Good day and welcome to the Old Dominion Freight Line Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Drew Anderson. Please go ahead.

Thank you. Good morning and welcome to the second 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 August 3rd, 2022 by dialing 1-877-344-7529, access code 7163281. 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 yourself to just a few 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 second quarter conference call. With me on the call today is Adam Satterfield, our CFO. After some brief remarks, we will be glad to take your questions. I am pleased to report that the OD team delivered strong profitable growth during the second quarter, which resulted in new company records for revenue and profitability. Our revenue increased 26.4% to $1.7 billion, while earnings per diluted share increased 42.9% to $3.30. We also improved our operating ratio by 280 basis points to 69.5%. This is the first time in our company's history that we have produced a sub-70% quarterly operating ratio. We achieved these results by continuing to execute on our long-term strategic plan, which has guided us for many years and throughout many economic cycles. The disciplined execution of the business fundamentals that form this plan have supported our ability to double our market share over the past 10 years. We are confident that continued execution on this plan positions us to win additional market share over the next 10 years. The foundation for our ability to win market share is our relentless focus on providing superior service at a fair price. Our on-time service performance was 99% in the second quarter, while our cargo claims ratio improved to 0.1%. These service metrics reflect the efforts of our OD family of employees who maintain a steadfast commitment to delivering value to our customers each and every day. It appears that service quality is becoming even more important to customers when selecting a carrier which is why demand for our service has remained strong. This is a trend that began to develop with the economic recovery during the second half of 2020 and it continues today as many shippers are still struggling with supply chain issues. As a result, we believe our customer relationships have strengthened as we do our part to help our manufacturing customers keep their facilities running smoothly, while helping our retail customers keep products on the shelf and available for sale. Our value proposition also includes having sufficient capacity to support our customers when they need it the most. We currently have approximately 15% to 20% excess capacity within our service center network and we expect to open multiple new facilities during the second half of this year. These new facilities as well as various other expansion projects that we expect to complete should increase the amount of our excess capacity towards our longer term target of 25%. We remain committed to the ongoing expansion of our service center network, which we believe is important, regardless of the short-term macroeconomic outlook. Expanding service center capacity can take a significant amount of time, which is why we have historically been proactive with respect to our expansion efforts. This unique strategy has created a capacity advantage for us in the marketplace, which becomes more apparent to shippers in tight environments, like we have seen in the past couple of years. With over $700 million of year-to-date revenue growth through June, we are on pace to exceed $1 billion of revenue growth for the second year in a row. We simply could not have achieved these types of numbers without the consistent investment in our service center capacity, as well as the continued investment in our fleet, technology and the training and education of our OD family of employees. Our team has shown tremendous flexibility over the past couple of years in response to significant changes in our business levels. And I am confident that this team will continue to build on its success. We have created one of the strongest records for long-term growth and profitability in the LTL industry. By executing on our long-term strategic plan, providing superior service at a fair price and having the capacity to stay ahead of our growth curve, 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, Greg and good morning. Old Dominion's revenue growth of 26.4% in the second quarter was driven by the 22.6% increase in LTL revenue per hundredweight and 2.8% increase in LTL tons per day. Demand for our superior service remained strong during the quarter, which helped support the steady trend with our volumes and consistent yield improvements. On a sequential basis, revenue per day for the second quarter increased 11.4%, when compared to the first quarter of 2022, with LTL tons per day increasing 0.7% and LTL shipments per day increasing 1.7%. For comparison, the 10-year average sequential change for these metrics includes an increase of 9.6% in revenue per day, an increase of 7.4% in tons per day and an increase of 7.8% in shipments per day. At this point in July, our revenue per day has increased by approximately 18%, when compared to July 2021, which continues to exceed our long-term average growth rate. As usual, we will provide the actual revenue-related details for July in our second quarter Form 10-Q. Our second quarter operating ratio improved to 69.5%, with improvements in both our direct operating cost and overhead cost as a percent of revenue. Within our direct operating costs, improvement in salaries, wages and benefits, as well as purchase transportation cost as a percent of revenue, effectively offset the increase in our operating supplies and expenses. 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 our overhead cost as a percent of revenue during the second quarter, primarily by leveraging our quality revenue growth and controlling discretionary spending. As we move into the second half of 2022, we have areas of opportunity to drive further improvement in our financial results. We will continue to focus on obtaining the yield increases necessary to improve the profitability of each customer account. We will also maintain disciplined control over costs to keep our cost inflation on a per shipment basis to a minimum. Our team is now appropriately sized at most of our service centers to support our anticipated shipment trends. And as a result, we believe we should start seeing improved productivity throughout our operations. The stability of our workforce has also allowed us to reduce our utilization of third-party purchase transportation and move closer to the fully in-sourced linehaul operation that we prefer. We believe this is one of many key factors, creating the service advantage we have in our industry, all of which comes back to helping us win long-term market share. Old Dominion's cash flow from operations totaled $427.3 million and $816.1 million for the second quarter and first half of 2022 respectively, while capital expenditures were $229.4 million and $323.1 million for those same periods. We utilized $293.5 million and $731.9 million of cash for our share repurchase program during the second quarter and first half of 2022 respectively, while cash dividends totaled $33.8 million and $68 million for the same periods. Our effective tax rate was 26.0% for the second quarter of 2022 and 2021. We currently expect our annual effective tax rate to be 26.0% for the third quarter of 2022. This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.

