Old Dominion Freight Line Inc (ODFL) — Q2 2023 Transcript

Good morning, and welcome to our second quarter conference call. With me on the call today is Adam Satterfield, our CFO. And after some brief remarks, we will be glad to take your questions. The OD team delivered solid financial results for the second quarter, considering the operating challenges associated with the continued softness in the domestic economy and a decrease in our volumes. With a 15.2% decrease in revenue during the quarter, our team was focused on improving our yield, managing our variable costs, and controlling our discretionary spending. As a result, we were pleased to produce a 72.3% operating ratio and earnings per diluted share of $2.65. We achieved these results by continuing to execute our long-term strategic plans, which have guided us for many years throughout many economic cycles. The plan is centered on our ability to deliver superior service at a fair price, which included an on-time service performance of 99% and a cargo claims ratio of 0.1% during that second quarter. Providing this level of superior service strengthens both our value proposition and our relationships with our customers. Delivering superior service also supports our ongoing yield management initiatives. We have improved the quality of our revenue over the long term by offering a consistent approach to pricing, which is designed to offset our cost inflation and support our ongoing investments in service center capacity and technology. We believe that our ability to consistently offer network capacity differentiates us from others in our industry, which is an additional element of our value proposition that we believe will support our long-term market share initiatives. Our market share remained relatively consistent during the second quarter despite an environment where overall freight demand was subdued. The year-over-year decrease in our volumes, however, resulted in a loss of operating density. We believe that our long-term improvement in our operating ratio requires consistent increases in both density and yield, both of which generally require a favorable macroeconomic environment. With our commitment to providing superior service as our first priority for our customers, it becomes a challenge to maintain, much less improve, our productivity during periods with reduced density. As evidence of this fact, our linehaul latent load factor decreased 3.1% during the second quarter. We were pleased, however, that our platform shipments per hour increased 6.6% and P&D shipments per hour increased 0.5%. These improvements, as well as other efforts by our team to manage costs, helped us maintain our direct operating cost as a percent of revenue. Our overhead costs, on the other hand, increased as a percent of revenue during the quarter, as most of these cost categories are fixed. We also believe an increase in aggregate depreciation expense due to the ongoing execution of our capital expenditure plan. We believe it is critically important to continue to execute on this plan regardless of the short-term economic outlook. We currently have approximately 30% excess capacity within our service center network, which is a little higher than our target range of 25%. We are comfortable with the amount of excess capacity as we remain confident in our ability to win market share over the long term. Finding land and building service centers in the right locations can take considerable time. Therefore, we make every effort to stay ahead of our growth curve with these investments. We could not have doubled our market share over the past 10 years without our consistent investment in service center capacity as well as our regular investments in our fleet, our technology and training, education, and benefits for our OD family of employees. Our proactive approach to managing all elements of capacity has created a strategic advantage for us in the marketplace, which typically becomes most apparent to shippers in tight capacity environments. We do not always know when an inflection point in the demand environment is going to occur, but we believe we are well positioned to respond to any acceleration in volumes when it happens. Through the disciplined execution of our long-term strategic plan, our team has created one of the strongest records for long-term growth and profitability in the LTL industry. We remain committed to providing superior service at a fair price and maintaining the necessary capacity to support growth, and we believe we are better positioned than any other carrier to produce long-term profitable growth while increasing shareholder value. Thank you for joining us this morning, and now Adam will discuss our second quarter financial results in greater detail.

