Good morning, and welcome to the Old Dominion Freight Line Second Quarter 2025 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Jack Atkins, Director of Investor Relations. Please go ahead.

Thank you, Wyatt. Good morning, everyone, and welcome to the Second Quarter 2025 Conference Call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through August 6, 2025, by dialing 1 (877) 344-7529 access code 8056479. 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 cautioned that these statements may be affected by 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 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 Old Dominion's President and Chief Executive Officer, Marty Freeman. Marty, please go ahead.

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. Old Dominion's second quarter financial results reflect continued softness in the domestic economy. Although our revenue decreased in the quarter due to a decline in our volumes, our yields improved as our best-in-class service continues to support our disciplined approach to pricing. I want to thank our outstanding team for their unwavering dedication to our customers and continued commitment to executing the core elements of our long-term strategic plan. Although the challenging economic environment has persisted for longer than we anticipated, we have remained focused on what we can control as we work to ensure Old Dominion continues to deliver superior service to our customers while also operating efficiently. In addition, our ongoing investments in our network, technology and our OD Family of employees puts us in an unparalleled position to respond to an inflection in demand when it materializes. Delivering superior service at a fair price to our customers is the cornerstone of our strategic plan and has been central to our success for many years. Doing so consistently through the ups and downs of the economic cycle has strengthened our customer relationships over time and allowed us to keep our market share relatively consistent over the extended period of slower economic activity. As a result, we were pleased to once again provide our customers with 99% on-time performance and a cargo claims ratio of 0.1% in the second quarter. This consistency of our execution and our commitment to creating value for our customers doesn't happen by accident. It is a product of our unique culture and the result of the hard work of the OD Family of employees. Across our company, our team is focused every day on adding value for our customers. By keeping our promises to our customers, we help them create value for their own customers. Our commitment to service excellence continues to support our long-term yield management initiatives with a focus on individual account level profitability, our approach to pricing is designed to offset cost inflation and support our ongoing investments in our network, our fleet and our people. Although these investments have created headwinds to our profitability in the short term, we are confident that our consistent reinvestment back into our business for growth is the right long-term approach. We know that having available capacity to grow with our customers and support them during periods of stronger demand is an important component of our value proposition. We also believe that these investments are critical to stay ahead of what we expect to be favorable long-term demand trends for our industry. I'm very proud of our team and how they continue to find ways to reduce cost and operate as efficiently as possible during the period of uncertain demand. Given that our first priority is to uphold our commitment to delivering superior service to our customers, it can lead to increased operating costs due to the loss of operating density when volumes do decrease. While that was the case in the second quarter, we continue to believe that our business model contains meaningful operating leverage, and we remain confident in our ability to improve our operating ratio over the long term. We expect this to become more apparent as the demand environment improves, and we are able to leverage our investments in our fleet, service network and technology. Over time, our customers have recognized the value of our service by giving us more of their business, which has allowed us to win more market share over the last decade than any other LTL carrier. Looking forward, we believe that the consistency of our execution, unique culture and our team's daily commitment to excellence will allow us to be the biggest market share winner over the next decade as well. Our position is as strong as ever to respond to an improvement in the demand environment. As a result, we are confident in our ability to produce profitable revenue growth and drive increased shareholder value over the long term. Thank you very much for joining us this morning, and now Adam will discuss our second quarter in greater detail.

