Good morning. Welcome to the second quarter 2017 conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through August 4th by dialing 719-457-0820. The replay passcode is 9007431. The replay may also be accessed through August 27th 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're 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 update publicly 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. Ask in fairness to all that you limit yourself to just a couple of questions at a time before returning to the queue. Thank you for your cooperation. At this time, for opening remarks, I'd like to turn the conference over to the company's Vice Chairman and Chief Executive Officer, Mr. David Congdon. Please go ahead, sir.
Good morning. Thank you for joining us today for our second quarter conference call. With me on the call today is Adam Satterfield, our Chief Financial Officer. After some brief remarks, we'll be glad to take your questions. I'll point out that I'm off-site today. If we're not totally smooth with taking your questions and doing the responses, please forgive us. Old Dominion's operating momentum accelerated during the second quarter as strong growth in tons and revenue per hundred weight generated company records for revenue, EPS, and operating ratio. The 11.2% increase in revenue and 21.4% increase in diluted earnings per share are the best growth rates for these metrics we have had in over two years. Our growth for the quarter again validated the strength and soundness of our long-term business model, which we have discussed with you for many years now.
The 6.1% growth in tons for the quarter produced better freight density and improvement in our yield is reflected in the 3.8% increase in revenue per hundred weight, excluding fuel surcharge. The combination of increased density and yield, along with incremental improvements in productivity for the quarter, drove the 140 basis point improvement in our operating ratio to an 80.9. The success of our business model is no surprise to us or anyone who has studied our historical results over the economic cycles of the past 20 years. That success is not automatic and requires significant effort and commitment. First and foremost, our success is dependent on the consistent, long-term, and high-quality execution by each of our outstanding employees.
The commitment and hard work of our team is reflected in our industry-leading service with on-time deliveries in excess of 99% and a cargo claim ratio that has improved to a new company record of less than two-tenths of 1%. In addition, we strongly support our team's ability to deliver superior service through our long-term capital expenditure strategy, which is designed to create operating capacity that can absorb anticipated gains and market share. This investment is not only for tractors, trailers, and service centers, but also includes substantial expenditures on technology infrastructure to enhance both our pickup and delivery visibility for our customers and our internal operating efficiencies. Looking ahead, we remain cautiously optimistic about the economy and other industry dynamics that could affect supply and demand.
While we will continue to be prudent with our approach to managing labor and equipment capacity, we believe Old Dominion is the best-positioned company in the LTL industry to benefit from an improving economy. We have consistently demonstrated our ability to win market share by continuing to deliver a value proposition of superior on-time, claim-free service at a fair price. We are confident that continued execution, combined with our financial strength and available capacity, will produce additional long-term growth and shareholder value. Thanks for your time this morning, and now Adam will discuss the second quarter financial results in greater detail.
Thank you, David, and good morning. The second quarter of 2017 turned out to be a record quarter in many ways for Old Dominion. We set new company records for revenue, operating ratio, and earnings per diluted share. Our revenue increased 11.2% to $839.9 million, and our operating ratio improved 140 basis points to 80.9%. The combination of these factors allowed us to increase earnings per diluted share by 21.4% to $1.19. We believe our results for the quarter were due to continued improvement in the domestic economy, as well as the consistent execution of our long-term strategic plan. Three basic elements of superior service, fair price, and network capacity all worked in harmony to produce profitable growth. Our revenue increase for the second quarter reflects an increase in both LTL tons per day and yield. LTL revenue per hundredweight increased 5.1% and increased 3.8% when excluding fuel surcharges.
LTL tons per day increased 6.1% as compared to the second quarter of 2016, with LTL shipments per day increasing 5.6% and LTL weight per shipment increasing 0.5%. We were pleased with the strength of our volumes as we finished the quarter, as June LTL tons per day increased 7.8% as compared to June of 2016. This was higher than our year-over-year growth rates for April and May, primarily due to a 1.2% increase in LTL weight per shipment for June. Our revenue growth in July has continued at a double-digit pace, although it is slightly below the overall pace of growth for the second quarter. Month to date, our LTL tons per day have increased 6.7%. As a reminder, the third quarter of 2017 has 63 workdays, which is one less than the third quarter of 2016.
