Old Dominion Freight Line, Inc. (ODFL) Earnings Call Transcript & Summary

All right, everyone. We're going to get going with our next panel. Really happy to have Adam Satterfield, CFO from Old Dominion. He's going to make just a quick minute of opening comments, and then we'll get right into questions. I've got a bunch, but if you've got some as well, type them in, and we'll get to him.

All right. Great. Thanks, Scott, and hello, everyone, from the virtual world. I think that we just wanted to kick things off a little and remind everyone that -- how Old Dominion is built for the long term. We obviously understand that there's a lot of questions today that are going to be more short-term focused, and obviously, we're prepared to talk about those. But our company, before we entered this pandemic, was built with an eye to the future. We continue to make decisions that are in line with what our long-term focus is going to be, and we feel like we're better positioned than anyone to recover from this pandemic and continue our market share growth story forward. And so we definitely are making sure that we've got everything in place from an employee standpoint, equipment standpoint and the service center infrastructure as well to take us well into the future. And we feel like there's going to be opportunity coming once things turn. The trucking market doesn't follow necessarily GDP. So once things start turning positive, there's likely to be tightness in the transportation space. And I think that you've seen from our past results that we deal with positive inflections and demand probably better than anyone. So we've got the experience to do it. All the pieces of puzzle remain in place as well, and we're ready to manage through this and well into the future. So with that, we'll turn it over. And I'm sure we'll be focused more on the short-term, but I just want to remind everyone of the long-term opportunities that OD has.

We're going to try and get to all of it in the next 25 minutes or so. So -- but we'll start sort of short-term and then we'll get longer-term. So can you talk about just the tonnage trends that you're seeing play out right now? And we had a bunch of private LTLs yesterday talk about certainly seeing improvement in May relative to April, and early to mid-April felt like the bottom for them. I don't know if you can give a May update, but if not, can you just talk directionally? Is that similar with what you guys are seeing right now?

Yes. We aren't ready to put an update out on May at this point or talk about current trends. We'll put our mid-quarter update out like we typically do with the actual stats right after the month closes. But I would say that what you heard from the shipper panel is probably pretty consistent. And as you can imagine, when things really fell off in April, they fell off just like off a cliff and revenue trends were pretty consistent throughout the month, day by day and week by week. There was pretty consistent revenue per day trends. And I think what we saw was the immediate effects of businesses that were open. They're open and shipping, and those that are closed or if they're running at some fraction of the normal operation, that sort of normal operation continued as the stay-at-home and shelter-in-place orders continue to be in place. With those being relaxed, I think it's logical to assume that the things obviously should be picking up a little bit. But I do think that there's still a lot of uncertainty out there. And that's some of the feedback we're hearing from customers as well. What will consumer demand really look like? Will people be comfortable and have the confidence to leave their homes and to go out and shop with crowds and so forth? And so I think you've got some on the producer side that are kind of waiting to see what that demand is going to look like to ensure that they don't get too far ahead of the curve in the event that some of these orders become more restrictive again. So the next couple of weeks will be important as we close out the month of May. But likely, June is going to be the more telling story for the quarter and how things may look to finish out this quarter and then what they might look like in the back half of this year.

Okay. Adam, I'm yet to get an answer that I'm happy with on this weight per shipment trend from anybody. What -- I still don't understand the spike, and maybe you can help us. Maybe with a little bit more hindsight, you have some sense on why weight per shipment is up so much? And then maybe as things are starting to reopen, directionally, should we think that the weight per shipment starts to normalize? I don't know.