Thank you, Marty, and good morning. Old Dominion's revenue totaled $1.41 billion for the second quarter of 2025, which was a 6.1% decrease from the prior year. Our revenue results reflect a 9.3% decrease in LTL tons per day, which was partially offset by a 3.4% increase in the LTL revenue per hundredweight. On a sequential basis, our revenue per day for the second quarter increased 0.8% when compared to the first quarter of 2025 with LTL tons per day increasing 0.1% and LTL shipments per day increasing 0.8%. For comparison, the 10-year average sequential change for these metrics includes an increase of 8.2% in revenue per day, an increase of 5.3% in LTL tons per day and an increase of 6.0% in LTL shipments per day. The monthly sequential changes in LTL tons per day during the second quarter were as follows: April decreased 3.7% as compared to March, May increased 0.5% as compared to April and June decreased 0.6% as compared to May. The 10-year average change for these respective months is a decrease of 0.7% in April, an increase of 2.5% in May and an increase of 2.1% in June. For July, our current month-to-date revenue per day is down 5.1% when compared to July 2024, with a decrease of 8.5% in our LTL tons per day. As usual, we will provide the actual revenue-related details for July in our second quarter Form 10-Q. Our operating ratio increased 270 basis points to 74.6% for the second quarter of 2025, as the decrease in our revenue had a deleveraging effect on many of our operating expenses. This contributed to the 160 basis point increase in our overhead cost as a percent of revenue. Within our overhead costs, depreciation as a percent of revenue increased 80 basis points while our miscellaneous expenses increased 40 basis points. The increase in our depreciation cost as a percent of revenue reflects the ongoing execution of our long-term capital expenditure program which we believe will support our ability to grow with customers in the years ahead. Our direct operating cost also increased as a percent of revenue despite our team's best efforts to manage these variable costs. The 110 basis point increase in these costs was primarily due to higher expenses associated with our group health and dental plans. As a result, our employee benefit cost increased to 39.5% of salaries and wages during the second quarter of 2025 from 37.2% in the same period of the prior year. Overall, we continue to be pleased with how our team has remained focused on controlling what we can until the demand environment improves. The OD team has continued to deliver best-in-class service while operating very efficiently and we've also managed our discretionary spending. We will, however, continue to make the investments that we believe are necessary to ensure that our business remains well-positioned for the long term. Old Dominion's cash flow from operations totaled $285.9 million for the second quarter and $622.4 million for the first 6 months of 2025, respectively, while capital expenditures were $187.2 million and $275.3 million for those same periods. We utilized $223.5 million and $424.6 million of cash for our share repurchase program during the second quarter and first 6 months of 2025, respectively, while our cash dividends totaled $59.0 million and $118.5 million for those same periods. Our effective tax rate for the second quarter of 2025 was 24.8% as compared to 24.5% in the second quarter of 2024. We currently expect our effective tax rate will be 24.8% for the third quarter. This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.

Our first question will come from Chris Wetherbee with Wells Fargo.

Appreciate the comments. Maybe we could just start with your thoughts around the operating ratio. Obviously, it's a challenging environment from a tonnage perspective, at least year-over-year. Kind of how do you think about sort of the normal progression from 2Q to 3Q on the OR, and maybe kind of how you feel like you can fare given the circumstances we're in from a macro backdrop?

Sure. The 10-year average for us usually shows a flat to 50 basis point increase from the second quarter to the third, based on a typical sequential revenue growth of about 3%. However, considering the current demand environment, we haven't observed that positive inflection in our revenue this year. If our revenue per day remains flat, similar to what we experienced in the second quarter, I anticipate an increase in the operating ratio, likely in the range of 80 to 120 basis points, which is worse than our usual sequential change. Additionally, I expect an increase in our salary wages and benefits, particularly due to our annual wage increase effective September 1. While we usually have revenue to offset this somewhat, I also foresee continued pressure on our fringe benefit costs, which will be part of the driving factors. Our operating supplies and expenses are likely to rise a bit as well, and our overhead costs, which were higher in the second quarter than I had expected, should increase further in the third quarter. They were around $310 million in the second quarter, and we've been running at about $305 million, so I expect those to continue to rise. There will likely be ongoing pressure in the miscellaneous expenses line as well. Overhead costs are dependent on revenue, so if revenue remains flat, those costs will increase a bit more. However, if we can achieve improved revenue, we will provide a mid-quarter update, and over time, that should lead to leverage.

Our next question will come from Eric Morgan with Barclays.

I wanted to ask about the market share commentary. Just if we look at the ATA's shipment index, actually turned positive the past couple of months, at least for April and May. So I don't know if that's kind of the best data to use, but it's what we have and obviously, it's a bit different from what we're seeing from you as well as your publicly traded peers. So I guess just curious if you have any thoughts on what's happening among the private carriers, where we have kind of less real-time insight, how they've been responding to this downturn, if that's changed at all in recent months and just how you get your competitive positioning here?

