Old Dominion Freight Line Inc (ODFL) — Q3 2022 Transcript

Thank you. Good morning, and welcome to the third 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 November 2, 2022, by dialing 1-877-344-7529, access code 3324067. 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 ask in fairness to all that you limit yourselves to just a couple of questions at a time before returning to the queue. Thank you for your cooperation. At this time, for opening remarks, I would like to turn the conference over to the company's President and Chief Executive Officer, Mr. Greg Gantt. Please go ahead, sir.

Good morning, and welcome to our third 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. During the third quarter, the Old Dominion team extended the company's track record for double-digit growth in revenue and profitability. The third quarter of 2022 was our seventh straight quarter with double-digit revenue growth and our ninth straight quarter of double-digit growth in earnings per diluted share. These financial results reflect the ongoing strength and demand for our services as we continue to deliver value to our customers by providing superior service at a fair price. Consistently executing on this key element of our long-term strategic plan is critical to our continued ability to win long-term market share. We were pleased to provide our customers with 99% on-time service and a cargo claims ratio of 0.2% during the third quarter. Service means much more than just picking up and delivering our customers' freight on time and damage-free. In fact, MASTIO & Company conducts a comprehensive industry study each year that most recently measured carriers on 28 service and value-related attributes. We are extremely proud that MASTIO recently named OD as the #1 LTL provider for the 13th straight year. And in this latest survey, shippers and logistics professionals ranked OD as #1 for 24 of the 28 individual attributes. The consistency of our service performance over many years, as validated by MASTIO, reflects the commitment from each of our team members who work hard every day to go above and beyond for our customers. Our superior service performance has not only allowed us to win market share over the long term, but it has also supported our long-term yield management strategy. This simple strategy focuses on increasing our yields to offset our cost inflation each year while also supporting our ongoing investments in capacity. We have consistently invested 10% to 15% of our revenue in capital expenditures each year, regardless of the economic environment. Investments in our fleet and technologies have helped us improve our operating efficiency and customer service, while the significant investments in our service center network generally support our growth. We have expanded the capacity of our service center network by over 50% in the past 10 years while doubling our market share, and we believe further investments will be necessary to ensure that our network is never a limiting factor to our growth. We believe a big part of our value proposition is having available capacities when our customers need it the most. The capacity advantage we have in the marketplace was especially critical for customers that dealt with various supply chain issues over the past 2 years while industry capacity was generally limited. We increased our revenues by over $2 billion over the past 2 years, which would not have been possible if we had not consistently increased our network capacity. Our business model continues to prove itself time and again, and we are extremely grateful to our customers for their trust in us. Freight is a relationship business, and we believe our superior service, available network capacity and consistent approach to pricing have allowed us to strengthen our long-term relationships. We also believe the value offered by a carrier is becoming increasingly important to shippers, which is why we remain absolutely committed to executing on the fundamental elements of our long-term strategic plan. As a result, we will continue to focus on providing customers with superior service at a fair price. We will also continue to invest in our OD Family of employees, our fleet and our service center network to support our long-term growth initiatives. Old Dominion has the financial strength to make these investments, and as a result, we believe we are better positioned than any carrier to produce long-term profitable growth and increase shareholder value. Thank you for joining us this morning, and now Adam will discuss our third quarter financial results in greater detail.

