Morning, and welcome to the Q2 2016 Conference Call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through August 5 by dialing 719-457-0820. The replay passcode is 4,6,368,822. The replay may also be accessed through August 28 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 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 Aldermenian'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 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, but 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 Executive Chairman, Mr. Earl Coggan. Please go ahead, sir.
Good morning.
Thank you for joining us today for our Q2 conference call. Joining me this morning are David Congdon, Old Dominion's Vice Chairman and CEO and Adam Satterfield, our CFO. After some brief remarks, we'll be glad to take your questions. During the Q2, we remain focused on executing our strategic plan and customers continue to respond to our value proposition of providing on time claims free service at a fair price. Based on our on time delivery of 99% and our cargo claims ratio of 0.28 percent for the quarter, we continue to believe our service is the best in the industry.
The economic environment remains soft, however, and our year over year results reflect the softness. We expect that our 2nd quarter financial results will continue to outpace our industry peer group and believe our LTL tonnage represents a gain in market share despite being down slightly from the Q2 last year. We note that the Q2 started out slower than expected in April, but we began to see more of a normal sequential trend with our May June results. In addition, the comparable quarter decline in the fuel surcharge moderated for the 2nd quarter, a trend that we expect will continue in the second half of twenty sixteen based on current diesel fuel prices. We also expect that the decline in non LTL revenues will lessen in the second half of twenty sixteen based on our timing for eliminating certain services in 2015.
Before I turn things over to David, I would like to take a moment to pay our respects to Mr. Harwood Cochran, the Founder of Old Dominion Transportation Company, who passed away earlier this week. Armwood Cochran was, I think, the very best LTL trucker of his generation and he certainly made significant contributions to our industry. And the Congdon family and the Cochran family have been very good friends for many, many years. I would like to offer our deepest sympathy to the Cochran family during this difficult time.
Now here is David Congdon to give you more details on the quarter.
Thanks, Earl, and good morning. From a financial perspective, the Q2 was similar to the Q1 in many respects. Adam will review the specific numbers, but the basic story is that the combination of our tonnage, yield and productivity for the 2nd quarter was not sufficient to drive operating leverage versus the Q2 of last year. Instead, the small decline in revenue had a deleveraging effect on our income statement and increased operating costs resulted in an 80 basis point increase in our operating ratio for the quarter. We have consistently said that the key factors to long term margin improvement are increased density, productivity and yield, but a positive macro environment is necessary to support our revenue and yield growth.
While our density has not increased like we would have liked this year, I am pleased with the improvement in our direct costs. We improved our platform productivity with a 3.7% increase in platform shipments per hour and our P and D productivity metrics were flat. Our line haul laden load average decreased 2 percent as we continued to run schedules to meet service, but this is an area of opportunity for us. Our yield remained steady
during the
Q2 with revenue per hundredweight excluding fuel surcharges up 2.7%. As Earl said, however, the economic environment remains challenging, although recently reported data from ISM and industrial production has been positive. Despite the economy, we will continue to focus on the disciplined execution of our strategic plan. Our value proposition is built on providing superior service at a fair price and we do not intend to waiver from this core strategy. In addition, we will continue to focus on further controlling our costs.
With that said, however, we will continue to make strategic investments that position us for long term success. We invested nearly $300,000,000 in capital expenditures during the first half of twenty sixteen, which we expect will again differentiate us in an industry that is spending far less on a relative basis. Our balance sheet remains strong with a debt to total capitalization of only 11%. To summarize, let me repeat what I've said many times before. Our plan, regardless of whether we face ongoing macro weakness or a strong environment, is absolutely clear and has not changed.
We will continue to provide our customers with superior on time claim free service at a fair price. We will maintain our disciplined pricing philosophy and we will continue to make significant investments in capacity, technology and training and education for our OD Family of employees. These factors all contribute to a value proposition that allows us to keep the promises we make to our customers and that they make to their customers every day. We are confident that the execution of this strategy will enable Old Dominion to continue to win market share, driving our long term prospects for further profitable growth and increased shareholder value. Thanks for joining us today.
And now Adam will review our financial results for the Q2 in greater detail. Adam?
Thank you, David, and good morning. Old Dominion's revenue was $755,400,000 for the Q2 of 2016, a 0.9% decrease from last year. Our operating ratio was 82.3%, which was an 80 basis point increase over the Q2 of 2015. Earnings per diluted share were $0.98 which was a 2% decrease from the dollar per share earned in the Q2 of last year. Revenue for the Q2 continued to be impacted by a decline in fuel surcharges as well as a $9,700,000 decrease in non LTL revenue.