Thank you, Marty, and good morning. Old Dominion's revenue results for the second quarter reflect a 14.1% decrease in LTL tons per day and a 1.1% decrease in LTL revenue per hundredweight. Our yield metrics were affected by the significant decrease in the price of diesel fuel during the quarter as LTL revenue per hundredweight, excluding fuel surcharges, increased 7.6%, reflecting our consistent approach to managing yield. On a sequential basis, revenue per day for the second quarter decreased 2.0% when compared to the first quarter of 2023, with LTL tons per day decreasing 1.8% and LTL shipments per day decreasing 0.3%. For comparison, the 10-year average sequential change for these metrics includes an increase of 9.8% in revenue per day, an increase of 6.8% in tons per day and an increase of 7.2% in shipments per day. Our shipments per day on average have been relatively consistent since December of last year. We had previously communicated our expectation for volumes to remain consistent through the second quarter despite the sequential growth that we have historically achieved during this period. Our baseline thinking was for volumes to remain consistent through the third quarter as well, although we have noticed an incremental increase in revenue over the past few workdays. The change in our revenue on a week-by-week basis so far in July has been relatively consistent with historical averages. As a result, it appears that the sequential change in both revenue and shipments per day for July will be the first time this year where we're more closely aligned with our 10-year average sequential change. While there are still a few workdays remaining in July, our revenue per day has decreased by approximately 15% to 16% when compared to July 2022, although the timing of the July 4 holiday has skewed this number slightly. If the trend that we've seen over the past few workdays holds steady through the end of the month, we expect the price of diesel fuel and our purchase transportation cost improved 60 basis points. These changes more than offset the increase in salaries, wages, and benefits as a percent of revenue for our drivers, platform employees, and fleet technicians that are included in our direct costs. Old Dominion's cash flow from operations totaled $287.8 million and $703.2 million for the second quarter and first half of 2023, respectively, while capital expenditures were $244.7 million and $479.4 million for those same periods. We utilized $160.5 million and $302.2 million of cash for our share repurchase program during the second quarter and first half of 2023, respectively, while cash dividends totaled $43.8 million and $87.8 million for the same period. We announced this morning that our Board has approved a new share repurchase program that provides us with the authorization to repurchase up to $3 billion of our outstanding stock. This program will begin after the completion of our existing $2 billion repurchase program that was announced in July 2021. While we intend to continue our focus of returning excess capital to our shareholders, our first priority for capital spending will continue to be the strategic investments in capital expenditures that support the long-term profitable growth of our business. Our effective tax rate was 25.4% and 26.0% for the second quarter of 2023 and 2022, respectively. We currently expect our annual effective tax rate to be 25.6% for the third quarter of 2023. This concludes our prepared remarks this morning. Operator, we're happy to open the floor for questions at this time.

There's a lot happening in the background right now with one of our major competitors. Could you elaborate on what you're seeing or expecting in terms of any shifts?

Sure. We don't want to comment specifically on any one carrier, but we have noticed an increase in business recently, particularly over the past few days. Over the last few weeks, we’ve seen a better trend, and this goes back further than that. We believe we are at the end of a long, slow cycle. We have stayed engaged with our customers over the past year and a half, especially since April of last year, when things slowed down. Typically, as we reach the end of such cycles, we begin to hear about service issues with other carriers and a need for shippers to reconsider using Old Dominion in their supply chain. We’ve increasingly had those discussions, which have intensified over the past few weeks. However, we measure our success over the long term and have doubled our market share over the last decade. Looking ahead to the next ten years, we see significant growth opportunities and aim to continue gaining market share in a way that aligns with us. We will keep engaging with customers to highlight the Old Dominion value proposition and how we can enhance their supply chain. This has led to a slight increase; we had been operating around 47,000 shipments a day, as mentioned last quarter. We typically observe a slight increase in shipments from the beginning to the end of the month, but recently, we've been closer to 50,000 shipments daily. It's challenging to pinpoint one specific factor driving this increase, but it's higher than our initial forecast from a month ago. We might have picked up around 1,000 to 2,000 additional shipments per day. We believe we’re nearing the end of the slow cycle and expect business levels to start improving towards the end of the year and into early 2024. Demand seems to be improving, and we’re having positive discussions with customers, just as we have throughout the year. It does feel like things are starting to turn positively.

Could I ask a follow-up? You mentioned that you currently have about 30% excess capacity in your network, whether due to demand or competitor issues. You also indicated that you typically prefer around 25%. Would you consider reducing that excess capacity to 20% or 15%, or is that a more fixed threshold for you?