Our second quarter operating ratio improved 140 basis points to 80.9%, primarily due to the improvement in our variable operating cost. Salaries, wages, and benefit costs as a percent of revenue improved 150 basis points when compared to the second quarter of 2016. We were extremely pleased with the efforts of our team members to manage this volume growth while also maintaining superior service. As stated in our release this morning, we do intend to hire additional employees in the third quarter in anticipation of continued growth, but we note that there could be a short-term negative impact on productivity metrics as a result. While most of our operating costs improved as a percent of revenue, general supplies and expenses increased 40 basis points when compared to the second quarter of 2016.
Among other things, the 24% increase in these costs reflects additional advertising and marketing-related costs that were mentioned in our first quarter earnings call. We expect a similar level of general supplies and expenses for the third quarter. Old Dominion's cash flow from operations totaled $127.7 million for the second quarter and $238.5 million for the first half of 2017. Capital Expenditures were $131.3 million for the quarter and $188.3 million for the first six months of 2017. Due to our current volume trends and increased confidence for further growth, we increased our Capital Expenditure plan for 2017 by $15 million to purchase additional revenue equipment. As a result, we now expect total Capital Expenditures of approximately $400 million for this year. We returned $15.3 million of capital to our shareholders during the second quarter and $23.6 million for the first half of the year.
We have $192.8 million still available for stock repurchases under our current $250 million stock repurchase program. Our effective tax rate for the second quarter is 38.6% as compared to 38.4% for the second quarter of 2016. We currently expect our effective tax rate to be 38.6% in the third quarter of 2017. This concludes our prepared remarks this morning. Operator will be happy to open the floor at this time for questions.
Thank you. If you'd like to signal for a question at this time, you can do so by pressing the star key followed by the digit one on your telephone keypad. If you're using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that's star one at this time to signal for a question. We'll take our first question from Todd Fowler with KeyBanc Capital Markets.
Great. Good morning. Thanks for taking the question. Adam, to your comment about the additional investment into the third quarter, can you give us an order of magnitude, either what you're thinking about from headcount or maybe the impact on the OR sequentially that the potential investments that you have to make going forward could have?
Yes, sure. Todd, this is Adam. Right now, when you look at where we were in the second quarter, our shipments were up 5.5%, let's say 5.6%, and our average number of full-time employees was only up 1%. We're somewhat lagging from a headcount standpoint with shipment growth when typically, we like to lead with headcount growth to make sure that we've got people in place and trained, because the most important thing for us is to make sure we don't have any sacrifice in service. We certainly had employees working hard during the second quarter to manage the volume growth that we had, and we actually had to use a little bit of purchase transportation as well. We did some hiring. The actual headcount growth at the end of June was up about 280 employees over March.
We've got to catch up a little bit with where we are. We're thinking somewhere in the magnitude of probably a couple of hundred employees, maybe a 2%-3% increase. Somewhat, it's just a measure of continuing to manage our labor with our volume growth. We always do a good job with managing labor to revenue, we may have got a little bit behind the curve a little bit on our hiring.
Okay. That helps and that makes sense. I guess maybe just to quantify it, if the third quarter OR versus the second quarter OR is typically down, let's call it 50 basis points or so, would the expectation be that because of that catch-up, maybe it's something different than the historical trend?
It could be a little bit. Going back to what happened in the second quarter, obviously with managing the additional volumes that we had with our people, we leveraged up hours, and we didn't have to incur that fringe benefit cost.
Going into the third quarter, we mentioned we're going to have to buy some additional equipment, and that was primarily on the trailer side, and we had to do some rentals last quarter. So we're making up for some of that. As we add people, achieving the normal 50 basis point increase going into the third quarter could be a little difficult. As I think we've said many times before, it always comes back to volume growth, which drives density and yield performance in terms of what we can do on the overall operating ratio. I think that we performed very well in the second quarter, and we've got some good growth trends thus far into the third. This is a little bit of an anomaly with only 63 days in the third quarter, so we will have one less day of revenue as well.
Okay. Maybe just for my last one, David, if you have any comments just on contract renewals and industry pricing here in the quarter. Obviously, it's a good quarter from a yield perspective, but it looks like a little bit of benefit from a shorter length of haul. Can you speak a little bit to what you're seeing with your contract renewals and just some general comments on your thoughts on industry pricing? I think that would be helpful.
