year, subject to the timing of certain real estate projects.

We returned $40.8 million of capital to shareholders during the second quarter, including $30.1 million of share repurchases.

Total amount of shares repurchased and dividends paid for the first half of 2018 was 68.8 million.

Our annual effective tax rate for the second quarter of 2018 was 26.2% as compared to 38.6% in the second quarter of 2017, due primarily to the positive impact of the Tax Cuts and Jobs Act.

We currently anticipate an effective tax rate of 26.2% for the third quarter.

This concludes our prepared remarks this morning.

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

I will note, however, that we're in different places this morning, so please forgive us for any stumbles as we start addressing your questions.

Thanks.

(Operator Instructions) And we'll go first to Ravi Shanker with Morgan Stanley.

So Adam, can you help elaborate on the weight per shipment decrease?

And kind of what is driving that?

Is that a deliberate shift in the mix of freight?

Is that more e-commerce?

What's the broader trend there?

Not necessarily a deliberate shift.

I think what we're seeing is that we are growing significantly with certain customers.

And like I mentioned, in our top 50 customers, we've got certain accounts that we're growing revenues significantly.

So we're picking up maybe in different states and different distribution centers that we're serving, but it's the same account, and it may just be a different mix of freight in certain cases.

So that's one element of the change that we're seeing.

We've made some changes in certain places and with certain pricing initiatives to also prevent some of the very heavy-weighted items that we were seeing to a small scale to make sure that we don't have significant weighted items taking up too much of our capacity.

We want to make sure that we're continuing to handle LTL freight and not truckload freight.

And so that has been intentional.

Got it.

And just pivoting to your comments on your overall growth, and the fact that you're picking up share.

Where is the share coming from?

Do you have a sense of that?

Is it coming from your bigger competitors?

Is it coming from mom and pops?

Is it coming from LTL as a whole picking up share within the different transportation modalities?

Or is it coming from brokers as shippers kind of move more to asset-based carriers?

The short answer is yes.

It is coming from all of the above.

But no seriously, we are seeing good growth across really all areas of the country for us.

Each of our regions is seeing nice growth, consistent with what we've talked about in recent quarters.

And most of the areas that we've been adding capacity, we've been seeing a little bit more growth.

And the Midwest is a good example of that.

And I think the Midwest growth also reflects the improvement that we've seen in the industrial economy.

When you look at certain macroeconomic numbers, obviously, with respect to the industrial economy, they're all firing on all cylinders.

And we're certainly seeing that with our own numbers and hearing it as well from our customers.

I will add, though, that we are starting to see good growth with retail-oriented customers.

And for the second quarter in a row, our customers that have an SIC code that we attribute to retail, we're seeing growth of about 28%, or we saw growth of about 28% in the second quarter.

So growing a little bit faster than the overall company average.

And I think, to answer your first question, may hit on the fact that if you believe in -- that there will be long-term secular shift of freight from different modes of transportation coming into the LTL industry, which we believe.

We're seeing some of that happening now.

It's not going to be an overnight type of change, but it's certainly something that we're seeing and something that we're capitalizing on as well.

Got it.

And just lastly, kind of given the strength of the current macro environment kind of barring some kind of trailer tariff dislocation or recession or something, it does appear to be sustainable for a while.

So are you planning to revisit your pricing strategy in terms of the timing of your GRIs or the kind of size of the GRIs relative to peers?

Well, we just had our GRI effective the beginning of June.

And that compares to the prior year, it was at the beginning of September.

So I think we've had a long-term pricing philosophy at the company that has worked out well.

And obviously, it's been very key to our results over the long run.

And that's one, to have pricing in place to achieve profitability on a customer-by-customer basis that is designed to offset the cost increases that we face as a company.

The cost of handling each individual customer shipments as well as supporting the reinvestments that we need to make in our business, particularly on the real estate side as well as the increase in technology demands that our customers have for us.

We'll next go to Amit Mehrotra with Deutsche Bank.

Adam, when I look historically at the sequential move in OR from 2Q to 3Q, you do see a step up, but it's not really that significant, 50 basis points or under for the last several years.

So if that trend holds, I guess, there is an implied acceleration in incremental margins as you move from the very strong results for 2Q to 3Q, it looks like something over 32% in the third quarter.