Yes, that 25% is just a target. We often experience periods where, on average, the system falls below that. A good example is 2021, when we had considerable sequential growth due to economic strength. Looking back, we were among the few carriers to achieve a double-digit sequential increase from the first to the second quarter of 2021, and we were the only carrier to follow that with another sequential increase from the second to the third quarter. Our past proves that with the right strategies, we can handle significant business increases by planning for the long term and building capacity into the system. We always aim to think several years ahead to stay ahead of our growth curve. The service center capacity is just one aspect of the overall capacity equation; the people and equipment components are also crucial. We try to maintain our service centers ahead of the curve and, in certain markets, even further ahead. However, this number can fluctuate, and each service center has different capacities. Overall, that's where we aim to be for the system average.

Just wanted to ask about sort of how we should think about OR in the third quarter? Like you're getting some volume, better pricing trends, presumably as well, how should we think about sort of the potential improvement? And should we essentially see sort of something maybe even above seasonality given the latent operating leverage?

I believe the top line will be the key factor here. We've shared some insights about our performance in July and will provide a mid-quarter update soon, including data for August. Typically, we see about a 50 basis point increase in the operating ratio from the second to the third quarter. I expect this trend to continue, with some increases in overhead categories contributing to a rise in our total overhead expenses compared to last year. This increase will partially stem from depreciation, and we anticipate miscellaneous expenses, including general supplies and expenses, to also be higher. Our ability to manage direct operating costs should remain stable as a percentage of revenue, reflecting a slight improvement while staying consistent with last year’s figures. The key issue will be how our overhead costs adjust as a percentage of revenue, which will heavily depend on the top line performance. If we maintain a flatter volume environment similar to our previous base case scenario, we could lose some leverage. However, if we achieve incremental improvement and growth, it could positively influence our operating ratio. I anticipate that we may experience a small increase in operating ratio of between 50 to 100 basis points compared to the second quarter. Ultimately, changes in overhead costs as a percentage of revenue will depend on top line outcomes.

Okay. Great. I guess I'd like to ask a question on the pricing environment. And I guess, more specifically, if you go back 3 months ago, it seemed like there was incremental competition around some of the transactional freight in the marketplace. Have you seen anything change there, whether it's over the course of the last few months or in recent weeks that would give you some more confidence about the trajectory of pricing in the marketplace? Just any sort of commentary on that, I think, would be helpful.

Yes. There have been no major changes in the pricing environment. I mean, we're still getting increases from our contract carriers, and there's not anything really crazy going on out there, which is a pleasant surprise in a slower environment. But again, we're not seeing any changes from the first quarter, and we're still getting increases when we need them.

But I guess just a quick follow-up on that, Marty, if I could. I mean, are you seeing maybe just given all the shifting dynamics in the marketplace, maybe a little bit less of a competitive situation going on with the transactional part of the market? Are you seeing some firming in pricing there, I guess, was what I was trying to get at?

I haven't noticed any changes in transactions at all. As I mentioned on the last call, we operate on a cost-plus pricing model. When we discuss pricing with our customers, we explain our costs, which helps them understand why price increases are necessary. We don't have issues with securing those increases, but I'm not observing any significant pricing adjustments since the first quarter.

Sticking with that transactional theme. Adam, last quarter, you kind of flagged the 3PL business losses as being a bit more outsized. Has that basically run its course where there's not much more 3PL business to lose? And as you talked about this kind of recent uptick in the last few work days, has that been more kind of transactional volume as well, maybe getting some of that 3PL back? Or are you actually seeing core LTL freight pick up substantially over the last week or so?

Yes, it's primarily about our core business. Looking at our top 50 customers, the 3PL segment performed in line with our overall company average in the second quarter. Our core contract business, those with direct contracts, showed better performance. However, with revenue down 15%, most were affected. A significant part of this decline was due to a sharp decrease in fuel surcharge revenue, as fuel prices dropped nearly 30%. This presented a challenge for us. Over the past year, we have maintained consistent communication with our customers, and we are pleased with the trends we've observed. While we wish we could discuss growth and see substantial growth occurring, the past year has been difficult. Nonetheless, we have managed to establish strong, long-term relationships with customers who appreciate the value of Old Dominion, and they continue to expand their business with us. The overall demand environment and the state of the domestic economy have also influenced our customers' operations. In many cases, contracts are still awarded to the same customers, though their business volume may have decreased. I believe we are nearing the end of this phase and that stabilization is coming. The underlying demand for LTL transportation seems to be reaching a point of stabilization. We've experienced stable trends throughout the year, and I feel like we are approaching a turning point. Discussions with others in the industry indicate more service failures, which typically lead to business returning to us. I am optimistic about these fundamental trends as we move into the second half of the year and prepare for 2024.