Yes. The best data that we probably get from an industry standpoint that includes the private carriers is really from Transport Topics. And so that's the data you'll see most typically quoting the 10-K about the size of the industry and so forth. And so you really only get an annual read on some of those carriers without the month-to-month trend. And the ATA is good, but I think it typically has always had a much higher report of revenue for the entire industry, and it includes, I believe, some ground business from some of the other parcel carriers. So that's why we typically have used Transport Topics. But I think when we look at that information, Transport Topics just published recently, and we saw a pretty consistent trend for market share for us. And we've got granular level detail that we get through a proprietary database that's out there as well. And overall, I'd like to think that our market share, when you look through this downturn, our strategy is that we want to maintain market share in periods of economic weakness, while also getting increases in our yields. And I think when we go back and look at kind of where things were in '21, '22, that's effectively what's happened. And it always moves up or down a little bit here and there. But the key will be continuing to execute our strategy like we've done in the past and then make hay while the sun is shining; I mean that's what our model is based on. I still feel like we're in a better position than anyone else when the demand environment does eventually inflect back to the positive. And I think we're probably better positioned than we've ever been. But if you think back to the cycle increases that we saw in 2014, 2015, same thing with '17 and '18. We've been able to outperform the market from a tonnage growth standpoint anywhere from 1,000 to 1,200 basis points. So we just need a little help from the economy to get back to where we really see that demand environment inflecting back to the positive. And obviously, some macro factors are starting to settle a little bit with respect to the tax bill, trade. Hopefully, at some point soon, we'll get an interest rate decrease. I think once some of those measures of certainty come back into the market, it will create opportunities for our customers that will create opportunities for us to start growing our volumes again.

Our next question will come from Jonathan Chappell with Evercore ISI.

Adam, one of the things you mentioned in response to Chris' question was you expect pressure on operating supplies and expenses. You said the same thing in April and operating supplies and expenses have actually improved by 80 basis points as a percentage of revenue in 2Q. So did something happen in 2Q that really helped you on that cost line item that you expect to reverse in 3Q? Or how do we match up the pretty big sequential improvement in 2Q to ongoing pressure expected in 3Q?

Yes, we are experiencing strong performance in repairs and maintenance. Our team has effectively managed those costs. I anticipated some pressure from the first to the second quarter due to potential increases in park costs from tariffs. However, we have observed ongoing changes in our fleet, including the removal of older equipment that would have incurred high repair costs. This reduction in our fleet has contributed to an improvement in our cost per mile this year. In fact, over the past few years, we saw a significant increase in cost per mile in 2022 and 2023. The sequential performance from the first to the second quarter has been better than expected. Looking ahead to the second to third quarter, our average fuel price per gallon was around $3.56, and we are currently seeing elevated fuel costs. This will impact our operating supplies and expenses as fuel typically drives costs as a percentage of revenue. If fuel prices remain stable, we could still see influences on our direct costs. In the short term, if the fuel surcharge increases, our fuel expenses as a percentage of revenue might also rise, although we could expect a decrease in direct labor costs as an offset. Traditionally, the second to third quarter reflects stable costs, but I anticipate ongoing pressure in salaries, wages, and benefits due to our recent wage increases. We may experience one month of that cost reflected in the quarter, and while we typically see some sequential revenue growth to help mitigate this, flat revenue growth could put additional pressure on that line item. We've also encountered higher fringe benefit costs in recent quarters, which I expect will continue and may increase further in the third quarter compared to the second. Additionally, miscellaneous expenses related to changes in our fleet, including some losses from selling older equipment, could impact that line item. These factors together may lead to increased pressure on our overall overhead costs.

Our next question will come from Jordan Alliger with Goldman Sachs.

So just sort of curious sort of you gave some color and commentary around the OR revenue per day sort of flattish. I mean given the easy comps, I think, that are coming up, both in terms of tonnage per day and revenue per day. I'm assuming as we look forward from July, those trends on a year-over-year basis, I would think, have the opportunity to get quite a bit better, but just curious your thoughts on the latter half of this quarter against those comps.

