Old Dominion Freight Line Q2 2026 Earnings Call

Good morning. Welcome to the Old Dominion Freight Line second quarter 2026 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Jack Atkins, Director, Investor Relations. Please go ahead. Thank you operator.

Good morning everyone. Welcome to the second quarter 2026 conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today through August 5th, 2026 by dialing 1-855-669-9658, access code 8521187. The replay of the webcast may also be accessed for 30 days on our 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 facts may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements.

You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Old Dominion's filings with the Securities and Exchange Commission and in this morning's news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise. Finally, before we begin, we welcome your questions today, but ask that you limit yourselves to just one question at a time before returning to the queue. Thank you for your cooperation. At this time, for opening remarks, I would like to turn the conference over to our President and Chief Executive Officer, Kevin Freeman. Marty, please go ahead. Good morning.

Welcome to our second quarter conference call. With me today on the call is Adam Satterfield, our CFO, and after some brief remarks, we would be glad to take your questions. Old Dominion produced strong results in the second quarter, which include a 10.4% increase in revenue and a 450 basis point improvement in our operating ratio. In addition, our second quarter earnings per diluted share increased 32.3% to $1.68, which matched our previous company record that we set in the third quarter of 2022. These results reflect both continued improvement in demand trends as well as our ongoing focus on yield management and operational execution.

While the difficult operating environment over the past few years presented us with a number of challenges, including lower network density and inflationary cost pressures, we continued to diligently execute on our fundamental aspects of our long-term strategic plan and invest for the future. The strength of our second quarter results demonstrates the benefits of this strategy. While I'm proud of these results, I'm even more proud of our OD family of employees and their unwavering commitment to provide our customers with superior service at a fair price. That was the case again in the second quarter when we provided our customers with 99% on-time service and a claims ratio of 0.1%. In addition, we have made approximately 1,000 lane adjustments this year that improved our service standard transit times.

Our team continues to leverage their experience in new technologies to further improve our service standards and overall value proposition for our customers. Our customers rely on us to keep their promises to them by picking up and delivering their freight on time and without damages so that they can keep their commitments to their own customers. Our proven ability to execute on behalf of our customers at all points of the macroeconomic cycle has created an unmatched value proposition in our industry. That is why it is critical, despite a prolonged period of softness in the domestic economy, to continue to make the key long-term investments in our network, our technology, and our people so that we can now continue to deliver best-in-class service as the operating environment changes.

Consistently providing our customers with superior customer service is the cornerstone of our strategic plan. Doing so supports our yield management initiatives. Our disciplined approach to pricing, which focuses on individual account level profitability, is designed to offset our cost inflation over the long term and support reinvestment back into our business. Our ability to take a long-term approach to our investments in our network and our OD family of employees helps ensure that we are always in an unparalleled position to respond to both current market conditions and future growth opportunities. Our strategic plan has worked through many economic cycles. That said, our greatest opportunities to win market share often come when industry capacity is generally limited and the domestic economy is strong. The domestic economic environment remains relatively stable. We are encouraged by the continued improvement in demand that began late last year.

Based on feedback we have received from our customers, we believe that our superior service is increasingly differentiating Old Dominion within our industry and providing opportunities for incremental growth. We reported strong second quarter results that demonstrate the power of our disciplined execution and the strength of our long-term strategic plan. We returned to revenue growth in the quarter and produced strong operating leverage on our incremental revenue. Because of our consistent investments in our network and our people, we have all the necessary elements of capacity that we need to support our customers and take on additional volume opportunities as the operating environment changes. As a result, we are confident in our ability to win market share and produce profitable revenue growth, which we believe will generate increased value for our shareholders over the long term. Again, thank you for joining us this morning.

Adam will discuss our second quarter in greater detail. Adam? Thank you, Marty, and good morning.