Maybe I wanted to come back to pricing for a minute, maybe kind of big picture. If we think about the potential for a capacity event in the industry where we see capacity materially tighten, I think we've looked at these in the past, we've seen meaningful pricing opportunities for the carriers in the space. I guess conceptually, how do you think about that? If we were to see some degree of capacity event, given the strength in pricing over this last cycle, is there still material upside as you think about that? I know volume ultimately will come back, but I wanted to get a sense of what you think about the potential future pricing opportunities are as capacity potentially gets tighter in the industry?

For us, it's all about maintaining a consistent process, which we emphasize frequently. We're focused on a cost-based process, as Marty mentioned earlier. We discuss our cost inflation with customers and the necessity of implementing a price increase that exceeds our cost inflation by 100 to 150 basis points each year to support our significant investments in service center capacity and technology. I believe this is generally understood and makes sense during our discussions. Naturally, managing our costs and keeping cost inflation under control is complex, and I'm pleased to see that our cost per shipment numbers are starting to moderate. If we exclude fuel, our core price inflation is moving closer to our expectations for this year. Our team has excelled at managing costs and controlling inflation as best as possible in a low volume environment. Achieving a 72.3 in the second quarter, despite a 14% decrease in tonnage, is quite impressive. However, it’s vital for us to remain consistent with our strategy. If other carriers start to make moves similar to those in 2021, closing the pricing gap and potentially raising their prices even more, that could create favorable opportunities for our market share. We tend to be slightly more expensive than other carriers on average, so seeing that gap narrow would benefit our pricing initiatives. Our main focus is on our own operations, having conversations with customers to showcase the value we provide compared to the industry, and identifying our needs to enhance cash flow and strengthen our balance sheet to support further investments and continue the company's growth.

Adam, regarding the uplift in shipments of 47,000 to 50,000, are there any changes in the mix? If this increase is due to diversions, it's noteworthy that Yellow has a significantly lower weight per shipment. Are there any observations on how this might separate shipments from tonnage? Considering the elevated tonnage numbers from the last few days, if we assume they remain stable, how does August compare year-over-year? Lastly, Yellow is quite different from OD. I understand you may not want to address Yellow specifically, but as the third-largest LTL company, they seem to be on the verge of going out of business. If Yellow's customers are looking to divert, do you think OD is the natural alternative given that you are known for being a high-quality service provider? I'm trying to determine if you are a good indicator of this trend, or if the diverted business might go elsewhere.

I’ll try to address your questions in order. To answer your first question about our mix, there hasn’t been much change. Our average weight per shipment has decreased slightly, dropping by about 10 pounds to around 1,525 pounds recently. While not much is changing, we seem to be attracting more smaller tariff-based customers, which typically have lower weights per shipment, and that’s a positive development overall. Whether this trend continues is still uncertain, as things are still evolving. In August, we saw a sequential increase of about 0.5% in our shipments per day compared to July. If this trend holds, we might experience a stronger carry-forward from July’s performance. Last year in August, we had an average of 51,000 shipments per day, so we are getting closer to that if we can maintain around 50,000 shipments consistently. However, keep in mind that there’s a natural progression from the start of the month to the end, and we are observing some trends already. It’s not just a matter of expecting immediate change from our recent average of 47,000 shipments per day since last December. This has been a gradual development, and we can’t attribute it solely to one factor. Historically, as we reach the end of a cycle, we start to win business from different carriers. There may be direct freight opportunities and also indirect trade possibilities if an industry event arises, but that’s still uncertain. We continue to engage with our customers, ensuring they are aware of our capacity and the service we offer. Drawing from our experiences in 2021, when freight was moving quickly to us, we stepped up significantly in the second and third quarters. The conversations we’re having with shippers now are similar to those times. Our focus is on protecting the capacity for our existing customers as we navigate any potential periods of increased freight opportunities.