Thank you, Greg, and good morning. Old Dominion's revenue grew 14.5% in the third quarter to $1.6 billion, and our operating ratio improved to 69.1%. The combination of these changes helped produce a 36% increase in earnings per diluted share for the quarter. Our revenue growth was due primarily to the 17.4% increase in LTL revenue per hundredweight, which more than offset the 2.6% decrease in our LTL tons. We believe this decrease in LTL tons reflects the overall softness in the domestic economy that has generally caused a decrease in demand for our customers' products. Demand for our service has remained strong, however, as customers are continuing to take advantage of our value proposition. On a sequential basis, revenue per day for the third quarter decreased 3.8% when compared to the second quarter of 2022, with LTL tons per day decreasing 4.3% and LTL shipments per day decreasing 3.6%. For comparison, the 10-year average sequential change for these metrics includes an increase of 3.6% in revenue per day, an increase of 1.2% in tons per day and an increase of 2.4% in shipments per day. At this point, in October, our revenue per day has increased by approximately 8% when compared to October 2021. This month-to-date revenue performance includes a decrease of approximately 7% in our LTL tons per day. As usual, we will provide actual revenue-related details for October in our third quarter Form 10-Q. Our third quarter operating ratio improved to 69.1% with improvements in both our direct operating cost and overhead cost as a percent of revenue. Many of our cost categories improved as a percent of revenue during the quarter, although our operating supplies and expenses increased 300 basis points due primarily to the rising cost of diesel fuel and other petroleum-based products as well as the increased cost for parts and repairs to maintain our fleet. We more than offset the impact of this increase with the improvement in our salaries, wages and benefits and purchase transportation. The improvement in these expenses as a percent of revenue reflects our best efforts to effectively match all of our variable costs with current revenue and volume trends. Old Dominion's cash flow from operations totaled $514.2 million and $1.3 billion for the third quarter and first 9 months of 2022, respectively, while capital expenditures were $181.7 million and $504.8 million for the same periods. We noted in our release this morning that our capital expenditures are now estimated to be $720 million for this year. The decrease from our prior estimate is primarily due to the timing of equipment deliveries that we expect to be pushed into next year. We will provide further details about our 2023 capital expenditure plan with our fourth quarter earnings release. We utilized $345.4 million and $1.1 billion of cash for our share repurchase program during the third quarter and first 9 months of 2022, respectively, while cash dividends totaled $33.4 million and $101.4 million for the same periods. Our effective tax rate for the third quarter 2022 was 23.9% as compared to 25.2% in the third quarter 2021. We currently anticipate our effective tax rate to be 25.6% for the fourth quarter. This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.

Okay, great. So I guess, first, Adam, I'd be curious if you could maybe give us the full stats for September in terms of tonnage per day on a year-over-year basis. And was there anything sort of unique going on in September with regard to the end of the quarter with the hurricane? And I guess just kind of wrapping up that September, October commentary, do you feel like the sequential trends are the underperformance versus seasonality is maybe accelerating somewhat? And if you can provide some color on what's driving that. So anyway, I know a lot there, but just curious on current trends and if you could provide some additional color there.

Sure. We'll test my memory, I guess, and see if I can remember all of those. For September, looking at a year-over-year basis, our tonnage was down 5.4% and then shipments per day were down 6.8%. So we had a little bit of an increase in weight per shipment for the month. It was up about 1.5% overall. If you remember, we've talked before about the weight per shipment trend last year was our low watermark, if you will, where we were at a total of 1,538 pounds. So we did start seeing a sequential increase from the third quarter to the fourth quarter of last year. So that should somewhat normalize as we transition. Looking at things on a sequential basis for the tonnage, we did have in September about a 0.4% increase versus August. The 10-year average is a 3.9% increase. Similar to what we saw in the third quarter is somewhat similar to the second quarter. We did underperform for the total quarter, the average sequential trends in 2Q. And we did, again, this is the third straight quarter of underperformance, if you will, but we started out with the decrease in July, which is pretty typical. We were down 4%. The 10-year average is down 3%. And then we dropped a little further in August, which is normally about flattish. And then we just didn't see the sizable increase that we typically do in September. I will say that as of now, we're trending pretty much in line with normal seasonality at this point, which I think is an encouraging trend. Certainly, a lot of work left to do as we go through the fourth quarter. Typically, we would see an increase in November and then it drops off in December. Normally, overall, you've got a decrease on average for the fourth quarter versus the third. Last year, we did have an increase, which makes the comps quite a bit tougher in the fourth quarter. We anticipated that really going into the beginning of this year. So it certainly feels like demand is present for us. The feedback that we're getting from our customers has been positive. We're seeing good trends with our national account reporting. We're not losing customers. So things are all trending favorably in that regard. It's just a matter of the demand; we feel like is not out there for our customers' products, if you will. We're just not picking up as much freight for those same customers that we may be making stops every day at their locations. So just continuing to kind of work through these challenges, if you will. We've certainly made adjustments all year. I think when you look at the operating ratio performance in general and what our service metrics are, we've been making adjustments to this lower-than-anticipated volume environment that we've been in. Typically, when we've been in a down cycle, we've been in a negative GDP environment this year. A lot of times, we'll see 3 to 5 quarters where we kind of underperform our 10-year average. I always like to remind everyone that our 10-year average includes doubling our market share. But this was the third quarter where we underperformed. We're going into the winter. That's always a little bit seasonally slower anyways. We feel like based on what we've been able to do so far this year producing over $900 million of revenue growth, good solid operating ratio improvement. We'll get through this winter and then perhaps we start seeing some build-up once we get into the spring. I'm talking on a sequential basis, to start seeing that build-up back in the business once we get into the spring. Maybe sooner, obviously, a lot's going on with the economy. But that's some of the baseline for what we're thinking right now.