We generally, on contracts, achieve 3%-4%, pretty much tied to inflation and cost. That's part of our formula is to be fair and equitable with our customers. There was no real major change there. The industry pricing dynamics, I think we're still in a very disciplined environment right now. We don't see any major irrational pricing with the exception of the occasional irrational behavior you might see. It's very spotty. Usually, when you see a competitor put in a price that's drastically cheaper than ours, they just don't know the handling characteristics, or I think they're shooting in the dark. There's no irrational players out there at this moment. We're happy about that.
Okay, that sounds good. Thanks for the help and nice quarter today.
Thanks, Todd.
Thanks, Todd.
We'll go next to Allison Landry at Credit Suisse.
Hi, Allison.
Thanks. Hi, thanks. Good morning. I wanted to ask about e-commerce and the broader trend that we're seeing sort of in the retail supply chain, whereby sort of moving away from a traditional supply chain to one where you have more fulfillment centers and distribution centers that are closer to the end consumer, more inventory, faster turns. As you think about that sort of secular trend longer term, do you think that ultimately LTL benefits from a modal shift away, potentially from long-haul trucking? Are you seeing that now, or is that something that you would expect to happen over time?
We think it will happen to some degree over time. If a shipper goes from 2 major distribution centers, one in the east, one in the west, to 15 or 20 fulfillment centers more closely located to their customers, they're not going to need as many full truckloads into those multiple fulfillment centers, and you would think there would be a shift toward more LTL as a consequence. Second part of that is that our value proposition, our 99% on-time service, very fast transit times in regional, interregional, long-haul lanes, our cargo claim ratio, all of that, I think, plays into the LTL that moves into both DCs and fulfillment centers. Whoever's product it is, they certainly want it on the shelf quickly, and they don't want damages. That's where we shine.
Are you seeing any customers, whether it's an e-tailer or a brick and mortar, are you seeing any customers approach you to sort of figure out ways outside of using small package, for example? Have you seen any of that, what are you hearing sort of from customers in this respect?
Yeah, not so much on the really small package side, Allison. Certainly, we are every day talking with customers, and as they continue to transform their businesses and supply chains, we're dealing with that, where we've got packages going into distribution centers and fulfillment centers, as David mentioned. We're getting some good growth in those next day and second day lanes, as evidenced by the decrease in our length of haul. The other piece of this is on the middle mile side as well, where you've got the goods going from a fulfillment center closer to a final delivery agent for those larger, bulky type items. That's usually a sold good. As David mentioned earlier, service is going to be critically important. We feel good in that regard in terms of the service product that we have and the available network capacity.
The critical piece, though, is just ensuring that you're getting paid appropriately for committing that level of capacity to these customers.
Right. Just one last question on this. FedEx has talked about using some of their, I think, 24-foot trucks in their LTL division so that it's easier to actually deliver some of those larger items to a residence. Is that something that you guys would be able to participate in as well?
Right now, we've talked about home deliveries and so forth in the past as part of our strategic planning process. We still evaluate it. There's certain customers that may demand that we have an option. If you recall, we had a white glove service offering years ago. We ended up, we were using agents. It wasn't at the same level of service offering that our normal LTL product is. We moved away from it. I think there's other opportunities for us in terms of committing capacity. We're making some residential deliveries today that's less than 2% of shipments. There are add-on fees that go along with that. Certainly it can be difficult hauling a 48-foot van through a residential neighborhood.
as we continue to look in terms of that final mile delivery into homes, it's just what are the profit potentials there in terms of the rate that can be charged, what the handling characteristics and density can be, and ultimately, is that a profitable business or not to add on to our existing suite of services.
Right. That makes perfect sense. Thank you so much for the time. That was really helpful.
Thank you.
We'll go next to Scott Group at Wolfe Research.
Hey, good morning, guys. It's actually Rob Salmon on for Scott.
Good morning.
Hey, Rob.
Hey, Rob.
Hey, guys. I was curious if you could give us a little bit more color in terms of the July update. Could you talk to the impact of the fourth and just sequentially June to July, how that's compared to your historical trends that you've seen over the years?