We will now begin the question-and-answer session. The first question today comes from Jordan Alliger with Goldman Sachs. Please go ahead.

Yeah. Hi. Good morning. I was wondering, if you could talk a little bit about the price environment. Obviously, there are some concerns out there about – more than some concerns about moderation in demand and volumes and you've had some of your rates of growth probably slow as well on that front. Can you maybe talk about ex-fuel sort of the core price thoughts as you move through the balance of this year? And have you had discussions with shippers, or have they come to you and started to talk about things as they approach their next contracts? Thanks.

Yes. Jordan, so far we haven't seen much of any customers asking for cheaper rates, or any kind of exception pricing or anything such as that. I think from what we can tell, the industry is extremely disciplined. I think over our history we've been extremely disciplined. And I think that will continue to be our focus. And right now, that's what we're seeing throughout the industry. So I think that's good for all of us. So, we'll see but so far very positive from that standpoint.

And then just a follow-up on fuel and fuel surcharges, I know the mechanisms are supposed to work as a pass through. Obviously, fuel surcharges have generally ramped up for the industry pretty quickly, maybe even faster than the cost of diesel. Can you talk about the impact on P&L from the rising fuel environment? Thanks.

Jordan, the way our program is designed, we really want it to be neutral to the bottom line as fuel goes up and down. And certainly as contracts come up in each period and they come up in every quarter for us. But as they come up we look at what the current fuel price environment looks like and then we try to stress test both up and down to see what that individual customer's overall revenue contributions might look like, and being the same for what their costing looks like. And so we try to do the best we can to make sure that that customer's individual account profitability understanding all the costs that go into the model for each individual customer account will come out positive, whichever way the fuel might trend. So I think that, our surcharge has certainly been effective with offsetting the increased cost of diesel fuel, and certainly that's having a direct effect on other petroleum-based products, but there's also a lot of indirect effect as well. That's why we continue to see our cost going up, and it's why we've got to continue to be disciplined with our yield management program.

Thank you.

The next question comes from Jon Chappell with Evercore ISI. Please go ahead.

Thank you. Good morning. Greg, there's been this thought that as trucking capacity truckload capacity starts to loosen, and especially as we've seen some major retail pre-announcements that LTL has been this massive beneficiary with the only capacity in town, can you kind of detail your book of business a little bit? And how much you would consider that's on your network today being non-traditional LTL freight? And have you seen any shift in your market share either up or down let's call it since mid-May when this whole retail fear started to really emerge?

Yeah. Jon, I'm going to let Adam address that. But obviously, there's business that moves back and forth. And it's extremely hard to measure. But I think Adam's got a better handle on those specific details than I do.

Yes, Jon, just to give a little bit of detail, certainly, as those announcements came out last quarter from certain retailers, we've been addressing that question, but we've got many customers that ship and receive that are beyond those two big box retailers. But nevertheless, our book of business is still 55% to 60% industrial. And I think the industrial-related customers when you look at certain macroeconomic factors in that industrial economy is they're continuing to expand and we probably got a little bit more growth out of our industrial-related customers in this most recent quarter than on the retail side. But our retail, which is 25% to 30% continues to perform strongly as well. It's just a little bit below the company average, but we're still seeing nice growth there. So it's something that we'll continue to work through though, and we believe we've got opportunities with each of those pieces of our business overall. We don't have a lot of truckload spillover-type business in our network. We worked incredibly hard last year, to make sure, when capacity was at a premium that we were allocating capacity more so to traditional LTL shipments and customers that were tendering those to us for the sense that whenever the truckload environment freed up a little bit that we wouldn't have this swing of freight going back into that market. And traditionally you see more of those shipments would be in our spot quote network. That used to be about 5% of our overall revenue. It's probably about 1.5% at this point. And those are shipments generally that existing customers have and that they're asking for something different from us so to speak. But we feel good about demand. We've talked about that. We've had a lot of customer engagement in recent months and we're hearing good things from our customers. They continue to demand service quality. We've worked really hard for multiple years on improving and strengthening our value proposition. And I think we're seeing that come through with the strength in customer relationships that we have right now. And so as a result we're not losing business. The volumes are a little bit flatter but I think you can just look and some of that may be demand for existing customers' products. So we feel good about everything our customers are telling us and just continuing to work and manage through to where the volumes are currently trending as we try to manage all elements of capacity within our business.

That's helpful, Adam. For my follow-up to Greg, the economy has changed a bit since the start of the year. You mentioned you still have 15% to 20% spare capacity and ambitions to grow the network as you outlined in January. Have you considered scaling back on some of that growth in the latter half of this year due to the more uncertain economic conditions, or do you believe this is the right opportunity to invest while others reduce their efforts, potentially enhancing your long-term market share?