Okay. That's very helpful, Adam, and you've addressed all my questions. For my quick follow-up, I'm curious about the sequential change in operating ratio from the third quarter to the fourth quarter. You mentioned that tonnage usually softens sequentially, and I know there are many factors to consider. Historically, there's been about a 200 basis point drop from the third to the fourth quarter. Is that how we should view it this year, or could you provide some additional insights?

Sure. Yes, for one, the fourth quarter, we usually have an annual actuarial assessment that can impact, if you just look at the raw numbers, the pure average. But it's usually about a 200 to 250 basis point sequential deterioration from 3Q to 4Q. I think probably the appropriate target would be about a 400 basis point increase off of 69.1 that we had. Just talking through a few of those puts and takes that will go into it. I'd say 400 would be the target, probably plus or minus a little bit, depending on some cases, some of these expense items I'm talking about, but also the top line. We had a one-time item that favorably impacted our operating ratio by about 100 basis points in the third quarter. So kind of adding that back to normalize what our fringe benefit costs have been trending earlier this year. Then I think that similar to the 2Q to 3Q change in our general supplies and expenses, we generally see a little bit of improvement from the third quarter to the fourth quarter. I expect that from a dollar standpoint, that should remain somewhat flattish, but as revenue is typically a little bit lower, we expect that to increase maybe 20 basis points from 3Q to 4Q. Depreciation is another item. We're still taking delivery of equipment. Normally, you kind of have all your depreciation in there, so I expect to see that continue to tick up a little bit. Finally, our miscellaneous expenses, those have trended low throughout the year. Those are typically around about 0.5 point. I think we're at 20 basis points, 0.2% in the third quarter. I expect that to normalize at some point as well. Those cost items just may create a little variance versus what the 10-year average might otherwise suggest. But we're looking at every dollar we can from a discretionary spending standpoint and we'll be managing productivity and other costs as tightly as we can as we continue to adjust to current top line revenue and volume trends.

James on for Allison. I just wanted to get a little bit more color on September and just kind of wanted to understand if there was a mix shift in that month that might have impacted yields and trying to sort of get a sense of what pricing was independent of that mix shift change and sort of how we should think about that moving forward?

Yes, nothing major that we have not already been seeing certainly that our weight per shipment has been trending higher, as I mentioned, at least through the third quarter. Our length of haul has been a bit lower as well. That's down almost 1%. Both of those metrics put a little downward pressure on that reported revenue per hundredweight metric. I think we've talked a little bit about that on the last earnings call. Overall, excluding the fuel surcharge, the revenue per hundredweight was up 7%. So we're still seeing good yield performance overall. Those yields are mixed metrics, if you will, somewhat reconcile how we got from the growth rate that we are seeing for the second quarter to the third quarter. Overall, as contracts are renewing, we're continuing to look for increases and design, with our long-term philosophy, is we always are looking to try to increase yields to offset our cost inflation. I would say core inflation is probably a bit higher than what some of these increases we're getting right now just dealing with this inflationary environment. But we're always looking at things on a long-term basis. We're continuing to make progress on those renewals, trying to get our cost-plus type pricing to ultimately support the investments that we're making back in the system. We've invested a lot in real estate capital expenditures. When you look over the last 10 years, it's been almost $4 billion of investment in total with about $2 billion going into our real estate network. So I think we've certainly done a good job of making sure we're investing ahead of growth, and we don't want the network to be a limiting factor to our ability to grow. It's been important to build in that capacity into the service center network, and it certainly makes years like 2021 and the growth that we've seen in revenue this year possible.

Got it. And just a follow-up on that, just given the renewals that you're seeing, the sort of efficiency in the network, if tonnage trends continue negatively or even sort of become more negative, do you think 2023 is a year that you can still get OR expansion sort of at or above 100 basis points? Or are you going to start bumping up against fixed costs fairly soon?