Sure. Yeah, certainly that first week, the way the days fell for this, really for June and for the rest of the year. It's set up nicely to finish June on a strong note, and then we started out that first week of July a little bit softer. We've been seeing nice growth as we've moved through the month of July, though. When going back to June, the normal sequential increase from May to June on the weight side is 2.1%. We were actually up 4.3%. Now, part of that was shipments were above what the normal sequential trend would have been as well. Shipments, the 10-year average is a 1.4% increase over May. We were up 2.3%. What we saw was a nice increase in weight per shipment as we finished June.
I think that as you've seen some truckload reports for the second quarter, that things are probably getting a little bit tighter out there. Our weight per shipment so far into July has cycled back down a little bit closer to where we were in April and May. Some of that is we're managing some of these volume quotes and those business moves that are coming in to make sure that it's not disrupting our other LTL business. Many of these moves that we're doing are for existing LTL customers, and they're just heavier weighted LTL shipments. Anyways, we would have expected with that 4.3% sequential increase into June, that July would be below trend.
Normally, July is a 2.1% decrease, and we're having a little bit more decrease on the weight side, but a piece of that is related to, as I mentioned, that weight per shipment is below where we were in June.
That's really helpful. I guess if we're thinking about incrementals, they were very strong in the quarter, in excess of 30%. If I'm aggregating the impact of one fewer working day, as well as the expected headcount growth, how should we be thinking about incrementals this quarter in relationship to the performance in Q2?
That's a good question, Rob. We've certainly had quarters in the past, especially when you're in an accelerating type of environment where we've had around 30% incremental margins. Over the long run, we say that we're more focused on 20%. Going into the third quarter, we've got to see will these volume trends continue to hold and show nice acceleration. That'll be a big piece of it. Certainly, those other factors, will we keep it at that 30%? That might be a big ask. Will it be as low as 20%? In one quarter's time, I wouldn't expect so. Somewhere probably in the middle.
My comment to that, Rob, would be that we're experiencing just solid, yet moderate and very manageable growth right now. It's putting us in a sweet spot. When you combine the quality of the revenue that we do handle with the cost structure that we have against that revenue, the continued slight improvements in productivity, and the headcount is probably 2.5% maybe overall, is all we're anticipating. Less than 3% anyway. With the shipments and tonnage at probably a greater rate than the headcount, I expect that we'll continue to see some pretty strong incremental margins. Things feel really good right now.
That's a great color. Appreciate the time.
No problem.
We'll go next to Amit Mehrotra at Deutsche Bank.
Great. Thanks so much. Thanks for taking my question. I just wanted to follow up on the comment you just made about things looking really good right now. On one side in the quarter, we did finally see some pull on industrial production, and truckload capacity finally appears to be tightening. On the other hand, there's a lot of industrial activity, energy sector activity growth in the quarter that may be driving growth in excess of maybe what you would see normally. That piece of it doesn't necessarily look like it's sustainable, at least in the current oil price environment. I just wanted to get your thoughts on, you guys are ready to start ramping up labor and investing in fixed asset, but you have all the stars that aligned in the second quarter that may not necessarily be extrapolated to the back half.
Just wanted to get your thoughts on industrial production and then also the energy economy. Thanks a lot.
Yeah. I'll take that one. I was just reading a pretty detailed report this morning, for example, that GDP is expected to be 2.2% in 2017 and grow to 2.4% in 2018. Manufacturing from 1.7% in 2017 to 2.4% in 2018. TL capacity in terms of tractor count is off about a little less than 6%, which means the capacity is tightening there. Housing starts have gotten back up to an average level. The ISM at 57.8 appears as strong as it was in the positive cycles of 2010 and 2014. Construction spending is up. Retail sales is up. All that sounds pretty dadgum good to me. As we said in the release, we're cautiously optimistic that the economy will continue to behave nicely.
With that, combined with rational behavior of the industry and from a pricing standpoint, I think we're set up right now to have a good year this year and a good year going into 2018.
Yeah. Well, I certainly hope that's the case. I just maybe for our own help, Adam, could you help us with trying to understand, if you look at the business as a whole, whether it's shipments or revenue, in terms of how much of that is exposed to rig counts, completions, derivative effects on that, and how much is exposed to a lot of the just broader stuff that you just talked about and which obviously is signaling at least positive growth over the next year and a half? Just to help us sensitize ourselves to maybe the exposure there would be helpful.