Yeah, absolutely. It's the latter Jon for sure. Sometimes our opportunities are a little better when it slows down. And sometimes you just have better opportunities when it's like it is today. So we can't stop. I've talked about it before how difficult it is to expand your network, how long it takes, how lengthy the process is in certain locations, some certainly way worse than others. So we can't quit. We want to continue to grow that share and we know we've got to continue our efforts on a consistent basis to have that tight capacity when things get tight like they have been in the last 1.5 years or two years.

Great. Thanks Greg. Thanks Adam.

The next question comes from Jack Atkins with Stephens. Please go ahead.

Good morning, and thank you for taking my question. Could you provide the June tons per day figure on a year-over-year basis? Also, Adam, while we will wait for the Q to get detailed information on July, could you share any insights or commentary on how July tonnage is trending compared to usual seasonal patterns? That would be helpful for everyone.

Sure. In June, our tons per day remained consistent with last year's figures, and sequentially, it was flat as well. For shipments, June's daily shipments decreased by 0.7% year-over-year, but increased by 0.6% compared to May. Looking at July, we are seeing an upward trend. Overall revenue was up about 18%. While we typically don't disclose full details about yield, currently, revenue per hundredweight in July is up approximately 7.5%, which can provide some insight into the expected volume trends. It's important to note that this figure is slightly below what we achieved in the second quarter. We're anticipating some shifts in our freight mix compared to the third quarter of last year, which had the lowest weight per shipment. Back then, we observed sequential decreases, with an average of 1,538 pounds for that quarter. In July, we are still seeing an average weight per shipment of around 1,560 pounds, compared to 1,570 pounds in the second quarter. As the weight per shipment increases, we usually see a corresponding decrease in revenue per hundredweight, so there will be some impact from that.

Okay. And that 7.5% is ex-fuel correct?

Correct. Yes.

I wanted to clarify that. For my follow-up, Adam, is there a way to consider the trends in operating ratios as we move into the third quarter? Typically, we see some seasonal degradation from the second to the third quarter. However, as we've discussed over the past two years, it seems like normal seasonal patterns no longer apply. I would be interested in your thoughts on how we should view the sequential trends in operating ratios, including any factors we should consider.

Sure. Typically, there is about a 50 basis point increase from the second to the third quarter. However, this year we have some different factors in play. One notable aspect is in our general supplies and expenses. While I can’t reveal specific details at this moment, we are implementing some exciting new marketing initiatives that will lead to higher costs in the third and fourth quarters compared to the second quarter. Therefore, we expect a 40 to 50 basis point increase in those costs as a percentage of revenue from the second to the third quarter, primarily due to the timing of these programs. This is expected to bring the normalized number to around 100 basis points, similar to what we discussed at the end of the first quarter call. Our miscellaneous expenses have been lower than the typical average, which is usually about 0.5 points, and I anticipate a return to that average. So I believe a normalized target for us would be in the range of 100 to 150 basis points, based on a starting point of 69.5%.

Absolutely, we definitely saw that. Well, thanks very much for the color. I'm really appreciating it. I'll hand it over.

The next question comes from Ravi Shanker with Morgan Stanley. Please go ahead.

I'll just kick off with that comment. Congratulations on the margins guys. That was a pretty incredible achievement. Maybe to just start off with a big picture question related to that. How do you run the business? Do you run it for top line growth, EBIT growth? Do you have a margin target? Do you have an incremental margin target? Kind of what's your north star if you will in how you run the business?

All of the above.

We have broad measures that we consider. Any investment we make needs to yield an appropriate return. When engaging with our customers, we evaluate our long-term market share opportunities, which influences the necessary investments. Our strategic plan begins with delivering excellent service, which supports our yield management and generates cash flow that can be reinvested in capacity and our workforce, ultimately enhancing our service products. However, we do not aim to grow for growth's sake; we seek to achieve profitable growth. This is why we emphasize our long-term margin improvement potential. We established an annual operating ratio goal of below 70% after the fourth quarter last year, and achieving this for even one quarter demonstrates that it is possible, though we need to maintain our efforts. There is no quick solution; it requires disciplined execution of our plan and continuous improvement, with every employee contributing daily to enhance the company, whether by improving service and revenue or reducing costs. We aim to sustain profitable growth, and we have a strong history of doing so. Looking ahead over the next decade, we see significant opportunities that should also enhance shareholder value.

Understood. And if it were easy everyone would be doing it. Maybe a second question on the macro, obviously a lot of red flags out there on inventory levels, what are your customers telling you about what their inventory levels look like? And what do you think is a potential risk to the cycle in the back half? And maybe if you can distinguish that between industrial and consumer end markets that would be helpful.

