Good morning, and welcome to the second quarter 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 5th by dialing 719-457-0820. The replay passcode is 4,636,822. The replay may also be accessed through August 28th 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 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 Congdon. Please go ahead, sir.
Good morning. Thank you for joining us today for our second quarter 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 second quarter, we remained focused on executing our strategic plan, and customers continued 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% 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 this softness.
We expect that our second 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 second quarter last year. We note that the second quarter started out slower than expected in April, but we began to see more of a normal sequential trend with our May and June results. In addition, the comparable quarter decline in the fuel surcharge moderated for the second quarter, a trend that we expect will continue in the second half of 2016 based on current diesel fuel prices. We also expect that the decline in non-LTL revenues will lessen in the second half of 2016 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 Cochrane, the founder of Old Dominion Freight Line, who passed away earlier this week. Harwood Cochrane was, I think, the very best LTL trucker of his generation, and he certainly made significant contributions to our industry. The Congdon family and the Cochrane family have been very good friends for many, many years. I would like to offer our deepest sympathy to the Cochrane family during this difficult time. Here is David Congdon to give you more details on the quarter.
Thanks, Earl, and good morning. From a financial perspective, the second quarter was similar to the first quarter 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 second quarter was not sufficient to drive operating leverage versus the second quarter of last year. Instead, the small decline in revenue had a de-leveraging 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&D productivity metrics were flat. Our line haul laden load average decreased 2% as we continued to run schedules to meet service. This is not an area of opportunity for us.
Our yield remained steady during the second quarter, with revenue per hundred weight 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. We do not intend to waver 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 million in capital expenditures during the first half of 2016, 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 made to our customers and that they make to their customers every day. We're 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. Now Adam will review our financial results for the second quarter in greater detail. Adam?
Thank you, David, and good morning. Old Dominion's revenue was $755.4 million for the second quarter of 2016, a 0.9% decrease from last year. Our operating ratio was 82.3%, which was an 80 basis point increase over the second quarter of 2015. Earnings per diluted share were $0.98, which was a 2% decrease from the $1 per share earned in the second quarter of last year. Revenue for the second quarter continued to be impacted by a decline in fuel surcharges, as well as a $9.7 million 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 first quarter call, we did not see as many of those issues in the second 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%-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 second quarter of 2015, which included a 1% decrease in weight per shipment, partially offset by a 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 second quarter increased 5.3% as compared to the first quarter 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 for May and June that were pretty much in line with averages for years when Good Friday was in the first quarter. 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 second quarter 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. The year-over-year increase in salaries, wages, and benefits for the second quarter 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 second quarter of 2015. Fringe benefit costs in the second quarter benefited from a reduction in expense for retirement plans and were lower as a percent of salaries and wages than the fourth quarter of 2015 and the first quarter 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. Old Dominion's cash flow from operations totaled $123.8 million for the second quarter and $292.2 million for the first half of 2016. Capital expenditures were $175.2 million for the quarter and $295.5 million for the first six months of 2016, which is approximately 75% of our $405 million estimate for the year. We repurchased $40 million of common stock during the second quarter and $84.7 million in the first half of 2016, which left us with $245.6 million available for purchase under our new $250 million repurchase program. We completed the previously authorized $200 million repurchase program in June, which was approximately five months prior to its scheduled expiration.
Our effective tax rate for the second quarter and first half of 2016 was 38.4%, compared to 38.6% for the second quarter and first half of 2015. This concludes our prepared remarks this morning. Operator, we will 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. Ladies and gentlemen, if you'd like to ask a question, please press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up the handset or depress your mute function to allow that signal to reach our equipment. Again, that is star 1 if you'd like to ask a question, we'll go first to Chris Rutsey 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, maybe a comment on sort of how the revenue per hundredweight 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%, our shipments in June were basically flat, again, on a year-over-year basis. Then the revenue per hundredweight, excluding the fuel, it did trend below 3%. When you look sequentially, though, the absolute number for the revenue per hundredweight ex fuel is 16.6 in the second quarter, our weight per shipment was 1,559. If you look at the first quarter, our weight per shipment was 1,545, revenue per hundredweight ex fuel was 16.54. Sequentially, our weight per shipment has increased, yet our revenue per hundredweight has actually increased slightly as well. Some of what's going on with the comparison is last year, the weight per shipment was decreasing.