Yes. We definitely believe it will normalize, and we started seeing some of that towards the end of the month and April. But if you think about it just generically, the weighted average of the shipment base, typically, the national account shipper has got a heavier weight per shipment. They've got more product than they're -- that they're moving versus a smaller mom-and-pop type of accounts. So if we've got a national account that might have an average weight per shipment of 2,000 pounds, they're normally 60% to 70% of our business. And you've got mom-and-pop accounts that the average weight per shipment might be closer to 1,000 pounds. They're normally 25% or so of our business. With more of the mom-and-pops being impacted, then you just got a higher weighting of that heavier business in the mix. But in addition, why we saw a big spike at the end of March and early April, if you will, with the national accounts, in many cases -- especially with the hoarding that was going on. If you had a national account that had a 2,000-pound average, just say, that 2,000-pound may have increased to 2,100 pounds. So totally inconsistent with prior recessionary periods. You've got some accounts that might be operating at 110% of where they were before the pandemic began. And then you might have some accounts that are operating at 25% or even 0 from where they were before. So it's really just a mix shift, if you will, that's happened. But especially now that some of that initial hoarding that was going on and people sort of ramping up and getting cleaning supplies and so forth out and about, that kind of reverted back a little bit lighter, as we finished out the month of April. And we'd expect that to continue to sort of normalize a little bit higher because, again, that going back to if it's just a 2,000 pounds now, that's skewed higher than our normal 1,600 average. But now as more and more of the mom-and-pops come back in line, we'd expect it to revert back closer to that 1,600-pound mark before we -- or by the time -- to the end of the quarter.

Okay. So logically, as things improve, shipments should recover a little bit faster than tonnage? Logical.

Things, yes.

Yes. Okay. And then -- so -- and then when we think about weight per shipment going up, though, historically, we think that that's a good thing for incremental margins for LTLs. But also when we -- when the mix skews more towards national accounts versus smaller accounts, we tend to think about that historically maybe as not so good for margins. Are we thinking about those 2 things right? And then help us think about the net of those 2?

Yes. I think the hard part to look at it is, again, who's open and who isn't. It isn't like it's just a general increase across the board. If it's just one particular shipment that you're thinking about, then as the weight goes up, the revenue per shipment is higher, the cost per shipment is generally the same. So you've got higher operating income per shipment. But the fact that the mix is skewed and the customers are just different, then that certainly is going to play into the margin implications. But for us, we try to manage each of our customers the same. We think the margin contribution, if you will, from each customer, whether it's a national account versus a small account, should be the same. And much of our growth in recent years has come from national account business. And we've continued to improve the operating ratio while we've grown. So it's probably true that the national accounts, if you just group them as a whole, the operating ratio may be slightly higher than the mom-and-pops. But overall, I don't think that's going to have as big of an impact on the second quarter operating ratio. It's more in line of what just aggregate revenue levels are, how we manage our direct cost and then the overhead cost, how they might trend as a percent of aggregate revenue.

So what do you think -- I know you're not going to give us operating ratio guidance, but what do you think is the right way to start thinking about the operating ratio for second quarter? Is it looking -- is first quarter the place to start and go sequentially from there? Is it -- should we be looking year-over-year? How would you guide us to at least try and start thinking about it?

I think the first quarter is the better period to look at. The year-over-year, last year, we had a 77.9% operating ratio. And typically, we've always said you need some revenue growth to try to improve the operating ratio, and obviously start now at 19.5% down, it's going to be harder to get improvement there. But the way revenue fell off a cliff, depending on what revenue ends up looking like for the second quarter, if that same trend from April continued through the rest of the quarter, we'd have lower revenues in the second quarter than the first. Typically, 2Q revenue is about 10% higher on a per-day basis than the first quarter, and that's why we get so much operating ratio improvement. But I think what we tried to sort of guide people and talked about on the earnings call was that our direct operating cost as a percent of revenue in the first quarter were around 58%. We had an 81.4% operating ratio. So the balance was an overhead type of cost. And so if we can manage our direct cost flattish, if you will, from the first quarter to the second quarter, our aggregate overhead cost in 1Q, those should be lower in the second quarter from some of the cost control actions that we're taking and some just naturally should be lower as well. So that's where we might see the margin degradation because we can't -- we're not overcutting, if you will, because, again, we think that things will be back. And we don't have to in the short run. But certainly, if we want those costs to be lower in aggregate, it just might have a little margin degradation depending on what the revenue base might look like. But the biggest channel for us is making sure that we're managing all the labor cost, that's the biggest cost element, what goes into that direct cost percentage. And certainly, we'll be looking to try to not only manage that flat from 1Q, but to try to get improvement.

And what is the aggregate sort of costs you've taken out? If you have a number you can share or an update on furloughs or anything like that?