We feel optimistic about the feedback we're receiving from our customers, and things are unfolding as we anticipated. Over the past few quarters, customers have consistently shared positive insights that align with the demand trends we are observing. We believe that even if consumption slows and impacts overall GDP, freight demand could remain robust. This perspective is reinforced by our ongoing discussions with customers. Many report that their inventory levels are below optimal, and numerous customers are facing record back orders, requiring them to address labor shortages and other supply chain challenges to ensure they have the necessary components to produce finished goods. Hence, we expect freight demand to stay stable, which will help us maintain our volume as we progress through the year. Nonetheless, many companies still have issues to navigate, and we aim to support them, particularly our manufacturing clients, by alleviating supply chain burdens. For entities requiring products for sale, we are prepared to deliver the high-quality service our customers expect, evidenced by a 99% on-time delivery rate and a claims ratio of just 0.1%.

Got it. I have one last follow-up on fuel. You mentioned earlier that you expect fuel to be net neutral to EBIT. However, I see you're achieving nearly a 50% incremental margin on fuel surcharge revenues. I'm trying to understand this better. Is it primarily a timing issue? From a modeling standpoint, how should we consider fuel amid the volatility, especially with a potential moderation in the latter half of the year? What impact does this have on your overall incremental margins?

I think it's uncertain what will happen with fuel prices, but we certainly hope they decrease for the overall health of the economy. Historically, if we enter a period of declining fuel rates, we can look back to 2015-2016, the last time we saw significant decreases. In a declining rate environment, we will be assessing contracts as they expire and will experience lower fuel surcharge contributions along with lower fuel costs. While it’s common to separate fuel from both revenue and expenses, it is indeed part of the revenue we aim to collect and is also included in our expenses. Thus, it's something we need to factor in. This is why our long-term yield management philosophy considers fuel in both revenue per shipment and cost per shipment. Over the past 10 to 15 years, regardless of whether fuel prices were moderately higher or lower on average, we have managed to exceed our cost per shipment inflation by 100 to 150 basis points. Although individual quarters may vary, our strong relationships with long-term customers require us to assess the inputs on both the revenue and cost sides to create a positive difference, enabling us to reinvest in our business. No one else is investing in service center capacity like we are, which is part of our value proposition and allows us to help our customers grow.

Great. Thank you, so much.

The next question comes from Tom Wadewitz with UBS. Please, go ahead.

Yes, good morning. It's Tom Wadewitz. Adam, you mentioned that you have the necessary resources and can likely maintain stability for a while. When many new employees come on board in a short time, there’s a chance for them to learn the system and improve their performance. How should we consider the possible effects on your margins or various cost categories if we maintain a steady tonnage environment and a consistent headcount over the next few quarters? In what ways could this productivity influence margins and which cost areas could see improvement?

Yes, Tom, I’ll attempt to answer your question. We’ve been through a challenging period, not just for our company but for the entire LTL industry, especially with the growth we've seen over the past year and a half. Since the fall of 2020, it's been difficult for all of us to meet customer needs and manage equipment requirements. We’ve hired a significant number of employees, over 6,000 across all roles including dock workers and drivers. This surge in headcount has brought in many inexperienced employees, which we've had to address over the last couple of years. While I don’t think anyone wants things to slow down, it can be beneficial when we start to see a leveling off as we are now. This allows us to refine our processes and improve employee training, as they become more familiar with their roles. We're not continuously adding to our workforce as we were previously, and this presents some advantages. Moreover, it gives us the opportunity to enhance our platform and P&D productivity, as well as line haul load factor and other performance metrics. It also allows us to evaluate our clerical processes and explore technologies that could assist us. Overall, there are numerous advantages to not being overwhelmed with busyness. While none of us want to see a slowdown, we prefer to focus on the positive outcomes and improvements we can make during this time, which will better position us for the future.

Okay. And I guess the second question is really just kind of a clarification. I know you talked a bit about July. You had a couple of questions on that. Is the tonnage implied in that something around flat, or does it imply down a little bit? I know you don't want to give us the precise numbers, because it can change a bit as you have the full month. But is the backing into kind of a flattish tonnage number about right, what you've seen so far in July?

It's down slightly, Tom. When we analyze it, it's down a bit compared to the same period last year, similar to what we've observed in the previous quarters' initial months. In the first quarter this year, and in the second quarter as well, the numbers were significantly lower than normal seasonal trends. I'd describe our performance as somewhat below our typical seasonal patterns. July usually sees a decline of about 3% compared to June, and we're slightly below that this time. Comparing this year to 2019 on a year-over-year basis, the trend in July relative to June appears to be somewhat similar. We'll monitor how the rest of the third quarter develops, as September is usually our busiest month of the year. We hope to see volumes increase as we move through this quarter, and we'll keep in close contact with our customers to manage costs effectively and ensure we're prepared for the volumes we're experiencing.

Great, okay. Great. Thanks, Adam. Thanks, guys.

The next question comes from Chris Wetherbee with Citigroup. Please go ahead.

