Good day and welcome to the Old Dominion Freight Line Third Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Jack Atkins, Director of Finance Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to the third quarter 2024 conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through October 30, 2024, by dialing 1 (877) 344-7529, access code 4016991. 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. 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. 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 ask that you limit yourself to just one question at a time before returning to the queue. At this time for opening remarks, I would like to turn the conference over to Marty Freeman, the Company's President and Chief Executive Officer. Marty, please go ahead, sir.

Good morning and welcome to our third quarter conference call. With me on the call today is Adam Satterfield, our CFO. After some brief remarks, we will be glad to take your questions. I am joining the call today from a separate location, therefore, please bear with us when we are taking questions if there are any connectivity issues. Old Dominion's financial results in the third quarter reflect continued softness in the domestic economy. Our revenue and earnings per diluted share both declined on a year-over-year basis during the quarter, although our market share and volume trends remained relatively consistent with the first half of the year. While the operating environment continued to be challenging, our team did a good job of managing our variable cost, and we also continue to control our discretionary spending. The deleveraging effect from the decrease in revenue, however, caused many of our cost categories to increase as a percent of revenue. This was the primary driver for the increase in our operating ratio to 72.7 in the third quarter. We have been pleased with the consistency in our market share this year, which is in line with our historical experience during slower parts of the economic cycle. We continue to have strong customer retention trends, and we are also winning new business. Our customers have simply had fewer shipments that they turned over to us, and our average weight per shipment has also remained at historical lows. The stability of our market share continues to be supported by the quality of our service and overall value that we offer to our customers. These are a few of the foundational elements of our long-term strategic plan. The OD family of employees continued to execute on these core principles during the third quarter as our on-time service was 99% and our cargo claims ratio was 0.1%. While we are incredibly proud of these service statistics, we would also like to remind you that superior service means much more than simply picking up and delivering our customers' freight on time and claims free. There are plenty of other attributes that shippers consider when selecting a carrier, such as carriers' trustworthiness, ease of doing business, and the quality and responsiveness of customer service representatives. In fact, Mastio & Company measured 28 different service and value-related attributes as part of its recent annual survey of shipper and logistic professionals. Mastio published the results of its 2024 study last week, and we were honored to be named the number one national LTL provider for the 15th consecutive year. OD finished number one in 23 of the 28 evaluated categories measured by Mastio and maintained a sizable lead against our competition when it comes to the overall quality of service. I would like to congratulate the entire OD family of employees on this remarkable achievement and I would also like to thank this outstanding team for their commitment to our company and our customers. We continue to believe that consistency and quality of our service over the long term has differentiated Old Dominion in the marketplace and driven our long-term profitable growth. While becoming the best carrier in the business was hard, remaining the best carrier for 15 straight years is an incredible accomplishment and that is hard to put in perspective. Every member of the OD team has played a part in our success, and I can assure you that each of us is incredibly motivated to keep delivering our promises to provide our customers with the highest standard of service. By continuing to provide best-in-class service to our customers day after day and year after year, we are also able to maintain our long-term and disciplined approach to pricing. We continue to focus on consistently improving our yields to sufficiently offset our cost inflation and support additional investments in capacity and technology. These ongoing investments have created incremental value for our customers in many ways, which has further enhanced our industry-leading value proposition. Our customers have recognized our value proposition over time, which has allowed us to earn more and more of their business. As a result, we have won more market share over the past 10 years than any carrier in our industry. While the economic environment has remained sluggish for much longer than we ever anticipated, we believe we are better positioned than ever to respond to the eventual inflection in demand that will occur as the economy improves. We have the capacity, the fleet, and most importantly, the committed team of people to take advantage of an improving economic environment. Our unique company culture and each employee's commitment to excellence gives me tremendous confidence that we can also be the biggest market share winner over the next 10 years. This confidence is bolstered by the results of the most recent Mastio study, as well as the ongoing conversations we have with our customers. By staying focused on long-term opportunities for additional profitable growth, we remain confident in our ability to create additional value for our shareholders. Thank you for joining us on the call this morning, and now Adam will discuss our third quarter in greater detail.