Well, I think the thing that we typically see in the past, and you can look at sort of 2016, 2019, as an example, is when we get into an environment where revenue is flat to down overall, that's something where we will continue to invest like Greg mentioned in his comments earlier, we're going to continue to invest for the long term. That often creates a little headwind, if you will, on the depreciation cost as a percent of revenue. The OR change that we saw in '16 and '19, the slight deterioration in those periods was pretty much limited to that change in depreciation cost as a percent of revenue. We certainly are looking to manage all of our variable costs to match those revenue volume trends. We'll be looking for productivity and will be looking closely at every dollar that we spend. We certainly want to spend dollars when there's an appropriate return that's there and don't want to do anything that might limit our long-term performance. You have to be careful with discretionary spending. We've generally been able to manage all those other costs flat. Our cost structure is highly variable; more than 2/3, almost 3/4 of our cost over now. So we just continue to work those costs as best we can, looking for productivity in any way that we can to save money to offset any kind of pressure we may be seeing on the top line.

Just a follow-up maybe on the cost front. Looking ahead beyond the current quarter, you talked about inflation. Is there any relief on the inflation front, whether it be on the wage side? I assume on the purchased transport side, but just sort of your thoughts on sort of the cost inflation environment as we move beyond this? What you're seeing today?

From a core inflation perspective as we approach next year, it seems everyone in the country is hoping for some relief. This likely begins with improvements in energy costs, which drive overall inflation. We need to see some movement there to alleviate uncertainty for many business owners and customers, which in turn should influence the Federal Reserve's actions. Once this uncertainty is cleared, I believe we can expect to see reinvestment in businesses and an uptick in freight flows, hopefully returning to the levels we anticipated at the beginning of the year. In our case, salaries, wages, and benefits make up about 65% of our total costs. We just implemented a wage increase at the start of September to reward our employees for their performance over the past year. We manage that aspect of inflation effectively, though we have seen some rising costs in benefits, particularly in medical expenses, as we continue to enhance paid time off and other benefits for our employees. An additional 15% of our expenses come from operating supplies and costs, with fuel being a significant factor. Our surcharge program has helped mitigate the increase in this area, and we hope to see a decrease as we progress through 2023. This should assist with the rising costs of parts and other components we've faced this year. We have also seen increases in equipment depreciation costs and anticipate some moderation in those as we move into next year. We are yet to finalize our equipment orders and pricing. Furthermore, like other carriers, we have encountered higher insurance premiums in recent years. We must continuously seek ways to offset increases in one area with savings in another. Our primary focus will be on improving productivity, especially since salaries, wages, and benefits constitute our largest cost. While we can manage inflation, we can also help ourselves by striving for better performance in these critical areas.

Adam, I wanted to just follow up. I thought I heard you say that core inflation is now tracking above some of the recent pricing increases you're getting. That feels like a pretty big change just for third quarter rent per shipment ex-fuel is up 9%. So just add a little bit of color or clarity to what you're saying there.

Just mainly talking about what we've seen in terms of cost on a per shipment basis. Sometimes those per shipment costs increase a little bit more when you're in a little bit softer environment overall. I mean we've still got a positive spread in terms of when you look at revenue per shipment performance versus its cost per shipment. We certainly think that can continue overall. The focus is always to try to achieve 100 to 150 basis points of positive spread overall in what we can get on a revenue per shipment basis with the fuel versus what the cost per shipment with the fuel can be. Just looking at things on a pure cost per shipment basis is certainly trending a lot higher than what I had thought. I thought we would see moderation in the back half of this year, as we started comping against some of the increased inflationary items that we experienced in the second half of '21, but that moderation hasn't happened. We're still seeing some pretty big increases. A lot of it is driven by these increased fuel prices that have remained high throughout the year. We thought we were going to start seeing some relief a few weeks ago on that as it started trending down a little bit the last 2, 3 weeks. I think it's back up about $0.50 over where we had dropped to a bit prior. No change in terms of what we're going to be looking for from an increased standpoint and what we think we can achieve because we've got to have cost-plus pricing in our business that offset that inflation, but more importantly, to keep supporting the reinvestment back in our business.