So is it right to assume some acceleration of incrementals in the back half of the year given that trend and the pricing backdrop?

Because volumes are also, I would argue, obviously slowing and coming up against tougher comps.

If you could just help us think about that.

Yes.

Well, we'll repeat what we've said, that we don't necessarily manage the company with incremental margins.

Certainly, when we talk about the long term, we'll still continue to say that 20% to 25% is kind of what we target.

We'll probably use that range until our operating ratio approaches a 75%, which is somewhat what that implied.

But obviously, what we produced here in the second quarter shows the power of our model.

And we talked about it, when you pull apart our operating ratio and look at the breakdown between direct operating costs and overhead, obviously, we achieved strong quality revenue growth in this quarter and were able to get tremendous leverage on our overhead cost.

We continue to sow good improvement with our direct cost as well.

And that's our salary, wage and benefits and the operating supplies and expenses.

So we'll continue to focus on improving those costs.

If we can get those improvements and with those costs being around 60% or a little north of there, then certainly we can have quarters where we've got an incremental that is 30%.

And we've done quarters where it's been above that.

And we don't give a certain range for each quarter as guidance per se, but certainly, we're focused on bringing consistent quality revenue growth into the company.

And I think that based on what the macro economy is showing and the customer demand that we hear every day, we've got tremendous opportunity to continue to show accelerated revenue growth.

And we're focused on putting much of those dollars of revenue that we grow to the bottom line.

Great.

And so if I -- just a follow-on to that, talking about OpEx leverage.

I mean, historically, you've talked about operating expenses per shipment kind of in that 4% to 4.5% range.

And I think in the first half, it's been closer to kind of that 7% to 8% range.

Is there, as the business grows, I mean, is there an ability to further leverage, I mean, I guess there is, but can you get down to 4% and 4.5%?

Or is maybe the OpEx per shipment level kind of, for this year, in that 7% to 8%, is kind of more the right number to target?

So if you back fuel out, which is just one cost element, we did move closer to 5% in the second quarter.

And if you recall in the first quarter, we had a little bit of acceleration in benefit costs and some other things.

And then we had the productivity challenges as well that put us more in that 7% range.

What we're seeing is fuel prices have increased significantly.

It's not only the increase in fuel, but we're seeing other petroleum-based product cost increasing as well.

And that's driving some of that increase in our operating supplies and expenses as a percent of revenue that we saw on a quarter-over-quarter basis.

So that's one element.

Certainly, we're going to continue to focus on improving productivity.

And I think we've got opportunities there as well.

We'll go next to Brad Delco with Stephens Inc.

Maybe for Greg, looking sequentially, shipments increased 9.4 or 3%.

I think, Adam, you said that's a little bit better than historical averages.

And your employee count improved or increased 4.7%.

So you did get a lot of good leverage on your workforce.

Greg, you mentioned that you lost some dock and labor productivity.

How do we think about the employee count going forward relative to your expected shipment growth?

And maybe what exactly are the areas for improvement on some of those productivity challenges you're having with the labor force?

Okay.

Well, obviously, Brad, as you can see, we have added a lot of folks to the workforce, particularly on the platform in our P&D and line-haul operations.

But we were a little behind, if you will, with the surge in growth that we've had.

We obviously had to ramp up our hiring efforts.

And fortunately, we were able to add to the force as needed and where needed.

So happy that we've been able to do that.

Going forward, I don't see quite the need that we've had.

We've got 2 peak months, a couple peak months coming up.

We went through a big month in the end of the second quarter in June.

But think we've got a couple peaks yet to deal with, but we're much closer to the desired number of folks that we need than we had been in the past.

So I feel good about where we are.

I think you'll see those hirings level out quite a bit from here forward.

There'll still be some in some locations where we have some needs but much less than what we did through the second quarter.

Okay.

So sort of more in line with the sequential trend in shipments, I guess, is the thought there?

Yes, Brad.

Yes.

Brad, I'd like to add -- this is David, that the time frame it takes a new employee that comes on our dock to really learn our systems, the technology side of it and to really learn the OD way of moving freight, packing trailers and delivering a claim-free delivery, it takes time to reach a full level of productivity.

I've been through it.

It's at least 6 months, 6 to 9 months to really get fully up to speed with a tenured employee.