I wanted to go back to your comment on the capacity in the network. You referred to the 30% being above what your target is. I guess if you kind of juxtapose that with there may be opportunity for terminals related to the discussion we've been having about the big industry participants that are under pressure. So I'm wondering, would you consider being opportunistic and say, 'Hey, we've got maybe more capacity than we need in the network, but there is an opportunity to kind of bring in a bunch of additional terminals that maybe fit well?' Or just how do you think about that and the kind of pace of terminal additions if you look at, I don't know, the next two years, something like that?

Yes. Tom, we're always looking for opportunities. And that's why we try to stay so far ahead of the growth curve. We generally are looking at each service center in each region and projecting out 5 years of potential growth to know where we're going to have facilities that start hitting capacity. And those are the ones that go on our target list for kind of we roll out internally a two-year capital expenditure plan to expand service center capacity and where we need it. So sometimes an opportunity presents itself that maybe we don't need this particular location, but in year 4, for example, but if it's a good facility, then we would go ahead and take advantage of it. And again, it gets back to, we've got our long-term market share initiatives and what we think we can achieve over a longer period of time. We know we're going to keep growing this network. We've been one of a few carriers that have been expanding. Many talk about it, but when you look over the last 10 years and you look at the capacity additions that we've made, the public carriers in total are actually down in terms of the number of service centers in the industry. So we're going to continue to say that's a big part of our value proposition is, we're consistently investing dollars to be able to support our customers' growth and make sure that we can be there when our customers need us the most and when they've got growth potential but they need an LTL carrier to be able to respond. We not just be able to respond in the middle of the month when things aren't as busy, but at the end of the month when they're trying to get the freight moved off the dock and delivered to their customers, that's one thing that they can rely on OD. So we'll certainly continue to look for opportunities, and we would be opportunistic in adding facilities if it makes sense within the long-term vision for our network.

If we reflect on the significant shifts in the industry, such as the consolidation of freight back in 2002 or changes with New England motor freight, it's evident that these transformations can happen quickly. You mentioned that customer discussions are increasing. Are these mostly with existing customers? Adam, you mentioned the top 50 customers are also facing a decline in their business. Is this primarily due to internal factors, or are you having new conversations? I assume there aren't many new discussions, especially since users of Yellow are likely looking for lower costs rather than higher quality. Also, could you share your thoughts on headcount as you navigate this shift? I know you have 30% excess capacity in your facilities; how do you see that impacting headcount and overall capacity?

Yes, we engage with new customers every week. Our team of over 500 salespeople is dedicated to bringing in new business and conducting discussions about onboarding. We also address inquiries from existing customers regarding capacity, showcasing our terminal network and availability. These conversations are ongoing. Regarding labor, we have that aspect under control with our driver training school for combo drivers. When demand is low, they assist on the dock, and we can easily transition them back to driving as tonnage and shipments rise. We believe we are well-prepared to handle any potential increases in demand, and I am confident in our ability to manage whatever challenges may arise.

And just to clarify, Marty, could you provide a follow-up? I know you mentioned it was a slow grind, but I want to understand if there has been a significant change in the last 48 hours. I understand they stopped picking up freight last night, and I'm trying to grasp the speed and scale we are discussing here.

Yes. We're reading the same thing as you are. So we really don't know what's going on, but we're talking about it within our senior management team every day and how we're going to put forth our plan to handle additional business. But we're not really seeing any major business coming out of that. And just like you, we don't know how that's going to end up. So we don't want to speculate at this time.

Adam and Marty, I'm not sure if this got captured in some of the previous answers, but I wanted to ask it maybe a little bit more directly. If you think about the potential share wins from this, I guess, impending competitor exit, would you expect to see outsized share gains given your capacity expansion or maybe slower share gains given a more disciplined yield approach and what you mentioned was a higher average price than the market?