Old Dominion's revenue increased 10.4% to $1.55 billion for the second quarter of 2026, while our operating ratio improved 450 basis points to 70.1%. The combination of these factors resulted in a 32.3% increase in our earnings per diluted share to $1.68. We were pleased to return to revenue growth in the second quarter, which included an increase in our yield and an improving trend with our volumes. Our revenue results include a 15.2% increase in LTL revenue per hundredweight, which was partially offset by a 4.1% decrease in our LTL tons per day. Excluding fuel surcharges, our LTL revenue per hundredweight increased 5.5% due to our continued focus on revenue quality during the quarter. On a sequential basis, our revenue per day for the second quarter increased 14.6% when compared to the first quarter of 2026.

With LTL tons per day increasing 4.0% and LTL shipments per day increasing 3.2%. For comparison, the 10-year average sequential change for these metrics includes an increase of 7.1% in revenue per day, an increase of 4.4% in LTL tons per day, and an increase of 5.2% in LTL shipments per day. The monthly sequential change in LTL tons per day during the second quarter were as follows: April decreased 2.8% as compared to March. May increased 3.0% as compared to April. June increased 0.9% as compared to May. The comparative 10-year average change for these respective months is a decrease of 0.9% in April, an increase of 2.2% in May, an increase of 1.7% in June.

While there are still a few workdays remaining in July, our month to date revenue per day has increased by approximately 7.5%-8% when compared to July of 2025. This includes an increase in our LTL revenue per hundredweight that is partially offset by a decrease in our LTL tons per day of approximately 1.0%. Although our tons per day are slightly lower than July of last year, the sequential change from June of 2026 is significantly better than our normal seasonality. The increase in July's LTL revenue per hundredweight, excluding fuel surcharges, is currently tracking below the second quarter growth rate of 5.5% due primarily to changes in the mix of our freight. As a result, I'm currently anticipating an improvement in this metric for the third quarter of 4%-4.5%.

To be clear, this is a positive trend for our company as it reflects the continued increase in our weight per shipment. We continue to be as focused as ever on our long-term yield management initiatives, which have helped us become the most profitable carrier in our industry. As usual, we will provide the actual revenue-related details for July in our second quarter Form 10-Q. Our operating ratio improved 450 basis points to 70.1% for the second quarter of 2026, with improvements in both our direct operating cost and our overhead expenses as a percent of revenue. Within our direct operating cost, improvements in our salaries, wages, and benefits as a percentage of revenue more than offset an increase in our operating supplies and expenses. This increase in operating supplies and expenses was primarily due to the increase in the cost of diesel fuel and other petroleum-based products.

The improvement in our overhead cost as a percent of revenue was partially due to the change in our net miscellaneous income and expense. This line item included $17.2 million of net gains on the disposal of property and equipment during the current quarter. We also saw improvements in a number of other overhead expenses due to the leverage gained from the increase in revenue, as well as a continued focus on controlling our discretionary spending. Old Dominion's cash flow from operations totaled $272.7 million for the second quarter and $646.3 million for the first six months of 2026, respectively, while capital expenditures were $77.0 million and $139.6 million for those same periods. As announced in our release this morning, we increased our 2026 capital expenditure plan and now expect aggregate capital expenditures to total approximately $380 million this year.

The $115 million increase from our original plan includes an additional $60 million for tractors and trailers and an additional $55 million for real estate and service center expansion projects. While we continue to have plenty of service center and equipment capacity to accommodate anticipated growth opportunities, these increases reflect strategic purchase opportunities that fit into our long-term capital expenditure plan. We utilized $151.6 million and $239.7 million of cash for our share repurchase program during the second quarter and first six months of 2026, respectively, while our cash dividends totaled $60.2 million and $120.7 million for those same periods. Our effective tax rate for the second quarter of 2026 was 25.0% as compared to 24.8% in the second quarter of 2025. We currently expect our effective tax rate to be 25.0% for the third quarter of 2026. This concludes our prepared remarks this morning.

Operator, we'll be happy to open the floor for any questions at this time.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question today is from Jonathan Chappell with Evercore ISI. Please go ahead. Thank you.

Good morning. Adam, a lot of volatility from month to month as we look at seasonality and your 10-year average is obviously a lot better in May, maybe a little slower in June. Can you just speak to the overall demand environment as we think about July trending from here? Also, to the extent that you can put a pin on it, we've been hearing a lot about freight shifting from a tight TL market to an LTL market. Are you seeing that and where do you think you stand as far as the quote unquote "innings" of that transition?