Our LTL revenue benefited from an increase in yield that was partially offset by a decrease in LTL tons. LTL revenue per hundredweight increased 0.8% for the quarter and increased 2.7% when excluding fuel surcharges. While we noted an increase in price competition during our Q1 call, we did not see as many of those issues in the 2nd quarter and we continue to characterize the pricing environment as relatively stable. We expect that our contractual renewals will continue to increase at rates between 3% to 4%, although reported yields may differ from this range. As David mentioned, we do not intend to make any changes to our pricing philosophy.
LTL tons decreased 0.3% as compared to the LTL tons decreased 0.3% as compared to the Q2 of 2015, which included a 1% decrease in weight per shipment, partially offset by 0.6% increase in LTL shipments, For July, on a year over year basis, our month to date LTL tons per day decreased 1.5% as compared to July of 2015. On a sequential basis, LTL tons per day for the 2nd quarter increased 5.3% as compared to the Q1 of 2016. While this was lower than our 10 year average sequential trend, which is an 8.5% increase, we are encouraged by the sequential increases in tons per day from May June that were pretty much in line with averages for years when Good Friday was in the Q1. In addition, the sequential trend for July is in line with our 10 year average, which is a 2.4% decrease in LTL tons per day as compared to June. Our operating ratio for the Q2 of 2016 increased 80 basis points as compared to the same quarter of last year.
The decline in revenue generally had a deleveraging impact on all of our expense items. However, the 90 basis point increase in depreciation and amortization costs was also a result of the long term investments we have made in real estate, equipment and information technology. While overhead costs were generally higher as a percent of revenue, our direct operating costs such as salaries, wages, benefits, operating supplies and expenses and purchased transportation improved slightly as a percent of revenue on an aggregate basis. Year over year increase in salaries, wages and benefits for the Q2 was primarily due to a 2.2% increase in the average number of full time employees and general wage inflation. Our fringe benefit costs were 31.9% of salaries and wages as compared to 31.5% in the Q2 of 2015.
Fringe benefit costs in the 2nd quarter benefited from a reduction in expense for retirement plans and were lower as a percent of salaries and wages than the Q4 of 2015 and the Q1 of 2016. I don't expect for this trend to continue, however, and believe that benefit costs will trend higher again in the second half of the year. Full Dominion's cash flow from operations totaled $123,800,000 for the 2nd quarter and $292,200,000 for first half of twenty sixteen. Capital expenditures were $175,200,000 for the quarter $295,500,000 for the 1st 6 months of 2016, which is approximately 75 percent of our $405,000,000 estimate for the year. We repurchased $40,000,000 of common stock during the 2nd quarter and $84,700,000 in the first half of twenty sixteen, which left us with $245,600,000 available for purchase under our new $250,000,000 repurchase program.
We completed the previously authorized $200,000,000 repurchase program in June, which was approximately 5 months prior to its scheduled expiration. Our effective tax rate for the 2nd quarter and first half of twenty sixteen was 38.4% compared to 38.6% for the Q2 and first half of twenty fifteen. This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time. We are in different locations today, so please forgive us if we talk over each other a bit.
Thank you. And we'll go first to Chris Rezvi of Citi.
Hi, thanks. Good morning, guys.
Thanks for the July month to
date tonnage number. I was wondering if you could give us the June number and then maybe a comment on sort of how the revenue per 100weight ex fuel might be looking July month to date?
Sure. The tons per day for June on a year over year basis were down 0.3% and our shipments in June were basically flat again on a year over year basis. And then the revenue per 100weight excluding the fuel, it did trend below 3%. When you look sequentially though, our the absolute number for the revenue per 100weight ex fuel is 16.6% in the second quarter and our weight shipment was $15.59 If you look at the Q1, our weight per shipment was $15.45 dollars and revenue per 100weight ex fuel was $16.54 So sequentially, our weight per shipment has increased, yet our revenue per 100 weight has actually increased slightly as well. Some of what's going on with the comparison is last year, the wafer shipment was decreasing.
Now on a sequential basis, now we've got it increasing. So there's some different factors going different ways that's going to impact that overall comparison. And that continued into the back half of last year. And we're seeing weight per shipment continue to hold pretty steady in terms of moving up right now. But we still feel good about the pricing environment.
We're still getting contractual renewals at the same rate that we were earlier in the year and feel pretty good about the environment.
And in terms of sticking on pricing for a second, in terms of that pricing dynamic that you mentioned that
you saw a little less
of the pricing competition, I'm guessing that probably is holding over here until at least the beginnings of Q3. But can you sort of speak to maybe what has changed? Do you think it's just sort of individual carrier decisions that they're making a little bit more rationality? Or is it weight per shipment getting a little stronger? I mean, what's your sort of read on how things are trending from that perspective?