Thank you, Marty, and good morning. Old Dominion's revenue totaled $1.47 billion for the third quarter 2024, which was a 3.0% decrease from the prior year. We had one extra workday in the third quarter of this year, so the decrease on a per day basis was 4.5%. These revenue results reflect the 4.8% decrease in LTL tons per day that was partially offset by the 1.5% increase in LTL revenue per hundredweight. On a sequential basis, our revenue per day for the third quarter decreased 1.9% when compared to the second quarter of 2024, with LTL tons per day decreasing 3.2% and LTL shipments per day decreasing 1.0%. For comparison, the 10-year average sequential change for these metrics includes an increase of 3.6% in revenue per day, an increase of 0.9% in LTL tons per day, and an increase of 2.3% in LTL shipments per day. The monthly sequential changes in LTL tons per day during the third quarter were as follows. July decreased 4.4% compared to June, August decreased 0.8% compared to July, and September increased 1.7% compared to August. The 10-year average change for these respective months is a decrease of 2.9% in July, an increase of 0.6% in August, and an increase of 3.5% in September. For October, we expect our revenue per day to decrease by approximately 11.2% to 11.8% when compared to October 2023, with a decrease of approximately 9.2% to 9.8% in our LTL tons per day. As usual, we will provide the actual revenue-related details for October in our third quarter Form 10-Q. Our operating ratio increased 210 basis points to 72.7% for the third quarter of 2024. As Marty mentioned, the decrease in our revenue had a deleveraging effect on many of our operating expenses during the quarter. This contributed to the 110 basis point increase in our overhead cost as a percent of revenue. In addition, for the first time this year, our direct operating cost also increased as a percent of revenue when compared to the same quarter of the prior year. The increase in our direct operating cost as a percent of revenue was primarily due to an increase in cost associated with our group health and dental plans. As a result, our employee benefit cost increased to 38.6% of salaries and wages during the third quarter of 2024 from 37.3% in the same period of the prior year. Old Dominion's cash flow from operations totaled $446.5 million for the third quarter and $1.3 billion for the first nine months of 2024, respectively, while capital expenditures were $242.8 million and $600.4 million for the same periods. We utilized $187.7 million and $824.8 million of cash for our share repurchase program during the third quarter and first nine months of 2024, respectively, while our cash dividends totaled $55.6 million and $168.2 million for the same periods. Our effective tax rate for the third quarter 2024 was 23.4% compared to 24.08% in the third quarter of 2023. We currently expect our effective tax rate to be 24.5% for the fourth quarter. This concludes our prepared remarks this morning. The Operator will be happy to open the floor for questions at this time.

We will now begin the question-and-answer session. Please limit yourself to one question. Our first question today comes from Eric Morgan of Barclays. Please go ahead.

Hey, good morning. Thanks for the question. I guess I just wanted to start on the near-term. It sounds like October tonnage decline is getting a little bit worse relative to September. Is that being driven by shipment weights coming lower? It has been the trend here recently. And then, how are you thinking about operating ratio into year-end here? That'd be helpful, thank you.

Yeah. From a volume standpoint, the year-over-year our tonnage in October, taking the midpoint of that range we gave, would be down about nine and a half percent. There are many days left to finish out this month and so we'll see how the rest of the month finishes. If you take the midpoint in October, that's got our sequential change down, just call it about 3.5%. The 10-year average sequential is a decrease of 3.1%, and that's October versus September. So, it's actually encouraging to see what our volume trends have been so far this month. This is the first time that we've been, I would say relatively close to what our normal sequential changes have been in the first month of the quarter. So, we feel good about how volumes are trending and continued strength in our yield performance that we've seen as well. We will continue to watch that. But year-over-year I think is just skewed a bit by, if you recall last year, we had a competitor that had a cybersecurity issue, and we had some temporary freight coming into the system, if you will. So, we picked up some incremental freight that was a bit unusual and caused outperformance from a seasonal standpoint that is not present right now. But feeling good thus far about the October trend.

Thanks. And just the operating ratio side of that, if you wouldn't mind. Appreciate it.