I think to start with that first, I still think we're in the early innings. We're hearing some of that from customers, but I haven't really seen the big weight per shipment change within certain categories, particularly with the RPO-managed business that you would see when there's a major inflection going on with the truckload spillover one way or the other. I still think that there's probably a lot left to go with that renormalization there, if you will. I expect that will continue as the truckload rate environment continues to be really strong. Overall for us, demand continues to improve. I'm happy with a lot of the trends that we're seeing. You're right, I think that it's choppy month to month when you look at our sequential growth versus our 10-year average trends. That's not uncommon when you get in periods like this.

There have been certain months where we've just significantly outperformed the 10-year average, then the next month might be a little bit softer and so forth. That's kind of the way the second quarter shaped up. We had a really strong February and March, then the April was softer than the 10-year average, then we climbed out of that and essentially brought the full quarter sequential trend back to right there at what the normal quarter would be. I've looked at if you went back to the beginning of this year in normal seasonality, if you just played it out month by month, in July, we're handling probably about three million pounds more per day than we would if normal seasonality had played out.

To me, I think we're obviously outperforming at this rate for full seasonality, I think we're just in the early stages of the economy getting going again with where ISM has just been in the low 50s, has not really had a big breakout yet. I still think there's a lot of room to run when you look at things like some of the inventory to sales ratio as low as that is, and that somewhat reconciles with feedback we've heard from customers about the need for restocking and so forth. Really excited about where we are, but more excited about the opportunities that lay ahead to carry some momentum through the balance of this year into 2027 as well.

Thanks, Adam. The next question is from Chris Wetherbee with Wells Fargo.

Please go ahead. Yeah. Hey, thanks.

Good morning. Adam, you've given us sort of revenue ranges. You've given us OR sort of dynamics for the forward quarter in the past. I was wondering if you could help us a little bit with that. Obviously, the second quarter from an OR perspective does have the gain in it. Maybe just some thoughts on how you think about revenue opportunity in the third quarter and also the operating ratio.

Yeah, I'll just maybe answer one of those and leave the other for someone else's follow-up. Maybe just to start with the top line, because I haven't always given revenue guidance, but I think it's probably appropriate, especially with some of the volatility that we've had with fuel. I guess to start, the July revenue growth rate of 7.5%-8%, that includes sequential change in tonnage that's significantly better than the 10-year average, as I mentioned. Just put some context around that, the tons per day right now is sequentially down about half a percent. The 10-year average is down 3%. Seeing really strong performance there. I think that if we can carry momentum through the rest of the quarter and may see some of this choppiness that I just spoke about in either August or September.

I think if we can just carry some of this momentum forward, I would think that we can get a 10% increase in revenue for the full quarter, so bring that growth rate up. That would put the absolute number at about $1.54 billion or $1.55 billion for the full quarter. Obviously, we give our mid-quarter update, so we'll be able to track along with that the entire time. Conservatively, if we carry that same 7.5%-8% growth rate, that'd be about $1.52 billion for the full quarter. Yeah. As a baseline, what I'm anticipating for fuel is assuming that we're going to see stability. It had stabilized for a bit during the second quarter.

It's re-inflected back positive, but I would like to think that we see some resolution there and have fuel that maybe trims back down. My baseline is $4.95 as an average per gallon for the full quarter. We'd like to see that come under control, which I think will be a net positive for the overall economy.

Okay. That's helpful. Appreciate it.

The next question is from Jordan Alliger with Goldman Sachs. Please go ahead. Yeah. Hi, good morning.

I guess I'll follow up on the going from revenue to the sequential OR thoughts. I guess if you could just let us know if that would be off of the reported OR or any adjustments related to that net property gain. Thank you. Yeah, I figured that would be close on the heels, Jordan.

Obviously, the 10-year average change for us at least, is for the third quarter operating ratio to be flat or up 50 basis points from the second quarter. I think we can essentially hit our normal seasonality, but you do have to add back some of the items to normalize what that third quarter operating ratio would be, and the biggest of which is obviously the big gain that we had on property sales during the quarter. With some of those things in mind, I would say a normalized overall increase off the 70.1 would be an increase of about 150 to 200 basis points from the second to the third quarter.