We said in the Q1 call that really it was selective some of the actions that we had seen that nothing was broad based. And I think carriers go through their own assessments for business they need in different lanes and so forth. And we felt like some of the pricing actions on a few customers in a few places didn't necessarily make sense to us. But overall, we had characterized the environment as stable then and we continue to characterize it as stable today. So I think there's always spotty issues regardless of the environment.
And I think that's just what we were seeing in the Q1.
Okay. That's helpful. And one quick follow-up question. I think you mentioned in the prepared remarks that headcount was up 2.2% in the second quarter. How should we think about sort of the year over year progressions in 3Q?
If tonnage is down, does that number kind of flatten out, turn a little lower? How can you manage that sort of
on a quarter to quarter basis? Go ahead, David.
I'd say, absolute headcount should remain relatively flat, aside from attrition that we may have, but we're looking real if we have some attrition in our headcount just for normal reasons, we'll look real strongly at whether we need to replace positions or not. But I would think the absolute headcount ought to remain relatively flat now. We're properly staffed to do the amount of work that we're doing now. I guess a lot of it will depend upon how the economy shakes out coming out of July and into
the Q3 peak season. Okay. That's helpful. Thank you for the time. I appreciate it.
And we'll go next to Matt Brooklier of Longbow Research.
Yes, thanks. Good morning. I just had kind of had a follow-up to the headcount question. Is there a number in terms of tonnage in your mind that would require you to add additional heads, let's say, the tonnage starts to pick up, we start to see reacceleration in the second half of this year. Is there a certain level of tonnage growth that you would need to reach before you start adding heads again to the model?
It's hard to say that, Matt. It's really all depends on those decisions are made on a service center by service center basis. Historically, coming into July has been a pretty decent month for us last several years, but August it builds and September builds to a larger amount. We're usually hiring some people for a peak season in September about now, but it's we don't necessarily gauge it that all of a sudden we're up 5%, so we're going to add X number of people. It's just something we have to gauge based on the workload that's hitting our service centers and how many hours per week people are working to determine if we need to put some more people on payroll.
Okay. But just to reiterate, with kind of the current trajectory of tonnage right now, you feel comfortable with holding headcount, I guess, flat going into the second half of this year?
I wouldn't say for the whole second half. Maybe I misspoke a few minutes ago to say headcount was to be flat. I believe from an overhead standpoint and management salaries and fixed salary standpoint, our headcount should be relatively flat. From a dockworkers and drivers standpoint, I would anticipate that we will grow headcount a little bit going into the fall. We're going to watch it because this economy is just remains soft and we don't want to get go overboard with too much headcount, but we've got to stay ahead of it too, because it takes a good couple of months to train somebody to our methods of moving freight in our network.
So we've got a it's just a very careful balance.
Okay. That helps. And then just in terms of the month to date tonnage, it's down a little bit more than it was in June. I'm just trying to get a sense for it wasn't a huge change and obviously things can shift from month to month. Was there anything going on with the calendar that potentially impacted your tonnage and drove tonnage down maybe a little bit more than where it was in June?
The comparison for July is probably a little tougher last year. On a sequential basis, we were down 1.2%. And I mentioned the 10 year average is down 2.4% July compared to June. So I think that we still feel good about our sequential trends being in line. This is basically 3 months in a row.
We talked about April in last quarter's call, but May June and the way July is trending, we're encouraged by that as well as some of the positive economic data that's come out recently. It's not necessarily strong, but at least it has been positive. And we feel good about the fact that we've got 3 months now that's back on trend and we'd like to see that continue.
Okay. Appreciate the time.
And now we'll take a question from Ariel Rosa from Bank of America.
Hey, good morning, guys. So first, I wanted to start just follow-up on pricing. Last year and for the past several years, there's been a pretty step up in sequential pricing between first half and second half. Just wanted to get your sense of if that's likely to repeat?
Some of that though again if you look in the last year, we had an unusual phenomenon going on with weight per shipment as that was trending down. And I'd say trends were 14. Our weight per shipment ticked up. Last year, it ticked down. Down.
I'm looking at it more on a sequential basis for right now and just seeing good hundredweight or revenue per shipment continues to sort of trend in line with where we'd expect and you're not seeing any sequential deterioration in that. And so talking to our pricing department, they're continuing to see the same types of contractual renewals that we have been seeing. And we feel like that again as we characterize that the overall pricing environment continues to be stable.
So Adam, just when you say you're seeing it consistent on a sequential basis, Does that mean kind of on an absolute basis seeing it flat? Or is that even if you can talk about July, maybe what the trend is looking like?
I mean, it's very similar. But yes, revenue per 100weight ex fuel ticked up a little bit as compared to the absolute number that was in the Q1 despite the fact that wafer shipment moved up, which would in theory put negative pressure on that revenue per hundredweight number.
