Old Dominion Freight Line Inc (ODFL) — Q1 2022 Transcript

Thank you. Good morning, and welcome to the first quarter 2022 conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay, beginning today and through May 4, 2022 by dialing 1 (877) 344-7529, access code 8164823. 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. As a final note, before we begin, we welcome your questions today, but we do ask in fairness to all that you limit yourselves to just a few questions at a time before returning to the queue. Thank you for your cooperation.

Good morning, and welcome to our first 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 successfully launched another year by delivering first quarter results that included new company records for both revenue and earnings per diluted share. We began the year with significant momentum in our business and expected that we would continue to win market share in 2022. This expectation has already become reality, as the 32.9% increase in revenue was the fifth straight quarter where we recorded double-digit revenue growth. We also improved our operating ratio to a first quarter company record of 72.9%, which drove our seventh straight quarter of double-digit growth in earnings per diluted share. Our revenue growth for the quarter included a 17.4% increase in LTL revenue per hundredweight and a 12% increase in LTL tons per day. The improvements in both freight density and yield created operating leverage that allowed us to improve our cost categories as a percent of revenue, which also drove the improvement in our operating ratio. Density and yield are the key ingredients to long-term improvement in our operating ratio and both generally require the support of a favorable domestic economy. We expect to further improve each of these two elements as we work through 2022. Demand for our superior service has remained consistently strong, and we do not see that changing in the foreseeable future based on recent conversations with both our customers and our sales team. We continue to receive feedback regarding the general lack of capacity within the LTL industry. This feedback is not unexpected, given that the LTL industry has seen a net decrease in the number of service centers over the past 10 years, at least for the public group, excluding OD. Customers also appear to be dealing with lower inventory balances than they would prefer, which can result in missed revenue opportunities for them. We have unfortunately heard similar stories from our suppliers and have seen little improvement with their inventories this year. We believe these issues are driving many new customers and increased shipments from existing customers to OD. Despite all of the general industry and supply chain challenges, Old Dominion has continued to maintain our service center capacity to support our customers' growth. This has been and remains an integral piece of our value proposition, and we are well positioned to benefit from the continued strength in demand for both our superior service performance and network capacity. We have opened three new service centers this year and currently have approximately 15% to 20% excess capacity. These additions were part of our 2022 expansion plan that targets an additional five to seven new facilities this year. While our service center network is in good shape, we are continuing to work on the other two pieces of the overall capacity equation. We increased our average number of full-time employees by 18.5% during the first quarter, and we expect to continue hiring additional employees during the second quarter to support our anticipated growth. As the capacity of the OD team increases, we would like to reduce our reliance on purchased transportation. To accomplish this, however, we will need to increase the capacity of our fleet. While our 2022 capital expenditure plan includes approximately $485 million for equipment, we are experiencing delays with the delivery of new equipment. These delays were anticipated and limit our ability to effectively match the receipt of new equipment with the expected seasonal increase in our volumes. As a result, and similar to 2021, we will operate existing equipment that would have otherwise been replaced and use purchased transportation as needed to support our growth. As part of our effort to deliver best-in-class service for our customers, we remain committed to ensuring that each element of capacity is in place to support our ability to win long-term market share. As we continue to manage through the short-term challenges within the current freight market, we will also maintain our focus on long-term opportunities for our business by continuing to execute on our long-term strategic plan. This plan has helped us achieve a 10-year compound average growth rate in revenue and earnings per diluted share of approximately 11% and 24%, respectively. As part of this plan, we have consistently invested significant resources to support the doubling of our market share over the past 10 years. This has included a significant investment in our OD family of employees to help ensure that each employee is motivated and rewarded for providing superior service to our customers. We believe that consistently providing customers with superior service at a fair price and regularly investing in our people, equipment and network capacity to stay ahead of anticipated volume growth will support our long-term growth initiatives. As a result, we are confident in our ability to continue to produce further profitable growth and increased shareholder value. Thanks for joining us this morning, and now Adam will discuss our first quarter financial results in greater detail.