So with all these folks that we've added, nearly 1/3 of 3,000, nearly 900 in just this most recent quarter, it's going to take a little while.

We should be able to get some of our lost productivity in terms of shipments per hour, pounds per hour back, both in the -- primarily the dock but the P&D as well.

Okay, that's helpful.

So really the issues are just new employees and them needing to ramp.

And then maybe sort of the second question, thinking about productivity and sort of your incremental capacity with your assets.

Where are your sort of load average is running now versus -- to the extent you can give us a historical context.

Or is this -- are these load averages as good as you've seen them?

Or do you think you still have room to optimize the freight in the trailers?

I think they're fairly close to some of our better quarters in the past.

I'm not looking at those numbers right in front of me.

But yes, they're pretty much near our historical peaks if I recall.

But we do have some room, Brad.

There's always room for improvement in that area.

When you talk about 8,000, and 9,000 closes a day, absolutely, there's always opportunity to make improvements in that area.

We'll go next to Scott Group with Wolfe Research.

So Adam, can you give us the monthly sequential tonnage trends?

And then sort of how July is tracking?

And then maybe normal seasonality?

And then just on the revenue comment, that it's up the same, and July is -- you saw in second quarters.

I guess that implies double-digit yield growth.

I just want to confirm that, that's right.

That's right.

And on the yield side -- and we saw this with June as well as the weight per shipment as we've been facing 4% or close -- in the high 3s increase in weight per shipment, certainly that's had a negative effect on our reported revenue per hundredweight.

So as the weight per shipment has now become a little bit more normalized, you don't have that same type of negative pressure, and we're getting more yield as a result.

On the sequential changes for the second quarter for tons, April was up 2.4% over March, May was up 3.1% over April, and June was up 2.5% over May.

And that compares to the 10-year average, April of 0.7%, May 4.1% and June 2.3%.

And on the shipments, that was -- weight.

On the shipments, we had -- April was up 3.6%, May was up 2.5%, and June was up 2.2% over May.

That compares to the 10-year average, which is April increasing 0.6%, May increasing 3.4% and June increasing 1.4%.

And recall, the April and May trends were a little different versus the 10-year average with the timing of Good Friday this year.

But just that last metric there, you can see that we're still getting tremendous increase in shipments.

And that June of up 2.2% versus the 1.4%, we're getting the throughput of shipments.

We're just seeing a little bit decrease in shipment size.

And can you talk sequential for July, or is -- because it's not a full month, you can't really talk [to] that yet?

Well, it's not a full month at this point.

But what I'll tell you is that, basically -- and what we talked about of shipments are somewhere around 11%.

That's pretty consistent with the year-over-year growth that we saw in shipment count on May and June.

And then the weight is trending up.

So right now, we're pretty much in line with sequentials on the shipment side.

And the weight is just seeing that a little bit more decrease in weight per shipment from June into July than what we normally might see.

But as I mentioned before, some of that is intentional and as a result of actions that we've taken.

Okay.

That's helpful.

And then maybe just my last question when you do a sub-80 OR for a quarter.

Do you think that, that's a place you can do?

Can you do it full year sub-80 in the next couple years?

Do you think that's realistic?

I guess we'll see what happens.

As my former mentor used to say, we don't give guidance.

And -- But I think that when we talk about incremental margins, we've averaged a 25% since 2010, and you can see what the power of the model is doing.

We've had, going back to the second quarter of last year, each quarter since that time, we've seen above-normal revenue growth.

And so as we continue to get this strength in our revenue that's coming through, we're taking advantage of these multi-year investments that we made in capacity.

There's certainly operating leverage in the model.

And we've long talked about that the 2 key ingredients to long-term margin performance are density and yield.

And so we're certainly getting the density.

The yield environment continues to be very strong.

We're getting the increases that we need from our customers.

And both require the support of a positive macro environment.

And certainly, everything we see and read continues to be extremely positive.

Yes, Scott, this is David.

I'd like to just add to this.

The -- We have what we call a good balanced growth for the second quarter.

And that implies a lot of things.

One is just the mix of business that we have, customers we have, levels of pricing we have within each individual account.

The fact that we are growing multiple shipment shippers, and we're growing multiple shipments with those shippers is just -- I mean, every measure of density you see across our network is good, with just a rock-solid customer base and a rock-solid pricing philosophy that's going to carry forward as we keep growing in the future.