Okay.
Got it. That makes sense. And then the release mentioned some changes in freight mix weighing on yield. Could you just go into that a little bit more and what it is the changes in kind of what you're shipping?
Mix changes every day depending on what we're picking up and what customers are coming in or what customers are going out. And so we've talked about we've had in the Q1 call a little bit of customer churn and but we're replacing the customers that we lost. Some of them may be coming back to us and we're bringing in new business and that's supporting sequential trends that we started seeing since May. So I mean all of that goes into play and we often talk about the fact that revenue per 100weight is a yield metric and not core pricing. And so there are times when revenue per 100weight will be lower like it was in the Q2 than what we are saying that our contractual renewals are holding and there are times when it's been higher.
So you can't always reconcile those two numbers. But we still feel good about the pricing environment and our own ability to get necessary price increases to support our continued investments here at the company.
I guess Adam I meant more. Is the freight mix a reflection of anything that's going on with the economy and kind of the underlying LTL industry?
No. It's just the revenue per hundredweight is what it is and our mix is what it is. And it's just as main thing is that we manage to the operating ratio of each and every account. And we've got target ORs and we're finding that we can manage to that and that environment is stable. This revenue per hundredweight whether what it does sequentially or what it does year over year is purely an end result of a yield management process.
And again, different customers give us different lanes and different consistencies of freight and different pounds per cubic foot and that's a moving target all the time. So you just can't focus on that and call that a good or bad pricing environment based on year over year or sequential trends in remnant runaway.
Okay, great. Thank you.
And now we'll go next to Todd Flower of KeyBanc Capital Markets.
Great. Good morning. David, the past several quarters, we've been talking about the impact of the smaller shipments on your productivity and some of the costs associated with that. And it looks like the way per shipment stabilized here sequentially. Do you think that the network is adjusted to the smaller shipments and that the costs are more in line with where the shipment sizes are?
Or is there still some opportunity to get some efficiencies with where the shipments with where the shipment size is trending?
We focus
I didn't mean to make
you sigh that deeply.
So Yes. Well, yes, we focus on productivity day in and day out and actually hourly. And we're always working on improving efficiency. I think the point I was trying to make at the on the last call is that, if you're dealing with a shipment that weighs £1500 and moving it across the dock And now your weight per shipment is, I'd say £1300 and it's still 3 skids of freight, but they're just a little bit shorter, a little bit less weight on the pallets. It takes the same amount of time to move it across the dock.
And so the lower weight per shipment was impacting some of those freight handling metrics negatively. And now that things are leveled out, it's maybe less of an impact.
Okay. And so when you think about if weight per shipment stays here sequentially going forward, is there still some opportunity on the productivity side? Or do you think that you kind of have adjusted and kind of are handling the freight the way you need to based on the weight per shipment is?
You can look at any with 226 service centers, there's always some service centers whose productivity is not where it ought to be. And we're working to find out why and working toward improving productivity. But then, other centers might be kind of peaked out in their productivity, because you can't you just can't move a forklift any faster across the dock or load the trailers any faster. But again, it's something we're continually looking at productivity and if we see weakness in productivity in any particular terminal or on any particular ship within a service center or any particular individuals that working on a ship, we're continually addressing our productivity and striving for improvement.
Okay. That helps. And maybe just for a follow-up. Adam, I know the depreciation has been a bit of a headwind here in the 1st part of the year because of some of the investments that you've been making. How does that play out?
I mean, are you caught up now on the fleet side? Or is depreciation still going to be a bit of a headwind until revenue growth kicks back in at some point in the future? I guess, how do we just think about the investments that you're making in the 1st part of the year relative to the changes in revenue?
Yes. We definitely need the revenue to catch back up. And we will for one thing, we've about purchased all of our revenue equipment in the first half of the year, which was on a little bit of an accelerated basis from prior periods. That's usually what contributes most of the depreciation for the year and there will still be some continued uptick as it wasn't fully complete. But then you've got the ongoing investments in IT and the real estate, which doesn't have as much of an impact in the short term on your depreciation line.
But we probably bought more equipment this year than perhaps what we needed based on where our growth is. And so we continue to look at that. And as we start making preparations for next year, we'll weigh what the size of the fleet is, what our replacement needs are and what our growth may be. But we certainly would like for the top line to catch up with where we are.
Okay. But it sounds like if nothing else you pulled some of that forward and you can grow into it at some point
in the future? That's right.
Okay. Thanks a lot for the time this morning and congratulations on a nice quarter.
And now we'll go to Ravi Shanker of Morgan Stanley.
A couple of follow ups here and a bigger question. The follow ups would be, I'm sorry if I missed this, but did you give us the revenue per hundredweight ex fuel in July and how that's trending year on year?