Yeah. About 60% of our revenue is industrial related, and we don't have a tremendous amount of exposure to rig counts and really that energy industry. There's an element of it that's there. I think just to tag on to what David was saying, though, is that we started seeing improvement in ISM numbers, and we were waiting around for it to see when is it going to really be translated into our numbers. Especially you go back in the last year, it just seemed like the economy was so choppy, we couldn't get any sustained momentum really with the economy, nor could we get it in our own volume trends. I think we're finally starting to see some things at least from a sustainability standpoint, our volume trends staying in line with where we'd expect they would be.
I think the other thing is just as some freight is potentially coming back into the LTL environment, that you're seeing some volume increases with some of the other carriers. As a result, rates are going up. Over the last year and a half, we talked about the fact that We were questioned often about our market share gains. We said, if you look along the price and service continuum, that maybe shippers were weighing price more than they were service. I think now that some of the other carriers are increasing rates, that you're seeing a shift maybe back to equilibrium. I think when pricing is more in line, we feel that we have a service advantage, and that's demonstrated in our 99% on time and claims of less than 0.2%. We certainly have got available network capacity.
We're back in this sweet spot of growth of, we built up all this network capacity, we're able to grow into it. We're getting more and more customer feedback of coming back to us for service. We feel good about just the industry dynamics, and as a result, are positioning for some continued growth. Certainly, we're not going to go out. We increased our CapEx by $15 million for equipment. Equipment capacity is a little easier to get. We long have a long-term plan of investing in our real estate network and maintaining excess network capacity. We can get the equipment capacity. Now the final piece is making sure that we've got the people in place to be able to continuously pick up and deliver our freight on time to make sure that the service isn't jeopardized in any way. That's what we're addressing right now.
Right. Okay. Thanks so much for answering my questions. Yes, sir.
We'll go next to David Ross with Stifel.
Good morning, gentlemen.
Good morning. Good morning.
ABF came out with the cubic minimum charge, which we think is opening the door for some more dimensional pricing in the LTL system. What are you guys thinking on changing the rate structure, pricing structure, and the potential for going to an all dim pricing model sooner rather than later?
Yeah. We've created and have a density tariff that we've had for, gosh, over five or six years ago. Maybe it's maybe even longer. We've just not seen that much demand for that particular tariff. Logic says that we can't keep raising base rates and raising discounts, and it makes no sense to have 90% discounts. At some point in time, there's either got to be a reset of the rate structures to bring the discount levels down or some move toward dimensional pricing. We're prepared for it and can accommodate dimensional pricing now.
Yeah. Okay, because it's not really a demand issue. Shippers weren't demanding that UPS and FedEx change their dim divisor, or that they change their fuel surcharge programs. It's just a matter of, I guess, willingness on the carrier side to make the pricing change.
Mm-hmm. Adam, you want to take a shot at that? I think it's just going to come back to when you've got so many shippers, especially your smaller mom and pops that just don't have the systems in place, and in many cases may not even have scales. So it'll just be an added element of complexity, perhaps. We're not sure that the shipper community is ready for it. We've been talking about it for probably a decade and trying to get ready for it. Somewhat, we manage to it by having the dimensioners in our facilities and costing to make sure that we're accounting for the cube space in our trailers. It's just going to be a matter of, if anyone, and others in the industry elect to push for it.
I don't think that we would be out there to push and demand and say, this is the only way to account for it. The way we try to account for it is measuring the weight and density and audits and inspections of the freight that we're handling, and then going back to our customers and saying, this may not be the type of freight that we agreed to from a pricing standpoint and making adjustments in real time. I think we've been pretty successful with that, and that's why we've had such good yield performance. We're probably not there to necessarily go out and drive that for the industry.
Excellent. Thanks, guys.
Okay.
We'll go next to Chris Wetherbee at Citi.
Hey. Good morning, guys. I wanted to ask a little bit about sort of the cost cadence again as we think about it, specifically on sort of the advertising. I think it's sort of a seasonal dynamic that's going to run through into the fall. Give us a little bit of sense of how we should be thinking about it. I don't know if you can give us a specific number from 2Q, maybe how we should think about that lapping or maybe falling off in 3Q, or does it stick around and then go away in 4Q? I'm just trying to get a sense of maybe how that specifically plays out.