Thank you. The next question is from Tom Wadewitz with UBS.

Please go ahead. Yeah, good morning.

Adam and Marty, I wanted to get your thoughts on maybe what's happening with service and capacity in the market. I think there have been some data points or feedback that there are maybe a couple pretty good sized carriers that have hit some embargoes in the Midwest and capacity constraints. Have also heard feedback about LTL driver market getting a bit tighter or a little harder to hire drivers. Maybe more of a connection with truckload than I would have expected. What are you seeing in terms of are you also observing that, and is that starting to have an effect on your business in terms of maybe some shipments coming over to you that might even affect July?

Just if you think that's happening, and how quickly that or how much that might affect you and what you see in your shipments and your pricing. Thank you. Good question. First of all, we're not having any capacity issues, whether it be with equipment or drivers or real estate.

You are correct, we are hearing some talk about some of our competitors having problems picking up at the end of the month. We have seen some of that freight move over temporarily. If we get a major inflection in the economy, I think we'll see it daily. Yes, we are hearing that. I think some of that, as Adam alluded to earlier, could be coming from the full truckload industry. Some of that freight starting to spill back over in a small way to the LTL environment. I think that's a double whammy for us.

You think that's maybe boosting July, or was that happening earlier in the quarter?

Yeah. I think it's been happening. We've heard it earlier in the year and look, this is a big part of our value proposition, is always having capacity and it's not just the service center capacity, it's having trailing equipment where you can spot trailers at our customer's doors, particularly end of month, end of quarter. Having driver capacity as well. As Marty said, we've got plenty of capacity across all of those three major elements. I think when other carriers are operating in the first quarter, the public company average, excluding us, was a 94. You got to start managing cost in different ways and maybe aren't able to keep the amount of excess capacity to respond to growth opportunities as they're coming on a sequential basis. I definitely think that's been a little part of the story.

Again, like I said earlier, I think we're just in the early stages of recovery, and it's been nice to see us be tracking it at seasonality really going back to November of last year. It just feels like we're in the early stages of this, and we got a big runway of growth ahead for us, and we're eager to get back to it. We've built up a tremendous amount of capacity over the last few years with the continued investments that we've made, we're eager to get freight back into the system. You look at what we can produce in the second quarter, the control that we've shown over cost and improvement that we've had in our direct cost in particular. We're still down a long ways from where we were back in 2022.

If we can continue to see that inflection like we just saw from the second to third quarter, just a 4% sequential increase in our tonnage. Doing that with the same headcount, look at all the leverage that exists in our business. A lot of opportunity to grow the top line, but more importantly, to keep improving our operating ratio and produce strong profitable growth.

Great. Thank you. The next question is from Eric Morgan with Barclays.

Please go ahead. Hey, good morning.

Thanks for taking the question. I wanted to ask on pricing, just curious if you could discuss what drove your yields ahead of your initial guidance in the quarter, especially with weight per shipment improving through the quarter. Relatedly, just wondering if you could elaborate a bit on what those mix effects were you referenced that's driving the 3Q yield growth a little bit below 2Q. Thanks. Yeah. The second quarter, I think, just benefited some.

There's always a mix that's going on. It could be a balance of national account versus your small mom and pop. Some of our higher priority services and so forth. We were pleased to see the overall revenue per hundredweight in the second quarter tracking. Our guidance going into the 2Q was thinking that it'd be at about 4%-4.5%. So obviously we're well ahead of that. Sometimes just looking month to month and so forth, the revenue per hundredweight can move up or down, and I don't think that there's anything to call out. To me, what we're seeing with it coming back down, the rate of growth that is, it's still sequentially increasing the revenue per hundredweight, that is.

It's very similar to what we saw sequentially back in 2017, where we had weight per shipment that was outperforming normal seasonality through that year, and that was in the early stage. If you recall, that's when the real inflection was beginning. I'd like to think that some of the similarities that we're seeing in our numbers, particularly with yield, particularly with tonnage and weight per shipment, maybe this is the start of the real inflection like what we saw back then. That's why I wanted to make clear that this is a positive when you see the revenue growth and it coming in the form of tons and weight per shipment and our yields continuing to improve. That's what puts profits to the bottom line, and that's a key driver of what allowed us to operate at a 70.1.