Well, as you know, we're very disciplined on price, and we're not going to do anything to trash our service by taking on too much freight. So we expect if something were to happen that we would remain disciplined in that manner. And like Adam said, we'd look after our existing customers, and we cost out every piece of business that comes through this truck line. And if it doesn't have the yield that we expect, we just won't take it on. But we also expect if there is a major event happening that we'll gain business probably from other carriers that weren't participating in that event because they may take on too much revenue and trash their service, and we'll benefit from that as well. So we've experienced that before and ready for it again.

So I just had a follow-up on the headcount comment. Marty, you mentioned you're confident from a labor perspective that you can handle some of this incremental freight. Are you saying that you think you can handle the surge with limited headcount increases from here or are you just more confident that you'll be able to ramp up your labor force accordingly if you do see volume tick up? And then I was also just curious on cost per employee. Any thoughts there? I know it's been kind of trending roughly flattish, up a little, down a little over the last few quarters? Just curious how this could affect that metric.

Yes, this is Adam. We have experienced a decrease in headcount, which has been ongoing since last year. However, we have sufficient capacity in three key areas. While we primarily focus on our service centers, we also have the equipment and workforce needed to respond to increasing business levels. We have a flexible workforce and the ability to bring back our employees when necessary. Marty highlighted our internal truck driving school, which has produced about a third of our drivers. Some drivers from this program continue to work on the platform until demand allows us to transition them into full-time driving roles. Additionally, we have other options available. In the past, when business accelerated, we have used purchased transportation as a temporary measure to support our workforce. The decision to supplement our capacity depends on the rate of volume increase, and while we prefer to operate our entire fleet with our own personnel, there may be times when this approach is necessary. Ultimately, our goal would be to return to 100% in-sourced operations as soon as possible if we need to take that route.

Adam, you mentioned a few times the intra-month seasonality of shipments, which we can’t predict. I wouldn’t typically ask a short-term question, but these are unusual circumstances. If possible, could you share the year-over-year tonnage for the last few days and what that trend looks like? We’re trying to understand the recent run rate. Also, I believe yield is down about 3% in July. Do you have any insight into what yield excluding fuel is doing this month?

Yes. We previously discussed that the revenue per hundredweight, excluding the fuel surcharge, is between 6.5% and 7%. Currently, we are seeing fuel prices decrease, and I believe July will be the low point. At this stage, we continue to average a 30% reduction in fuel costs. Last year, fuel prices started to drop in the third quarter, and that trend continued, which should lessen the challenges as we move through the latter half of this year. We are experiencing core increases, as mentioned by Marty earlier, and it will be crucial to assess whether we or our competitors see sequential increases. We aim to achieve this every day, with contracts coming up for renewal that allow for negotiated increases. If the mix remains relatively stable, we should observe sequential increases in yield metrics. Recently, we've maintained around 50,000 shipments per day, partly due to typical growth as the month ends. It remains to be seen if this will accelerate further. The 50,000 figure provided this morning assumes we keep that level for the remaining workdays until Monday. If the actual numbers differ from today's discussion, you can evaluate where we stand. Last July, shipments were just over 51,000 to 52,000 daily, and I noted that August had around 50,000 to 51,000. Thus, if the 50,000 figure holds, we're returning to last year's shipment levels. On a broader scale, our success won't hinge on immediate weeks, months, or quarters, but rather on the long-term potential for market share. We remain confident in our long-term market share potential because we continue to win business based on our service quality. Our value proposition focuses on delivering excellent service at a reasonable price while ensuring network capacity to support customer growth. We believe our service and capacity advantages will help us gain market share, regardless of what may transpire in the coming weeks.

So Adam, your point there is that others may get maybe a little bit more of the volume day one, but to the extent that they struggle with this big surge in volume, you'll then get it on a derivative basis, maybe it's not day one but it's weeks or months from now. Is that kind of what you're trying to say?