Thank you, Greg, and good morning. Old Dominion's revenue for the first quarter of 2022 increased 32.9% to a company record of $1.5 billion. While our operating ratio improved 320 basis points to 72.9%. The combination of these factors resulted in a 52.9% increase in earnings per diluted share to $2.60 for the quarter. Our revenue per day increased 30.8% as the first quarter of this year included one extra work day. This growth was balanced between increases in our volumes and yield, both of which continue to be supported by a favorable domestic economy. We continue to win a significant amount of market share as demand for our superior service and available network capacity remains consistently strong during the quarter. As a result, the year-over-year growth in our revenue and volumes continued to trend above our longer-term averages. LTL tons per day increased 12% and our LTL revenue per hundredweight increased 17.4%. While changes in our freight mix contributed to the increases in this yield metric, the 10% increase in our LTL revenue per hundredweight, excluding fuel surcharges, reflects the success of our long-term pricing strategy. Our consistent strategy is designed to offset cost inflation while also supporting further investments in capacity by focusing on the individual profitability of each customer account. On a sequential basis, revenue per day for the first quarter increased 1.2% as compared to the fourth quarter of 2021, with LTL tons per day decreasing 1.4% and LTL shipments per day decreasing 2.2%. Our revenue per day performance during the first quarter, both with and without fuel surcharges, exceeded our 10-year average sequential trends, although our volumes were below our 10-year trends. It is important to remember, however, that our 10-year average trends include the doubling of our market share. As a result, there may be quarterly periods where sequential performance may be below our 10-year trends despite solid year-over-year performance. The first quarter is a good example as we believe we won a significant amount of market share and produced solid profitable growth as a result. The monthly sequential changes in LTL tons per day during the first quarter were as follows: January decreased 5.8% compared with December, February increased 5.1% versus January, and March increased 3.6% compared to February. The 10-year average change for the respective months is an increase of 1.6% in January, an increase of 1.7% in February and an increase of 5.6% in March. While there are still a few workdays that remain in April, our revenue growth continues to be very strong and reflects the favorable demand environment described earlier by Greg. Our month-to-date revenue per day has increased by approximately 28% compared to April of 2021. We will provide the actual revenue-related details for April in our first quarter Form 10-Q. Our first quarter operating ratio improved to 72.9%, with improvements in both our direct operating costs and overhead costs as a percent of revenue. Within our direct operating costs, improvement in our salaries, wages, and benefit costs as a percent of revenue effectively offset the increase in expenses for both our operating supplies and purchased transportation. The increase in operating supplies and expenses as a percent of revenue was primarily due to the increase in the cost of diesel fuel and other petroleum-based products. We improved overhead costs as a percent of revenue during the first quarter, primarily by leveraging our revenue growth and controlling discretionary spending. As mentioned on our fourth quarter call, we expect our core inflation, excluding fuel, to be between 4.5% to 5% for the year, with higher inflation in the first half of the year that is expected to moderate in the back half. We believe our fuel surcharge program is effectively offsetting the increased cost of our fuel and our yield management strategy is effectively offsetting cost increases in other areas. As we continue to experience cost increases related to our real estate network as well as with our equipment, parts, and repairs, it will be critical to maintain our focus on productivity while continuing to control discretionary spending to minimize the overall effect on our cost per shipment. Old Dominion's cash flow from operations totaled $388.7 million for the first quarter, and capital expenditures were $93.7 million. We currently anticipate our capital expenditures to be approximately $825 million this year, which includes $300 million to expand the capacity of our service center network. We utilized $438.4 million of cash for our share repurchase program and paid $34.2 million in dividends during the first quarter. The total amount for share repurchases includes a $400 million accelerated share repurchase agreement that was executed during the first quarter. Our effective tax rate was 26.0% for the first quarter of 2022 and 2021. We currently expect our annual effective tax rate to be 26.0% for the second quarter of 2022. This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.

Adam, if I could start with you. In the last few quarters, you can kind of throw all of your historical seasonal operating ratio trends out the window, just a very robust pricing environment. You're doing much better than 10-year trends. As you start to anniversary some of these big pricing and tonnage moves over the last several quarters, do you envision a return to kind of the long-term trend margin seasonality? Or some of these vast market share gains that you're making going to continue to make those trend in a more favorable momentum?