Yes, they would, Jordan. In the second quarter, we saw a decline of about 6.1%. Currently, in July, we're down around 5%, indicating some improvement. If we maintain the second quarter's average daily revenue of about $22 million, we could see a slight decrease of just over 4%. If revenue holds steady at the $1.4 billion from the second quarter, that’s the trend we might anticipate. July usually presents challenges in terms of daily tons, where we typically see a decrease of about 3% compared to June; however, we are currently down a little over 2%, which is better than usual. While I’m not ready to confirm a turnaround or the typical acceleration we expect in August and September, this does provide some cautious optimism, highlighting better performance despite the expected downturn. The real question will be answered as we progress through the quarter and provide mid-quarter updates. If we follow our usual seasonal pattern—assuming that’s possible—we might see a revenue comparison with last year's third quarter that shows a decline of about 1.5%. We'll keep monitoring the situation, and our outcome may fall between a 1.5% to 4% decline, depending on how developments unfold this quarter.

Our next question will come from Tom Wadewitz with UBS.

So I wanted to see if you could offer a little more perspective just on pricing and kind of how you think about revenue per hundredweight ex fuel in 3Q. And just whether the pricing, I mean your commentary is pretty consistent over time that you see stability and discipline in the market, but is anything changing on that front? Is there any kind of areas where you see increased competition as the downturn extends?

Yes, I would say that overall we need to rely on what was reported in the first quarter. Most carriers have continued to report positive yields overall. We are executing our plan, which is distinct. We approach things with a focus on costs and strive for consistency throughout the cycle. Achieving these consistent cost-based increases is crucial for the long-term improvement of our operating ratio. Looking ahead to the third quarter, I estimate that the yield excluding fuel will likely be in the 4% to 4.5% range, which aligns with where we are in July. We expect to see a consistent sequential increase in that reported figure, but it may come in slightly lower. This isn't indicative of any changes; it's simply a result of last year's figures. We do continue to seek increases and are succeeding during renewals. It's been challenging in this environment, especially regarding market share. However, during our renewals, we are maintaining business and securing increases on the accounts we retain, while also winning new business. Overall volumes are down, but I believe a quick recovery could follow, as many expect this turnaround to happen sooner rather than later. We anticipated a recovery before encountering several economic headwinds. Now, as some macroeconomic issues are being addressed, I feel optimistic about a return to the market and an increase in freight opportunities. Our value proposition includes having capacity. While capacity is not currently in high demand due to prolonged weak conditions, we've received feedback from customers regarding competitors who struggle with consistent pickups in certain markets, leading them to reach out to us. Therefore, when true demand recovers, I anticipate an acceleration in those inbound calls, similar to past recoveries. For instance, in 2014, our tonnage grew by 17% while the market was up only 5%. In 2018, we increased by 10% with the market at 1.5%. During the cycles of 2021 and 2022, we achieved $2 billion in cumulative revenue growth. We believe we are in a strong position to take advantage of future opportunities; we just need a bit of assistance from the economy at this time.

And our next question will come from Daniel Imbro with Stephens Inc.

Adam, maybe following up on that last discussion just on competition out there. I mean, you guys specifically have been a leader in a lot of the high service parts of the industry, whether it's SMB or grocery, kind of anything with the most arrived by date. But a lot of your peers are talking about trying to grow here. So I guess, are you seeing the better offerings from some of your peers making any encouragement on your business as you go to market? And I guess, if not, what do you think the public markets underappreciate about why that will be harder for others to take from you guys being the leader there?

No, I think that any customer that we have, obviously, we've got a target on our back, if you will. But we're competing with every account, we're competing with the other carriers, and we have been for years. So I don't think anything has changed with that. I think there's this perception that we've got some secret segment of the market that the other carriers haven't figured out until now. And that's just not the case. I mean we're competing with all the other national carriers in some markets with the regional carriers as well. So our service product, when you think about the 15 years of Mastio wins. There's more to service than just being able to pick up and deliver on time and without damages. And we do those core things better than anyone else, but it's continuing to figure out ways that we can add value to our customers. And ultimately, that's the business that we're in. It's how do we work with our customers, create win-win scenarios where we can help each other and add value. And so I think those are the things that we'll continue to look at and leverage. We've got about 12% market share, and there's a tremendous amount of share opportunity out there within an industry that we think continues to have tailwinds for it. So we continue to believe that the e-commerce effect on supply chains will continue to shrink shipment sizes and have truckload to LTL conversion. I think if nearshoring and reshoring opportunities continue to play out that creates inbound and outbound opportunities for us as well. And just supply chain sophistication with the interest rates higher today, there's a cost of carrying inventory. And so that's the value add that we can have where our customers know they can rely on our on-time and claims-free service. So it's figuring out how to go into each and every customer account, figuring out the problems that they're having and delivering a solution for that customer. That's what I think we do better than anyone else. And that's why we're so confident in what our long-term market share opportunities are.