I realize we had the real estate gain in there, but even if you back that out, that's one of the strongest operating quarters that we've ever had. If I go back and compare to the second quarter 2022, and I often talk about that breakdown of cost, direct operating cost and overhead. Our direct operating cost in the second quarter of this year were about 200, 250 basis points better than where we were in the second quarter of 2022, when we reduced to 69.5 operating ratio. When you think about that increase in our overhead cost there's the tremendous amount of leverage that can not only take us down into the 60s or just hitting right there at getting to a 69 operating ratio, but it's going to be able to allow us to drive it even much lower.

Thank you. The next question is from Ravi Shanker with Morgan Stanley.

Please go ahead. Great. Thanks.

Morning, everyone. Adam and Marty, there's been a lot of focus on TL versus LTL conversion on this call. I think in the down cycle, we've also seen brokers take a bunch of share from asset-based LTLs in the marketplace. Obviously, the broker relationship right now is under scrutiny post Montgomery. I'm wondering if you're seeing any shift away from brokers back to asset heavy as well as we go deeper into the cycle. Thank you. Probably a little bit early for that.

We saw revenue growth with our 3PL related customers in the most recent quarter that was similar to the overall growth rate for the company. That's hanging in there. That's something that we obviously like to have customers direct with us. If that's a change that develops, we'll work with them. If a customer is using a 3PL, we treat them the same. We look at the cost. The important thing with business, and about a third of our revenue right now is with 3PLs, is to understand the cost on any customer account, whether it's direct or with a 3PL, and to price it appropriately so that we've got similar account level profitability across our book of business. That's the way we look at it.

We look at customer specific cost. Then we provide customer specific pricing to those 3PLs. We'll take it if it comes at us and be happy to do so.

Sounds good. Thank you. The next question is from Ken Hoexter with Bank of America.

Please go ahead. Hey, great.

Good morning. Thanks for the insight before on some of the struggles at the carriers popping up. That's definitely an issue we've been hearing about also. If I can just take Ravi's question in maybe a different way, another upheaval or start is in the brokerage side, just given the heavy use of brokers that you have, we're seeing a lot of lawsuits go on now that are maybe whether it was from Montgomery and risk that moves up the food chain or last week, just the exposure. Is that impacting discussions with the brokers? Are you seeing any flows that might be changing? Maybe just talk about what you're seeing from that brokerage follow through.

Yeah. Nothing at this point, Ken, that I've heard. We obviously, especially with some of our largest ones, several of our top 10 customers are 3PLs and have not really seen any type of material change there. Obviously, with the revenue growth being pretty consistent with the company average at this point. I haven't really heard a lot of feedback that there's been a lot of discussion. Obviously, as many of you have written about, it's a potential big change that's coming for the industry. I'm reading you all report about the increase in insurance costs, and that's something that we've talked about in recent years. To be a large, sophisticated LTL, well-capitalized carrier, we have dealt with double-digit premium inflation for many years now. That's something that goes into our cost model that we've got to continue to account for with our pricing.

It sounds like that's something that they will have to further account for. If a customer is using a 3PL, there's obviously got to be margin for the 3PL to manage. If we give the same price, then that's a cost. I think that'll be something to where they have to prove their value proposition, the 3PL that is, to the shipper. If more and more shippers choose to use Old Dominion direct, then we'll be here for them, I should say, and be happy to handle it. Yeah, it's definitely cost inflation that's coming that may drive some of that cost through 3PL business versus none, and maybe reverse some of the shift that we've seen increased use of 3PLs over the past, say, 10, 15 years.

Thanks, Tom. The next question is from Jason Seidl with TD Cowen.

Please go ahead. Thanks, operator.

Gentlemen, good morning. A lot's been covered, and I appreciate it. Wanted to go a little bit of a different direction. One of your competitors on their call talked about looking at the use of autonomous trucks for some of the line haul operations, and that they might have gotten to the point where it's a viable option for an LTL carrier. Just wondering what your thoughts on that were and if you've looked into it.