But this economy right now is -- it's got to be the best I can remember in my career right now.

When you look across nearly every economic indicator from the inventory sales ratios, GDP, industrial production, ISM, construction spending, retail sales, you name it.

The macro economy is strong, and certainly, we do -- everyone's -- there's a notion out there in the most recent days that we've reached some kind of a peak.

And everything's going to go to hell or something.

I don't know.

But I don't believe it.

I think if trucking has been a leading indicator of an economy, we're just not seeing any weakness.

And when we -- you look at the tonnage index that (inaudible) is putting out right now, that is rock solid.

So it's -- the entire industry continues to be strong.

And we're just not seeing any notion of peak in the economy right now.

And certainly, no notion of peak when it comes to Old Dominion.

We're -- We have a proven history of being able to power our way through any economic cycle.

But right now, the stars could not be any better aligned for future profitable growth at Old Dominion.

We'll go next to Matt Reustle with Goldman Sachs.

Just wanted to touch on CapEx a bit.

You maintained the budget for '18, but when you look out to '19, pretty strong comments on the macro backdrop right there but also looking at current capacity, how do you see that shaping up in terms of spend in '19?

We haven't formulated what we think our plan will be.

From a capacity standpoint in our real estate network, we're continuing to see, on average, capacity within the -- probably in the 15% to 20% range, and maybe it's on the low end of that scale.

We've opened 3 service centers thus far this year.

And we've got several more that should be opening soon and may end up opening a total of up to 10 this year.

We started the year with 228.

We've historically been spending somewhere -- 12% to 15% of our revenue on our capital expenditures.

And certainly, the most important piece of that CapEx budget has been what we're doing from a real estate standpoint.

We've got a long-term plan of adding another 35 to 40 centers, at least based on what we think today and where we think we can grow the company to in the future.

And we're going to continue to execute on those plans.

And if we find availability, certainly, we would intend to jump on that strategically.

Just to add to that.

This is Greg.

We have a lot of property purchases in '18 that should become construction cost in '19.

We expect it to be similar, but we'll have to wait and see where it shakes out.

Sure.

Okay.

That's helpful.

And one on market share, thinking a little bit longer term here.

Obviously, this year, it seems like you're picking up big gains in share.

But what should we think about as a longer-term target on overall market share?

And any guidance on timeline or goals that you've set for yourself in getting there?

We haven't put anything out at this point in terms of what our next long-term target is.

I think based on where we're trending from a revenue standpoint, we're probably somewhere in the 10% to 10.5% market share range.

But we feel really good about our opportunities.

One, I feel like the LTL industry, in particular, is the best industry within transportation suited for long-term growth.

And I think that we're better positioned than anyone to capture our share of that growth going forward.

And certainly, that's what our intention is and how we've executed over the long term.

So we feel good about that standpoint.

And we don't necessarily see any type of metric that we think that we can only get to and stop.

We've got better service.

We're continuing to give our superior service at a fair price.

And we're adding capacity every day to the network to continue to grow and meet the demand, the ever-increasing demand from our customers.

We have no notion of peak.

We'll go next to Todd Fowler with KeyBanc Capital Markets.

Just to come back to the conversation around the weight per shipments.

Understanding that, that's something that you're focused on.

Is that -- Was that based on looking at just the profitability of some of those shipments relative to where you would want your margin profile to be?

And can you talk about kind of the timing, do you think that you saw most of the benefit of that in the second quarter from a margin perspective, or is that something that should continue to build as you move through the rest of the year?

I'll say, Todd, what it was is, there has definitely been some falloff of truckload into LTL with customers breaking up large shipments.

I mean, full truckloads into large LTL shipments.

And we've been very careful to not bog our network, bog our capacity down with too many of these large LTL spot quote-type shipments because we've had such a increase in demand from our LTL shippers to handle more and more of their freight.

And so what we referred to on that weight per shipment focus was that we have intentionally raised our pricing on spot quote -- large LTL spot quote-type freight in order to discourage it so that we would have the capacity for our smaller shippers.

And that has contributed to the flattening of our LTL weight per shipment.

Got it.

Okay.

That makes perfect sense.

And then just, Adam, for the second quarter on the cost side, I mean, I understand that fuel was moving up, and there was some productivity, maybe some inefficiency or not full productivity with some of the new hires.