Daniel, as you referenced in the retail industry, including grocery, there's a penalty if the spread is not on the shelf on time and in full; they're called fines. And many of our competitors, they can go out and talk about meeting those expectations with fancy marketing material and so forth. But until they can stop those fines in our customers' pocketbooks, nothing is going to change, and we figured out how to do that many, many years ago, especially in the grocery industry. So we don't see anybody getting close to what we can offer from a service standpoint in the retail industry.

Our next question will come from Ken Hoexter with Bank of America.

I just want to understand maybe a little bit more on the backdrop here, the stock's down about 8%. Easier comps are coming up, right? Revs are down 5% in July. Do you expect to get that to maybe flat for the quarter? Others reported a deceleration in tons and pricing despite easier comps. Peer mentioned this morning they're implementing an early GRI. So I think you mentioned a deceleration in yields at 4% to 4.5%. So that's also a deceleration versus history. Are we getting a more competitive environment that just consistently is beating this market while we're in a decelerated market? I just want to understand your view of the backdrop. And then the holding share, I'm still confused by that one because every public carrier reported stronger percentage gains. Does that mean we're looking at just the private guys? I want to revisit that question earlier. Is it just the private guys that are losing relative share? Maybe if you can just expand a little more on that.

No, I think that, one, with respect to the yields, I think what we're looking at will be a continued increase sequentially. And so if we are kind of in the middle of that 4% to 4.5% range, that would be up 1.5% to 2% sequentially. In the last few years, when you look at the 10-year average, the sequential increase there from 2Q to 3Q is a little bit stronger. But when you look at kind of the last 5 years, that really skews that average, so to speak. So if you kind of look at a 10-year average sort of pre-COVID, it was more in that kind of 1.5% range about where we are thinking about being. So we're not seeing any change with respect to what our thinking is from an overall yield management standpoint. And I think that when you think about the industry as well, I think most carriers have kind of figured out that yields are important, those that you go back over the last 10, 15 years that they've taken a focus off yield, that's had pretty negative impacts on their overall profitability. And so I think that's why we've seen such consistency in the industry over the last 3 years where demand has been soft overall. From a market share standpoint, I think that since really Yellow closed their doors, I think there's been a lot of choppiness in terms of figuring out where our share is. And we obviously report that and report it by region, overall, in our deck that's out on our Investor Relations website. And so you can kind of see how share may be changing in one region versus the next. But it's something that when we look at the overall market, again, kind of factoring in what I just said about using the data out of Transport Topics, it looks like our share is relatively consistent with where we've been really over the last couple of years. And it's not to say that when we've gone through periods in the past of slow markets, that we're flat or could be down slightly whatever. It's about the same. We've continued to execute a plan. We've continued to manage our cost. Our service has gotten better. And I think we're in a really strong position. It's just overall change that we sort of look at. And so we feel good about where we are, but we feel better about what the opportunities looking forward will be.

And our next question will come from Scott Group with Wolfe Research.

This question addresses the broader situation, which is somewhat related to your previous response. If you examine the numbers, your company currently leads in yields but is lagging in tonnage compared to other public companies. It could be argued that this is typical in a softer market that is becoming more competitive. Your company remains more disciplined with pricing than others. However, what feels different is the length of this situation. Having been three years into it, tonnage is still down significantly. Does this prolonged duration shift your perspective in any way, or is your approach simply to continue with your current strategy, ride it out, and wait for the market cycle to turn? Or, because this cycle is lasting longer than usual, are you reconsidering your strategy?