Yeah. Jason, I think that's something that any type of technology you got to continue to look at and stay on top of. I think that one of the things that people have got to consider as well is what's the cost of the technology on a per mile basis? Some of the things that I've seen and read, I don't know that you've got the value add. You think about our fleet of equipment, we dual use a lot of our tractors, so they're running P&D during the day, line haul at night. If you've got to pay the technology provider, I don't think that autonomous vehicle would be more for line haul application. You either are buying specific P&D units that's going to drive your unit cost up, or you're paying for a mileage where you're not really using and leveraging the technology.

I think like many things that are like that, you got to stay on top of. We don't want to be on the bleeding edge of that technology and development and so forth. It's just like any other investment when it comes to technology. There are a lot of opportunities that we take a look at where the cost of the technology doesn't really provide an appropriate return. Investment in autonomous would be a similar type of analysis that we would go through. To me, it's something, too, that I don't know. It's hard to imagine a world where you got 80,000-pound trucks driving up and down the highways without someone sitting in the cab to deal with those one-off scenarios, to deal with cargo theft. That is already a problem when you've got a driver sitting in the cab.

There's a lot of other incremental challenges that would present and would have to be dealt with from a regulatory standpoint before this goes worldwide. Obviously, it's been dealt with and utilized in certain lanes and so forth. The scale and be nationwide, I still have some reservations about.

It sounds like it's more than just the total cost of it all. There's other factors in terms of you guys taking advantage of something like this as it comes available.

I think so, yeah. Look, our business is pretty simple. At the end of the day, it's how do we manage the revenue per shipment and the cost per shipment and give the very best service in our industry to be able to support the value and our yields. Like I said, it's no different. Everything we look at is how can we minimize the inflation in our cost per shipment and continue to get yields to support the value proposition. We'll continue to look at it. Like I said, I don't think we'll be on the bleeding edge with adoption there.

Appreciate the time and color as always.

The next question is from Bascome Majors with Stephens. Please go ahead. Yeah. Thanks for taking my questions.

If we look back, I think this is the first time the capital envelope has gone up since the beginning of 2024. I'd just be curious both big picture thinking on where this is going. Is it the tightness at capacity at some of your peers that's bringing freight your way, or is it what you're hearing from customers on Sort of macroeconomic expectations that's driving you back into a period of growth investment, albeit gradually, and if you could just give us a quick update. I mean, you talked about having a lot of capacity now. Any sort of sense of where you stand on people and equipment in the network today? Thank you. Yeah. The increase that we had, keep in mind, the total $380 million is still well below our normal range, is 10%-15% of revenue.

Like we said, both the increase in the real estate side and the equipment really are strategic purchase opportunities. From a real estate standpoint, you've also got some timing of projects that we've continued to spend on our network because of the confidence we have in our long-term market share opportunities. We've got a couple of unique opportunities where it could be something that fit in the long-term plan in a market that's hard to find real estate, to not get into too many specifics. You've also got some lease-to-own conversions, timing of projects that we may get started in the balance of this year that may have been in 2027 initially.

We're always fine-tuning that model, that drove some of that increase there. There's one or two strategic purchase opportunities that are in there that just sort of fit when we think about our 5 and 10-year plan. On the equipment side, that's a little different. Some of that spend would have been allocated to 2027. We're kind of pulling some of those purchases into the fourth quarter of this year. Again, just through conversation discussions, our op teams felt like it would be better to go ahead and pull some of that equipment into this year. Overall, to answer your question, it's not necessarily a need to increase the capacity of our service center network. We've still got north of 35% excess capacity there. We've got plenty of power and trailing equipment capacity at this point.

Really when we get into the fall of this year is when we'll be forecasting for next year's volumes to think about what our replacement needs would be, any growth needs. I think given where our fleet is versus some prior years when we've had similar growth numbers, still we'll probably lean more towards replacement just to grow into the fleet that we have. Probably add some trailing equipment to make sure we've got plenty of capacity there. On the people side, like we talked about on the last call, we were able to accommodate this 4% sequential increase in tonnage that we just had with essentially the same workforce. Through the balance of the third and fourth quarter, probably not a lot of material change in our headcount overall there.