Yeah. In my comments this morning, I mentioned that in general supplies and expenses, we had about a 24% increase compared to the second quarter of last year. It was a pretty good step up in pace from where we were in the first quarter, and we expected that. It's in line with the seasonal build of freight. Some of the things that we were doing were targeted in that regard. I would expect our general supplies and expenses to be in a similar type of range in the third quarter as they were in the second. You should have some cycling down as we go into the fourth, similar to a bell curve with lower cost in the first and fourth quarters, and a little bit higher cost in the second and third.
Some of those costs that are in that line item are variable in nature, there's certainly some natural fluctuation that's going up and down with our volume trends there as well.
Okay, that's helpful. When you talked about them last quarter, I think there was some expectation that there could be some revenue attached to it, and obviously tonnage growth was solid in the quarter. This is getting, I guess, maybe a bit too granular, but trying to get a sense of maybe what your initial impressions have been with this sort of push higher on the advertising side. I know it's mostly on the MLB side, but how the revenue sort of uptake or results have been from this push in advertising?
Measuring the return on marketing expense is one of the most difficult calculations you can try to make. We're really still very new into our relationship with the MLB, and we plan to have a long-term relationship there too. We watch our marketing budget every year, and it's just an expense item that makes up part of our cost structure. We think it's a very necessary thing to continue to build our brand awareness and build customer loyalty. We're remaining committed to marketing.
Okay. From a market share perspective, what we see in the quarter on performance, you'd probably call it consistent with your typical ability to gain share within the market.
We haven't seen all the results for the second quarter of our competitors, so it will be interesting to see how our growth rates stack up. Going back to my comments a little bit ago, the good news is the tonnage that we are bringing on the truck line is solid, well-priced. It fits in our cost structure, and it's generating incremental margins. Others might grow equal to us or maybe a little bit faster. You're not seeing the growth come with solid growth in yield and solid growth in tonnage. We've got both.
Got it. Appreciate the time. Thank you.
We'll go next to Ravi Shanker at Morgan Stanley.
Thanks. Morning, guys. A few follow-ups here to some of your prior comments. First, on the kind of e-commerce collections. When you look at both your business and just LTL as a whole, just how much of revenue do you think comes from just filling inventories for retail stores or doing the FC to store move? Why should that change over time from being what I believe today is more of a TL business to being more of an LTL business?
Scott, at this point, retail for us is somewhere in the 25% of our revenue ballpark. We're not doing as much of the fulfillment center to store and so forth that you mentioned. I think in terms of just the general big picture of why it may move from truckload into LTL, I think David hit at it earlier. When you think about the increased number of fulfillment centers versus larger scale distribution centers covering a region, these fulfillment centers are managing a significant number of SKUs, and they're not going to be bringing in multiple or large quantities of goods. It's going to be more of increased number of SKUs, rapid inventory replenishment, and we think that really bodes well for us and our service capabilities.
It naturally, unless there's change in dynamics within the truckload industry, would shift to lower weighted goods in the LTL industry. We just think that that's going to be a continued change in dynamic. In terms of whether or not we stay so focused on that, it's certainly an opportunity, and again, it's an LTL opportunity. A lot of things will come back to industry capacity and where other carriers are, what carriers focus on, some of this retail growth. We anticipate there will be continued growth within the industrial segment of the business, that may free up in other opportunities with existing customers and new customers across other elements and businesses. Until you see any measurable increase in capacity by the other carriers, we see opportunity across multiple fronts.
Got it. That makes sense. Second, on ELDs, I think you mentioned that you're obviously looking forward to truck capacity tightening later this year. Do you think that the kind of spillover of the pricing impact from TL to LTL is concurrent, or do you think there's a little bit of delay there?
There probably was a little bit of some spillover in our numbers in June, I mentioned our weight per shipment going up. That's something that we've got to manage and control here. I think I mentioned earlier that some of these volume loads that we handled were with existing LTL customer accounts and perhaps that were struggling to find suitable capacity in the TL sector. Some of this too may have been, we've talked about this the last few quarters, that we think that there's a fringe element of truckload carriers that were out looking for 10,000, 15,000-pound shipments that normally would move by LTL. Especially in the 3PL segment, they were able to secure capacity at a lower rate on a TL carrier.