I didn't give that number yet. Right now, we're trending it's trending up about 2%. So that's the comment that we had made before that but on an absolute basis, it's right in line with where we have been. But we'll continue to see that number potentially differ from that 3% to 4% target range that we have on true underlying pricing as compared to yield.
And that's because that funky math that
you have said is because of the direction of movement? [SPEAKER JEAN FRANCOIS PRUNEAU:] Well, there's always a difference between price versus yield. But yes, the weight per shipment trend definitely impacts that.
[SPEAKER CHRIS
STATHOULOPOULOS:] Okay. And the weight per shipment trend, is that
up sequentially or year on year so
far in 3Q? Right now,
our weight per shipment continues to trend. We've been saying since the back half of last year around £15.50 And that's basically where it continues. It was $15.59 in the second quarter and that was up a little bit from the Q1 is at $15.45 but it's somewhere around $15.50 plus or minus £10 is what we've been trending this year. But last year, particularly in the first half of the year, it was declining sequentially.
Got it. And just a bigger picture question on just e commerce. And I just wanted to clarify a few things. Can you just remind me what percentage of your revenues roughly do you guys believe comes from e commerce? Maybe what percentage of that is from Amazon versus the other retailers?
And also, what are you seeing in terms of e commerce trends right now? There's a lot of talk about the omnichannel shift in the next year or 2 especially, do you guys see that as a real long term opportunity for you guys?
Right now, about we've got, I would say, little e commerce, true e commerce freight. We don't have any last mile. I mean we do some residential deliveries, but about 15% of our revenue overall is retail. And we would focus more on freight that's going into distribution centers than we would going into some residential area. But I think the long term trends and we've talked about this before is that as e commerce as that environment changes, I think it can ultimately drive more freight into the LTL industry.
And I think that having the amount of capacity that we do and the continued investments in capacity that we would be benefactors of that. Got it.
I think it's understandable that you guys don't have much B2C last mile e commerce. But do you have a sense of the when you consider the B2B kind of intra DC moves, again, what percentage of that of the stuff you're moving comes from e commerce?
We don't have a breakdown on that, Bobby.
Okay. Thanks for the help.
And now we'll take a question from David Ross of Stifel.
Yes. Good morning, gentlemen.
Good morning, David.
Adam, if you could just give us an update on the IT rollout, the new platform, I think you were migrating towards maybe about half way through now. Is that on plan? Any issues? We continue to work on that. It's a big project.
I wouldn't say that we're halfway through, but that's not going to be a big bang theory kind of a deal where we flip the switch and turn things live. It's coming on in multiple pieces. And I think we're making progress at a pace that we had established and there are certain new world of Java and the user interface screens that we've got. So things seem to be progressing, but that's a long term deal as we convert all of our systems, most of which are homegrown into this new programming and format, but we're taking the time to do it in a way to enhance the processing capabilities and overall efficiency that we hope will drive long term productivity for us and give us
a further
differentiated advantage in the marketplace. But no negative surprises so far and everything seems to be tracking on plan? Yes. I'd say it's tracking on plan. It's just it's a big project and some things are going to go better than expected, some things not as good as expected.
And we just continue to work through it every day. And it's a big coordinated effort from a lot of people involved and we'll continue to work at it. This is one of these things though that it comes at a short term cost and we knew going into it if revenue softened that we've got to stay committed to it because again we think it gives us long term strategic advantage and we're continuing to do that. So it's higher overhead in the short run, but long term we think it's going to be beneficial for us. And I got the June tonnage was down 0.3% and July down 1.5%.
Did you provide April May year over year tonnage comp? Yes. April was plus 0.1%. May was down 1.0%. Okay.
Thank you very much.
And now we'll go to Rob Salmon of Deutsche Bank.
Hey, good morning guys.
Adam, in
your prepared remarks, I thought you had called out a fringe benefit in the Q2. Can you remind us what the magnitude is at and kind of what you guys are expecting with regard to fringe benefit inflation in the back half of the year?
Yes. I mean the benefit costs are what they are and there's a lot of different things that go into it. The past couple of quarters, I talked about it initially in the Q4 of last year that our cost had ticked up as a percent of salaries and wages sort of out of line with what the previous quarters had been. And so it had ticked up to sort of 33% to 34% as a percent of salaries and wages in the Q4 of 2015 and Q1 of 2016. It was 31.9% and an element of that is retirement plan benefit costs that are linked to share price.
And as that share price decline, we got a little bit of a benefit. But there's a lot of moving parts and pieces. I would just expect that we've continued to see higher group health benefit costs And our workers' comp or not workers' comp, but the paid time off benefits have continued to be higher as well. So we're not necessarily giving a hard fast number, but I would just expect it to be higher than that 31.9% that we saw this most recent quarter.