Is there anything that you would call out maybe that went in your favor during the second quarter that wouldn't be recurring as you move into the third quarter as we think about margins sequentially?

Or was it just a situation where you did get the leverage that you'd expect, and from a cost standpoint, it was a good cost quarter?

I think it was a good cost quarter just overall.

One thing that came in a little bit more favorable than perhaps what we anticipated was we had really good benefit cost performance.

We continued to see increases that we expected with the changes that we've talked for a couple of quarters about with respect to the vacation change that we improved this year for employees as well as some of the performance-based compensation as well.

But we had some really positive trends overall with health claims and with worker's comp as well, that there's a lot of numbers that kind of go into that overall benefit cost.

And -- But that dropped a little bit lower, it was approximately a little bit around 33% of salaries and wages and which was normalized compared to basically the same as the second quarter of last year.

But from a sequential standpoint was better than what our first quarter performance was.

And given the increases that we anticipated, I think I made a comment on our last quarter call that I anticipated those costs being somewhere around 34% of salaries and wages, more in line with what we had seen for the full year in '17.

But otherwise, I think we talked a little bit in the first quarter as well.

And it's part of the reason we had the 520 basis point improvement from first quarter and the second quarter that is a little stronger than normal.

But in the first quarter, there weren't material items to call out, but it just seemed like we had a little bit higher miscellaneous expenses, a little bit higher things here and there.

Whereas some of those were more in line with what we would expect going forward.

So nothing really material to call out other than we did have that slight improvement sequentially in the benefit rate.

Good.

Okay.

Yes, that helps, and I remember that from 1Q and seeing that reverse here into 2Q makes sense sequentially.

We'll go next to Chris Wetherbee with Citi.

Wanted to touch a little bit on breaking down the yield.

You mentioned that, Adam, I think that yields are running kind of in that double-digit range in July.

Just wanted to get a sense, how do you think about pricing in this context?

It's been accelerating sort of the revenue per hundredweight without fuel the last couple of quarters.

Do you see that sort of trend continue as you go into the back half of the year?

Are things getting stronger against relatively neutral comps?

Certainly we have every intention to improve our yields, and this is the environment.

If you can't get an increase now, I don't know when you will get it.

But we've been addressing underperforming accounts.

We put our GRI in, in the beginning of June, and that certainly helped that metric improve what we had reported from a quarter-to-date number through May with our mid-quarter update to what we ended up producing for the second quarter.

So as I mentioned earlier, that weight per shipment in July, right now weight per shipment is about the same as where we were in July of last year.

So that is normalized.

And I mentioned what the weight per day, how that's trending, so you can kind of back in to what the overall revenue per hundredweight is and -- with the fuel.

And -- But revenue performance continues to be very strong.

And some of this, it's not all just the fact that fuel is increasing.

With some accounts, we've had to address the fuel payables for the account.

And that's a yield performance and management initiative that we've taken.

So I mean, we're looking across all elements.

The philosophy that we follow is looking at the revenue input for each customer and what those cost inputs may be as well.

We're trying to improve the operating ratio for each individual account.

And that's what our pricing department is doing a fantastic job of right now.

Okay.

That's helpful.

(inaudible) this may be -- I was just going to say that just because it's a favorable environment, we once again will commend our sales team that's out every day meeting with our customers and working through their initiatives and building these relationships and so forth.

And they're the ones going out and obtaining these increases.

They're just not being willingly handed to us.

It's certainly a favorable environment.

But the freight doesn't just fall on the truck, and these increases in rates just don't materialize out of thin air.

So I think we've got to commend each and every one of our employees that are out giving service and getting these increases that we need.

Okay.

No, that's very helpful.

And yes, I guess when you look historically or even just looking at the second quarter, typically revenue per hundredweight without fuel account for more than 50% (inaudible) with fuel increase.

That type of relationship should still hold?

Or do you think because of some of the actions you're doing on the fuel side, if you're getting, say, 10% revenue with -- per hundredweight with fuel, that it would be less than half?

I'm just trying to get a rough sense as sort of where that ex fuel number shakes out within it.

I honestly don't go through and look at the variation between the with and without.

Really, the thing we pay attention to the most is the revenue per hundredweight with fuel and then what our cost per shipment with fuel, how those 2 are trending.