Hey, thanks. Good morning. I guess I just wanted to touch on sort of the commentary around the pace of demand and not to be too nitpicky, but I guess I just want to sort of maybe understand, it seems like tonnage is maybe performing a little bit less than typical seasonality. So I guess I'm curious, do you think there is a sort of demand deceleration that's kind of becoming more clear within the numbers? It sounds like customers are still relatively optimistic about what the pace of volume might look like as the year progresses. But is there a bit of a disconnect between what you're hearing from them and what's actually coming through from a tonnage perspective?

I don't believe it's a straightforward situation. We have been addressing this throughout the year, trying to distinguish between the demand expressed by our customers and the actual trends in tonnage. As I mentioned, we have been underperforming compared to typical seasonal patterns. However, we must also consider that our 10-year average includes our market share, which has doubled during this period. We have managed to gain market share. In comparing our results to the industry, particularly over the last couple of quarters, it's clear that public carriers have experienced an overall decline in tonnage, while we have seen remarkable growth. Based on customer feedback and discussions, I expect our volume numbers to continue to outperform at least the public group we benchmark against. The discussion about demand refers to the demand for our services. While our customers may not have the same volume of shipments to offer due to a decrease in product demand, we are still acquiring new customers and maintaining our daily pickups. The key positive takeaway is the strength of our pricing programs and the ongoing conversations with customers that have resulted in no loss of accounts. The importance of service is increasingly recognized by our customers. We have demonstrated our value proposition over the years. While our initial costs may be higher, when considering the total transportation costs—such as fulfilling on-time delivery requirements for retailers—we can ultimately help our customers save money. These factors continue to fuel the positive conversations we are having with our clients.

Okay. That’s very helpful. Appreciate that color. That makes sense. And you guys have been through obviously many cycles and so – and have been pretty successful in navigating through those cycles. You just mentioned the sort of resiliency and the pricing you're able to get in this market even as maybe demand at your customers is beginning to fall a little bit. So if we think about sort of a normal recession whatever that may be in your definition, how do you think sort of operating ratio and maybe earnings power progresses, assuming that maybe the back half or some point in 2023, we're seeing more sustained negative volumes for the industry? Is positive profit something that we can kind of continue to look for from the model? Just kind of curious, how you think about that resiliency in a downturn.

Chris, I think all of us are going to have to see where this thing goes. I mean I don't think we're in a recession yet, at least I haven't heard that. We'll have to see where it goes. But at the same time you got to remember, we're up against some tremendous numbers from last year and we're still at a very, very decent level of business, where we can turn a pretty good profit I think. I mean we think we've proven that, right? And certainly, the second quarter bears that out. But I think we're still in a pretty good spot. Again, we can't control the economy and some of the things that the government does that drive some of it and whatnot. But I think we're still in a good spot today and let's hope we don't see further deterioration in the things going on from an economic standpoint.

Okay. No, that’s very helpful. Certainly, we can see the strength of the numbers we have no doubt about that. Thanks for the comment. Appreciate it.

Sure.

The next question comes from Scott Group with Wolfe Research. Please go ahead.

Hey, thanks. Good morning. I just wanted to follow-up on the headcount question. So if I look back at some of the past periods where tonnage has gone negative, headcount usually follows and comes down too. If I just take flat headcount from here in Q3, it's still up about 10%. Do you see opportunities if tonnage stays negative to reduce headcount, or are you going to be potentially more reluctant to do that this time around just given the problems that everybody had hiring people?

I think maybe you're pretty perceptive of how our industry has been the last couple of years with that question, Scott. No question. I mean we certainly don't want to get in a situation where we have to start making cuts and that kind of thing. That's extremely hard to do. We always hate to do that. I mean obviously, we've got to try to match revenue or the shipment levels to labor. I mean that's what we've done for many, many years and we have to continue to do that. In some cases, attrition helps to take care of our situation. So we always have a little bit of that, probably much less here than most places. But we – obviously, we're stalling hiring. We're not actively hiring hardly anywhere now maybe specific needs and replacements and that kind of thing but we're certainly not adding anybody on top of what we've got. So yes, I can promise you any reductions we would make we would look at those very, very carefully before we execute it if that makes sense.

Okay. But it does sound like if we're not sort of hiring more will there be some sort of natural attrition that could take the headcount down a little bit from here?

Certainly. Absolutely.

Okay. And so maybe just to tie that with that last question. So in an environment, where tonnage stays negative for a little bit, do you think you could still improve the operating ratio or maintain the operating ratio as you've done in like 15 out of 16 years or something like that?

Well, that would obviously, would be our objective to continue to maintain and certainly improve. I think we've proven it over the course of time and we'll just have to wait and see. I don't want to get into all of that at this point in time. My crystal ball is not completely crystal clear. So we'll just have to see where it goes, but we'll certainly continue to do the right things day-to-day. We'll continue to execute from a service standpoint and what not, keep our people focused on doing the right things and those are the things that drive the bottom line, sometimes the top and the bottom line. But we'll continue to do those things well and we'll see where it goes.

Thank you for the time, guys. Appreciate it.

The next question comes from Todd Fowler with KeyBanc Capital Markets. Please go ahead.