Well, I think that certainly, some of the quarters, those trends are very consistent. We've talked before about the first quarter and the fourth quarters can be a little bit more movement versus the average, just given the variability at times with revenue trends in those periods and certain costs that trend in various ways in those periods as well. But I think we've certainly performed very well the last couple of years and produced a lot of operating ratio improvement. I think regardless of the seasonal sequential changes from quarter to quarter, we always talk about over the long term that we generally expect we've seen and would expect to continue to see 100 to 150 basis points of operating ratio improvement. And a lot of that gets back to our focus with our pricing philosophy. We try to achieve revenue per shipment growth of 100 to 150 basis points above our cost per shipment inflation. And when you look over the last 10, 15 years, including fuel in both of those metrics, that's what we've been able to achieve. So certainly, some years when we've got significant revenue growth like we saw last year, and certainly, in the environment that we're in right now, where we're growing revenue at about 30% in the first quarter, a little over that. Certainly, it's a good environment to keep driving improvement in the operating ratio maybe above those longer-term averages. But over time, that's certainly part of the focus is to continue with that same type of mentality with our yield management philosophy.

Got it. And a follow-up for Greg. Last quarter, you specifically called out some of the issues you've had with some of your suppliers being unable to get the equipment that you would have liked to have to grow and maybe some of the elevated maintenance expense associated with that. But given how low your capital expenditures were in 1Q vis-a-vis your full year number, are you expecting some of these supplier constraints to kind of lift so you'd have a very back-end loaded spend and get the equipment that you're looking for by the end of the year?

Yes. I'm not sure things will improve significantly. The equipment we anticipated receiving this year was scheduled for later delivery than usual. Normally, we would start receiving trucks from late in the first quarter through early fall, and by that point, deliveries would mostly be finished, leaving us with what we've purchased for the year. This year, however, it's a lighter build from the start, as we were informed. So the situation is simply that it's arriving a bit later. We're receiving less than we initially hoped for, and it's coming later than expected.

So I guess, maybe to start, Adam, if we could go back to your April commentary for a moment. Obviously, there are a lot of changes taking place in the freight markets kind of broadly. I was just maybe curious if you could kind of comment on April, relative to March so far and how it's trending versus either your expectations for April as you were kind of going into the months or just relative to normal seasonality, just sort of curious if you could maybe kind of give us an update there on how the month has trended versus plan.

Yes. It's, I mean, a continuation of strong revenue growth, 28% is about where we are. Continuing to see strong yield performance, which has certainly continued throughout the first quarter and same types of trends into April for sure. So it's a reflection of our ability to continue to win market share. We talked about it earlier that, as we continue to have conversations with our customers and with our sales team. We continue to get positive feedback as it relates to demand for our service. And many of these conversations center on the lack of general capacity within LTL and LTL is different from truckload. I think a lot of shippers have seen the value of LTL. And certainly, the e-commerce effect on supply chains, there's been movement of freight within LTL that we believe will stay, and we believe we'll continue to see tailwinds on over time for the industry, and we think we can be the biggest participant in winning share as that industry continues to grow, much like we've been the biggest share win over the last 10 years. So certainly, that's our plan, is to keep investing ahead of growth and keep delivering service value that's better than anyone else in our industry. We've got an unmatched value proposition and our customers continue to respond to that. And so that will be our focus, is to continue delivering best-in-class service and making sure we've got the capacity to support our customers' growth.

Okay. No, that makes sense. And that's great to hear on April. So I guess maybe for my follow-up question, just kind of going back to Jon's point on operating ratio and sort of thinking about seasonality into the second quarter. Typically, over the last couple of years, you guys have seen between 350 to 400 basis points of sequential improvement, 1Q to 2Q. Adam, is there anything to kind of keep in mind as we sort of think about this year, in particular, moving from the first quarter to the second quarter? And do you think that, that type of normal seasonality is the right way to kind of think about it? I mean, that would imply an operating ratio in the upper 60s. So just sort of curious if you could maybe give us some thoughts on that?

Certainly, in the first quarter, we saw sequential changes from the fourth quarter that exceeded our expected seasonality. Some of the benefits we observed deviating from the 10-year trend were in our miscellaneous expenses, which were lower than the usual 0.5%. We also experienced favorable conditions in general supplies and expenses, reflecting our control over discretionary spending. There are times when we gain advantages in miscellaneous expenses, though it can vary, usually around 0.5% up or down. We anticipate that some of these items may increase. Looking at the typical seasonality from the fourth quarter to the first and then to the second, our operating ratio would have been just above 70%. While we would be satisfied with that, our focus remains on achieving an operating ratio that begins with a 6, which we consider favorable.