Adam, I want to clarify the sequential change in operating ratio from the third to the fourth quarter. I believe you mentioned it might be around 400 basis points, give or take, in relation to the 69.1%. I just want to confirm that. Additionally, as you consider potential factors that could impact this, it might help to understand how this could bring the operating ratio closer to being flat year-over-year. From what I gather, you're still below that based on the guidance, but I'd like to know more about the dynamics that could possibly lead to a decline in the operating ratio as we look ahead to the coming quarters.

The 400 basis point, plus or minus, that was off the 69.1 reported operating ratio. Just the delta versus the normal cadence, the biggest being that 100 basis point benefit that was one-time in nature that was recorded in the third quarter. As we transition into the next year, typically the first quarter is about 100 basis points worse than the fourth quarter. In the first quarter of '22, we had a 70 basis point improvement. We know we've got some tougher comparisons coming up from both a top line standpoint and an operating ratio standpoint, just given the phenomenal performance we had this year. It's almost a 300 basis point improvement in the operating ratio from a year-to-date standpoint. It's been an incredibly strong year coming off of the improvement we made in 2021. We had $1.2 billion of revenue growth and we put another $900 million year-to-date on top of that. In a probably a negative GDP environment. I think we're probably in a stronger position than we've ever been in going through a slower macro environment with respect to the relationships that we had with our customers. We've not lost any business that we've got to try to go back and regain. It’s just going to be a function of when our customers have more freight to be able to give to us. That's encouraging. I mentioned that I feel like the October trend is encouraging as well. Just be a function of getting through kind of this winter and seeing where that baseline becomes where we finished the fourth quarter of this year from a volume standpoint and then getting through 1Q. Like I mentioned, seeing if we can't start getting some of that seasonal build-up that we would typically see coming to us early next year. A lot of it in terms of an OR standpoint becomes more challenging to get year-over-year improvements in a flattish or down revenue environment. We’re going to manage all of our variable costs and just sort of keep investing. We might see some loss there on the depreciation line, but that's something that we know once that volume returns to the business.

Yes, that makes sense. You have historically excelled in tonnage performance compared to peers during both up and down cycles. As you consider the current situation, perhaps with more competitors focusing on growth, do you agree with that observation? How do you view your potential relative performance as you navigate what may be a softer market over the next year?

A lot of times, our market share has been flatter, if you will, looking at 2016 and 2019 as recent examples. For the last 3 quarters, while we've been still producing really solid volume growth, if you back us out from the public carrier group, volumes have been negative on a year-over-year basis going back to 4Q of last year. Really just looking at total tonnage, it's kind of on an average basis was flattish pretty much since the first quarter of '21 through the second quarter of '22. We've certainly significantly increased our market share when you look at the volumes and the revenue trends for us through these last couple of years. It might be a point where we may get to where we're sort of flattish with the group. But right now, it just feels a little bit different. We've not lost any business. We've been talking to customers about the value-add that we provide and how we help customer supply chains really over these last couple of years as people have dealt with the pandemic and supply chain challenges.

Adam, I don't know if you mentioned this before, but you talked about October being a little bit better. Can you just quantify that for us? Typically, what's the historical shipment volume or tonnage role from October, September to October versus what it was? And then less of a nitpicky question. I guess I'm not so worried about Old Dominion's ability to see a positive spread between revenue and cost per shipment. I think you've done it 10 in the last 15 years because of the MASTIO data and the service and you guys are just best in class there. But I guess the question really is the industry's ability to see positive yield ex-fuel growth next year. Some of this is a pricing discipline question for the industry, which I ask every quarter, but I just want to get your perspective in terms of what you think the industry's ability to see yield ex-fuel positive pricing is next year based on everything you're seeing out there from a pricing perspective.

Sure. Yes. One, thank you for recognizing the service performance. As we said, service supports yield. You can't go into an account at a renewal if you've had service failures, missed pickups, late deliveries, damage shipments, and that kind of thing to be able to get the consistent increases like we've been able to achieve really over many years now. But that is a differentiated quality from us versus the group. We just want to build in a fair approach that tries to create win-win scenarios for us and for our customers. More importantly, they can recognize the value, and there's a difference between price and cost. I think we're increasingly seeing customers recognize that value that we're able to deliver for them. We'll certainly continue with our initiatives. I can't comment on what the other carriers will be doing and what their strategies will be going forward. But I think that, like I mentioned, the last 3 quarters, other carriers at least have been negative from a volume standpoint and have continued to push pricing. It’s hard to imagine that, that changes. It certainly seems like that's been favorable to their financial results. There’s been general improvement and industry dynamics. But yes, our yield philosophy has been different from the group for many years. The key is just these contracts are renewing and they renew throughout the year for us to continue to make improvements, and we work on a continuous improvement cycle with our yield management and the efficiency of operations.