Hey, great. Thanks and good morning. So Adam, in your prepared comments, you had some commentary about cost inflation to the back half of the year. And I'm guessing or I think that traditionally you put through an employee wage increase at some point in the third quarter. And it sounds like you're also getting some benefit from improving productivity from the workforce standpoint. So I guess my question is are your comments that waging that cost inflation on a per shipment basis, is that going to increase or accelerate in the back half of the year, or does that start to level off? I guess, I'm just kind of curious, what your expectations are on the cost inflation side moving forward.

Yes, we always implement a wage increase at the beginning of September each year, which is a standard practice that contributes to why the operating ratio in the third quarter is typically higher than in the second. At the start of the year, we anticipated higher inflation in the first half, as we began observing rising costs around this time last year. Consequently, our costs are increasing, and when reviewing contracts that were renewing during these times, we had to secure larger increases. We initially expected to see some moderation in our costs in the latter half of this year; however, we have noted a persistent rise in fuel prices this year, leading to indirect effects on our overall cost structure. Currently, I don’t foresee the moderation we previously anticipated, but I don’t think costs will escalate further from here. We might continue to see core inflation in the 7% to 9% range that we have observed. When we analyze our costs, excluding operating supplies and expenses such as fuel, we saw about a 10% increase per shipment in the second quarter, which was higher than our expectations. However, we have opportunities to improve productivity across our operations, which could help mitigate some of that cost inflation per shipment. We managed to reduce our purchase transportation costs in the second quarter, and while we are currently in the 2% to 2.5% range for that line item, there may be additional reductions possible. In general, we are focused on managing each item on the income statement and identifying discretionary spending areas where we can cut back and save.

Perfect. Okay, good. That's helpful, and that makes a lot of sense. I guess just to follow up, and it's a little bit of a tricky question to ask, but from a bigger picture standpoint, it sounds like a lot of your competitors their approach to the LTL market now is a lot more like your approach adding some more terminals, focusing more on service. I guess, as you think about the competitive landscape, does that change your ability to win share in the marketplace going forward, or have you seen any differences in customer responses, due to some of the things that your competitors have been doing over the last, let's call it four to six quarters?

I don't think so, Todd. I mean, we'll continue to execute and do the things that we know best, how to do. I think we've had a pretty steady run up, on our share and I would expect that to continue.

Yes. That makes sense. I know it’s a tricky question to ask but was just curious about time itself. Thanks for the time this morning. I’ll turn it over.

The next question comes from Ken Hoexter with Bank of America. Please go ahead.

Good morning, Greg and Adam. Congratulations on surpassing 70%—that’s impressive leadership from your team. I have a few questions regarding the downturn and its potential effects on the operating ratio. It seems that July is showing more significant negative tonnage trends compared to June, possibly beyond just seasonal adjustments. Can you discuss how a normal cycle works in this context? How does this influence pricing pressure? I understand you typically maintain your pricing due to service quality, but I’m curious, how long does it take for these negative trends to impact pricing, especially considering recent developments in the truckload sector?

Yes. When looking at the rest of the group excluding us, there have been negative or flat volumes for at least the past three quarters compared to last year. The pricing environment has remained positive, and we haven’t heard anything to suggest otherwise. We understand our strategies and plan to continue executing them. A significant part of our yield management strategy involves addressing cost inflation, but an even larger focus is on generating returns that allow us to invest in our real estate network. Over the past ten years, we've invested about $2 billion to expand our network capacity, which has increased by a little over 50%, while the number of service centers in the industry has actually decreased by a few percent. Any additions we have made are in response to customer requests, particularly on the retail side, where e-commerce freight shifts from truckload to LTL, showcasing the strength of our network in helping customers manage their supply chains and ultimately save money. We aim to sustain our positive revenue growth, which stands at 18% despite a slight decrease in tonnage for July. This growth is still above our long-term average over the past decade, and we will focus on leveraging this for bottom-line impact. Moreover, we anticipate improvement in our operating ratio as we move into the third quarter.

Adam, could you clarify your observations from the last couple of quarters regarding the industry? Have you noticed a more immediate effect on industry pricing or your pricing in a situation with reduced tonnage? Or does it typically take around three quarters to begin experiencing pressure? I'm trying to understand if this current situation is truly unique due to industry changes or if it follows a more conventional delayed pricing pattern.

Well, I think if you look back 2019 is a good example where the environment was softer. And I think the industry was pretty disciplined with pricing during that period. So, we certainly expect that our own pricing will continue to be positive. And again, we haven't really heard anything from any other carriers. We'll continue to see maybe what they're saying publicly as well. But I think it takes a lot to run an LTL company. Certainly, there's a network effect that has to be managed there. And that's the big difference between us and the truckload environment. I think that it seems to us from what we've heard that there's not many LTL carriers at least the public ones that have taken on a lot of truckload spillover freight. So, I don't think you're going to see this vacuum effect as truckload has loosened a little bit of freight spilling back into that mode like, we may have seen in prior cycles as well either. So, to me that would lend itself to seeing a little bit more stability maybe with volumes even though like I mentioned they're down for the other carriers or have been for the last few quarters. We'll continue to watch that. But I think we would expect to see the continuation of a disciplined approach much like we did in 2019.