And we've got to have a positive variance there to ensure that we can continue to improve our operating ratio and support the reinvestments in our business.

And so in the second quarter, revenue per shipment, I may have said hundredweight, but revenue per shipment was up 10.7%, and our costs per shipment were up 7.6%.

And that's all-inclusive of fuel.

But certainly, we've got that positive variance there in the second quarter.

And we would like to say that, that could continue.

But realistically over the long run, when you look, going back for multiple years, we've had a positive increase in revenue per shipment of about 4.8%, and our cost per shipment have trended up 4%.

So it's that positive delta there that, again helps us contribute to the improvement in the operating ratio but also support all these capacity investments we continue to make.

Okay.

No, that's helpful.

And then just one point on that capacity.

David, it sounds like you were thinking that the cycle still has some room to grow here.

So from a capacity addition standpoint, when you look out the next 6, 12 or maybe 18 months, so when you're doing your planning, are you changing sort of the pace of that growth at all?

Or is it kind of still steaming ahead the way you have over the course of last 1.5 years, 2 years?

Say we're continuing to steam ahead.

Adam mentioned earlier, 15% to 20% capacity in the network.

We continue to find ourselves in certain of the larger metropolitan areas where our door pressure is getting so high that we're basically out of capacity.

And those are generally the places where we're either adding doors, or we're looking to spin-off into a new location in a major metro area and have multiple service centers there.

So we just have to stay ahead of it and do the best job we can forecasting where we're going to be reaching capacity limits and trying to take action with our growth in those places.

But we haven't seen much letup in our real estate department, [and I don't know how many] in the last 10 years, and it just seems like it's still a very busy department.

And we anticipate having a lot of activity in the next few years to come.

I mean, here we are with 10% market share.

There's 90% out there for us to go after.

So we'll just keep on growing and keep making hay while the sun's shining on our service.

We'll go next to David Ross with Stifel.

We haven't talked about the IT conversion in a while.

And Adam, I guess last we spoke, it was on track but maybe taking a little bit longer than expected.

Where do you stand on that process?

And then you mentioned earlier in the call that you're investing to keep up with the increased IT demand the customers have.

Could you talk a little bit more about what those demands are?

And what customers are requiring from their carriers these days?

Sure.

That may be easier to address.

And this is -- it's not necessarily anything new but certainly changing.

Where customers just -- more and more, they want real-time data, data connectivity into our systems.

And I think the better system connections that we can build with our customers, the stronger relationships that we build with those customers as well.

And it's anything and everything but from freight visibility to billing information and so forth.

And again, the better we can do from that standpoint, perhaps the stickier we are with our customers.

And it helps us, too, from a overall cost performance standpoint.

From just the general state of our technology department, we had this multi-year project going on.

We kind of paused last year.

And I think we talked about this a little bit.

We've changed leaders in that department.

And I think we're starting to make some real good progress on certain things.

We've done a lot of work of getting our technology infrastructure built out in different data centers in different places of the country, building in some redundancies and certainly looking to add as much technology efficiency that we can within each area of the company.

And whether that's our operations out in the field, which most of our systems are homegrown as well as the back-office operations here in the corporate office.

So we're going to continue to make progress there as best we can.

Is anything specific that the customers are asking for that you're investing in or that you might be doing better than others or ...

I think the thing that we're probably doing better than others on really gets to our operating systems.

And that's everything from our route planning technologies, load planning technologies, everything as it relates to moving freight through the system.

And certainly, that's been something that we've been focused on for many, many years.

Now we're on different generations of handhelds.

We're rolling out now an updated generation for our driver handheld systems.

And we're always working on different tweaks and so forth to continue to drive improvement there in the field as it relates to moving freight but also as we can maybe drive some efficiency and some automation into certain processes here at the corporate office.

Great.

Real quick, you've done pretty much every job there is in a trucking company.

So how does the new CEO role meet your expectations?

Or how is it different than you thought it would be?

I don't think it's a whole lot different than I thought it would be.

Obviously, some additional responsibilities.

But it's like any new job you take.

It's new responsibilities, new challenges.

You face them, and you do the best you can, work with your team and move ahead.

So it's fun.

We're in good times in the business, so that certainly eases the pain if there is any.

It would be tough if we had ugly numbers.

