奧多明尼昂貨運 (ODFL) 2020 Q2 法說會逐字稿

Good morning, and welcome to the Second Quarter 2020 Conference Call for Old Dominion Freight Line.

Today's call is being recorded and will be available for replay beginning today and through August 7, 2020, by dialing (719) 457-0820.

The replay passcode is 1718368.

The replay of the webcast may also be accessed for 30 days at the company's website.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, 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 would like to turn the conference over to the company's President and Chief Executive Officer, Mr. Greg Gantt.

Please go ahead, sir.

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

With me on the call today is Adam Satterfield, our CFO.

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

The OD team delivered solid financial and operating results for the second quarter despite the operating challenges we faced with the economy.

Although our revenue declined 15.5%, we were pleased to improve our operating ratio to a quarterly record of 77.8%.

We accomplished this by focusing on improving our yield, managing our variable cost and controlling our discretionary spending.

Our yield management process has strengthened the quality of our revenue and profitability over the long term.

Through this process, we manage profitability on an account-by-account basis.

We believe this approach is consistent and fair for our customers.

It is also supportive of our ongoing investments in capacity and technology while helping offset cost inflation.

We believe customers appreciate the consistency of this approach as they know what to expect from us each year.

Providing superior service at a fair price is our value proposition, which is critical to our long-term customer relationships.

Our team is relentless in its commitment to providing the very best levels of service to our customers regardless of the economic environment.

While we continued with many operating challenges in the second quarter, including the 16.6% decrease in shipments per day, we produced a new company quarterly claims ratio of 0.1% while also improving productivity.

There are many components of our industry-leading service.

And based on customer feedback, we believe the gap between us and our competition has widened in the current environment.

It has historically become a common practice in our industry to focus primarily on cost in a recessionary environment.

This narrow focus generally leads to customer service failures, which is why we are so committed to the service standards that support our revenue quality.

We have long believed that this creates a competitive advantage for us in our industry, and it is especially critical now because the importance of high-quality and dependable service seems to have recently increased for many of our customers.

As evidence to this trend, we have been awarded new business in the past few months from customers that have historically provided lower rates rather than overall value.

This trend not only leads us to believe that many of our competitors are remaining relatively disciplined with their pricing, but it is also encouraging for future market share opportunities.

While the quality of our revenue is critical to our operating ratio, appropriately managing our cost is just as important.

Minimizing our cost inflation on a per shipment basis is an ongoing process based largely on the productivity of our employees as salaries, wages and benefits represent our largest expense.

As a result of operating efficiencies and improved productivity, we are able to improve our direct cost as a percent of revenue during the second quarter.

The unfortunate reality of the sudden significant reduction in revenue that occurred in April 2020 was an adjustment to our workforce to balance our employee count with available work.

Believing that the economy could recover quickly, we implemented an employee furlough program that initially resulted in 15.5% year-over-year decrease in our full-time employees in April.

While the economy is still recovering, our volumes increased sequentially in May and June, and we are cautiously optimistic that this accelerating trend can continue.

Many of our furloughed employees have been able to return to work as a result of this improvement.

We took various other measures to reduce operating expenses while also controlling discretionary spending to reduce overhead cost.

In addition, circumstances associated with the COVID-19 environment created certain cost savings that are expected to diminish in future periods such as a reduction in group health and dental claims, travel and customer entertainment.

Second quarter of 2020 was one of the most difficult periods I have experienced in my career, and I am especially proud of our team's ability to respond quickly and manage our operations in this environment.

I think the quality of our results shows that our business model works in both good times and bad.

While certain challenges will likely continue until the economy recovers, we believe there will be long-term changes to supply chains that should create opportunities for the LTL industry.

With our industry-leading service, our unmatched long-term investments in service center capacity and the dedication of our OD family of employees, I'm confident that we are in a better position than any other carrier in the industry to respond to increased customer needs for LTL services.

As a result, I am also confident in our ability to continue our long-term producing profitable growth while increasing shareholder value.

Thank you for joining us this morning, and now Adam will discuss our quarter financial results in greater detail.

Thank you, Greg, and good morning.

Old Dominion's revenue for the second quarter of 2020 was $896.2 million, which was a 15.5% decrease from the prior year.

Our operating ratio improved 10 basis points to 77.8%, which contributed to our earnings per diluted share of $1.25 for the quarter.

Our revenue results for the second quarter reflect the 12.1% decrease in LTL tons and a 3.8% decrease in LTL revenue per hundredweight.

The decrease in the average price of diesel fuel reduced our fuel surcharges, which had an impact on our top line revenue as well as our yield.

Excluding fuel surcharges, LTL revenue per hundredweight decreased 0.5%, due primarily to the significant increase in weight per shipment.

Multiple factors can have a significant impact on revenue per hundredweight, most notably being the average length of haul and weight per shipment.

Changes in revenue per hundredweight are also not linear with respect to changes in our mix.

As a result, revenue per hundredweight is a tough measure to evaluate when the mix of our business changes so significantly like it did during the second quarter.

While the change in revenue per hundredweight might suggest otherwise, we continue to negotiate rate increases during the second quarter and believe underlying pricing trends remained relatively consistent.