Yeah, I was going to try to leave that for someone else. Those are two big questions packed into one, so just trying to keep questions to one. But just to go ahead and address that because we know it's going to be a question anyway. The normal Q3 to Q4 regression is about a 200 to 250 basis point deterioration, excluding any insurance adjustments. We do an actuarial assessment in the fourth quarter every year. Sometimes those are good guys. Sometimes, like last year, I think we had about a 70 basis point headwind regarding the actuarial adjustment. So, I think when thinking about this fourth quarter conservatively, I think we ought to slide that scale up about 100 basis points. The reason for that would just be the continued risk from a revenue standpoint and the impact that would have on overhead expenses. We just saw that headwind play out in the third quarter. Going back to the guidance that we gave at the end of the second quarter call, revenue came in softer, and as a result, our overhead expenses were about 40 basis points higher than anticipated. There is a continued risk with respect to our fringe benefit costs. Those were higher than what the trend has been this year and higher than what they had been for the same period last year in the third quarter. So, there is a continued risk those may stay a little higher in the fourth quarter. Both of those could trend better if we can get our revenues back closer to seasonality.

Thanks a lot.

Our next question today comes from Jason Seidl with TD Cowen. Please go ahead.

Yeah, thank you, Robert. Good morning, gentlemen. I appreciate the time. You brought up Estes' issues that they had last year that sort of grew sort of beyond normal tonnage numbers for you in October of '23. Should we expect that by November and December the tonnage comps get easier so we're not really looking at down as much as we're seeing in October?

Yeah, I think that's fair. October is definitely the toughest comp when I go back and look at last year's sequential performance in November versus October, our tonnage was down six-tenths of a percent. The 10-year average there is a 3.1% increase. And then December outperformed; we were down 4.8% in December of '23 versus November of '23. The 10-year average there is 7%. So, I think that this is probably the toughest comp of the quarter in October. But depending on how November trends, if we get some acceleration back in the business, December is always tough for everyone given the holidays and whatnot. But if we can kind of hang on, we had a little outperformance there. So, December will be a little tougher versus November. But overall, as we progress through this fourth quarter, it feels like we're finally getting to what we hope is a floor. We're encouraged about how things are trending. It's good to see the sequential performance thus far in October and we got many days to get through this quarter. And Q1 is also tough to think about from a big picture standpoint. We've been underperforming normal sequential trends for about two and a half years now. So, it feels like we're finally coming to the end of a cycle. We've got to go through these tough quarters, but we have been seeing, I think, traction with respect to interest rates declining. We'll have the uncertainty of the election behind us pretty soon. Hopefully, we can get back to seeing some growth in our industry. Typically, when the industry starts to inflect positively, that's when our model shines the brightest and we win the most share. So, we're looking forward to getting through this final quarter of the year and starting out next year with hopefully some good strength.

No, I hope so too out of it. And with the year-over-year comp in October for Estes, did that impact the weight per shipment at all? Could you remind us?

The weight per shipment last year? It was pretty much right in line with what our normal ten-year average would be. So we were down three-tenths of a percent and then pretty much performed about in alignment with what the normal weight per shipment would trend. Typically, you'll get a little bit of an increase in weight for shipment from the third quarter to the fourth quarter. That's something that was a little bit of a surprise for us in the third quarter; our weight for shipment ticked down a bit. July was pretty consistent, consistent with our ten-year average, but then it dropped further in August and came back a little bit in September. Overall, we have been underperforming what the weight should be. In October, we are actually seeing a bit of an increase. The ten-year average for October is down three-tenths. So, if we're seeing a little bit of an increase, that’s obviously a good thing for business. We're getting more weight per shipment, going to have a little bit higher revenue per shipment as well, which generally drives improved productivity. Hopefully, that’s a sign of hope with respect to the economy as well. So that would be another metric to continue to watch to see if we see things start to pick up for us.

Right. Well, listen, I really appreciate the time and color, guys.

Our next question today comes from Daniel Imbro with Stephens Inc. Please go ahead.