That wouldn't be so much fun, I'm sure.

But certainly a good time to get promoted.

But -- at OD, anyway.

We'll go next to Ari Rosa with Bank of America.

Wanted to ask about the resource additions.

Is there a little bit of a concern or to what extent -- obviously, it looks like the service metrics continue to be top-notch.

But is there any concern that you lose some quality as you grow?

And in that context, maybe you can discuss the hiring environment and any challenges, whether they'd be regional or just kind of an across-the-board in terms of wage pressures or difficulty finding skilled applicants?

I think the challenges are somewhat across-the-board.

Obviously, there's some locations that are a little tougher than others.

But we've had growth across the network.

So we have added folks across the network.

Again, I think the pressures that we've seen, and the issues that we've seen are in the lost productivity that we've had in the second quarter.

We've added a lot of folks.

And as David mentioned before, it takes time to get those new employees up to speed.

Obviously, what we do is, it's not just moving a box from one place to the other.

There's -- it's technical.

There's a lot of technical difficulties to overcome.

There's a lot of training involved in the technical side of it.

We have a tremendous amount of tools that we have to train our folks and get them up to speed to use, to prevent claims, to maximize space, load factor if you know what I'm saying.

But it's not easy to get them there, so it does take time.

So I think as we continue to hire, there'll continue to be some drag, again, maybe a little less going forward than we've had.

I don't quite see the need in the third quarter.

I think we made some of the investments, so surely, it's going to get better from here forward, least we hope so.

But it has been a challenge.

But again, nothing we can't handle.

Fortunately, as I mentioned before, we have been able to respond to needs, and I think that's the good thing.

We've got a value proposition that we've committed to our customers to maintain.

And we can't do it without an adequate supply of people.

So glad we've been able to ramp up and ramp up where and as we've needed.

So it's all good.

That's -- Those are good challenges to have.

So going -- I think it was Scott who asked about this, but this idea of hitting 25% type operating margins or 75% OR, is there a way to quantify how much of a drag there was as a result of these -- the time to ramp up and maybe the lag time in some of the P&D employees?

How much of a drag did that have on the OR?

Because looking at it, obviously, you guys posted a phenomenal OR for any quarter, any LTL company, but it sounds like it could have been better.

So maybe could just get your thoughts on that?

Ari, it's hard to calculate that number, and we don't even try to because the costs are what the costs are, and that's embedded.

And what we've done there, certainly, we've got the opportunity to continue to improve our margins over the long run.

And I think we've talked about that in terms of just big picture, what it takes to improve margin.

So we're going to continue to stay focused there.

Some of the challenges that we face, though, as we're growing, and we're growing in new locations, the cost per shipment may be different to handle in different places.

But we're getting the revenue per shipment growth that we need.

And that gets into if you're taking on new customers or new freight in different locations for existing customers, going through a bid process, trying to understand what the shipment characteristics are to make sure that we're pricing appropriately but then doing the work on the back end as well to make sure that we did, in fact, get the freight that we thought we would get.

So certainly, I think we've been doing a good job there.

As you're growing rapidly and adding new service centers, that creates a little -- or natural inefficiency as well.

You're constantly increasing your shipment count.

In some cases, it may be one shipment that creates a new schedule for our line-haul operations between cities.

So these are all things that we're dealing with in high-growth environment, but we certainly handled it pretty well.

Great, Adam.

Maybe I can throw one more in that's a little bit out of left field because it's not often part of the OD story.

But maybe get your thoughts on doing acquisitions or any kind of M&A.

You obviously have the balance sheet for it.

And just given how you guys clearly seem to be much better at managing LTL assets and network spend than your peers.

Is that something that would ever be attractive?

Or is it just really a focus on organic growth and maybe scaling progressively rather than being able to tick off a under-managed asset and/or kind of improving it that way?

Ari, our organic growth has been going so well over the last decade, and we see ourselves in just a prime position right now to continue organic growth.

That is our priority.

And it's -- as we've been discussing, it's tough to manage the growth we're -- just the organic growth with adding people and adding technology and just staying up with it, keeping the service levels where they are and the claim-free status down -- the claim ratio down as low as it is.

We don't need an LTL acquisition to grow our business.

We are always getting -- people are always knocking at your door and sending you proposals of this company and that company to look at.