Okay. That's helpful just from a contextual standpoint.
What do you guys think is the
right optimal capital structure for Old Dominion from a debt to cap or a debt to EBITDA perspective? If I think about the first half of this year, despite really front loading the CapEx for the full year, you're still at just 11%.
Based on
what I'm trying
to get at is how should I think about the use of that free cash flow in the back half of the year given the lower CapEx needs?
We continue to look at that and obviously we want to optimize our balance sheet. We finished our $200,000,000 repurchase program early and launched into an upsized $250,000,000 deal. I think the last few quarters, the last 12 months, I guess, we've purchased close to $150,000,000 So our capital allocation strategy is 1, to invest in LTL. We think that's where the best returns have been. We've said that we'll continue to look.
And secondly, at M and A opportunities and we haven't had one since 2,008 because they've just the ones that we've looked at haven't made sense for us. And then we'll look at returning capital to shareholders. So I think that in essence of the right M and A opportunity, we've increased that pace of repurchasing. But we continue to look at ways that we can make strategic investments in the company as well and want to maintain some dry powder. But our debt to cap did move up to 11% at the end of this quarter from where it had been in lower single digit.
Right. No, makes a lot of sense. Nice execution in this tough quarter, guys. Thank you. Thank you.
And now we'll take a question from Scott Group of Wolfe Research.
Hey, thanks. Good morning, guys.
Good morning, Scott.
So Adam, if we assume just that normal sequential volume trend continues in August September, do you have a sense what does that imply for Q3 tonnage? I think it's a little bit better than the down 1.5 in July, but just want to make sure we're thinking about that right?
Well, on a 10 year average basis, 3rd quarter's weight per day is generally up 2%. So if things continue to move in August September according to the normal sequential trend, that's the number that you would get. You're talking sequentially up 2%, so down slightly, but not down of 1% not
down as much as 1.5% year over year?
Yes. The year over year is again last year looking at it, I think that we were a little bit stronger sequentially than just slightly than sort of the long term average. But it's we'll just have to wait and see. I guess we're not ready to give a range on what we think that our total tons for the quarter would be. But again looking at it, I guess now we're trying to look more at getting back onto a consistent sequential type of change with our volumes knowing that we've mentioned it before, we've cycled out some business and we'll continue to look at that and that may impact as we were growing in the last year some of the year over year trends.
Okay. That makes sense. Can you remind us when and how big the annual wage increase was this year and then how that compares versus a year ago?
Well, we haven't talked about typically it happens the 1st September and last year we gave about a 3.5% wage increase. And we haven't announced that to our anything to our employees at this point. But based on current trends, we would expect that there would be a wage increase this year. We're just not ready to talk about the amount. Okay, fair enough.
And then just kind of last question. So you talked a little bit on the prepared comments about the deleveraging impact of down revenue and slower tonnage. What is kind of the level of either tonnage or revenue growth where you can start to see margin improvement again on a year over year basis? And given the easier fuel comp, do you think we can get back to margin improvement in the Q3? Or is that tougher just given the tonnage environment?
No. I'm not really ready to give any guidance on where our OR is going to be for the Q3 at this point. But we'll still continue to have some headwinds on the top line basis as we go into the back half of the year. We knew the first half of the year was going to be more challenging than the back. But the Q3 will continue to the fuel should moderate if prices stay where they are on that comparison.
But in non LTL really it was in it was more so the 4th quarter that those services were fully out of our number. So we still had close to or just call it $19,000,000 of non LTL revenue in the Q3 of last year. And while we gave that number in the Q1, it was about $13,000,000 and that's about what it was in the Q2 as well. So if that continues to trend, we'd still have that headwind there.
But there's not a good rule of thumb in terms of how much tonnage or total revenue growth you need to see margin improvement? Rodney McMullen:]
It's going to vary every year based on the investments that we're making from what the contribution to expense for depreciation is going to be, what our CapEx size is and so forth. But obviously, we need more growth or growth to start with at this point.
Okay.
Thank you, guys.
And now we'll go to Brad Delco of Stephens.
Good morning, David. Good morning, Adam. How are you guys doing?
Good morning.
David, I don't know maybe this
is best for you, but in the earlier comments, I think it was mentioned that you believe your tonnage in the quarter suggests you're still taking market share. And so I guess the bigger picture question is, why do you think there's such a disconnect between maybe the ISM data and or industrial production relative to what we're seeing amongst LTL carriers?
That's a good question. And I honestly don't have an answer why there's a disconnect with the ISM data. ISM has improved a little bit, but we haven't seen it come through yet in terms of LTL tonnage. But why is I'm not an economist, so I have no real idea.