On a sequential basis, now we've got it increasing, there's some different factors going different ways that's going to impact that overall comparison. That continued into the back half of last year. We're seeing weight per shipment continue to hold pretty steady in terms of moving up right now. 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.
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 into at least the beginnings of the third quarter. 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 their 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 first quarter call that really it was selective, some of the actions that we had seen, that nothing was broad-based. I think carriers go through their own assessments for business they need in different lanes and so forth. We felt like some of the pricing actions on a few customers in a few places didn't necessarily make sense to us. Overall, we had characterized the environment as stable then, and we continue to characterize it as stable today. I think there's always spotty issues regardless of the environment, and I think that's just what we were seeing in the first quarter.
Okay. That's helpful. 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?
Well, Go ahead, David.
I'd say absolute headcount should remain relatively flat. Aside from attrition that we may have, we're looking real strongly at whether we need to replace positions or not. I would think the absolute headcount ought to remain relatively flat. 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 third quarter peak season.
Okay. That's helpful. Thank you for the time. I appreciate it.
We'll go next to Matt Brooklier of Longbow Research.
Yeah. Thanks. Good morning. I just 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 re-acceleration 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. Those decisions are made on a service center by service center basis. Historically, coming into July has been a pretty decent month for us the last several years. August it builds and September builds to a larger amount. We're usually hiring some people for a peak season in September about now. We don't necessarily gauge it that, oh, 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. Just to reiterate, with 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 going to be flat. I believe from an overhead standpoint and a management salaries and a fixed salary standpoint, our headcount should be relatively flat. From a dock workers 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 just remains soft and we don't want to go overboard with too much headcount. 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. It's just a very careful balance.
Okay. That helps. 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 what 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. Yeah, I think that we still feel good about our sequential trends being in line. This is basically three months in a row. We talked about April in last quarter's call, but May and 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. We feel good about the fact that we've got three months now that's back on trend, and we'd like to see that continue.
Okay. Appreciate the time.
Now we'll take a question from Ari Rosa from Bank of America.
Hey, good morning, guys. First wanted to start, just follow up on pricing. Last year and for the past several years, there's been a pretty big 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. I'd say trends where 14, our weight per shipment ticked up. Last year, it ticked down. I'm looking at it more on a sequential basis for right now and just seeing good stability in our revenue per hundredweight. Our revenue per shipment continues to sort of trend in line with where we'd expect, you're not seeing any sequential deterioration in that. Talking to our pricing department, they're continuing to see the same types of contractual renewals that we have been seeing. We feel like that, again, as we characterize it, that the overall pricing environment continues to be stable.
Adam, just when you say you're seeing it consistent on a sequential basis, does that mean on an absolute basis, seeing it flat? Or even if you can talk about July maybe, what the trend is looking like.
It's very similar. Yes, on an absolute basis, revenue per hundredweight ex fuel ticked up a little bit as compared to the absolute number that was in the first quarter, despite the fact that weight per shipment moved up, which would, in theory, put negative pressure on that revenue per hundredweight number.
Got it. That makes sense. 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 and 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. We've talked about, in the first quarter call, a little bit of customer churn, 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 the sequential trends that we started seeing since May. All of that goes into play, and we often talk about the fact that revenue per hundredweight is a yield metric and not core pricing. There are times when revenue per hundredweight will be lower, like it was in the second quarter than what we are saying that our contractual renewals are holding. There are times when it's been higher.
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 the underlying LTL industry?
No. It's just that the revenue per hundredweight is what it is, and our mix is what it is. The main thing is that we manage to the operating ratio of each and every account. We've got target ORs, and we're finding that we can manage to that and that the environment is stable. This revenue per hundredweight, what it does sequentially, or what it does year-over-year, is purely an end result of a yield management process. Again, different customers give us different lanes and different consistencies of freight, different pounds per cubic foot, and that's a moving target all the time. 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 revenue per hundredweight.
Okay, great. Thank you.
Now we'll go next to Todd Fowler 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. It looks like the weight per shipment stabilized here sequentially. Do you think that the network has 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 shipment size is trending?
We focus on.