And what about the October versus September data point?

Yes, sure. From a tonnage standpoint, and again, keep in mind we typically don’t even talk about those details; just give sort of an average change in the revenue. The number will change a little bit as we finish out these final few days of the month, but right now, what we’re seeing from a month-to-date standpoint. It looks like that we’re going to be pretty much right in line with the normal sequential change for October. Typically, October decreases about 3.5% sequentially versus September, and we’re right in that ballpark. As we finish out the month, that’s the first time since February of this year that the numbers have pretty much been in alignment. If we can keep pace with those normal sequentials as we go through 4Q and 1Q, then we have an idea what type of build-up we might see sequentially as we start getting into the spring of next year.

So Adam, I think you've touched on this in a couple of different ways on the call here, but I just wanted to kind of square up the comments on the weight per shipment. It was up in the third quarter. It sounds like it's still trending positive. But your comments about customers seeing less demand, I would think that would have an impact where there just be less freight on each pallet. So can you just talk a little bit about the mix and what's been going on with weight per shipment? It seems like it's at a normalized level, but I just want to make sure that's the right way to think about it right now.

From a sequential standpoint, it decreased about 10 pounds from the second quarter to the third quarter. Right now in October, it's pretty much about the same as where we were, right around 1,560 pounds, if you will. Yes, if that trend held through the fourth quarter, we'd be looking at a decrease. We took action last year in terms of getting some of the heavier weighted shipments out of our system. Some of those spot quote system shipments as well. Those spot quote of the total of our business have decreased as a result of what we were doing last year, in an effort to protect capacity for our existing LTL customers and make sure that we can deliver what they needed. But we started seeing an increase sequentially in the fourth quarter of '21 versus that low watermark that we hit in 3Q. It went from 1,538 pounds up to 1,575 in 4Q and then increased further in the first quarter of this year to 1,589. Since that point, it's been declining a bit, but that’s kind of what we've been seeing from a weight per shipment standpoint.

Okay. That sounds like tonnage being down slightly, while the weight per shipment remains consistent, is a reasonable combination overall. For a follow-up, I'm interested in your thoughts on headcount. It decreased sequentially, likely allowing some attrition to take its course, and I don't think the fourth quarter is typically a major hiring period. How should we view the trends in headcount, whether sequentially or year-over-year, considering the current demand?

Todd, I think you'll continue to see that trend track our shipments. Right now, like you said, we've simply been letting attrition take care of our needs or move it back in the right direction. But we would continue to do that through the first quarter, which is typically our slowest quarter. However, we aren't really hiring or filling vacancies and whatnot, but not much going on from that standpoint at this point in time.

Got it. So you've got a little bit of a glide path for the next couple of quarters just on the attrition front.

Yes, I believe so. However, it's important to remember that we are still operating driving schools and training drivers because we anticipate changes in the future, and we aim to emerge in a stronger position, both in terms of drivers and capacity. We believe we are taking the right actions today to prepare for when conditions improve, as has been the case in our industry previously.

Adam, I just wanted to follow up on some of the tonnage commentary already. Specifically, if we were to take a little bit of a glass half full approach here, I think you said in the start of the call that you've kind of underperformed on share for like 3 to 4 quarters and already 3 quarters into it. If you historically look at like your tonnage, it stays negative for like 2 or 3 months maximum, and you're already kind of pretty much all the way into that. You did say that you don't think there's a positive catalyst on the horizon. But are you looking for any potential signs of the cycle maybe turning and we may be kind of in a restock kind of uptick position maybe in the next couple of months?