You may find a TL that was willing to handle multiple stops and doing some different things that may have been outside of their sweet spot, absent other volumes. If some of those dynamics come back into play where normal shipments that will move LTL move by LTL and TL stays in its world, then that bodes well for everyone. We've just got to be careful, I mentioned this earlier, that we're not taking on volume loads at the expense of other LTL shipments such that it may impact service in any way for us. Any volume loads that we're taking on have got to be priced accordingly for the capacity that we're taking on.
Understood. Very helpful. Just lastly, I think you mentioned earlier a 6.7% tonnage growth in July, which was a bit of a deceleration sequentially. Can you just confirm that that is not adjusted for the Fourth of July holiday?
Yeah. We don't do adjusted, that's just the rate of growth where we are. Certainly that first week I mentioned was a little bit slower, that plays into the month-to-date average. That's just where we are. Keep in mind too, what I mentioned about the fact that the weight per shipment is down a little bit. Our shipment growth in July is slightly below. There's multiple factors that come into play with these things. The shipment right now is up a little over 5.5%. Shipment growth in June was up 6.5%, it is a slight deceleration. All in, I mentioned that our revenue is growing at just slightly below the pace. The revenue in July is slightly below the pace that we had for all of the second quarter. You've got those volumes and the yield components coming into play.
On the yield side, there will be some compression in terms of fuel surcharge revenue in the third quarter as well, as fuel is more normalized, where it was increasing last year and it's actually the last few weeks been decreasing.
Understood. Very helpful. Thank you.
We'll go next to Brad Delco at Stephens.
Hi, guys. This is actually Scott Schoenhaus on for Brad. Congrats on the quarter.
Scott.
I just wanted to follow up on the pricing environment. Some of your peers recently put in GRIs. Just wanted to see how you're thinking about rates to non-contractual customers. As a follow-up, do you think we're set up as of right now for another round of GRIs in early 2018, particularly if we do get that TL spillover that seems to be already happening or setting up to be happening in a tightening capacity?
Yes, Scott. We haven't made any announcements at this point. If you remember, our GRI last year went in effect September the 26th, and we're normally on a 10 to 11 month cycle. We've had discussions along those lines and certainly we've got cost increases and would expect to have an increase, but we haven't made any announcements in terms of that as of yet. Second part of your question, whether or not some of the other carriers try to go after a second rate increase or not. If you look at over the long run, the yield performance and where industry margins are, we maintained all of last year that we felt like industry pricing would stay stable because of the fact of industry consolidation and where industry margins are.
I think some of the other carriers will continue to have a need to push for price. Certainly, as other carriers do that, we look at ourselves, what we need to cover our cost inflation, and that could bode well for us from a volume standpoint if we don't need as much price as perhaps some of our competitors do.
No, thank you. That's very helpful. I guess my last question is on driver pay. I think you usually do an increase around September or October, usually around 3%-3.5%. How should we think about this for this year? Similar timing, similar rates, or is it going to be a little bit more given it seems to be the LTL environment's more competitive?
We typically have an increase at the 1st of September. We haven't announced anything to our employees as of yet, we normally don't give the rate. Certainly, the factors that go into play when we make those decisions are how the company is performing, where we're at. We take those into play. They've averaged 3% or so. I think that's what the increase was last year. We'll make that announcement on the fourth quarter call, at least to the investment community once we go out and announce our plans to our employees.
That's just for me. Thank you very much.
We'll go next to Ariel Rosa at Bank of America Merrill Lynch.
Hey, good morning, guys. Nice quarter. Just to start with, I was hoping you could address where some of the strength is that you're seeing and what are some of the regional differences across the country. Is it gaining share in the markets where you're strong, or is it really increasing penetration in some of the markets where you have less of a presence that's really driving this strong growth?
It's been pretty balanced actually, which is what we would want and expect. We're getting some really good growth in the Midwest region of the country. If you think about it, that's where we've added some capacity. Our Gulf Coast region, that's also seeing nice growth. We did just recently open our fourth terminal in the Chicagoland area. It seems that as we continue to add capacity really around the country, there's demand there for our service product, and we're able to increase growth. We've talked about that's part of our long-term plan for market share growth. We continue to look and evaluate real estate opportunities. We've got a target list of about 35 to 40 service centers or so, and we continue to keep our eyes open because the demand for real estate typically in the markets where we're looking is continuously increasing.