Exactly. Slow and steady generally wins the race, and we want to be patient with the things. And certainly, we're looking and having conversations with customers and want to help where we can. But just like in 2021, you have to be careful about opportunity. You don't want to take on so much so fast that you end up not being able to deliver on the service value that we offer with 99% on time and a claims ratio of 0.1%. So we want to be methodical about the way we go through this and make sure that we're protecting servicing capacity for our existing shippers without taking on too much of what opportunity may be out there. And so I think when you go back and you look in prior trends, like I said, we stepped up in the second quarter more so than anyone else. When you look at 2021, when you look at that sequential acceleration, and then we continue to follow on from there where others didn't. So it's always just making sure that you don't over-extend yourself in the short term and just keep that eye on the ball for the long-term vision.

Sorry to say this topic, but I just wanted to kind of basically clean up the commentary on this call, which is the uptick in volume that you see in the last few days, how much of that is because of a cyclical improvement versus flow-through from what's going on at your competitor? Like is it one of the two of them? Is it both? And kind of can you tell the two of those apart?

It's difficult to pinpoint what's causing the recent acceleration. As I mentioned, we anticipate an increase going into the last full week of the month, and it's slightly higher than my initial forecast for this week. The volumes on Friday were heavier, and Monday and Tuesday have also seen more activity than expected. This could be partially due to increased business from an existing customer experiencing their own end-of-month surge, and there's also some freight diversion contributing to it. With around 50,000 shipments a day, it's hard to identify the exact reasons for any specific shipment. However, we've noticed positive trends for several weeks now. We closed June strong, and despite an average of 47,000 shipments per day, we've had decent end-of-month performance. The trends within the month have been good over the past couple of months. Although we experienced a slowdown earlier in the month, which is typical, we've made up for it as the month progressed. Overall, I'm satisfied with our performance in July, but when we project the daily shipments, we're still behind June's numbers. Some of this is because July is a 20-workday month, and the way the July 4 holiday fell, that Monday was likely a half workday. Adjusting for that, we had observed better trends, with shipments closer to around 48,000 per day before this recent uptick. While I can't fully identify the drivers of the change, it seems typical for the end of a slow period since last April, and there's been an acceleration in the last few working days.

Very helpful. Super quick follow-up. Did you take any short-term cost savings actions in this quarter that may potentially unwind if tonnage really comes back?

We maintain a disciplined approach to managing our variable costs and controlling discretionary spending. This mindset is important to maintain constantly, regardless of the business environment. If you don’t adopt this mindset during favorable times, it becomes difficult to adjust when challenges arise. We have successfully reduced some costs, resulting in a better operating ratio for the second quarter than we had initially anticipated. Additionally, overhead costs typically account for about 19.5% to 20% of our total revenue, while direct costs range from 2.5% to 53% of revenue. We expect to see some cost increases, including depreciation, general supplies, and miscellaneous expenses, rising from the second to the third quarter. These expected costs will be present, and whether we achieve revenue growth to counterbalance them remains uncertain, similar to previous discussions. So, we expect some dollar increases going into the third quarter.

I wanted to focus again on what's going on with Yellow and look out at pricing. I don't think I heard this, but generally, I wouldn't have expected anybody to try to push the GRI through, excluding what's been happening. But do you think there is a likelihood that this occurs now if there is a bankruptcy in the near future?

As I mentioned earlier, I prefer not to predict what will happen, but I can say that we implemented our General Rate Increase in January, and we do not anticipate needing to implement another one this year regarding transactional business. We will manage our operations in the same manner, regardless of their presence. I can't speak for other carriers, but perhaps some of them might feel the need to adjust their prices and may use this situation as an opportunity. It's uncertain. However, we have a solid understanding of our costs, which we had before and will continue to have moving forward. Therefore, I don't foresee us considering a General Rate Increase on transactional business.

Okay. Marty, that makes sense. So you're not expecting it, but you wouldn't be surprised if maybe others tried because you're not exactly at your level. I wanted to, Adam, jump on something you mentioned with sort of slow and steady wins the race and freight coming back with people not being able to handle it. But even if people handle it, won't there be cases of freight not being what people think and it's just needing to find proper homes within a given network?