We believe revenue per shipment is a better measurement as we focus internally on maintaining a positive spread between our revenue and cost per shipment.

The 4.9% increase in revenue per shipment excluding fuel surcharges for the second quarter was relatively consistent with the change in the first quarter 2020 as well as our long-term trends.

With respect to our revenue trend during the second quarter, revenue per day on a year-over-year basis was down 19.3% in April, but then sequentially improved in the remaining months of the quarter.

Average revenue per day in June, for example, was down 11.4% as compared to June 2019.

Our changes -- our change in volumes also followed a similar pattern.

On a sequential basis, LTL shipments per day decreased 15.7% in April as compared to March 2020.

Shipments per day then increased 9.7% from April to May and increased 7.1% from May to June.

The sequential acceleration in shipments and revenue has continued into July.

With only a couple of days remaining in the month, our current revenue per day is trending down approximately 3%, plus or minus.

As usual, we will provide the actual revenue-related details for July in our second quarter Form 10-Q.

Our operating ratio improved 10 basis points to 77.8%, which was a record for us despite the significant decline in revenue.

More than 2/3 of our costs are variable or semi-variable, and our team was effective in matching these costs with the change in revenue while also controlling our discretionary spending.

Our operations team also did an outstanding job with improving efficiencies during the quarter.

We have historically improved productivity during recessionary environments.

And from experience, we believe we can maintain much of this productivity once we return to a growth environment.

While the loss of revenues certainly had a deleveraging effect on our fixed cost, the improvement in our direct cost as a percent of revenue more than offset the increase in overhead cost as a percent of revenue.

Old Dominion's cash flow from operations totaled $312.2 million and $516.2 million for the second quarter and first 6 months of 2020, respectively, while capital expenditures were $67.9 million and $120.1 million for the same period.

We returned $146.1 million of capital to our shareholders during the second quarter and $342.7 million for the first half of the year.

For the year-to-date period, this total included $306.8 million of share repurchases and 34 -- $35.9 million in cash dividends.

Our effective tax rate for the second quarter 2020 was 25.7% as compared to 26.1% in the second quarter of 2019.

We currently expect our effective tax rate to be 26.0% for the third quarter of 2020.

This concludes our prepared remarks this morning.

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

(Operator Instructions) We'll take our first question from Jack Atkins with Stephens.

Congrats on a great quarter.

Thanks, Jack.

Thank you.

So Adam, if I could maybe start going back to your commentary on the pricing environment for a moment because I think in your prepared comments, you said that the pricing environment remains relatively consistent with what you've been seeing over the past several quarters with regard to the second quarter.

We have heard some anecdotes on public conference calls here, though, over the last couple of days that maybe there's been a little bit of an acceleration in pricing in the third quarter.

And I'm just curious if you could maybe talk about, have you noticed a shift in tone around pricing in discussions with your customers over the past several weeks, maybe a couple of months?

I don't know that we've heard a shift in tone at any point recently.

Certainly, our approach is always one of consistency, and I think that's what our customers appreciate.

They know what to expect out of us, and we're pretty disciplined in that respect to focus on what our cost inflation is every year and the pricing and the operating ratio on an account-by-account basis that we try to target with our customer accounts as well.

So for us, we just continue on with our consistent approach, and we've been getting increases all year long.

And in some cases, in the early part of this quarter, that may have impacted some of our volumes as well.

But like we mentioned earlier, we are starting to see some volumes coming back to us.

That's been an encouraging trend in some of the business that we may have lost back in April, some of that business coming back to us just based on the service that they received from the other carrier that they might have switched to.

And when they look and think about the total value equation, they didn't feel like they were getting the value there and they came back to us.

So that's what we'll continue to focus on.

It's just our consistent long-term type of approach to offset cost inflation that's worked for us, and that's what we intend to continue.

Okay.

Great.

That makes sense.

And then, I guess, for my follow-up question, just kind of thinking about the operating ratio here.

I guess normal seasonality 2Q to 3Q would call for some modest deterioration, but your commentary around revenue trends per day in July would indicate that maybe revenue is trending better sequentially.

But there may be -- or there's some temporary costs that are getting layered back in now that the business is stabilizing.

So Adam, can you maybe help us kind of think through those puts and takes and how that relates to OR progression as we move into the third quarter?

Sure.

Yes.

It typically is about a 50 basis point deterioration from the second to the third.

But in a normal environment, which clearly we aren't in, we would have seen the second quarter revenue up about 10% over the first quarter, and then third quarter increases slightly typically from the second quarter.

So you get, historically speaking, most of your operating ratio improvement there in the second quarter on a sequential basis, that is.

And so in this environment, if we can keep this accelerating revenue trend, then some of the leverage that we lost, particularly in overhead and within that overhead category on the depreciation, we lost quite a few basis points there from the first to the second quarter.

So if we can continue this revenue trend and revenue can meet or exceed where we were in the first quarter, then certainly that depreciation, in particular, unwinds and there should be some other costs that would unwind along with that.

And we fully expect to try to maintain the productivity.

That should continue.

Certainly, there will be some costs that will be coming back online in the third quarter.