Yes. We haven't provided any kind of update in that regard. But the biggest element obviously is the -- on the wage side. And our headcount was down about 15% in April versus the 22% drop in shipments. And the absolute headcount, they don't have to match because we're matching hours to labor revenue dollars. So we felt good about our ability to keep those costs matched, if you will, and the adjustments that we made really quickly in April. And so if you start getting a little bit of anticipated increase in shipments, then that should revert back. And that's why we didn't necessarily want to overcut from a people standpoint initially when we made those adjustments. We wanted to adjust enough, but you also have the ability to reduce hours worked. And so that was part of the equation that we went through with the adjusting our cost.

Adam, someone's asking, can you just clarify the comment about direct OpEx? So I think you said it was 58% of the revenue in the first quarter. And what were you suggesting the right way to think about that was going forward?

Well, if we can just manage those costs, I mean that's -- we manage our labor to revenue. That's a day-by-day measurement. It's the first thing I look, what revenue, and then our labor cost when I come in every morning. But if we can manage those costs sort of flattish from the first quarter into the second quarter, then -- that's why I felt like that first quarter operating ratio. It was an 81.4%, but keep in mind, too, it had about 100 basis points impact from the special employee bonus that we paid out. So kind of an 80.4% is kind of our baseline. That's how we're going to measure against ourselves to see how good a job we did with controlling the controllable costs and then any discretionary costs that we can take out as well.

And you're saying you want to keep that flattish as a percentage of revenue, not flat in absolute dollars?

Absolutely. Right.

Got you. Okay. That would be great. Okay. Can you talk about the pricing trends that you're seeing? And any change in the pricing environment? Is it getting any tougher? Talk about how the GRI is sticking just broadly on pricing trends.

Yes. It's -- we've seen consistency thus far this year, which has been nice. And I think there's a couple of elements that have played into it. But we started out last year, it was about this time, where we were starting to feel a little bit of pressure and some of that has certainly continued on a spotty type of basis. There's certainly some large customers that are sending in requests that, "Hey, I'm on a price decrease of X," and we decline those. And we've been able to keep business because they won't service. And there's another industry issue that's kind of hanging out there as well, where people are going to try to push. But if they want to secure and make sure they've got capacity that's already in place because if any kind of consolidation happen, we're going to protect the customers that we have. And so that's certainly an issue that's in the back of some shippers' minds. And -- but we'd expect that it's always a competitive environment in LTL. And we'll continue to go through our bid process, get our increases. We've been able to achieve increases this year. And we are going to continue to push for our cost-plus type of pricing. And I think our customers understand that we have to have these increases every year to do the things they ask us to do, to make sure we've got people in place. Capacity, obviously, is not an issue right now, but we were the only company invested in capacity before. And that was a long-term advantage that we felt like we had. So for all those reasons, we definitely will keep our disciplined approach to pricing.

Is there more freight moving around than normal because of that potential consolidation event that you talk about?

No, I don't think so. Yes, certainly, any time over the last 10 years that there have been any kind of conversations that picked up or new stories come out, then that just sort of creates some conversations with customers. Typically, it might be a lot of accounts will have multiple carriers in place. So if it's a common customer, the questions might intensify for how much business we might be able to handle if something were to happen. But I don't think that necessarily anybody thinks that something is a definite type of event by any stretch. And really, I think probably the base assumption is that there would be no type of event really, but it's certainly worthwhile to ask the questions and make sure you've got a backup plan if one's needed.

Okay. I want to start thinking about the recovery. So over the past basically year, right, your tonnage levels in a slower environment have generally underperformed some of the other LTLs. Maybe that's just you being more price disciplined. As things recover, would you expect to see your tonnage start to outperform peers again?

Certainly. And that's typically the way it plays out. And the pricing issue was frankly why we lost some business last year. We had customers that -- industrial economy was slower, and they were looking to save costs across their transportation spend, especially after going through the truckload rate environment the year before. And we're trying to get cost decreases. So that was the biggest driver of why we were losing some business last year. I think our market share was kind of flattish overall. But typically, when we get into an environment where the demand inflects to the positive, that's usually where our share gains really accelerate. And you can look at -- back to 2017, 2018. We were going along in the middle of 2017, doing quite nice with about 11%, 12% revenue growth. And almost overnight, in September, our revenue growth rate increased to 20%, and that continued through 4Q of '17 and into 2018. And the reason for that is, is that often a lot of our competitors are using truckload for their line-haul operations or a significant piece of that. And so anytime there's changes in that truckload market, be it capacity, that was the event in 2017 after a couple of hurricanes, but rate as well becomes disruptive. And our competitors will start putting embargoes in certain markets. And we'll increasingly have customers that will call us because they've had service failures or just a general lack of a competitor willing to pick up deliver freight. Yes, we've actually seen some of that recently where some competitors are not making some pickups or they're not being flexible to make sort of unscheduled pickups and things like that. So it's easier to kind of cut and go back and try to meet the decrease in sort of demand than we believe the increasing environment. That's where it seems like some of our competitors struggle more. So having that price discipline in place, having all the elements of capacity in place, we certainly think that -- and would expect that when the market starts recovering, that our market share should be significantly above the industry.