Yeah, hey, good morning, guys. Thanks for taking our questions. I want to follow up maybe on the near-term trend. So, it seems like LTL yield growth has moderated a bit across the industry. I appreciate the tonnage update for October. Adam, could you share some color on how you see yields shaping up here into the fourth quarter and then more broadly, if the macro remains weak, do you expect to see any irrationality in the market that would make it harder for you guys to keep realizing price increases above inflation or how is your price realization going as you talk to customers? Thanks.

Yeah, I was pleased with our yield performance through the third quarter. It takes having superior service to support what we're able to achieve consistently year in and year out from a yield performance. We’re really proud of the service metrics we've been able to deliver. Just to repeat, winning that Mastio award for the 15th straight year, hopefully has put to bed some of the faults that that gap between us and our competitors has closed. We're really pleased with this year's results. At the end of the last call, we talked about normal seasonality with respect to our revenue per hundredweight, excluding fuel surcharges. That would have put us in the 4% to 4.5% range for the third quarter, and we went to the top end of that, granted we had a little bit lower weight per shipment, as I referenced with Jason. That certainly assisted the revenue per hundredweight. It seemed consistent through the quarter and that’s what we would continue to expect. Our yield management process takes a long-term and consistent approach that tries to offset our cost inflation and support continued investments in our network and technology. If normal seasonality plays out for the fourth quarter, that would put revenue per hundredweight, excluding fuel, up in the 3.8% to 4.2% type of range. We expect to continue to get increases; we've seen it throughout this year and really throughout the last two and a half years we've been in this weak economic period, so just continue to execute on that consistent philosophy and continue to get increases as we go through bid renewals and be the same expectation as we go through this year and continue into next year as well.

Appreciate all the color. Best of luck, guys.

And our next question today comes from Scott Group with Wolfe Research. Please go ahead.

Hey, thanks. I just want to follow up on that last question. So, I think, Adam, your October update is that total yields were negative and I guess you're talking about yield ex-fuel up, call it 4%. So this drop-off in yield is entirely fuel. I know fuel is down, but I just want to make sure that that’s right. And then just to ask it sort of directly, are you seeing more pricing competition, irrational pricing? There's certainly more concern about that in the market right now. Are you guys observing it or not?

Yeah. Just to address, in October, we didn’t give the exact number but you can back into it. Revenue per hundredweight with fuel is trending down, a lot of that is fuel related. Fuel, at this point, is down about 20% compared to October of last year. It’s a bigger drop compared to what we just saw in the third quarter and that should moderate as we progress throughout the fourth quarter. It was about $4.50 a gallon last year in October but ended up averaging about $4.25 for the full fourth quarter last year. When looking at one-month trends, given the disruption last year we had some mix issues, so we expect to see that sequential trend play out. Revenue per hundredweight will remain in the 3.8% to 4.2% range, assuming mix stays constant. If we see a continued increase in weight for shipment, that could put some pressure on the reported yields, which would generally be a good thing. I think that with respect to the overall environment, we will have to wait and see what the other carriers report and what their commentary is like. I can only speak for us, but the environment has been pretty stable all things considered this whole year, and we have been able to continue to get our increases. It hasn’t impacted us or our market share. Our market share has remained flattish, which is typically what we see through a slower economic period.

Makes sense. Thank you, guys.

And our next question today comes from Jordan Alliger with Goldman Sachs. Please go ahead.

Yeah, hi. Morning. I know from a high-level standpoint, hopefully we are bottoming from a trend perspective. I'm just curious, are there any pockets of your customer base, whether it be retail, manufacturing, wholesale, or distributor, where perhaps you could point to even being some favorable volume or is it pretty much not the case? And then, secondly, if we have normal seasonality from October – I think we're running normal September to October. If we run normal seasonality through the balance of this quarter, is there a way to think about where tonnage could be year-over-year for the quarter? Thanks.