Typically, that plays out exactly as you described. where it may find a temporary home, but then ultimately, and in some cases, people have just got to get their freight moved and they may go to the next closest carrier from a price standpoint. And just to keep their supply chain moving. But ultimately, if they want value in their supply chain, that freight will find a home at Old Dominion.

I was wondering if you could maybe touch on the performance you've seen if there's been any differentiating trends between maybe your more retail consumer customers and then those that are more maybe industrial-focused? And then same thing, if you're hearing from your customers, kind of their expectations as you go into the back half of this year, thoughts on inventory levels where they stand today? Just any kind of bigger picture color would be helpful.

We experienced generally stable performance in the second quarter with both our industrial and retail customers. The industrial segment makes up 55% to 60% of our overall business. Historically, we monitor ISM and industrial production, which have been at or below 50 for the past nine months, aligning with industry volumes. This corresponds with the 14% decline we saw in the second quarter. However, we believe our discussions indicate that inventory levels are starting to normalize, supporting our view that we may return to more consistent volumes in the second half of the year, aligning with our typical sequential trends. Normally, in the third quarter, shipments increase by about 1.5% to 2% compared to the second quarter, followed by a decrease of around 3.5% in the fourth quarter. Recently, there has been a noticeable gap between our actual trends and the 10-year average, but in a normalized environment, we expect to get closer to those averages and anticipate real growth entering 2024. Conversations with our customers suggest a trend toward normalization, with freight activity beginning to pick up again, which is the positive outlook we have as we plan for the latter half of this year and into 2024. Additionally, there have been recent developments that have further accelerated this scenario over the past week or so.

Can you discuss the factors that are contributing to a return to the normal sequential trend over the past few months, particularly in terms of shipments from existing customers compared to new customer acquisition, and any other elements you think are important in assessing how to fill that excess capacity in the upcoming quarters?

Yes. Like I said earlier, and we've talked about this on recent calls. From a core contract customer standpoint, we've actually had good trends. And when we look at having a double-digit decrease in volumes, that may seem counterintuitive. But certainly, the economy has weighed on many customers and has impacted their trends. But when we look at our national account business and the wins that we've had versus losses, we continue to have good wins and have not really lost any share to speak of with those larger national accounts, but they've just had reduced volumes. We have lost and have talked about our business levels with third-party logistics companies that have been down in recent quarters and that was still negative in the second quarter as well. But that's something where I think that certainly shippers have been looking to save costs and they've been using the 3PLs to find carriers that had a little cheaper price than us maybe and divert some freight away for that reason. But I think now, just like we've seen in prior cycles, servicing capacity are coming squarely back into focus for many shippers. And so I think that lends itself to how we've won market share over the long term. So there's not necessarily any one piece of business that's changing any more than others. We've got a lot of consistency within our largest accounts, and these are long-term strong relationships that we have between us and our customers. And so our sales team, our pricing team, they're staying in front of our customers and staying engaged and making sure that they know we're here when they need us. And we're increasingly getting those inbound phone calls and being able to take on some incremental business. So it's good to see, but we still would like to see the overall macro environment improving, would love to see the ISM going back above 50 and really talking about more of a true improvement in the underlying demand environment versus what the supply situation in the industry might be.

I just wondering, the West Coast ports had a bit of a pickup in June. Just wondering, I know some of it is indirect if that benefited some of the volumes that you saw and then maybe if it picks up as the year progresses, would that help the

Yes. This is Marty. I read the other day that in June, imports from China to the U.S. fell 24%. Taiwan, it fell 23%, Vietnam 11%, and South Korea 6%. So we haven't seen a lot of energy coming from those ports. As you know, we have a division on the East Coast ports, and those business levels are down there. So I think the whole global economy is still rather weak, but we're prepared to handle that, too, if it picks up, but we're not seeing any of that movement so far this year in an upward manner.

Yes. I want to thank you all today for your participation, and we appreciate all the questions. If you have any further questions, please feel free to call us after the call. I hope you guys have a great day and a good rest of your summer.