But given all those factors, we certainly think that we should definitely be able to beat what that long-term deterioration is, simply, if nothing else, just the improvement that we should have the leverage on the depreciation.

We'll now take our next question from Todd Fowler with KeyBanc Capital Markets.

Greg, in your prepared remarks, when you talked about the quality of revenue and kind of improving that here in this quarter, I would think that that's maybe a little bit more challenging in a negative tonnage environment.

And maybe in the stronger tonnage environment where you can pick and choose the freight that you want, it's a little bit easier.

So can you expand on that comment and essentially what you're focused on and what you're able to do from a quality of revenue standpoint right now?

Sure, Todd.

No doubt, in this deteriorating environment that we just came through, we did see customers more likely to put out bids and rebid the freight and that kind of thing, and that was definitely a challenge for us.

As Adam mentioned, some of our -- we did lose some business in that process, but we gained some from others.

And fortunately, in other cases, we are gaining back some revenue that we lost earlier because of -- that couldn't meet the service -- same service standards that they had with us.

So it's ever a challenge.

That's our business.

And there's always -- you win some, you lose some.

But fortunately, at the end of the day, you hope that your service outshines -- the value outshines your competitor.

So far, so good.

We are regaining some of the business that we lost.

That's a good thing.

We've taken on some new additional business of late.

So I think there have been some opportunities that did open up for us as the quarter went on.

And as we roll into the third quarter so far in the month of July, it's definitely looking stronger.

Okay.

So Greg, just kind of comment that -- yes.

So some of the business that you lost early in the quarter maybe was more some price-sensitive business and it didn't fit as well in the network or wasn't as profitable and so it's okay to see that go away, but you're starting to see some of that come back now.

We are, coming back at our price.

Got you.

Okay.

That makes sense.

Coming back at our price.

We obviously lost it to a lower price, but that doesn't mean the customer got a greater value.

And it came back because of the value we provide.

Understood.

Okay.

And then just for my follow-up, Adam, do you have any color or anything you can share on the increase in the weight per shipment, the up 5% and kind of the level that you're at right now?

Is that something that you think is sustainable?

Do you see that as a shift in the business that you're handling?

Or is that indication of improvement in underlying economic activity?

Sure.

The weight per shipment has certainly been a wild swing since the trend that we had back in January and February right when things started changing.

Our weight per shipment increased above 1,600 pounds in March.

It reached a peak of 1,677 pounds in April, and then it started working its way back to sort of more of an average that we've seen over the longer term of about 1,600 pounds.

It was right at 1,600 pounds in June.

Much of that was in the early stages of some of these stay-at-home orders.

We had more national account business that remained open.

National account business typically has a higher weight per shipment than our smaller mom-and-pop type of accounts.

And so now some of those smaller accounts are starting to come back online, but we're still getting, I would say, more business from our national accounts.

They continue to be strong.

And when you think about some of the companies that are performing well in this environment and that have increased demand, it's a lot of those bigger on the retail side, some of those bigger retailers, and their weight per shipment just continues to be much heavier.

So it's a little bit different mix, but we're happy to see it kind of coming back to the 1,600-pound range.

And I would expect that as more of the smaller accounts come back online, it could drift down a little bit lower, but that 1,600-pound range has continued into July at this point.

And so if we can see that stay around that sort of level for the time being, that would be a good trend and contributor, too, to the overall revenue per shipment that we're seeing.

Our next question will come from Chris Wetherbee with Citi.

Maybe, Adam, I can hit back on pricing a little bit.

Can you give us maybe a little bit more specific sort of commentary where contracts are kind of being reset as you get through the quarter?

I don't know how much activity was actually happening in 2Q, but can you give us just sort of a rough sense?

It sounds like it's been consistent with what you've seen, but kind of curious if there's incremental color you can add.

Yes.

We kind of stopped talking about the -- our average contract renewals.

And some of that, we hear others kind of give the same commentary, and be it average increases in contracts or general rate increases, never seem to fully reconcile to even factoring in changes in weight per shipment to what some of the others might report as their revenue per hundredweight.

And so I would just say that looking at revenue per shipment and how that's trended, that's more in line with what we've been able to achieve with increases kind of on average.

And typically, that's been between 4% to 5%, and that somewhat falls in alignment as well.

We have a general rate increase that went into effect earlier this year.

That was at 4.9%, and that's generally the target that we have for our contracts as well.

So in -- that ballpark is really what our long-term trend has been.

It's what we continue to target, and it's what we've been able to achieve this year.

So it's been a good thing.

Obviously, the long-term success of that program, managing our cost, where there is a positive delta between our revenue per shipment and our cost per shipment, managing those 2 factors has really been a key contributor to our long-term operating ratio improvement.

Okay.

Okay.

That's helpful.

I appreciate that.

And then maybe when you think about volume opportunities and just sort of how you want to manage your network in the context of a potentially sort of tightening truckload cycle, when we've seen these in the past, there's been spillover into the LTL market.

You guys have always been disciplined about what kind of business you want to take on in those kinds of tight markets because maybe not all of it is what you really do want in the network.