From a breakdown of the revenue base, as you can imagine, we're seeing better performance with our retail-related customers and continued weakness with our industrial-related customers, which represent about 55% to 60% of our revenue. That's certainly showing in our numbers and the decrease we’ve seen. The ISM has been down for 22 to 23 months. So that’s been the challenge that we faced over this last couple of years. However, retail has performed a little better. A bright spot is our third-party logistics customers, which make up probably a third of our revenue, and we actually saw some revenue growth with our 3PL customers in the third quarter. We've talked in recent quarters that we feel like there's been some modal shift, especially last year when that large competitor closed. Customers were looking for homes for freight, and many LTL shipments might have ended up in the truckload world. There’s a tendency to see movement back and forth among modes. So now that we’re seeing some business flowing back in, that should bode well as we look to project out and consider 2025 as a potential bright spot in performance.

Thanks. And again, just any thoughts on normal volume seasonality from here for the balance of the quarter where that could maybe shake out?

We are long way from there. If we were to hit normal seasonality, that would put tonnage per day down like 6.5% to 7% for the full quarter. Revenue per day at seasonality would be at about $1.4 billion. We’ve been underperforming seasonality, as I mentioned, for the last couple of years. If you take the normal rate of underperformance, based on where we were in the third quarter, it would be around $1.35 billion. It’s something to keep in mind as we progress through the quarter and give our full updates. The revenue per day in October should look the worst, and hopefully things from a comp standpoint will start looking better overall as we get into November. We’ll provide our mid-quarter update that will help clean up your models from there.

Thank you.

Again, please limit yourself to one question. Our next question today comes from Jon Chappell with Evercore ISI. Please go ahead.

Thank you. Good morning, Adam. You mentioned the uncertainty around the election, which is a narrative we've heard recently about shippers kind of pausing until there’s more certainty. I know you have a diverse end market of customers, but can you frame what may be a temporary pause versus the ongoing industrial macro headwinds you’ve been facing?

Anytime you have uncertainty, looking at election years typically hasn’t been the best freight years in recent history. We’ve had customer conversations where people are being a bit conservative until they know what things may look like. I think that’s something temporary; however, at some point, people will need to return to grow and expand their businesses. There has to be some freight movement that we can benefit from. Whether we can get the level of uncertainty cleared up, then start assessing interest rate cuts, and get back to seeing a healthy consumer looking for products, replenishing inventory, which creates freight opportunity for us. The inventory scale has been drawn down; eventually, as we normalize, we expect we can pick up freight.

Thanks, Adam.

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

Hey, good morning. Adam and Marty, it sounds like a consistent top line, but fixed costs are starting to run. Is there anything you can or want to do at this point to cut those costs? Maybe shed some excess capacity? It seems like that's bearing down on the industry. Just to clarify your operating ratio comment, was that a 300 to 350 basis point sequential deterioration? So, you’re talking about a 75.5% to low 76% type number for the fourth quarter?

Yeah, that's correct, Ken. That was the sequential guidance from the quarter in that range. But we are taking action every day to keep our belts tight year in and year out in both good times and bad. If you don’t manage cost during good times, you may not know where to start when times are tough. That’s an ongoing focus for us and our team. We maintain metrics for productivity and have been effective in keeping costs in check, especially with a lack of density in the system. Opening five or six terminals this year, we had an improvement in our platform shipments per hour, pickup and delivery shipments per hour, and despite the volume weakness, our load factor from a linehaul standpoint has continued to face some pressure, matching the volume weakness with the decrease in weight per shipment. The most important thing is to keep providing service and maintaining our schedules; that's critical in slower periods to uphold our value proposition. Overhead cost has been about $300 million to $305 million each quarter this year as we look for ways to control discretionary spending. In terms of cutting back on capacity, we’ll keep an eye out for the long-term. We still believe we have a long runway for growth ahead. We’re likely to cut back capital expenditures into next year and grow into some of the capacity we have. As we project into an economic recovery, we feel good about our operating ratio today and how we can improve that with lowered overhead percentages once we start growing again.

Great, thanks. Appreciate the thoughts.

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

Thanks. Morning everyone. Can you share more details on the Mastio survey? You've long said that you're not hearing from your customers that the others are closing the gap as much as the narrative is out there. Can we see some of that in the results as well? Is there a risk that if they’re not closing the service gap, they become more competitive on price? Or does it take time for that service gap to close?