Could you please clarify one of the previous questions regarding your decision to pause hiring? If the current volume persists at these levels, do you foresee attrition surpassing your hiring efforts? I'm looking for clarification on your comments regarding employee levels.

Hiring practices are managed by each of our 255 service center managers. They need to engage with their customers at the local level to understand the freight demand in their facilities, ensuring they have the right personnel to meet customer service expectations. This management is not solely about the number of employees; it also involves adjusting work hours based on volume fluctuations. We will keep monitoring the overall volume trends and are currently optimistic about our headcount numbers. Our service centers will continue to manage their staffing levels independently, with some centers potentially adding staff due to strong double-digit revenue and volume growth, while others may face challenges due to specific customer issues. This is a coordinated effort under their oversight, with service center managers handling day-to-day operations.

Wonderful. Thanks very much, Adam, Greg. Appreciate the time.

The next question comes from Amit Mehrotra with Deutsche Bank. Please go ahead.

Hey, thanks. I'll try to just ask one question to balance out the three questions that some other people asked. I think three or four years ago, Greg and Adam you kind of started the call mentioning, some deteriorating pricing power in the industry. And on follow-up you kind of talked about just bringing attention to some indiscipline that you're seeing in certain lanes. I think part of the motivation was to kind of nip it in the bud early. It seems like we're kind of at that part of the cycle where we could start to see that a little bit. I'd love for you guys to comment on that. Are you seeing any players any large national players, because of weaker service levels or whatever that may be seeing a little bit more deterioration in demand start to be a little bit more indisciplined on pricing? If you can comment on that.

No. We have not seen that at all. Certainly not to my knowledge I haven't heard that. Like Adam had mentioned earlier, we've had an awful lot of customer interaction so far this year with customers coming here, some of the things we're doing out in the field from a customer standpoint, we have not seen that have not gotten that type of feedback from our sales department. So I think that's all positive. And I think if you look at our LTL industry, we're all healthier than we've been for the most part. I think the bottom lines have improved across the board. I think I can say that without putting a whole lot of thought into it, but I think everybody has to see the benefit of being price disciplined surely. So I think it's benefited the industry in general. So yes, let's hope that continues.

Okay. That's my one. Thank you very much. Appreciate it.

The next question comes from Bruce Chan with Stifel. Please go ahead.

Great. Thanks for the time here. Greg, I just want to follow-up on those pricing comments really quick. We've heard from a few others out there that there's been a little bit of a pickup in inbound RFPs and RFQs maybe especially from the larger national account side. Are you all seeing any signs of that?

I don't think so. I haven't heard that. Most of our larger national accounts have annual renewals and some may have two or three-year renewals. However, I haven't heard of any significant increase with the annual renewals. So, not at this point, but we'll have to wait and see. So far, things are looking good from our standpoint.

Okay. Great. Appreciate the time.

The next question comes from Ari Rosa with Credit Suisse. Please go ahead.

Hey, good morning. Greg, Adam. Thanks for squeezing me in here. So you guys talked about investing in the network to take share through the cycle or preparing for the next cycle. And it's certainly a formula that's worked very well for OD in the past. I wanted to get your sense for kind of how you're thinking about that in terms of the longevity of what a down cycle might look like, and kind of the risk that you might be sitting on idle capacity for an extended period of time if demand deteriorates. And it seems like there's kind of two different schools of thought. On one level, it seems like the LTL industry has been pretty tight on capacity and pretty disciplined about the way it's invested. And maybe that means there hasn't been as much froth that's developed on the supply side. At the same time, obviously, what we've seen in terms of consumer spending and durable goods orders has been pretty anomalous over the last kind of 18 to 24 months given COVID, and maybe there's some concern that those conditions that have existed over the past 18 months or so aren't really sustainable from a demand perspective. So I just wanted to kind of hear your thoughts on, as you invest to expand the service center footprint, how do you perceive the risk that you might be sitting on idle capacity for maybe a longer period of time than you might hope for?

Yes. We typically maintain some idle capacity, aiming for 20% to 25% excess capacity at all times. This is crucial because demand can shift quickly, and adding service center capacity cannot happen fast enough. In our LTL network, having sufficient doors is essential for processing freight and supporting growth. While we also need equipment and personnel, the doors take the longest to set up. When we observe positive trends in the domestic economy, our market share growth rate often outpaces others significantly, exceeding them by double digits. It's important to have a consistent investment strategy and to recognize areas where we might face capacity challenges in the future if demand rebounds significantly. We're accustomed to absorbing the extra costs associated with this strategy, which is unique compared to most of the industry that tends to operate closer to full utilization. However, that approach presents volume opportunities similar to those we experienced in 2020 and through our impressive growth in 2021 and the first half of this year. Last year, we achieved $1.2 billion in revenue growth and are on track for another year exceeding $1 billion in revenue, but this requires ongoing investments. In looking back at previous downturns, our operating ratio remained stable from 2016 to 2019, allowing us to manage variable costs effectively while seizing productivity opportunities. The only fluctuation in operating ratios was typically linked to depreciation due to our investments, which naturally increased as a percentage of revenue. We strive to keep our other costs stable or even improve them to mitigate any negative impact on the operating ratio until we see an increase in volume. We've stated that density and yield are crucial for long-term margin improvement, which will continue to be the case. Achieving that density requires an ongoing investment in capacity.