But I don't know if it's too early to see any indications of that or maybe talk a bit about how you're thinking about handling that as you move forward, but just kind of curious what your expectations are potentially around that truckload opportunity as things kind of move in.

So maybe it would be kind of larger LTL, smaller LTL type of opportunities going forward.

Yes.

I mean, certainly, that creates some opportunities for us.

And it really just gets back to our sales team, their discussions and ongoing conversations with our customers, what their customer needs are and if they've got freight that needs to be moved and we can help out.

Obviously, volumes are off for us.

Even though they're getting better, they're still down on a year-over-year basis.

So we've got capacity and are ready to help our customers when we can.

If that's a heavier-weighted shipment that might have moved by truckload, there's no such thing as bad freight, there's just poorly priced freight.

So if we understand all the shipment characteristics and have got good pricing practices in place, which I believe we do, then certainly, we're willing to handle about any shipment that a customer would want us to.

The best thing that we would see, the changing trends in the truckload world would be that if the truckload rates continue to increase, typically, that has the effect of increasing many of our competitors' cost structure.

Many of our competitors use outsourced truckload for purchase transportation.

So if our competitors now have got some unexpected cost inflation, that's going to put more rate pressure for themselves to go back and increase their rates.

Typically, that has the effect, too, of moving normal LTL business our way.

So multiple opportunities, I think, both from a direct and indirect basis for the truckload world improving.

Our next question will be from Allison Landry with Crédit Suisse.

I was just wondering, Adam, could you give us a sense of how much the lower group health and dental expenses were in Q2?

I know that you said some of that may come back in Q3 and in Q4.

So just wondering if there's any color you could provide there to help us with modeling.

Yes.

I mean, certainly, that was a benefit.

Our overall fringe rate, though, in the second quarter was 33.6%, and we typically target about 34%.

I think that at the beginning of the year, that was something that we talked about.

And so just the change in -- we were at 34% in the second quarter of last year.

So those numbers are pretty comparable from period to period, but probably resulted, I would just say, fringes overall in a couple of million dollars, $1 million to $2 million of savings comparing what we had this quarter versus the -- what the fringe rate was in 2Q of '19.

So a little savings there.

There's always sort of puts and takes in that fringe type of number.

Certainly, we were fortunate, I guess, if you will, to see that group health and dental was down and some of the others were up.

And on a sequential basis, simply having more income in the second quarter than the first, that drives things like our 401(k) match that we give to our employees, and it's things like that, continuously improving our benefits overall and giving more paid time off and doing some of these things that continue to motivate our employees and we think helps drive the bottom line success as well.

They understand the success they drive for the company they get rewarded for.

So we think that's been a very motivational tool over the years for our employees and helping our culture.

Okay.

That's helpful.

And then I'm sorry if I missed this earlier in the remarks, but could you give us the productivity metrics in the quarter?

I think you said sort of they improved across the board, but some of the specific KPIs?

And then if you could give us a sense of where you are with furloughs and just your overall view on how to think about head count levels in the second half.

Sure.

Yes.

We didn't give the specifics on the productivity, but we saw really strong performance.

Our platform shipments per hour for the quarter improved 7.1%.

Our P&D shipments per hour improved 4.2%.

Even our line-haul laden load average did improve 0.8%, and we talked about before that not all costs are variable.

And running this line-haul network that we have, serving 238 service centers, there's a fixed element of running that cost.

But I was really pleased with all the level of productivity that we had.

And as such, when you look at our productive labor cost on a per shipment basis -- so again, getting things back to how they are per shipment.

Overall, they were right at about 3% cost inflation, and that's pretty much in line with the wage increase that we gave last year.

So we had an improvement.

We don't give this level of detail, but our P&D and our dock cost per shipment were essentially both flat, and then we had a little inflation overall in line-haul.

But that would be expected based on that trend.

And I would say, an update on the head count, overall in June, we were down -- the full-time employees were down 10.5% just comparing June of this year to June of last year.

So we brought many people back from the furlough program.

If you look and compare April to June, we've -- the head count is up about 4.5% overall.

But if you compare kind of where we are today to where we were in March, we're down about 1,400 positions overall, which is about 7%.

And based on where we are, our shipments per day should be higher in July than they were back in March.

So that was kind of what we talked about in the prepared remarks that, unfortunately, when we go through an environment like this, we've made adjustments like we have, but you find areas of productivity when each department leader is going through evaluating their cost.

And costs don't save themselves.

It takes action and a plan.

We've gone through and we figured out ways to be able to do more with less, and I think that's what we're seeing now.

But if our accelerating trends continue, we certainly will have to continue to bring back some more employees.

We fully expect and we like that because it'd go hand-in-hand with the increase in volumes.

But I think overall, when you look at sort of the level of head count with the volumes, those should come back in alignment and eventually show some improvement there.

Our next question will come from Jason Seidl with Cowen.

I wanted to talk a little bit about the residential deliveries.

One of your competitors basically said they saw an uptick, almost a doubling in the percentage.

It still ticked down a little bit for them, but definitely above the prior year.

Can you talk a little bit about your experience with the residential market and how you see the margins there for OD?

Jason, we do not measure the number of residential deliveries that we had, and I didn't anecdotally hear a whole lot of commentary about additional residentials.