That’s a question for the other carriers, I don’t know their strategies. We were pleased with this year’s results. The sizable gap between our performance and others has been maintained. We're not going to rest on our laurels, though; we’ll continue to improve. Mastio has measured 28 different attributes, and we aim to be the best in each category. We’re committed to delivering solutions for our customers and maintaining long-term profitable growth.

Our next question comes from Chris Wetherbee with Wells Fargo. Please go ahead.

Hey, thanks. Good morning. Adam, I wanted to ask about the relationship between truckload and LTL. Your comments about 3PLs were pretty interesting. Historically, we’ve seen share move back and forth, but seems like more share than normal has moved back to truckload. The price dynamic between LTL and TL is wide, does that change anything in the next upcycle, or do you think it doesn’t take a significant upturn in truckload to push volume back to LTL? You mentioned seeing a little bit of that happen in the third quarter. I’m curious how you think about that relationship these days.

Last year was quite unusual, especially with all the volatility in the truckload market. Customers had to get their freight moved, and some ended up in the truckload world. We’ve heard discussions of consolidating shipments and utilizing truckload for zone skipping, but at the end of the day, if a shipment is less than 10,000 pounds, it makes more sense for LTL. I think that freight will come back to us more aggressively than what we’ve seen in prior economic cycles. LTL shipments are down about 15% from the peak in the second quarter, 2021. Some of that was loss due to economic factors, but some can be attributed to the modal shift we’ve noticed. When the wave finally returns, we sense that it presents a good opportunity for us, both directly and indirectly as other competitors face their service issues.

Got it. Thank you.

Our next question comes from Brian Ossenbeck with JP Morgan. Please go ahead.

Hey, good morning. Thanks for taking the questions. Just a quick clarification: did you see any impact from the hurricanes on the network, either yours or your customers? Should that start to pick back up here, perhaps in the fourth quarter? The NMFDA is looking at making changes to the class system mid-next year, do you have any early thoughts on that regarding implications for yourselves and the industry?

Yes. We had revenue loss related to the hurricane, and it presents operational challenges as well. We were pleased that all of our employees made it through the storm, everything was okay from both health and property perspectives, and our network was fine. Fortunately, none of our properties suffered significant damage. We had some downtime, which is typical after major storms. Fortunately, we’ve recovered swiftly. Operationally, some interstate systems in Western North Carolina will be impacted for up to a year before they’re fully repaired. However, our operating team has done a commendable job managing roundabout systems to keep freight moving within our service standards. The disruption was handled quite well through our robust systems. Regarding the NMFDA changes, we see that as an opportunity; we’re already dimensioning 75% of our freight, so we are well prepared for those adjustments. We’ll continue working with customers through these changes as they're implemented.

Thank you.

Our next question comes from Ariel Rosa with Citigroup. Please go ahead.

Hi Adam, Marty, Jack, just curious to hear your thoughts on the buyback. It's up quite a bit from last year. You still have a fairly modest dividend at under 1% yield. Can you explain the logic for favoring the buyback over the dividend? Is there an indication management believes the share price is undervalued?

The buyback was the first capital return program we started in 2014 when our cash flow model was changing. Today, our first commitment remains reinvesting in the company with strong returns on invested capital at 30%. The buyback provides a tax-efficient means and considerable flexibility to return capital. We continue believing in significant investment ahead; we spent about 10% to 15% of revenues on CapEx each year. The flexibility of the buyback allows us to step that up meaningfully if needed, depending on volume demands and trends. In the second quarter of this year, we spent more due to stock weakness, in line with past practices. We aim to return capital consistently, which may vary from quarter to quarter depending on stock performance, but we remain focused on long-term value generation.

Our next question comes from Stephanie Moore with Jefferies. Please go ahead.

Hi, good morning, thank you. I was hoping you could shed some light on the potential cyclical freight upside? What evidence or signals do you see that suggest an inflection in above-average volume growth?