Non-asset-based companies and things like that, truckload from time to time.

But it's -- we don't want to take our eye off the ball managing the business that we're managing now because when we're delivering a return on invested capital up in the high-teens to, what is it now, is it 20% right now?

The best place in the world to invest our money is in ourselves.

And doing what we know best and what our team knows how to do and make hay while the sun is shining.

So we're not going to say we won't do any acquisitions.

It's just not a priority for us right now.

We'll go next to Allison Landry with Crédit Suisse.

I'll just ask one.

It's been a long call.

But Adam, you mentioned earlier, in terms of e-commerce that you are starting to see the secular trends show up in the numbers.

And I realized this is small part of the business.

But could you give us a sense for what percent of revenues and maybe tonnage that it currently represents?

Yes, we don't break it down necessarily in terms of just e-commerce specific.

But overall, retail business is somewhere around 25%.

And it's probably picked up a little bit, maybe a couple of points.

Whereas industrial had been about 60%, there's probably maybe a little trade off there just because we've had tremendous growth.

And a lot of this comes in the form of -- as large retailers, that every retailer has to got to have an e-commerce strategy, but as supply chains become more sophisticated, as large retailers implement programs that charge back and fine shippers for not getting the freight delivered on time and without damage, it really creates tremendous opportunity for us.

And that's the opportunity that we're seeing now.

We manage it through our expedited department and have really seen good growth with that piece, maybe the e-commerce puzzle.

But right now, we don't do a lot of residential deliveries of any type.

We may have a little small amount of daily shipments that are being delivered within a residential area.

But it's other pieces of the transportation mile, I guess, that we're seeing opportunities and some good growth today.

We'll go next to Willard Milby with Seaport Global.

Just wanted to ask a real quick one.

Obviously, you stated that the employee count looks to be leveling off here, so you're going to have a nice, seasoned workforce ahead of peak season here.

Are you getting an indication that -- from customers, that peak season is going to keep creeping forward from, I guess, the usual last 2 months of the year?

I think we are expecting a peak yet, for sure.

I mean, typically our strongest months are yet ahead of us.

But we are anticipating that...

As far as creeping forward, I mean, maybe a little bit earlier in the year than expected?

Just given kind of capacity issues in the networks, I guess, across the country?

We tend to have one of our highest months -- from a tons per day standpoint is in September.

And that's been relatively consistent over the years.

So I don't know that we've seen any necessarily wholesale changes in that regard.

And we certainly would expect to see our trends continue like they have in the past.

But as I mentioned earlier, it's somewhat hard for us to tell.

We've been capturing so much market share in this environment that we've had now 5 straight quarters of above-normal sequential growth.

And I guess we've been talking a lot about market share.

And I think the size of the market that you've kind of implied with the 10% market share is somewhere in the $40 billion range, and that, I think, has grown in recent years.

As far as the fastest-growing segment, is that e-commerce related?

And is that where you've been maybe getting the biggest business wins?

I think the overall LTL industry is still highly dependent on the industrial market.

And I think that's why you saw in late '15 and '16, when some of the industrial-related economic numbers were showing weakness, you saw that a little bit in the industry as a whole.

So certainly we believe, and we're seeing to a small degree some of this retail-related freight that may have been more historically in the truckload area finding its way into LTL.

But that's just something that we'll continue to keep our eye on.

I think that, as I mentioned, about 60% of our revenue is industrial-related.

So it -- the industrial market continues to not only determine a lot of our growth but that of our competitors as well.

And we're seeing good growth with those industrial-related customers.

We'll go next to Scott Group with Wolfe Research.

Just really quick, can you share the pricing renewals number for the quarter?

Scott, we hadn't necessarily been giving that detail on what our contractual renewals have been.

Those were embedded in the revenue per hundredweight.

And that's one element as well as the GRI, which we do publish that, it was 4.9%.

But we're getting the increases we think we need right now.

And some of that is on base rate, some of that's coming through the fuel.

But it's so hard to reconcile any of those numbers really into what the reported yield, and I think it becomes a distraction more than anything.

And at this time, there are no further questions.

I'll turn the call back to David Congdon.

We thank all of you for your participation today.

Appreciate your questions, and feel free to give us a call if you have anything further.

Thank you very much, and have a great day.

This does conclude today's conference.

We thank you for your participation.