If we can take another sequential increase through 3Q, I think that presents some good opportunities there from a cost and margin standpoint. We've really, again, kind of getting into forecasting for next year, have got to think about when's the right time to start some of our truck driving schools again and to start getting more drivers in to accommodate what we think our growth expectations for 2027 might be.

Thank you for all the detail.

The next question is from Richa Harnain with Deutsche Bank. Please go ahead. Hey, thanks for the time also.

I guess first a quick housekeeping one. Adam, that OR sequential change you cited for 3Q, flat to up 50 basis points. I would suspect that's on GAAP, but wanted to make sure. I guess just bigger picture, tonnage came in line with normal seasonality this past quarter, and you meaningfully beat your OR outlook for the quarter, even ex that real estate gain. Looking into Q3, you're calling for pretty optimistic scenario, both around maybe macro demand picking up and OD specific demand as your peers face some challenges. I guess what's driving that tempered enthusiasm considering that you're thinking you could just be in line with historical trends in OR? Back to complimenting you on the strong performance in 2Q, the incremental margin we calculated in the quarter was really good, 60%.

Curious if that influences your outlook for OR longer term or if you'd caution us from using that optimistic of an outlook given fuel likely created some of that positive operating leverage. A lot in there, but I'll let you take it how you want it. Thanks. I don't know if I can track everything that was in there, but I would say a lot of the second quarter outperformance, if you will, the volumes just came in stronger than where we were three months ago talking about the call and where April was.

We just came back a lot stronger with volumes and obviously we were able to put a lot of that incremental revenue growth to the bottom line and a lot of that flowed through with the sequential change in salaries, wages and benefits. I think I'd pointed everyone to the second quarter 2022 as sort of a reference point when you had a similar type of change with fuel prices and so forth. We probably did a little bit better with our salaries, wages and benefits change.

Also, there was some benefit in some of our other op supplies and expenses and G&A type costs. Some of those are partly what I mentioned would be in that normalization of trending into the third quarter. I tell you, if we didn't have the fringe headwind, we'd be talking about the summer of 69 here. We did have a big headwind from the first and second quarter with our fringe benefits, which we had talked about at the end of the call, but boy, it sure would've been nice to have had a 69 operating ratio. We've been there before and we'll get back there again. Looking into the third quarter, you've got some of that. The guidelines that I gave is still 45%-50% incremental margins on that type of revenue growth. That's stronger than a longer term trend.

A lot of that will be based on what I mentioned earlier about our direct versus overhead cost. With our direct cost now at 50%-51% in the second quarter, that's something that, obviously you keep leveraging tonnage growth at the right price and you can put a lot of that to the bottom line. There's a lot of opportunity there when you think from a bigger picture and a longer term standpoint to further improve that direct operating cost percentage threshold. We've got to keep getting leverage on the overhead cost and controlling that discretionary spending. We're not seeing the same type of increase in depreciation this year because the CapEx program is lower than it's been in recent years. That's helped with some of our cost inflation.

A lot of those different variables that when you think over a multi-year through the cycle type of operating ratio change, our goal is obviously to get, we've stated multiple times, to get to a sub 70. When you think about growth within those expense thresholds that I just laid out, I don't want to say that 45%-50% is the new way to think about it. When you think about it in that context, getting to the sub 70 annual operating ratio is pretty easy to map out. We're going to achieve our goal. That's the immediate goal before we set a new one. I think it's clear to see why we've changed our operating ratio goal by 500 basis points at a time.

You can map out, and prove pretty easily a pathway that would get us to our next 500 basis point goal.

Thanks, Adam. Just if you could quickly clarify the OR sequential change for Q3 from Q2, that's based off GAAP OR, right?

It is, yeah. Okay. We like to operate on GAAP and talk about GAAP type numbers, we'll give you adjustments like the real estate gain.

I don't know that you'll ever hear me talk about non-GAAP numbers and adjusted EBITDA. I think GAAP makes more sense for an easier comparison.

Yep. All right. Thank you so much.