I know we had a few more in one segment of our business, but I don't think we saw a significant uptick in residentials at all.

Okay.

And would you say that the margins on your residential deliveries are equal to or better than the regular margins?

We -- Jason, all of our accounts, we price them based on the cost that those accounts require, and we price them accordingly.

We price in the residential stop.

There is a fee for that, as you know.

We price them accordingly based on the cost.

So I think that's an account-by-account basis, but they are not necessarily better or worse than the other business.

That makes sense.

And my follow-up is going to be on any potential acquisitions, any outlook.

I know in the past, you've mentioned your desire to potentially add some, I guess, business lines that would be complementary to your LTL operations.

We've also been hearing in the marketplace that the appetite for acquisitions has picked back up a little bit from sort of the start of COVID.

Wondering what your thoughts on that going forward are.

At this point in time, Jason, no.

We -- maybe we have somewhat of an appetite for an acquisition.

I just -- I don't know who that is or exactly what that is.

At this point, we're not looking at anything currently.

Well, we always have opportunities cross the desk, and we evaluate those as they come along.

But currently, at this time, we're not looking at anything in particular.

We'll now take a question from Scott Group with Wolfe Research.

So Adam, just on the 3% drop in rev per day in July, I missed it if you said so.

But directionally, can you talk about sort of the tonnage weight and yield trends within that, just directionally?

Yes.

A lot of that is -- it's mainly on the tonnage.

And so you've got some of the yield, if you will, sequentially that's moving up a little bit.

But yes, we're continuing to see acceleration essentially on the shipments and the times, and our yields continue to perform as well.

But overall, it's good to see.

Obviously, that coming back closer to kind of where we were last year after going through the second quarter and revenue being down double digits certainly feels a lot easier to manage and should produce a lot more opportunities once we can get back to revenue being flat and eventually get back to a growth environment, which is what we're more used to.

Okay.

And then I just wanted to ask a bigger picture question.

So you're seeing the biggest revenue drop in a decade, and you put up record margins.

And by the way, it's not just you.

We've seen this from some of the other trucking companies this quarter.

I'm just trying to understand how this is happening.

You mentioned a little bit of that health care cost.

Do you think there's anything else unusual from a cost standpoint, either fuel or lack of congestion or something else?

I guess, ultimately, what I'm trying to figure out is, next year, we're going to have good volume and revenue growth, hopefully.

So should we be thinking about strong incremental margins next year and getting to a mid-70s operating ratio?

Or is next year a year we get the revenue but maybe we don't get the incremental margin because there was something that was just unusual helping in this environment?

I guess that's the question.

Yes.

Let me say this.

There were certainly some things that worked in our favor, not just ours but probably the entire industry.

Obviously, the traffic congestion was a lot less than it has been in the past.

We did save some money on the group health and had less spend on customer entertainment, some marketing areas.

In marketing, we're down from what we normally see.

So there were some things that did save some short-term type cost.

But I'll say this, when this thing first started, we sat down as a management team and we made a plan, and the one thing that I made very clear was we had to execute on that plan.

We didn't dilly-dally.

We executed, and I think everybody took it very serious what they had to do.

Our big concern was continue to give the type of service that our customers are used to.

We didn't cut anything from that standpoint.

We were very pointed and determined in our efforts to continue those -- all the different service measures that we have and to continue to improve on those.

We did it, and I think you saw it in reduced claims.

And our on-time percentage was still above 99%.

So we did not slack off in any way, shape or form from that standpoint.

I think our customers accepted it.

While we may have saw some business walk for price early in the quarter, they started to come back later in the quarter as they realized they weren't getting what they were used to with OD.

So yes, there were some areas where we did save some money, but we did a lot of the things that we had to do to help ourselves from a productivity standpoint.

So yes, some good.

Certainly, we made a lot of things happen that we're very proud of at this point in time.

As far as next year, certainly, we think that there is an opportunity to continue to have the same type of productivity levels of improvement that we had in the second quarter.

You can measure it from there.

We certainly expect our revenue growth to come back.

Not exactly sure where that's going at this point in time, who knows where the economy is going to go.

We're facing a lot of things later this year and on into next year with the election year and all that.

We got a lot of challenges ahead, but we do definitely think if we have some growth, that we can drive the OR lower.

I don't think there's any doubt about it.

And as we've said before, we think we can manage through the good times and the bad.

I think we've proven that in the past, and I don't think there's any doubt, we will continue to prove that into the future.

We'll take our next question from David Ross with Stifel.

Just to follow up on that a little bit specifically as it relates to fuel.

It seemed to be a tailwind for a lot of carriers in the quarter.

What was the impact, Adam, of the sharp drop that we saw from March to April in fuel?

Was it a good guy in the quarter?

Significant?

Dave, we've tried to structure our fuel tables to really where they don't really impact us on the bottom line too much one way or the other.

We got hurt a little bit a few years ago back in '16 and really didn't have the lower end of our table where it needed to be.

But we addressed that throughout the year and then fully addressed it when the next GRI came about.

So net-net, we tried to do some back of the envelope type of calculations and believe it was fairly minimal.

On a net basis, maybe overall, slightly good.