Got it. Understood. Okay. Thank you for the time.

The next question comes from Bascome Majors with Susquehanna. Please go ahead.

Adam, in the last six months, your team has purchased significantly more stock than in any previous full year. Could you share your thoughts on the pace you're comfortable with for the second half? Will you consider taking on a bit of leverage to take advantage of the share price? Historically, you've operated within your free cash flow for total shareholder returns; is that a reasonable framework to consider for future share repurchases? Thank you.

Certainly, we typically assess our repurchase program based on our cash from operations. At the start of each year, we establish our capital expenditures, account for our fixed return obligations through dividends, and then allocate the remaining funds to the share repurchase program. We have previously indicated that when the opportunity arises, we will invest more into that program, which has been our sentiment this year. In the first quarter, we executed a $400 million accelerated share repurchase program. During the second quarter, our approach was more strategic, involving day-to-day purchases on a 10b-5 basis. We will continue to explore all options moving forward. With the share price currently lower than where we ended last year, we are committed to purchasing more shares and utilizing the cash available on our balance sheet. We will assess this on a daily basis. In the past, we have expressed that we do not intend to borrow to finance stock purchases, but we will evaluate the price trends and determine the best use of cash, while also considering a long-term perspective.

Great. So it sounds like leverage to buy stock is not plan A but opportunism can make that possible depending on your view of the market versus your stock price?

Correct.

Thank you.

The next question comes from James Monigan with Wells Fargo. Please go ahead.

Thank you. I wanted to follow up on the spread between pricing costs and the overall pricing environment. Can you share your thoughts on the level of cost pressure some of your competitors might be experiencing and whether you think that will help maintain pricing discipline? Additionally, what is your outlook for that pricing spread moving forward, considering that you own more of your assets and may have a cost advantage?

Yes. I don't know that we can comment on our competitors' cost structures, but certainly for us we obviously feel like we've got opportunity to continue to one to try to reduce some of our costs through productivity. But that's again, kind of, going back to our continuous improvement cycle and then trying to price above cost. And it's not always on a quarter-by-quarter basis. Again, it's not always going to be that we've got that 100 basis point to 150 basis point delta in our revenue per shipment and cost per shipment performance, and you've got to look at that on a more of a core basis. But we just look at it over a longer-term time horizon. But that's the yield improvements, one big element for the long-term margin improvement opportunities that we think we have. And I mean obviously a lot goes into that. It's easy to sit here and say that we need yield above cost, but a lot goes into both of those metrics. And certainly you got to have a service to support the yield. And then we've got to continue to look at ways that we can save on the cost side as well to make sure that our price deal in alignment with the market. And we do believe we can get a price premium in the market based on the quality of our service and we study our Mastio Quality results closely each year to look at how we compare against ourselves and how we compare against the rest of the industry to make sure that we're staying on top of changes. We're staying ahead of the market. We're continuing to give our customers what they are asking for as well, be it through capacity in markets, be it capacity of our trailer pool, technologies, pricing programs, and new changes there. You name it, we're always trying to stay ahead of the curve and we feel confident that we've got a lot of market share opportunities in front of us and we just want to keep our focus on execution to make sure we take advantage of those opportunities and again make sure that it's not just growth it's good profitable growth.

Got it. Just given how much cost run up, do you think that there's a repricing opportunity or a need to reprice moving forward on a larger portion of your business than normal?

No. And again that's part of our continuous improvement cycle. Our contracts in our business come up every day. It's why you generally see on a sequential basis improvements in our yield metrics as we go from quarter-to-quarter. So, as a contract comes up for renewal, we're going to ask for an increase. And to improve the yield on an account, it's not always through a price increase either. It's looking at other areas of opportunity in ways that we can help a customer save money and that may be an operational change. It could be a number of things and that's why it's so important for our sales team to stay engaged with the customers to understand what their needs are. Our pricing team as well, so that we can work together and create win-win situations because we're not here to just have a customer for this quarter and the next quarter. We've got customers that have been in place for many, many years. And any new customer that's coming on board, we want them to be in place for the long-term as well. So, it's all about creating those win-win situations. And whether it's again through an operational change, we've recently announced a new pricing program as well that we've got some engagement on and some excitement that can eliminate the need to have payment all the services for customers. And so those are the ways that we're going to continue to stay engaged with our customer base and try to do right things right by them and keep improving our sales both the top and the bottom-lines.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Greg Gantt for any closing remarks.

Well, 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 I hope you have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.