Now would you subscribe to the idea that we generally see LTL tonnage lag by about 3 months? I guess, July would sort of been the 5th month of when we saw the inflection to positive territory with ISM?
Yes. I've subscribed that there is a lag with the ISM data and perhaps 3 months sounds good to me. We have seen some improvement in our sequential trends in the last couple of months. Adam, would you speak to that? Because honestly, it does feel better, The daily tonnage, the daily shipments that we're seeing feel better every day when we've been when we're kind of looking at how much business we get each day.
And so, but Adam touch on what our sequential trends are doing recently?
Yes. I mean as we went through the Q2, our weight per day was up 0.6% in April versus March. The 10 year average was up 0.3%. But remember this is and it's the last quarter where I had to talk about it, but with the Good Friday in the Q1, these are thrown off and we would have expected that number to have been up more. Weight per day in May was up 2.1% versus a 4.7% average and was up 2.4% in June versus the 2.3% average.
And shipments were more in line and we talked about that when we put our mid quarter update. Shipments per day in May was up 2%. And when you just look at years when Good Friday was in the Q1, the average is 1.4% for us. So we felt good about the way May's revenue built from start to finish. We saw a similar trend in June July, pretty much has been very similar as well.
And so things just feel a little bit better. And perhaps what we are seeing though is once ISM turned back and stayed above 50 pretty much consistently in March forward that may be supportive of these trends.
Okay, got you. Thanks for the color guys.
And now we'll go to David Campbell of Thompson, Davis and Company.
Yes. Thanks for taking my question. This issue of non LTL revenue, you were down, I guess you were down about $6,000,000 year over year in the second quarter and it's from business services that you terminated near the end of last year. What were those services? And why did you terminate them?
It was 2 things, David. 1 was where we pulled back our ocean container drayage operations off of the West Coast. We discontinued those as well as Chicago. The second non LTL that change had to do with our global freight forwarding where we were booking the entire revenue of ocean containers and the purchase transportation against that. And we have partnered with Mallory Alexander to manage our ocean forwarding now.
And so we don't have that top line revenue. We're getting a we work basically off of a commission type basis on the net revenue. So anyway, that's those are the 2 primary areas. Adam, did I miss anything?
That's it. I'll add though that the decrease in the 2nd quarter was $9,700,000 not the $6,000,000 that was mentioned.
$9,700,000
And those are likely to continue in the 3rd quarter and then be less than the 4th? Right. Okay. So some of it is sort of an accounting thing where you're just picking up commissions instead of closing the revenues. It's not really reduced it doesn't sound like you really reduced services.
You're just partnering with somebody else.
That's correct.
Okay. Thank you for the help and have a good second, Q3 and thanks for the second quarter. Thanks,
Katy. Thanks.
And now we'll go to Taylor Brown with Raymond James.
Hey, good morning, guys. Good morning, Hey, Adam. Just quick housekeeping item. Can you guys give the service center count at quarter end and actually in Q1 if you have it?
That was 225 at the end of the Q1 and I think it's 226.
Okay. All right. Okay, perfect. And then David, can we talk a little bit about the real estate CapEx? So you guys mentioned in the release that you're looking to spend $170,000,000 earmarked
for facilities.
I think that's the highest budget we've seen. I'm just curious if you could talk about how tight land and facility availability is with industrial occupancy nearing all time highs? And are you guys seeing the cost per door, whether you acquire it or build it, rise significantly?
Well, acquiring land and building a freight service center has been a problem, a difficult endeavor for the last 30 years that I can remember. So and I believe it always will be. Unfortunately, everyone enjoys the clothes on their back and the food that they eat. They just don't want to see a truck in the neighborhood bringing the product to them. So our cost per door on construction has definitely risen.
The various environmental concerns, neighborhood concerns, landscaping, stormwater runoff, all those kind of things have caused the cost per door to rise. As far as the acquisition of used facilities, one of the issues we face today is most of the facilities that are out there on the market are just not big enough for us. And if we're lucky enough to find one that has some additional land that we can renovate and add doors, we found that to be the case from time to time. So it's real estate is always a challenge. And historically, we talk about real estate budget, but historically, we don't usually spend what we said we're going to spend in a given year because of the time delays in acquiring land and getting through the permitting processes and so forth.
Okay. Yes. No, that's great. And then can you give any sense how much capacity you guys are looking to add this year?
Do you have that, Adam?
No. And we don't necessarily break that down, Tyler, but I would say that the investments that we're making are generally more in expanding existing locations. The fact that we've only added one facility this year, it's primarily been expanding existing locations in that dollar amount. But we may add a couple of more facilities this year.
Okay, perfect. Thanks guys.