But the hard thing to try to negotiate and do these back of the envelope type of calculations is the simple fact that fuel is just another element that's -- of pricing that's negotiated with our customers.

So if you got somebody that wants to make -- in this environment, look like their base rates were better, that they didn't take an increase but we got an overall improvement in our fuel contribution or some other type of element that really gives us the same level of revenue, then that just becomes a tool to negotiate with.

So it's really hard to try to make that comparison, but I'll say that the change on the cost side -- I mean, obviously, it hit us hard on the top line.

And then on the cost side, you see the change and the improvement in the operating supplies and expenses.

A big driver of that, not all of it, but a big driver of that was the decrease in fuel.

Typically, when fuel changes so significantly like that in a period, you'd see the corresponding increase in your labor cost.

And I think that hit kind of masked the overall improvement, if you will, to keep our labor cost essentially flat like we did in this environment, with the surcharge revenue being down so much.

It was really impressive to me.

I thought -- and that was the biggest driver in our ability to improve the operating ratio, was what we were able to accomplish with all of those labor cost as a percent of revenue.

And then another thing impressive has been the insurance and claims line item.

It's been remarkably low and steady in a tough insurance market for a long time.

Can you talk a little bit more, either Adam or Greg, about what really makes it a nonissue for you guys and not something that investors had to worry about on the expense surprise side?

So for -- there's 2 elements that go into that insurance and claims line.

That's our auto accidents.

We call it BIPD, bodily injury and property damage, in the cargo claims.

And fortunately for us, our cargo claims has consistently improved and almost nonexistent at a record 0.1% for this most recent quarter.

So that element has come a long way.

You go back to the recession when I felt like we really differentiated ourselves -- the great recession of '09, when we really differentiated ourselves from our competition.

We were above 1%.

And we believe that that's where the industry average is likely, still north of 1% from the data that we get and feedback from customers.

So that's a good thing, that we've consistently driven that claims ratio down.

I mean on the auto side, certainly this year, and it's in the second quarter, like most of the other carriers, we're facing significant inflation with our insurance rates.

But we've been very fortunate in the fact that all the investment in new equipment and safety systems and training and so forth that we've made over the years, those all have accident mitigation type of tools with them in our tractors now, and then just continuous training on the dock and other places that we've done.

And so there's an element that goes into this line.

There's an element in our salaries, wages and benefits that goes hand-in-hand with those safety programs.

And we've continued to see workers' comp, which is in the benefit line, improvement there.

And so I think it's just a -- it's been a focus of our company to have safety programs in place and to always be trying to continuously improve those, and I think we've seen a big benefit.

The insurance line is one, but there's a hidden one that's in the fringe benefit line on the workers' comp that goes hand-in-hand.

So if we can just keep our accident frequency ratios low, those continue to improve and try to keep severity low as well, and some of that is mitigated by the investment in technology on the tractors, then hopefully we can keep that line item consistent like it has been in that 1% to 1.2% type of range.

Our next question will come from Ari Rosa with Bank of America.

So Greg, you mentioned in your opening remarks some lasting changes to supply chains as a result of the pandemic, which you think could benefit LTL carriers.

I was just hoping you could elaborate on that a little bit and get into some details, and then maybe, in the process, touch on what kind of e-commerce volumes you're seeing.

And if you've seen a big uptick in demand on that front and how it might impact your business.

We did see increases on those e-commerce type accounts.

We did see some big revenue jumps with those particular accounts on the inbound side for us, particularly.

I think you know we don't participate in a lot of home deliveries and that kind of thing, but there's another end of that.

So we did see some upticks on those accounts, which is a good thing, and that was really what those comments were pointed towards.

I think we'll continue to see those type customers business bases grow.

So I think that's a good thing for us, generally speaking.

And does -- do the characteristics of that business from either a pricing or kind of weight standpoint vary in terms of how it impacts your costs?

I mean I imagine you're still going to be pricing appropriately, as you've kind of hammered home for years, but how does that business vary in terms of its characteristics?

Those accounts here, they have practically everything.

They have a very, very wide variety of products.

So yes, each account that goes into those is vastly different, but they're all priced accordingly.

I don't think there's anything different, generally speaking, than with a lot of our other accounts, but we will price them accordingly regardless of the product.

I'll just add to that.

We've seen -- I was just going to add that we've seen growth over the last couple of years in our retail-related business.

It's close to 30% of our overall revenue so we're still closely aligned with the industrial sector.

But nevertheless, that business has been growing.

So this has been a trend that's been evolving but certainly accelerating in this environment.

And things aren't going to completely change overnight in terms of supply chains and whatnot.

But certainly, we feel like that more fulfillment centers, things of that nature as they continue to be built around the landscape, and much of the freight that will be inbound to those fulfillment centers will be more conducive to LTL type quantity shipments.

And so we certainly believe that we've already been winning business in that area and can continue because to be able to maintain and manage inventory quantities and the number of SKUs that they want to have in those facilities, you've got to have tight inventory controls, and that requires confidence in your carrier to deliver on time and without damage.

And certainly, I think we've proven that we do that better than anyone.

And I think that we'll be able to continue to participate, and that element of business continuing to give us a little bit market share.