The biggest thing is just the conversations that we've had with customers. Like I said earlier, I think there’s just so much uncertainty in the market today. That just gets into the psyche of business owners in terms of the risk they want to take for capital. There’s still a labor issue and supply chain issue that are impacting many customers today. We’ve heard firsthand that just given the uncertainty out there with the economy that some customers have made the decision not to be as aggressive filling open positions for fear of what may come on the demand side for their business. When you think about those 3 big layers of uncertainty that people are facing right now, you've got the upcoming midterm elections, and after that, you get clarity at least for the next couple of years. Then comes to the energy issue that it’s got to be dealt with. We’ve got to see some type of improvement overall in terms of where fuel prices are and the impact that has on overall inflation for the domestic economy. If that riddle gets solved, you'll get some clarity in terms of the interest rate environment. At some point, people have got to replenish their inventories, and there’s been a lot of conversation about inventories. We continue to face issues in terms of getting parts. Many of our customers give us the same feedback that they don't have the right levels of inventory in the right places, which creates freight demand. We're still looking at an inventory to sales ratio that's lower than pre-pandemic levels. That’s a lot of factors that have to be dealt with, but just having those conversations with customers, our sales team is doing that day-in and day-out basis, trying to build that into somewhat a baseline forecast to build around from an equipment planning standpoint, headcount planning, and service center capacity plan. That’s the best feedback. You can read all the economic reports in the world, but the best is the feedback we get from the ground up to help us plan our business.

Great. And maybe as a quick follow-up. I apologize if I missed this and you said it, but are you seeing any signs of TL players trying to encroach into the LTL market kind of given how loose things are on the TL side?

Not really. Where that may come into play and has in the past, say, around 2018 would be on some of those spot quote-type shipments. Before the strategic actions we took last year, spot quote shipments are like 8,000 to 10,000 pound type loads. Historically, 10,000 pounds somewhat defined the LTL industry. The actions we took last year were designed to get some of that freight out of our system and protect our LTL customers. The spot quote of the total of our business has decreased from about 5% of our total to probably more like 1% to 2% at this point. We were fortunate that we proactively tried to flush some of that out of the network. I don’t think that risk is out there as much as it has been in prior cycles.

Following up on Todd's headcount question. If I look at your shipments per employee, they're still, call it, 8% below where they were this quarter in 2019. Can you talk a little bit about maybe a more bottoms-up look at productivity and your own metrics? How does productivity compare to history on the dock right now? How does the driver productivity compare? Is there an opportunity in some of these tops-down metrics that we can calculate to get back to historic levels in a weaker demand environment? Or does it make sense to stay a little long headcount in a structurally tighter labor market?

Yes. I'll answer the last part first, Bascome. I think it makes sense to stay a little long from a labor standpoint because we had to work harder than we always had in years before to ramp up. We will be more diligent in maintaining that driver force and keeping it as high as we can without negatively affecting productivity. To go back to the general productivity question, we're starting to see some improvements from market improvement on the platform, which is a good thing. It’s pretty typical when we get in this environment. As our labor force becomes better trained and more experienced, we start to see the positive improvement cause change. We are seeing that now, which is certainly a good thing. We struggle a little bit on the P&D pickup and delivery side because we're not picking up the same number of shipments at each stop that we were doing when we were busier. That’s always a challenge. Your miles between stops and that kind of thing become greater and that’s certainly harder to keep up from that standpoint. We will continue to focus on those. We always think we have room for improvement both P&D and platform from a load factor standpoint. We'll continue to stay laser-focused on those and continue to try to drive some costs out when we can.

This is Matt on for Bruce. Curious to get your current view on net capacity in the industry and maybe how you might expect it to trend over the next couple of years here.

Certainly, I think in this type of environment, there's certainly capacity much more so than it was last year. We were the only ones not really suffering from a capacity standpoint. We're in better shape than most. As Adam mentioned before, we spend an awful lot of money to ramp up capacity. We've done an extremely good job of that. We continue to stay focused on building capacity, and like I mentioned before, we'll come out of this hopefully sooner than later. We’ll be in good shape, but I think there is some capacity out there now. We don't see the same things going on this year that we did last year when carriers were in trouble, limiting pickups and whatnot. We’re not seeing or hearing about those kinds of things now. There's capacity out there, but the question is what everybody is doing to try to ramp up the need as it arises on the other side. We've got a large number of capacity increasing projects underway now, and we'll keep working on those. Like I said, we'll be in better shape when volumes change.

Great. Lastly, are you seeing any changes or differences in underlying demand by specific end market or geography?