And how should we think about incremental margins on that? So if I go back and look, 2017, a year of really good tonnage and good pricing. It was a 25% incremental margin. 2018, a year of really good tonnage and just fantastic pricing. It was a 35% incremental margin. Is that the right range? Do you feel like we should be -- skip over the 20s and go right to the 30s on incremental margins? How are you planning for the recovery here?

Well, I think that the difference this time is we probably don't have to make as many investments. We talk about 25% long-term incremental margin sort of range, but there's a lot of investment that has to be made to sort of catch up with that. And where we are now, I think that we can take on a significant increase in revenues with sort of the pieces of capacity in place that we already have. And so for those reasons, I think that certainly the opportunity is there to have higher than that longer-term average type of number early in the recovery -- and it gets back to that cost breakdown that we just talked about. If 58% to 60% of our costs are the direct operating costs that are more variable in nature, then we can start generating tremendous leverage, if you will. We can have kind of a 35% to 40% incremental margin in the short-term type of period just like we've seen in some quarters past. And 2018 was a good example of that, where we had some really strong periods. But then you have to start hiring more, catching up. And with that comes a little loss of productivity generally. And then there's more step-up in equipment and other pieces of capacity that add more to the overhead cost structure.

So would you be disappointed if at the peak of the next cycle, you're not at a 75 OR?

I'll tell you what. Any OR in the 70s is pretty nominal good. So yes, it's hard to say we'd be disappointed, but we certainly believe we've got a lot of improvement ahead. There's obviously a lot of market share potential for us. And we don't want to just grow for the sake of growth. We want to grow profitably. And I think that we can put a lot to the bottom line and continue to improve the operating ratio along the way.

And what do you think so -- and what are the next sort of goals or targets on that market share growth in terms of percent share of the industry? Or how much you think in a normal year, you should be outgrowing the industry at this point?

Yes. I think that in times past, we've outgrown anywhere from 600 basis points to 1,000 basis points on kind of the volume side. And I think that we can look to see, again, kind of getting back to whenever the inflection begins, I think that you'll start to see that outperformance on the volume side. But we don't necessarily have any kind of stated target, if you will. Obviously, we can look and see the biggest player in the space, the market share that they have. And so certainly, that's kind of a goal that hangs out there, I guess, if you will, internally. It's just to keep marching up the leaderboard. And we're the third largest now when you look at consolidated revenue. So if we can come #2 and then we'll set our sight for #1.

Yes. Not a question about second quarter's weight per shipment, but just broadly, you've got the highest of anybody. Why do you think that is? And do you think that is a major factor in just your margin advantage over everybody else? Or is that not a big factor in your mind?

No. I think that we compete for the same freight with everyone else, so I think that historically speaking, some of the other companies grew up more as regional competitors. Con-Way was a super-regional type of model and had more regional business than perhaps we had. We were probably a little bit more longer haul. We had more interregional business as we grew, and we just sort of filled in the regional along the way. But a lot of times, those regional shipments are shorter lengths of haul and lower weight per shipments. And so perhaps some of the competitors just got a higher mix of that business. We have higher minimum weight thresholds than, I think, some of our competitors do. And so for that reason, we probably got a lower mix of the really light freight that's in our system as well. But it's kind of a combination of the good long-haul business that we still have and then not necessarily as much of the short-haul. Stuff skews our weight per shipment a little bit higher.

Okay. We have talked about fuel -- lower fuel historically as a headwind for LTLs. Certainly, it wasn't the case in first quarter. Are we just wrong at this point? And it just -- it's not an issue? Or is this a -- there's a lag benefit on the way down? And once it stabilizes, there is a fuel headwind so it could come. But I don't know, maybe we need to just move on and it's just not a headwind anymore?