Yes, we've discussed these numbers from both a quarterly and annual perspective. There’s a lot happening daily behind the scenes that often goes unmentioned. We are continuously working with customers to identify new opportunities. The past few years have been challenging due to initially soft demand and significant industry events, leading to fluctuations between being down, briefly up, and then down again. I would like to see revenue higher and for this cycle to turn around. There have been moments when it seemed like things were improving, particularly in late 2023 when we began reinvesting by running our truck driving schools and hiring staff in anticipation of sustained improvement. However, we encountered another roadblock with demand. When considering our model and the importance of revenue, looking at the sequential performance from the first to the second quarter, we typically don’t discuss sequential incremental margins, but we achieved about 60% incremental margins on the additional revenue during that period. This indicates the strength of our model once we begin generating revenue, but we are cautious not to pursue undesirable revenue that doesn’t align with our long-term goals. We've maintained strong cost management. In the second quarter, our operating ratio was 74.6%, with direct variable costs accounting for about 52% to 53% of revenue, similar to our performance in the second quarter of 2022 when we attained a sub-70% operating ratio. Our team has excelled at safeguarding service quality and managing costs despite a weak environment, which is challenging without network density. I’m very pleased with our efforts. Although our overhead costs have increased, we need a more substantial revenue base to regain leverage on those costs. That's part of our strategy; we believe in investing through the cycle and currently possess more capacity than ever from a service center network perspective. Yes, we are dealing with excess costs, with overhead accounting for about 22% of revenue in the second quarter, up from 17% in 2022. This illustrates the potential for model leverage once demand strengthens. Overall, we have performed comparably to the industry amidst the downturn. Industry-wide volumes are down about 15% from 2022, and our performance aligns closely with that trend.

Our next question will come from Jason Seidl with TD Cowen.

One clarification. I think you guys mentioned you expect losses on asset sales. Did I catch that correct?

Yes, Jason. We've been working on slightly reducing our fleet size in line with freight volume trends. We experienced some losses in the second quarter, which contributed to a rise in our miscellaneous expenses. Typically, those costs are around 50 basis points, but we observed an increase in the second quarter. I anticipate that we will continue to face pressure on those costs in the third quarter.

I was just a little confused because I know other carriers are actually reporting gains on sale. And so maybe you can walk us through the difference between you and them?

While we typically sell a tractor on average after 10 years, that likely means there's not as much demand for a 10-year-old million-mile single-axle day cab tractor compared to what you might see with truckload capacity.

And I guess, you mentioned the sequential move between June and July being slightly better than the historical average. Is any of this due to maybe some pull forward when people were worried about the tariffs potentially resetting again in August? Clearly, we're getting through some of the some deals. But did you get that feedback from any of your shippers that that was occurring?

Yes, there may be some of that. We haven't received significant feedback on it. However, when I analyze it by region, we haven't observed a substantial change in outbound business from places like California. Most of our regions are performing within a similar revenue range. So, I don't believe there is a major outlier affecting this.

Our next question will come from Bruce Chan with Stifel.

Maybe a bigger picture question here. We've been hearing pretty regularly in the past couple of quarters from some of the other carriers about AI and dynamic routing. I know that the OD style has always been to kind of quietly implement those things as part of the overall playbook, in many cases, much earlier than peers. But maybe just helpful to get an update on any optimization projects that you've got going on right now. And generally, how you're feeling about the various systems and your tech stack, anything incremental that we should be thinking about as an opportunity?