I didn't mean to make you sigh that deeply, so
Yeah. Well, we focus on productivity day in and day out and actually hourly. We're always working on improving efficiency. I think the point I was trying to make on the last call is that if you're dealing with a shipment that weighs 1,500 pounds and moving it across the dock, your weight per shipment is, let's say, 1,300 pounds, and it's still three skids of freight, but they're just a little bit shorter or a little bit less weight on the pallets, it takes the same amount of time to move it across the dock. The lower weight per shipment was impacting some of those freight handling metrics negatively. Now that things have leveled out, it's maybe less of an impact.
Okay. 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 have adjusted and are handling the freight the way you need to based on where 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. Other centers might be kind of peaked out in their productivity because you just can't move a forklift any faster across the dock or load the trailers any faster. Again, it's something that we're continually looking at productivity, and if we see weakness in productivity in any particular terminal or on any particular shift within a service center or any particular individuals that working on a shift, we're continually addressing productivity and striving for improvement.
Okay. That helps. Maybe just for a follow-up. Adam, I know that depreciation's been a bit of a headwind here in the first part of the year because of some of the investments that you've been making. How does that play out? 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? In the future, I guess, how do we just think about the investments that you're making in the first part of the year relative to the changes in revenue?
We definitely need the revenue to catch back up. 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.
Okay.
That's usually what contributes most of the depreciation for the year. There will still be some continued uptick as it wasn't fully complete. 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. We probably bought more equipment this year than perhaps what we needed based on where our growth is. 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. We certainly would like for the top line to catch up with where we are.
Okay. It sounds like if nothing else, you've 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, congratulations on a nice quarter.
Thanks, Todd.
Now we'll go to Ravi Shanker of Morgan Stanley.
Thanks. Good morning, everyone. A couple of follow-ups here and a bigger picture question. The follow-ups would be, I'm sorry if I missed this, 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, it's trending up about 2%. That's the comments that we had made before. On an absolute basis, it's right in line with where we have been. We'll continue to see that number potentially differ from that 3%-4% target range that we have on true underlying pricing as compared to yield.
That's because that funky math that you had said is because the direction of movement?
Yeah. Well, there's always a difference between price versus yield. Yeah, the weight per shipment trends definitely impact that.
Okay. 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 1,550 pounds. That's basically where it continues. It was 1,559 in the second quarter, that was up a little bit from the first quarter at 1,545. It's somewhere around 1,550 ±10 pounds is where we've been trending this year. Last year, particularly in the first half of the year, it was declining sequentially.
Got it. Just the bigger picture questions on just e-commerce. I just wanted to clarify a few things. Can you just remind me what percentage of your revenue roughly do you guys believe comes from e-commerce? Maybe what percentage of that is from Amazon versus the other retailers? Also, what are you seeing in terms of e-commerce trends right now? There's a lot of talk about the omni-channel shift in the next year or two especially. Do you guys see that as a real long-term opportunity for you guys?
Right now, we've got, I would say, little true e-commerce freight. We don't have any last mile. We do some residential deliveries, but about 15% of our revenue overall is retail. We would focus more on freight that's going into distribution centers than we would going into some residential area. 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. 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. Do you have a sense of 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, Ravi.
Okay. Thanks for the help.
Now we'll take a question from David Ross of Stifel.
Yes. Good morning, gentlemen.
Morning.
Morning.
Adam, if you could just give us an update on the IT rollout. You have the new platform I think you were migrating towards maybe about halfway through now. Is that on plan? Any issues?
Yeah. We continue to work on that. It's a big project. 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. I think we're making progress at a pace that we had established. There's certain applications that are being switched and turned on live from an old green screen AS400 application to the new world of Java and the user interface screens that we've got. Things seem to be progressing. That's a long-term deal as we convert all of our systems, most of which are homegrown into this new programming and format.
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.
no negative surprises so far, and everything seems to be tracking on plan?
Yeah, I'd say it's tracking on plan. It's just 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. 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 a long-term strategic advantage, and we're continuing to do that. It's higher overhead in the short run, but long term, we think it's going to be beneficial for us.
I got that June tonnage was down 0.3%, July down 1.5%. Did you provide April and May year-over-year tonnage comps?
Yeah. April was plus 0.1%. May was down 1.0%.
Okay. Thank you very much.