No. We've probably seen a little bit better performance with our industrial-related accounts once again in the most recent quarter, which grew a couple of hundred basis points faster than the overall company average revenue growth rate. On the retail side, it was probably a couple of hundred basis points below but overall, still seeing growth in all segments. Most of our regions, you got some growing a little bit more than others when we look at it. Most are saying fairly balanced, which is a good thing. It’s helped us be able to effectively reduce our purchase transportation, which was a positive for the third quarter. We're effectively back to prepandemic levels in the sense that we're fully insourced again, and that’s where we wanted to be; it improves our service value overall. That’s been a positive trend to help from a service and a cost standpoint.

That's super helpful. Congratulations again on the exceptional performance.

Yes, it's Tom Wadewitz. Adam, you provided a lot of information about September and October, but could you share what the revenue per hundredweight was trending in October, excluding fuel? Is that remaining stable, or where are we at?

Yes, pretty stable. Tom, I didn't give a specific number, so to speak, but I just mentioned that it's right in line, maybe a little bit better than what we saw the average for the third quarter. We were up 7.2%, the revenue per hundredweight in the third quarter, excluding fuel surcharge and right about that same level in October.

Do you think that’s the level at which you will stabilize? You mentioned that inflation might be stickier and higher than expected. Typically, we consider 4% to 5% as normal revenue growth per hundredweight to slightly exceed inflation. However, if inflation is higher, you need to increase your prices, correct? Do you believe that’s the appropriate level? Or do you anticipate that in a weaker market, growth will slow down further as we move into 2023?

No, I think that when you look at our long-term revenue per shipment performance, a little bit different from the per 100. Long-term revenue per shipment, we've averaged between 4.5% to 5%. That's what we’ve seen when you look at it in certain years, including fuel or excluding fuel, that’s kind of been the goal because long-term, our cost per shipment performance has been in that 3% to 3.5% range, mainly due to the increase we give our employees each year. We certainly face increased cost of equipment and insurance premiums and fortunately, we've been able to offset some of those other inflationary items through improved productivity and efficiencies within our operations. We’ll have the same objectives as we go through the rest of this fourth quarter into next year. Looking at the per hundred, we had bigger increases in 2021; some started particularly in the back half of the year when inflation was picking up. This year has been solid increases as well. The key is just the contracts that renew. We have improved yields throughout the year for us, looking at continuous improvement and efficiency within operations.

Adam, just two quick follow-ups for you. First, on the PT brought it up and then answer a couple of questions ago, 2.1% as far as I can tell is about as low as it's ever been in your network. So as you contemplate keeping maybe more resources from a headcount perspective just because of the challenges in hiring. Is there any more room to flex PT? Or are you kind of at the absolute minimum there? And we think about it holistically, salaries, wages and benefits plus PT probably stays a little bit elevated for the foreseeable future.

In the third quarter, we did not utilize any purchase transportation within our domestic line haul network. The balance we typically maintain, which ranges from 2% to 2.5% of revenue, is primarily due to our small truckload brokerage operation. This includes carrier costs and our partnerships with our Canadian operation. Those purchase transportation costs are already reflected in that baseline figure. I don’t anticipate that percentage decreasing significantly unless there are changes in those businesses, which we do not expect.

Okay. That helps. And then also to tie a couple of things together. I mean it sounded like you're pretty optimistic. I mean maybe optimistic is a strong word, but not as pessimistic regarding some of your customer commentary. But in your prepared remarks, I wrote down you said demand just isn't there for some of your customers' freight. So do we foresee maybe a late peak season where it's not there today? But going into a time that might seasonally be slower, you start to see a reversion or a catch-up? Or do we just kind of write off the rest of this year as it's going to be weak and maybe things are rightsized by '23 and start to see a pickup then?

Yes, for us, we don't have a peak season per se. Usually, September is our busiest month of the year just from a function of the seasonality in our business. We have pretty consistent seasonal trends year in and year out as we progress through the quarters. Nevertheless, certainly, some of the months we had in the earlier part of the year coming off the strength of how we finished '21. It looks like March will be our busiest month in terms of the average weight and shipments you will see. It’s just managing through kind of the base levels where we are. We started seeing volumes increase sequentially about 7.5% from the first quarter to the second quarter, and we were up about 0.7%. We just haven’t had that buildup we typically would see. If we can keep pace with our normal trends, that’s an encouraging trend.

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