Yes. I think, like you said, I mean we're always looking at technology. It's a key part of our business, and I think has been to help us with our operating ratio. And just to kind of keep reminding our operating ratio is about 1,500 basis points better than the company average or industry average, I should say. So regardless of what the other carriers have got as opportunities, we're still materially outperforming there. And I think that technology has been a key part of that. And you're right. I mean we don't normally try to announce everything and give totally our playbook away, but we're looking at ways to keep getting better. Continuous improvement is a key component for our foundation of success. And we've always got to look at ways that we can make investments that are really going to drive change from a service standpoint, ultimately or add value through the lens of driving operational efficiencies. And you mentioned line-haul optimization. That's kind of been the holy grail and the buzzword for the 21 years I've been in this industry. But that's something that we continue to look and we've got some tools that we've continued to implement and try to refine to drive some optimization there. Same thing within our pickup delivery operations and on the dock. And I think our increased use of some of those technologies is part of the reason why we've been able to keep those direct costs. And those direct costs are primarily variable costs, but the direct costs associated with moving freight to think that we've been able to manage those costs basically consistent with where we were. And when our business was running extremely at optimal state at the time back in 2022 with a sub-70 operating ratio, I think is pretty astounding when you think about the loss of density in our network now versus what we had in the network being. And so there's not just one thing to point to, but I think we've got a great team in the field. And I think we've got a great group and our technology team that's always looking for ways to get better to work with their business, to work with our customers. Another key part of the technology investment is how can we do things differently and add value and add stickiness with our customer base as well that differentiate us from our competition. So all of those things, I think, will continue to be strategic advantages for us and will be part of the story of how we get our operating ratio back towards that 70% threshold, but continue marching forward and drive long-term improvement there in the operating ratio, while we continue to improve density and yield.

Our next question will come from Bascome Majors with Susquehanna.

Just as a housekeeping item, can you remind us of typical revenue and margin seasonality for the fourth quarter? And Adam, if you look out longer term, not necessarily calling when the cycle will turn, but just thinking about what you think the business will respond like when it does? Can you update us on sort of the incremental margin or really other sort of profile you think you can deliver when we actually get some tonnage to flow through all the cost adjustment work that you've done over the last couple of years?

Typically, our revenue per day has a 10-year average decrease of 0.3%. The operating ratio usually increases by 200 to 250 basis points. We conduct an annual actuarial study, so there might be some variations in the insurance and claims line in the fourth quarter. Last year, we faced a significant unfavorable adjustment in this area, but we generally exclude that from our averages, which reflects normal performance. Looking ahead, I don't expect a sequential incremental margin of 60% to be standard. Considering our cost structure, about 70% of our costs currently are variable, which has helped us maintain our margins during this downturn. The direct variable costs account for 53% of revenue, allowing for incremental margins of 35% to 40% as we start to see demand increase. Over time, as we need to invest in more equipment and personnel, that margin will begin to compress. Historically, our average incremental margin has been around 35%, which seems reasonable. This suggests that we could return to a sub-70 threshold if we experience several years of revenue growth recovery.

Our next question will come from Ravi Shanker with Morgan Stanley.

I have this topic has been discussed a fair bit, but if I can just hit it again in a slightly different way. You guys have been masters of calling the cycle over the years and have shown your operating prowess as well. But to kind of Scott's point, it's been 3 years of a downturn. And even now, I think some of the TLs and rails are actually sounding a little bit better on volumes in the cycle, even though nobody is going to high fighting here. How can you guys tell if there is something bigger and more structural going on with the LTL space here rather than just a cycle? Maybe some more permanent share shift to TL, maybe in-sourcing by shippers, changing supply chains? Or your customers telling you that they will definitively be back with the same level of volumes are higher in the upcycle?

Yes, the confidence we have in our long-term market share stems from our discussions with customers and our expectations about future supply chain trends. We have observed a shift in market share from less-than-truckload (LTL) to truckload (TL) during this cycle. In the truckload sector, operators are often willing to run at breakeven or worse, as evidenced by the operating ratios that have been reported. We need to keep an eye on this trend as business begins to rebound. As rates increase and truckload carriers get busier, we might see them moving away from loading multiple shipments and making several stops, which isn't their preferred mode of operation. They typically resort to this when circumstances are challenging and they need to ensure their trucks are filled. Consequently, some of this business may return to LTL. We're also seeing significant wins from customers on specific lanes, although their overall volumes might decline. This could be due to varying demand for their products, as some are capitalizing on truckload opportunities. Multiple factors appear to be contributing to the increase in demand, and we anticipate a greater share shift back than in previous cycles. We believe we are well positioned from a capacity perspective, both in terms of our network and fleet. We're likely at a high capacity level, and our team is prepared. This allows us to maximize efficiency, particularly when a driver is already at a customer location and can pick up several shipments instead of just one. This is a pattern we have observed historically as volumes can quickly ramp up when the economy begins to recover, which we expect will occur eventually.