Got it.

That's really helpful color.

And then I just wanted to touch, for my last question, on the operating ratio.

And I know this is -- obviously, you guys have addressed this a bit.

But really impressive on the cost front.

Is it appropriate for us to be thinking about a sub-80% operating ratio as kind of the new plateau?

And would it be a surprise to see that tick back up if congestion turns to highways and that sort of thing?

And then in the past, you've occasionally provided a view on where you expect incremental margins to be.

I think you've kind of talked about something in the 25% range.

Should we be looking for kind of a step-up based on this quarter and just the impressive performance you're able to deliver?

I mean, certainly, there will be some costs that will come back into the business and we'll be prepared for those, but there should be other cost savings opportunities.

Keep in mind, with the big drop in revenue that we saw, typically, when you look long term, it's the density.

The revenue per service center factors, as that has increased, the operating ratio has improved.

And when we look at individual service centers and regions around the country, we know that we've got ongoing opportunity to improve our operating ratio.

And it really is driven down to the service center level when you look and think about all the dollars that we've invested over the years in expanding our door capacity and then the individual opportunity to improve the service centers ratio, all those 238 service centers roll up into the company average.

And you might have some that we just expanded and maybe hurt the operating ratio, but you've got a much larger group that were leveraging all the fixed costs there because we own most of our facilities.

And so it gives us confidence that we can continue to drive this operating ratio lower once the density factors come back.

But it's -- the density and the yield, and both of those generally require a positive economic backdrop to support each, those are the 2 key factors really to drive long-term operating ratio improvement.

And we're going to continue to focus on those.

It's a matter of managing revenue quality and cost, and we've got to consistently do both.

We've got to continue to look for ways that we can keep our cost inflation low while continuing to also give the service to our customers that provides value and allows us to get the consistent rate increases that we need as well.

And so this just continues to build on itself and also allows us to do the most important thing, and that's taking care of our employees and keeping them motivated, keeping them engaged to continue to give service, to be productive.

That employee and our family culture that we have is really what's been driving our long-term success, and we want to make sure that we don't miss out on that element as well.

Our next question will come from Amit Mehrotra with Deutsche Bank.

All the good questions have been answered -- asked to answer so I guess I'll have to ask a couple of bad ones, so forgive me.

I'm just trying to think about the sequential -- I mean, I know OR is kind of an output of various moving parts.

And as I think about the sequential movement from 2Q to 3Q, I just wonder why the output won't actually be more challenged, especially given what's happening on the weight per shipment side.

Because correct me if I'm wrong, Adam.

You mentioned that weight per shipment kind of was volatile, but then maybe went down towards the end of the quarter.

So as shipments are going up, weight per shipment is coming down.

You're adding resources to serve the shipments.

Wouldn't that represent -- I mean, it's maybe overly simplistic.

But doesn't that represent maybe an incremental headwind on the OR as we think about kind of the moving parts?

If you can talk about that.

Yes.

I mean, certainly, there are a lot of moving parts right now as we work our way through this environment.

And so yes, sequentially, the weight per shipment is coming down, but it's up on a year-over-year basis.

Our weight per shipment was pretty low last year in the third quarter.

But I think that we'll continue to keep our focus on maintaining our revenue quality.

And if we can keep that revenue per shipment high, which will -- we have no intent to change anything related to our pricing philosophies.

A little bit lower weight per shipment then certainly can -- if you've got the same cost per shipment to handle, then that can put a little compression on that individual shipment's margin.

But again, getting the leverage from the revenue growth like we talked through earlier, that's -- if you just sort of run out for the quarter kind of this trend that we're seeing in July, you'll have significant improvement sequentially in revenue.

And so the leverage that can come from that is significant and should offset any other type of challenge that we have.

Typically, our overhead cost average 20% to 25% of our revenue.

And in the second quarter, they were about 24%.

It's a period with revenue weakness.

And even though the aggregate cost -- absolute costs were lower on a year-over-year basis in the second quarter and they were lower in the second quarter than the first, some of the actions that we took, we obviously saw a lot of the increase in those cost as a percent of revenue due to the revenue weakness.

But sequentially, if we can show that improvement then -- and not increase those overhead costs, you're going to get a lot of leverage there.

And we'd expect to be able to work that 24% back down closer to the lower end of the range.

Certainly, it would be the idea.

And then we just got to keep the focus, and I can assure you we will, on maintaining all of our labor to revenue statistics, all of our productivity across all the areas of the operations.

That's the biggest cost element that we have.

But again, when density comes back into the network, as we were talking about our line-haul cost earlier, that should improve that line-haul cost that's more semi-variable.

So the density coming back and the revenue, certainly, that should give us much more opportunity than any other pressures related to a little bit lower weight per shipment should present.

Yes.

Okay.

And then I don't know if I missed it, did you talk about year-on-year tonnage in July?

I wasn't sure if you had mentioned that or not.

Well, I just generally said -- because July is not done and we got out of the habit of giving the number in the middle and -- even though we got 2 days left, but given an intra-month exact number and then the comparison that, that created and sometimes panic or sometimes exuberance that maybe neither was warranted of the change between the day of call and then what the actual number was.