Well, we'd like to think about it as being neutral and really just depends on negotiations, really. It was a headwind for us back in 2016. If you recall, when things changed then, and we had probably ignored the lower end of our fuel scale. And really, it wasn't compensatory for us when the fuel prices dropped, our costs dropped, but we weren't getting as much revenue contribution as what we needed to keep the operating ratio flattish for our customers. So once we work through that year, that fuel scale pretty much applies to your -- the 25% of our business. That's the mom-and-pops running on our base tariffs. So we were able to address some contracts as they renewed that year. But we tried to look up and down the fuel tables to see what the variable component of revenue might be and then what the fuel component is -- as well is. But there's always variability there. The fuel surcharge program resets every week. It's based on the retail average. And then the majority of our fueling is from bulk fuel. And so there's always sort of a gap there in terms of what we're buying it at versus what the fuel surcharge rate is as well. So depending on that gap, that can change things from a net fuel basis. But overall, we just sort of look at it as it's a variable component of pricing. It's a variable cost element as well. And we just got to try to marry those 2 to where it's got an insignificant effect one way or the other.

Now if we're right, second quarter, there's -- the gap between wholesale and retail is wider than normal. So if anything, that could benefit in the second quarter.

That could be a benefit in 2Q. That's right. We have taken benefit we can get with revenue being down like it is.

I understand. The -- some people just ask. There was a headline about the dividend. And is it to -- there was -- it went from $0.15 and changed to -- there's no change in the dividend, right?

No. We did have a stock split earlier this year. So it was $0.23 before. It's $0.15 now. So it's just the fact of stock adjustment.

Okay. Okay. That makes sense. Okay. And then I wanted to just wrap up. How do you think about, over time, e-commerce is going to continue to grow? Is this -- is that a good thing or bad thing for LTL? How do you think about Amazon as a customer? And then when you guys, at a Board level, think about long-term changes in the industry, do you think about Amazon ever as a potential competitor? Do you -- would you be surprised if they became an LTL carrier, if they bought an LTL carrier? How do you think about that kind of bigger picture?

Yes. We -- well, first, the e-commerce trends, I think it is a long-term tailwind for the industry just because the supply chain dynamics of how that freight just sort of moves through versus large distribution centers to store deliveries versus the smaller fulfillment centers. And it probably is more conducive to LTL quantity size shipments. And I think that you've seen probably the LTL market over recent years increase somewhat for that. And our retail-related business over the last 5 years has increased as well a little bit faster than the company average, because in many cases, they're pushing for higher service carriers. And obviously, that's something that we can easily serve our customers with, being the best service provider in the space. But from the Amazon standpoint directly, it's certainly something that we talk about every year as part of our strategic planning process and how that might look if they did decide to enter the market. I don't know that they necessarily need to, but it's not surprising to see them buying trailers and doing different things to take more control of their business and supply chain. No different than what Walmart has done over the years as well, just doing it in different ways. They haven't necessarily shown the appetite to want to employ drivers and deal with kind of that side of the business, if you will, if they can procure capacity like they have been doing so. We'll deal with them if they do decide to enter the space. I don't think they would necessarily want to do it organically. It will be more likely if they try to buy into the space just like FedEx and UPS did, then we'll just contend with them as a competitor. And it could be a competitor and a customer as well. So we'll cross that bridge when we get there. But we think and talk about it quite a bit.

Okay. And then last thing, just super quick. If over the next 3 years, what's most likely, no acquisition, buying an LTL or buying something outside of LTL?

Well, we haven't had an acquisition since '08. So that's -- probably the odds are more into that favor. But we've looked at a lot over the years, and they just haven't made sense from a risk standpoint or just -- from an LTL standpoint, there's not really any out there that really would give us more than what we can do organically. We've looked at a lot that were outside of LTL, and there's a risk of growing outside of your core. And so we'd rather be focused. There's so much opportunity in the LTL space. And we've been able to grow like we have. And so we're more focused, I guess, on just continuing to grow through that channel.

Great. Okay. We're going to wrap there. Thank you so much, Adam. I appreciate you being here. All right. So I've got to break. And on the freight side, we start again at 10:30 Eastern Time with Knight and Werner. Thanks again, Adam. Appreciate it. Be well.

All right. Thanks, Scott.