And next we'll go to Ben Hartford of Baird.
Hey, good morning. Adam, interested in any perspective you might have on bids in the back half of the year. Are you hearing any talk from customers regarding potentially pulling forward bids
that might hit in
the Q4 or early next year into
the Q3? We haven't heard anything like that. And bids for us, it's not any kind of seasonal thing that come in on a fairly regular basis throughout the year. And it's just something that constant communication that you have with our customer base and between our right department and our sales department as well. Sure.
And then a follow-up on the last question. The long term service center count, are
you still targeting 250 to 260?
Yes. I mean, obviously, that's going to vary as we grow and get bigger and we may find that we need spin off locations. But right now, I think that we've got another 35 to 40 facilities when we think long term where we may grow to. And there's probably going to be some ebb and flow there as we continue to make our way and achieve our long term growth objectives. But right now I'll add to that probably the capacity in the system that we have is somewhere in the ballpark of 25% plus or minus.
Okay.
That's helpful. Thank you.
And now we'll go to Jason Seidl of Cowen and Company.
Thanks. Good morning, guys.
Good morning.
Just a quick one here. In the past, when truckload capacity has tightened its impacts its impact of the LTLs in terms of different freight ships being around the move. If truckload continues to tighten, should we see a similar impact that we've seen in the past in you guys? And what do you think it might do for your pricing that's sort of in that 3% to 4% range? Could that boost it any?
Jason, our pricing philosophy is that we target the increases that we need on a fairly consistent basis to just be in line with what our cost inflation is. And so I think that there have been periods where maybe the industry is going up more just based on capacity or they may be cutting rates from an environment capacity has flipped and they're needing to get that volume. I think our customers like our consistent approach and we've had good success with that.
Okay. That's fair enough. I guess one follow-up. I mean, you guys touched on it briefly about maybe looking at some ancillary opportunities to tack on with acquisitions. What are the ones that you think would fit most?
Is it still something in maybe the warehousing mode? Or is there anything else that we should be thinking about that would make sense for OD?
It varies. We obviously continue to look, Jason, and try to figure out what we think would make sense long term for us. And we're doing a couple of different things here as it is. I mean LTL is really the growth engine of the company. And 1st and foremost, we've only got 8% to 9% market share.
So we're going to continue to focus on this long runway of growth that we have within LTL. There are other services that are complementary. Those other non LTL services that we have today the drayage, which we've changed our business model and we're trying to focus and be able to capture coming growth and maybe changes in capacity within that marketplace. We've got a truckload brokerage operation. We can continue to enhance that offering.
Really, we're going to focus on things that are complementary to our LTL business and maybe a service that when we're making sales calls on the decision maker at our existing customers that we can leverage those relationships.
All right, gentlemen, I appreciate the time. Yes. Okay.
And we'll go back to Ari Rousseau of Bank of America.
Hey, guys. Just wanted to sneak one last one in. On some of the pricing initiatives that you took kind of at the end of last year, specifically thinking about the changes in the way or having a change in the fuel surcharge option. And then also looking at some of the surcharges going into and out of California, just wanted to get a bit of a comment on how those are being received by customers, if you've gotten pushback, they've generally responded well, just thoughts generally?
Yes. I mean, some of those things and changes that were made, it's just it's always looking at what our costs are doing. And the industry changed fuel surcharge rates early in 2015 and we had just gone through a GRI and felt like that it wasn't the right thing to do to sit across our customer and say that fuel is going down, but we need a rate increase. And so we worked through that. But the fuel surcharge has just become a variable component to pricing.
And like David mentioned earlier in the call is that we've got target ORs for our customers and we're managing base rates and any type of accessorial charge based on what the cost of handling that customer's business is. And so that's been a consistent approach that we've had. We try to put in place fair pricing programs that's beneficial for both parties involved and continue to Are Are you speaking of that new tariff that we put in? Yes.
For the alternative fuel surcharge arrangement. Right. Yes.
That's been pretty small in terms of acceptance, but we went through that process of identifying it and working variance with their fuel and have to update their systems every week as the DOE price is changing. So it's been responded to by some customers that really were asking for it. But we didn't really anticipate that that would become widespread and the most adopted tariff option that we have. We've got multiple tariff options and but our 559, the most traditional one is continues to be what most of that business moves on. Okay.
That's terrific.
Thanks for taking the follow-up.
And with that, that does conclude today's question and answer session. I'd like to turn the conference back to Earl Cochran for any additional or closing comments.
Well, guys, as always, thank you all for your participation today. We appreciate your questions and your support of Old Dominion. So please feel free to give us a call if you have any further questions. Thank you and good day. And again, ladies and gentlemen, that
does conclude today's call. We'd like to thank you again for your participation. You may now disconnect.