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 second quarter. Can you remind us what the magnitude is at and what you guys are expecting with regard to fringe benefit inflation in the back half of the year?
Yeah. The benefit costs are what they are, there's a lot of different things that go into it. The past couple of quarters, I talked about it initially in the fourth quarter 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. So it had ticked up to 33%-34% as a percent of salaries and wages in the fourth quarter of 2015 and first quarter of 2016. It was 31.9%, an element of that is retirement plan benefit costs that are linked to share price. As that share price declined, 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.
Our paid time off benefits have continued to be higher as well. We're not necessarily given 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%. Basically, 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. Obviously, we want to optimize our balance sheet. We finished our $200 million repurchase program early and launched into an upsized $250 million deal. I think the last few quarters, the last 12 months, I guess, we've purchased close to $150 million. Our capital allocation strategy is, one, 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&A opportunities. We haven't had one since 2008 because the ones that we've looked at haven't made sense for us. Then we'll look at returning capital to shareholders. I think that in absence of the right M&A opportunity, we've increased that pace of repurchasing.
We continue to look at ways that we can make strategic investments in the company as well and want to maintain some dry powder. 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 a tough quarter, guys.
Thank you.
Thank you.
Now we'll take a question from Scott Group of Wolfe Research.
Hey, thanks. Morning, guys.
Morning, Scott.
Adam, if we assume just that normal sequential volume trend continues in August and September, do you have a sense, what does that imply for third quarter tonnage? I think it's a little bit better than the down one and a half in July, just want to make sure we're thinking about that right.
Well, on a 10-year average basis, third quarter's weight per day is generally up 2%. If things continue to move in August and 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 as much as 1.5% year-over-year?
Yeah. The year-over-year is, again, last year, looking at it, I think that we were a little bit stronger sequentially, just slightly, than been sort of the long-term average. 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. 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 of September, and last year, we gave about a 3.5% wage increase. We haven't announced that anything to our employees at this point. 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.
Just last question. You talked a little bit on the prepared comments about the deleveraging impact of down revenue and slower tonnage. What is the level of either tonnage or revenue growth where you can start to see margin improvement again on a year-over-year basis? Given the easier fuel comp, do you think we can get back to margin improvement in the third quarter, 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 third quarter at this point. 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. The fuel should moderate if prices stay where they are on that comparison. In non-LTL, really, it was more so the fourth quarter that those services were fully out of our number. We still had close to, or just call it $19 million of non-LTL revenue in the third quarter of last year.
We gave that number in the first quarter, and it was about $13 million, and that's about what it was in the second quarter as well. If that continues to trend, we'd still have that headwind there.
There's not a good rule of thumb in terms of how much tonnage or total revenue growth you need to see margin improvement?
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. Obviously, we need more growth to start with at this point.
Okay. Thank you, guys.
Now we'll go to Brad Delco of Stephens.
Good morning, David. Good morning, Adam. How you guys doing?
Brad.
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. 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. Now, ISM has improved a little bit, but we just haven't seen it come through yet in terms of LTL tonnage. The why is, I'm not an economist, so I have no earthly idea.
Now, would you subscribe to the idea that we generally see LTL tonnage lag by about three months? I guess July would sort of been the fifth month of when we saw the inflection to positive territory with ISM.
Yeah. I'd subscribe that there is a lag with the ISM data, 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're looking at how much business we get each day. Adam, touch on what our sequential trends are doing recently.
As we went through the 2Q, our weight per day was up 0.6% in April versus March. The 10-year average was up 0.3%. Remember, this is it's the last quarter where I had to talk about it, but with the Good Friday in the 1Q, these are thrown off, and we would have expected that number to have been up more. Waybill 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. Shipments were more in line. We talked about that when we put our mid-quarter update. Shipments per day in May was up 2%. When you just look at years when Good Friday was in the 1Q, the average is 1.4% for us. We felt good about the way May's revenue built from start to finish.
We saw a similar trend in June, and July pretty much has been very similar as well. Things just feel a little bit better. 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.
Now we'll go to David Campbell of Thompson Davis & Co.
Yes. Thanks for taking my question. On this issue of non-LTL revenue, which you were down, I guess you were down about $6 million year-over-year in the second quarter. It's from business services that you terminated near the end of last year. What were those services, and why did you terminate them?