I believe weight per shipment is usually the first thing we start to see. Historically, we've been down to low levels in weight per shipment recently, below 1,500 pounds. If we see an increase in weight per shipment, then we can expect order activity to pick up, eventually leading to multiple shipments, thus seeing further growth. We anticipate seeing some reacceleration, which does not appear to just return to a multi-year normalization pattern. Instead, we expect some trends supporting recovery led by e-commerce and near-shoring activities, creating freight demand. We’re focused on maintaining our relationships, and our sales team is trained to keep engaged with customers to identify their future needs. We must stay prepared as we work through these cycles.

Got it. So, you do believe that you should see some reacceleration here and this isn't just a multiyear normalization pattern?

We’ve been in a longer slow cycle than any of us anticipated. Typically, downturns are three to four quarters, but this has lasted longer. Historically, LTL has seen positive growth from ’09 to ’21, and there’s still growth opportunities in LTL. We’ve significantly increased market share from around 6% in 2012 to 12% to 13% today. As we’ve invested in capacity and anticipate further market share growth, we’re optimistic about upcoming cycles. To summarize, we have around 30% excess capacity, more than typical within our network. This gives us confidence that as demand recovers, and the market tightens, we can leverage our service to capture more share.

I'm sorry, just Adam, real quick, operating days in Q4, if you don't mind?

Yes, we have 62 operating days this year compared to 61 in Q4 of 2023.

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

Adam, as we think about the profitability of the business next year, can you level set what your view of seasonal margin performance would be in Q1 and even Q2, so we can check our models?

The first quarter typically sees an operating ratio improvement of about 100 basis points. The second quarter is where we see substantial improvement, typically around 400 to 450 basis points versus the first quarter. If we have a strong revenue growth environment, it allows us to leverage fixed costs effectively. In the third quarter, our direct costs as a percent of revenue were about 52% compared to the 20-21% in overhead; it exhibits how we leverage our cost structure.

Thank you.

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

Yeah. Thanks. I wanted to see if you could offer thoughts on where you think pricing bottoms and if inflation is acting differently this cycle? If shipments stabilize as you enter next year, do you think about needing 4% to stay flat on margin?

Our target has been trying to achieve a 100 to 150 basis point spread of price over cost to support our investment and long-term operations. This year, we aimed for cost per shipment inflation of 4% to 4.5%. With the volume weakness, we expect to see it end up around the higher end of that. We execute our bids as they arise to offset cost inflation by price increases. Maintaining that spread will be necessary if inflation remains present in future expansion periods.

And do you see a reason to think that inflation presents a situation different from what you saw this year?

We've managed numerous historic costs due to inflation. Salaries, wages, and benefits, accounting for 65% of our costs are primary drivers. Overall, we’ve had significant cost increases. Our maintenance, repair costs on a per-mile basis have significantly risen. We’ve managed to offset many increased inflationary items through efficiencies as we work through this lower-density environment.

Thank you.

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

Hey, good morning, guys. Just want to wrap up the weight per shipment discussion here. Marty, you mentioned getting fewer skids per customer. Is that all related to market softness or are you seeing a push from others that may be gunning for customer wallet share?

Yes. The reduction in weight per shipment is definitely our customers shipping fewer boxes. We’re seeing that, but we’re cautiously optimistic as we look into the upcoming holiday shipping. As for sales incentives, we incent our reps quarterly based on revenue growth, operating ratio, and service metrics. We aim to reward our sales team well for increasing their footprint within our business.

Great. Thank you.

And our next question comes from Jeff Kauffman with Vertical Research Partners. Please go ahead.

Thank you very much, and congratulations on the Mastio accolades. It seems like all questions have been asked, but could you drill down a little on tonnage? Please elaborate on the weaker-than-expected activity across your customer base and potentially stronger activity?

We analyze our business and group it generally with respect to industrial and retail. We haven’t seen any significant variations from expectations; we see continued weakness in industrial performance. Last year, it was holding better than indicated by the ISM trends. What stands out to me is we are winning new customer accounts each month. So, we’ve been managing to retain our market share despite market noise. Our ongoing engagement with customers highlights their evolving needs. While we remain cautious about the shorter-term challenges, we've had positive trends so far, especially within October.

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

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

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