James on for Allison. Actually, just to clarify on the previous question, you expect both those to normalize moving forward and not necessarily was it a reset in this quarter in terms of those expense levels?

Are you talking about the general supplies and expenses and the miscellaneous expenses?

Correct.

Well, like I said, miscellaneous generally is around 0.5%, and it was at 0.2% of revenue in the first quarter. So we would expect that to move back to where it's historically trended. Now again, it's not to say that some of the favorable trends that we saw in the first quarter couldn't repeat. There's a lot of elements that go into that miscellaneous expense. But it's more normalized around that 0.5%. And then certainly, in some of the things in the general supplies and expenses, we could continue to see some increases there as well. But no specific guidance, if you will, to say what that's going to be, but it wouldn't be unexpected to see that increase, if you will.

I just wanted to clarify. You mentioned having 15% to 20% capacity in your service centers and also that there were some issues with equipment deliveries. Overall, what is your current capacity across the three metrics you've mentioned—employees, trucks, and service centers? Do you believe you have the capacity to take on additional volume at this time?

Well, certainly, that's our expectation is to continue to produce growth. And the piece of the capacity equation that you always have to look at is on the service center side. It takes doors to process freight within LTL. And so that is the more determinant figure in terms of how much from the levels where we currently are that we can continue to grow. And we generally like to have somewhere 20% to 25% excess capacity. So our CapEx plan this year includes about $300 million to further expand the capacity of our overall service center network. We've opened the three facilities so far this year, and we've got more that are slated as we proceed through the year to keep expanding the number of service centers and some of those dollars are increasing doors at existing locations as well. Now when it comes to the people side of the equation and the fleet, much like you've seen in our numbers over the last couple of years, the lever that we pull there is we have to use purchased transportation if we need to supplement one or the other of those pieces of the capacity equation. Certainly, we've stepped up the increased use of purchased transportation. We were actually pleased to see that the outsourced miles that we had in the first quarter have actually trended down versus where we were in just the fourth quarter of last year. So we're continuing to make progress there as we continue to add people to our OD family. We had an 18.5% increase in the number of full-time employees. So we're continuing to be successful there and attracting new people to our business and retaining those that we already have. And then we're continuing to balance the capacity of our fleet. As Greg mentioned in prepared comments, there are multiple ways to do that. We're having to hang on to some of the older equipment. We will get some relief later in the year, we hope, with deliveries of what's been ordered, if you will. But again, we can use purchased transportation as needed to supplement there. So I think we've got those pieces covered, and we're continuing to give 99% on-time service performance with the claims ratio between 0.1% and 0.2%. So it's best-in-class service despite the significant volume of growth and processing significant growth on top of the growth that we had last year.

So Adam, maybe we could talk a little bit about yields and sort of how you maybe see that playing out over the next couple of quarters. I think we're starting to hit some of the tougher comps when we look at revenue per hundredweight excluding fuel, starting in the second quarter. I guess maybe two questions here. First, is the step-up of the comps kind of happened immediately in April? So is that sort of the trigger as you move from 1Q to 2Q? We're already beginning to lap those sort of more challenging comps? And I guess the second part, bigger picture piece of the question would be just how you think about sort of the pricing environment, your ability to sort of continue to get price. You talked about inflation being 4.5% to 5%. So presumably, you're sort of targeting somewhere in that, call it, 6% to 6.5%, maybe 7% range. Can you just talk a little bit about how you're thinking about it?

Yes. Certainly, the increases that we need in the first half of this year are going to be higher, just like we talked about the expectations on our inflation. We started seeing really the inflation pick up in the middle of last year. And so as contracts were maturing in, we were having to start asking for more. We look at the current environment as those mature and what we're seeing and what we're expecting. And we're always making predictions for multiple things, what our volumes are going to be, as well as our cost and what our customer needs are, but certainly started seeing acceleration in some of those renewals in the back half of last year, and those need to continue as we move through the first half. But we are starting to get some normalization on some of the weight per shipment trends. At this point, our weight per shipment is flat with where we were last year. We've seen a decreased weight per shipment over the last year or so, as well as an increase in the length of haul. So both of those changes in mix have been supporting that overall reported yield number, and making it look stronger than just the core increases that we're getting. But we continue to target cost plus. That's been our long-term pricing philosophy. It's been consistent and one of our customers know and can understand and we'll continue to execute on that same type of philosophy as we progress through the year. But with some of those mix metrics normalizing, when you just look at kind of normalized trends, if you look at kind of normal seasonality, if you will, just sequential increases from this point forward, it starts coming down. The year-over-year starts getting to the higher single digits to kind of mid-single digits and eventually normalizing, if you will. But certainly, right now, we're able to get increases that are covering our cost inflation, and I think you can see that in our numbers.