Well, it was two things, David. One 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 change had to do with our global freight forwarding, where we were booking the entire revenue of the ocean containers and the purchase transportation against that. We have partnered with Mallory Alexander to manage our ocean forwarding now. We don't have that top-line revenue. We work basically off of a commission type basis on the net revenue. Those are the two primary areas. Adam, did I miss anything? That's it. I'll add, though, that the decrease in the second quarter was $9.7 million, not the six that was mentioned.
$9.7 million?
Right.
Those are likely to continue in the third quarter and then be less in the fourth?
Right.
Okay. Some of it is sort of an accounting thing, where you're just picking up commissions instead of closing the revenues. It doesn't sound like you've really reduced services. You're just partnering with somebody else.
That's correct.
Okay. Thank you for the help, and have a good third quarter, and thanks for a good second quarter.
Thank you. Thanks.
Now we'll go to Tyler Brown with Raymond James.
Hey, good morning, guys.
Tom.
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 first quarter, and I think it's 226.
Okay. All right. Okay, perfect. David, can we talk a little bit about the real estate CapEx? You guys mentioned in the release that you're looking to spend $170 million 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. Are you guys seeing the cost per door, whether you acquire it or build it, rise significantly?
Well, acquiring land and building the freight service center has been a problem, a difficult endeavor for the last 30 years that I can remember. 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 their neighborhood bringing the product to them. 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.
If we're lucky enough to find one that has some additional land that we can renovate and add doors, we've found that to be the case from time to time. Real estate's always a challenge. Historically, we talk about a real estate budget, historically, we don't usually spend
What we said we were 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. Yeah, no, that's great. Can you give any sense how much door capacity you guys are looking to add this year?
Do you have that, Adam?
No, we don't necessarily break that down, Tyler, 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. We may add a couple of more facilities this year.
Okay, perfect. Thanks, guys.
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 fourth quarter or early next year into the third quarter?
We haven't heard anything like that. Bids for us, it's not any kind of seasonal thing. They come in on a fairly regular basis throughout the year. It's just something that, constant communication that you have with our customer base and between our pricing department and our sales department as well.
Sure. Then a follow-up on the last question. The long-term service center count, are you still targeting 250-260?
Yeah. Obviously, that's going to vary as we grow and get bigger, and we may find that we need spin-off locations. 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. Right now, I'll add, too, 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.
Now we'll go to Jason Seidl of Cowen and Company.
Thanks. Morning, guys.
Morning.
Just a quick one here. In the past, when truckload capacity has tightened, it's impacted the LTLs in terms of different freight shifting around the move. If truckload continues to tighten, should we see a similar impact that we've seen in the past in you guys? What do you think it might do for your pricing that's sort of in that 3%-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. 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 that 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. No, that's fair enough. I guess one follow-up, 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. We're doing a couple of different things here as it is. LTL is really the growth engine of the company, and first and foremost, we've only got 8%-9% market share. 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 are 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.
Yeah. Okay.
We'll go back to Ari Rosa of Bank of America.
Hey, guys. Just wanted to sneak one last one in. On some of the pricing initiatives that you took at the end of last year, specifically thinking about the changes in the way, or having a change in the fuel surcharge option. 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, if they've generally responded well, just thoughts generally.
Yeah. Some of those things and changes that were made, it's just always looking at what our costs are doing. 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. We worked through that. The fuel surcharge has just become a variable component to pricing. 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. 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 support the growth of our company.
Anything on adoption rates of the alternative pricing structure?
Are you speaking of that new tariff that we put in?
Yes.
Yeah.
For the alternative fuel surcharge arrangement.
Right. Yeah. That's been pretty small in terms of acceptance. We went through that process of identifying it and working through it because there were some customers that wanted to switch and not have that fluctuation and variance with their fuel and have to update their systems every week as the DOE price is changing. It's been responded to by some customers that really were asking for it. 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, but our 559, the most traditional one, continues to be what most of that business moves on.
Okay. That's terrific. Thanks for taking the follow-up.
With that does conclude today's question and answer session. I'd like to turn the conference back to Earl Congdon 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. Please feel free to give us a call if you have any further questions. Thank you and good day.
Again, ladies and gentlemen, that does conclude today's call. We'd like to thank you again for your participation. You may now disconnect.