So I kind of talked around it, I guess, but we're down -- the revenue is down about 3% sort of plus or minus at this point.

We'll see where we end up with these next 2 days of revenue.

And the weight somewhat in that -- the weight per day is somewhat in that same ballpark.

So that's continued to show improvement from where we were in June.

July has been a really strong month.

Typically, July is a month that the revenue falls off a couple of points from June.

And to see the revenue continue to accelerate, and we've actually got revenue per day that's higher in July, certainly, that's a big benefit and provides us with a lot of encouragement as we go through the third quarter to see that these trends continue because, usually, July is the weakest month of the third quarter.

So we'll continue to see how these trends play out, but it certainly gives us a lot of encouragement to see our customers continue to reopen their business, to increase the levels of business they're giving us and some of the new wins that we've been able to create, while our sales team hasn't even really been able -- be able to be out on the street making sales calls.

So it's been a coordinated effort.

And our sales team, got to give them a lot of credit for having to change the way they operate, how they communicate about the coordination between our sales, cost and pricing team and continue to stay engaged and strengthening relationships with our customers.

I think that's a big piece of not only our long-term numbers, but the improvement that we're starting to see as we go into the third quarter.

Let me add to that.

We saw our revenue trends start to improve in June.

And so far, through the month of July, they've continued to be very consistent, and they look good down the line.

If you look at revenue per shipment, weight per shipment per hundred and all those different things that we measure from a revenue standpoint, they're all consistent and look very good so far.

So we hope that trend will continue.

But we're encouraged, but not concerned at all.

We're very encouraged at this point.

Our next question will come from Jordan Alliger with Goldman Sachs.

Just a big picture question.

Your service standards have always been a tremendous part of your competitive advantage in the LTL space.

I'm just wondering, the industry itself, the competition -- or is the competition catching up or doing things in the right direction?

Does that impact the gap between you and the competition?

Or is it still head and tails above everyone else if the competitive advantage generally remains?

Yes.

Jordan, let me say, first off, everybody has service standards.

And while in a lot of cases, they're very similar carrier to carrier, ours are, I think, in line with most of our competitors or better.

But service runs a lot wider gamut than just A to B on time.

And there's a lot that goes into service, and I think that's where OD excels compared to our competitors.

And if you look at all of the things that we've done over the years -- and we talk about the low claims ratio, but that's a big part of it.

A to B and on time is a big part of it.

Our employees are engaged.

They know what their role is as it relates to service, and they execute on that role every day, whether it's a dock worker or the person that answers the phone in the office and talks to our customers.

How they deal with our customers, making timely pickups, making appointment times, all those things, there's just an awful lot of elements that go into service.

And I think we measure up far better than our competitors on a day-to-day basis.

And that's why I think -- and we sometimes lose business over price, but it comes back because of service.

And at the end of the day, we're getting it back, and we're getting it back at our price.

So there's an awful lot that goes into that.

We put a lot of work into that over the years, and it's paying off.

So we will continue to focus in that area and continue our commitment to our customers.

So it does make a difference.

I hope that answers your question.

And our next question will come from Ravi Shanker with Morgan Stanley.

Christyne on for Ravi.

Maybe circling back to some of the commentary around e-commerce and sort of a tangential theme to that.

Are you guys seeing any -- or do you expect to see any sort of blurring of lines between the LTL and TL operations kind of moving forward over the next couple of quarters and years as length of pull seems to be shortening on the TL side?

And on the LTL side, it seems like the shipments are getting a little bit heavier.

Are you guys seeing any, again, more blurring there?

Not that we can tell, to be honest with you.

No.

Yes.

Certainly, yes.

I think as suppliers try to get closer to their customers, the TL length of haul would get shorter, but we haven't seen that trend at all in our business.

Our length of haul has been very consistent over the last several years.

And to be honest with you, if anything, we've seen a little bit of an increase of late.

So if there's blurring of the lines, we can't see it.

There's still a pretty big distinction there.

Got it.

Okay.

That's helpful.

And then maybe just one follow-up, sort of bigger picture.

Has the strategy evolved at all in the last couple of months around electric vehicles, whether that's in P&D or maybe some shorter haul -- other shorter haul operations for you guys with some of the developments that we've seen from the OEMs in the last couple of months here?

Well, let me say this, I don't think that technology has evolved to the point that it's all that useful for us yet.

There's still a lot of issues with it.

I know you -- we all hear, see and read things that sound good, but I'm not sure the practicality in our particular company.

It's just not -- the technology is not there yet.

We can't make it work as it currently stands today.

So I think it'll continue to evolve and I think there will be an application down the road and maybe sooner than later, but we'll just have to wait and see.

There's still a lot of issues with it at this point.

And hopefully, it'll get there, but it's just not there yet.

And that does conclude our question-and-answer session for today.

I'd like to turn the conference back over to Mr. Gantt for any additional or closing remarks.

Okay.

Thank you all for participating today.

We appreciate your questions, and please feel free to call us if you have anything further.

Thanks, and I hope you all have a great day.

And once again, that does conclude today's conference.

We thank you all for your participation.

You may now disconnect.