Our next question will come from Richa Harnain with Deutsche Bank.

I appreciated the insights into your strong positioning to adapt to an improving environment. The OD model thrives when conditions are favorable. Can you discuss customer conversations? Although we've been hesitant to mention some positive indicators due to previous challenges, what are shippers saying about their willingness to provide you with more business in the future? Additionally, could you differentiate which industries you're feeling more optimistic about compared to those experiencing more negative trends?

Yes. I believe the uncertainty surrounding the economy has led to a decline in overall freight volumes. Industry volumes are down about 15% compared to 2021 and 2022, which has been a challenge for everyone. However, there was some initial optimism about the industrial economy last fall. Since 55% to 60% of our revenue comes from industrial-related sectors, this is crucial for us. We noticed an improvement in the ISM in December, which remained positive for a couple of months, but the discussions about tariffs introduced more uncertainty that dampened our momentum. For manufacturers, it’s difficult to determine costs without knowing the eventual tariff rates, which has left many customers trying to navigate these challenges. Some have chosen to wait things out. Currently, we have cautious optimism now that the tax deal is finalized, and the bonus depreciation may encourage further investment, especially if we see some trade agreements come to fruition. This would boost customer confidence. Another critical factor will be potential relief on interest rates, as customers are reviewing their finances to decide whether to invest and what returns they might expect. Clarity on these major issues is necessary to truly advance the economy. We feel we’re approaching that clarity and want to translate this sentiment into actual freight volumes. I'm noting some improved performance in July and we will continue to monitor the situation, as this could lead to sequential improvements compared to the relatively flat or declining business we've experienced over the past three years.

Our next question will come from Stephanie Moore with Jefferies.

Do you have any thoughts on the role of the LTL industry in relation to the potential transcontinental railroad? Most discussions are focused on how these deals affect line-haul truckload, but I'm curious about the position of LTL in this context and would appreciate your insights.

I don't expect to see any significant impact on LTL overall. There may be some effects down the line, and we will continue to monitor and engage with customers. However, I believe any changes in the rail industry are more distant and unlikely to directly correlate with changes in our business levels.

Our next question will come from Ariel Rosa with Citigroup.

So I know in reference to Bascome's question, you mentioned the normal seasonal trends from third quarter to fourth quarter. I was just wondering, it's been such a weird year, we've obviously seen some abnormal seasonal trends so far year-to-date. I'm wondering how you think about your ability to outperform normal sequential trends, I guess, as we move into the back half of the year, especially in the fourth quarter. And then also how the wage increases play into that? And kind of how much discretion you have around that? And what's kind of plan, how much pressure that puts on the OR?

Yes, our costs will increase due to the wage hike. This is part of the typical 200 to 250 basis point decline we see from the third to the fourth quarter. We experience one month of the increase in the third quarter and the full impact in the fourth quarter, which usually results in an increase of about 1 to 1.5 points. The 250 basis point change will be a significant factor. However, it ultimately depends on our revenue. In the fourth quarter, if we can maintain our revenue per shipment, particularly our net revenue per shipment, we'll keep managing our costs as we have. By the fourth quarter, I hope to see some reduction in our overhead costs. These are factors that could help us, but we need to keep managing our costs and improving our operational efficiencies, which our team is doing well. We're controlling our variable costs and need to continue this approach. Typically, we see a bit of a decline in volumes in the fourth quarter, which adds more challenges for our operations team. We must remain disciplined across all areas of our operation, emphasizing that every dollar spent should have a clear purpose and enhance customer service or long-term benefits. We're willing to make these investments despite short-term considerations, ensuring we keep a long-term perspective for Old Dominion's benefit. That's why we continue to invest and execute our capital expenditure program. By the end of this year, we expect to spend close to $2 billion on capital expenditures, even in a challenging environment that has presented its cost challenges. We've managed through this, and I believe that these investments will pay off once we navigate through the current economic conditions, as evidenced by the leverage we experienced in the second quarter.

This will conclude our question-and-answer session. I would like to turn the conference back over to Marty Freeman for any closing remarks.

All right. Well, thank you all for participating today. We appreciate your questions, and feel free to call us 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.