We certainly will continue to look to add to our network where we can to make sure that the network does not become a limiting factor to our growth in any way.
There was some chatter about competitors entering markets in the Northeast. Could you maybe address what you're seeing there? Are you seeing additional pressure in that market?
We're not seeing any pressure as of yet in that market from the expansion of other carriers.
Okay, great. Very helpful. Just last one for me. Obviously, the share buyback activity was a little bit slow this quarter, at least relative to what we were expecting. Is that trying to shore up the balance sheet and prepare for this increased CapEx spending, or is there something else driving the thinking there?
No. I think our balance sheet is in really good shape with where our debt to cap is. It's just a measure of where the stock price has been and what our thinking has been in the past of buying the stock when it's at a little lower price. We've bought fewer shares when our price has increased. It stepped up a little bit in terms of comparison to the first quarter, but it's still been light, I guess, in comparison to the pace of repurchase in 2016. We'll continue to evaluate our strategies around capital return to our shareholders. We are continuously doing that.
Got it. Okay. Very helpful. Thank you.
We'll go next to Tyler Brown at Raymond James.
Hey, good morning.
Adam.
Hey, Adam. You made some high level comments on 3PLs, but can you talk specifically about the trends there? Was that segment up in tonnage? It seems like they've been a bit erratic this year.
We actually had nice revenue growth in the third quarter, or second quarter with our 3PLs. I think some of that may be coming back to just shipper demands, available capacity within the industry, and shipper demands for a little bit increased focus on service over price that I mentioned earlier. Probably a little bit faster rate than the overall revenue growth of the company in the second quarter when it came to our 3PLs.
Perfect. That's good color there. Just a quick housekeeping item, David, you mentioned P&D or line haul productivity this quarter, how that trended. I assume both were fairly good.
Adam, do you have those numbers to share on that?
Our P&D shipments per hour increased 2.1% in the quarter. Our line haul [load mode] average was up 1%. On the dock, it was a little mixed. Our shipments per hour were down about 0.6%, but our pounds handled per hour were up 0.6%. Granted, we had an increase in weight per shipment and so forth, those were a little mixed there. I think that we continue to be very efficient. We're hiring new people, and there will be a productivity impact from those new hires. That's something that we anticipate, and it could have a little bit of a dampening effect of the improved productivity that we just saw in the second quarter.
Okay.
go into the third.
Okay. No, that's great. Just lastly, this is a bigger picture question, David, I always think of you guys as industry pace setters, I'm just wondering if you've given any real contemplation regarding automation. I'm not talking about necessarily over the road, do you think that automation could play a role on the dock or in the yard? Do you think that that's something that's realistic in the intermediate term?
Well, as far as automation on the dock and in the yard, we already have it. I think one of the steps that has been talked about for years, we've never quite gotten there that could help on the dock might be some kind of RFID tags on each pallet level RFID tag, not carton level, a pallet level RFID could improve some productivity there. For the most part, We've got everything that's available to the industry right now, [Tyler] on our dock and in our yards to manage those activities.
Okay.
Tyler, just to add a little bit to that, in terms of some of the new technologies that come out, we certainly stay focused on what's available. I think that we have evaluations of technologies on the dock in terms of automated forklifts and things, we'll continue to look at it. In a warehouse environment, it's a little bit different. I know you're familiar with a freight dock. In the middle of the night, especially on a break bulk location, is pretty hectic. There ever be the possibility of yard switchers and?
Right
that's something that, whether it's the technology for the switchers, whether it's technology in the trucks with the. We already have lane departure warning systems and the forward radar collision mitigation systems. I think we will continue to see, and we will continue to implement safety features on our trucks, as they become available and they're viable. That's something that we're always focused on, and certainly we've got the strength to make the investments in when they are available.
Right. Okay. No, I appreciate that very much. Thanks.
At this time, we have no further questions in the phone queue, so I'd like to turn the conference back over to Mr. Congdon for any additional or closing remarks.
All right. Well, thank you all for participating today. We appreciate all your questions. Feel free to give us a call if you have anything further. We thank you and have a great day.
This does conclude today's conference. Thank you for your participation.