Okay. Okay. That's very helpful. I appreciate that. And you mentioned that the weight per shipment has been ticking up sequentially here after, I think, bottoming kind of in the third quarter. Should we likely to be sort of up on a year-over-year basis as we move forward?

Well, right now, like I said, we're flat. So as we progress through the second quarter, then we could. If things just sort of hold steady, if you will, from a mix standpoint, then certainly, we would start seeing some increase, and that's kind of the point of you might start seeing the reverse of what we did last year, where the mix change puts a little bit of pressure on that reported revenue per hundredweight. Certainly, in the third quarter, that was our low watermark. I think we were at 1,538 pounds on average in the third quarter of last year. Right now, we're trending somewhere in the 1,575, so between 1,550 and 1,600 pounds, but it's been a little bit heavier on that scale over the last few months.

Adam, I want to clarify a couple of points. Regarding the 28% increase in revenue in April, can you provide a directional breakdown between fuel and tonnage and the underlying yields? Additionally, I was a bit confused by your comments on the second quarter operating ratio. You mentioned a normal seasonal range of something in the 70s, but you’re aiming for something in the 60s. I would appreciate your clarification on that.

I’ll clarify that first. Regarding our revenue growth, we don’t want to share too many details until the month settles out. As I mentioned earlier, in March, revenue per hundredweight, excluding fuel, increased by about 9%. This is the same year-over-year change we’re seeing. We usually don’t break down fuel contributions, but the average price per gallon in March was about $5.11 to $5.12, which was consistent with April. This reflects a roughly 62% increase in the DOE price per gallon in March, with a similar increase in April. Therefore, we can expect similar contributions. Overall yield continues to display significant strength, and comparisons become a bit different on the volume side. Looking back at last year, we had total revenue growth of about 16% in the first quarter and 47% in the second quarter. As we move into the second quarter, comparisons will be tougher, which is why we're pleased to report a strong revenue growth of 28% in April. You can expect to see contributions of that nature as yield is driving a lot of our current revenue growth, along with solid volume performance. Regarding the operating ratio, I won’t provide specific guidance, but we did see some favorable conditions in the first quarter. I mentioned general supplies, expenses, and miscellaneous costs, which may revert. There could be some pressure from the usual sequential change from the first to the second quarter. Additionally, we experienced lower fringe costs in the first quarter than I anticipated for the year, as a percentage of salaries and wages, and I expect that to normalize. So there may be some pressure in those areas. Time will tell. My point is that taking normal seasonality from the fourth quarter into the second, our operating ratio would land around 70.2%. This suggests less seasonal improvement than we usually expect. If we can achieve an operating ratio starting with a 6, like 69.9%, we would be very excited to see that.

James on for Allison. Just to start, you mentioned that the purchased transportation impact could potentially grow. Is that pretty much a result of needing to supplement some of those capacity gaps from our ex-truck inability with the equipment?

That's correct. We're still working on some of those variations. We still did have some purchased transportation effectively offsetting some of those longer than expected delays that we faced ahead of the fleet. And we just continue to aim to keep our service metrics at a best-in-class level, and that has led us to utilize that option more as we go through this time.

So Adam, just a quick follow-up on the yields. As we turn the corner into the second quarter, do you have any updates on how you're planning to attack pricing moving forward? The mix has changed, and we've seen strength across the board that you've mentioned. Can you kind of provide any insights there?

Yes. Our approach towards pricing is to ensure that we're consistently driving pricing that continues to outpace cost inflation. We emphasize this both through maintaining attention to the profitability of our service and aligning our growth strategies to seek out opportunities to enhance both our yield and tonnage situationally as we move through the next few quarters.

Well, thank you all for your participation today. We appreciate your questions, and feel free to give us a call if you have anything further. Thanks, and I hope you have a great day.