The next question is from Brian Osenbek with JPMorgan. Please go ahead. Hey, good morning.

Thanks for taking the question. Maybe Adam, if you can just give a little bit more context on the headcount and the labor side. Obviously, the fringe benefit was a pretty big increase, I would assume in the comp per employee. Does that continue to increase a little bit with the annual wage increase? I know you said you're going to keep the labor essentially flat, but just wanted to hear a little bit more about the cadence that you have visibility to. Some commentary on the truck driver schools and bringing those back and sort of review on capacity towards the end of this year and into next year as you start to think through that and what the next cycle could bring or require from a labor perspective. Thanks. Sure. Yeah. That's a good perspective, Brian.

We will give a wage increase the 1st of September, we haven't announced that to our employees yet, so I don't want to announce it here. Obviously, we continue to do well as an organization and we believe in sharing that benefit with our employees. That's something that we'll be working through and announcing here pretty soon. I think that like I had said, we've got the people capacity. People are able to start working more hours on average than they were before. Our drivers and platform employees have been eager to do that and see their take-home pay increasing as a result. We can continue to step up and meet the needs of our customers through the third and fourth quarters of this year.

The thought in terms of starting our truck driving schools and so forth, we've had our truck driving schools going and part of what we do in our strategy is to take our employees that are interested in being a driver and train them to get their CDL. When demand and volumes are there, we're able to put them into a truck pretty quickly. We've got someone that's been with us that believes in the OD family spirit and our culture, and we know they're going to do the right things right for our customers and continue to deliver service that no one else is even close to in our industry. I think it's all about making sure we've got people that are prepared, that if we start seeing the sequential increase that typically happens in kind of March of next year.

Who knows what volumes will be like through the balance of the third, fourth quarter. Just generally thinking about seasonality, you want to make sure that you got people that are ready to step in. The worst thing you can do is have volume opportunities coming at you and to not be able to take advantage of those. I think when you look at our history, we've proven out time and time again that we're able to rise to that challenge. That's what gives me the confidence to talk about some of these numbers that we've had or have today. When I look back, it's these high growth years where we really separate ourselves from our competition. You think about the 2014, 2015, and 2017 and 2018, 2021, 2022, those high growth years where demand's incredibly strong.

We've had tonnage, the change in our tons per day that's outperformed our competition 800 to 1,000 basis points. I think that's what we're looking forward to. I think that there continue to be capacity challenges in our industry to where when the industry really starts growing again, we're going to see the majority of that market share growth coming our way. We just want to make sure that we're prepared, and we know that we are. You got to stay ahead of the growth curve in this industry, and I think we've proven time and time again that we can do so.

Great. Thanks very much for that, Adam.

The next question is from Bruce Chan with Stifel. Please go ahead. Hey, team.

Good morning. This is Matt on for Bruce. Couple quick ones here. With respect to the stronger volume that you highlighted, the super seasonal trends, curious if you're seeing this uptick sort of broad-based across the book, or is it still concentrated in a handful of markets?

No, it's pretty consistent across our regions, which is nice. That keeps the network in balance for us. As you know, we're pretty much 100% insourced from a line haul standpoint. We're not facing any purchased transportation challenges that maybe some of our competitors are, and certainly not dealing with the cost inflation that go along with that dynamic with the truckload price increases that we're seeing right now. That's a benefit to us as well. Yeah, everything's staying balanced and pretty consistent. You've got a little bit of change and, like I mentioned earlier, when we were talking about yields with growth with national accounts, larger national accounts, growth with small and pop, but seeing pretty consistent performance, I'd say, across those two major components of our revenue. Same thing with the 3PL managed business as well.

Great. Super helpful. Lastly, I know you mentioned hearing that some peers are having some trouble making pickups due to the tighter labor market conditions. I guess, how would you characterize the financial health of smaller regional providers at this point, and maybe whether you're seeing any changes there in their pricing or competitive behaviors the market sort of improves or maybe what's likely to be a increasingly higher inflationary cost environment with issues like insurance? Thanks. Yeah. Our industry has got a lot of very high quality small regional carriers that they're private mainly, so we don't know their operating ratios.

More of the feedback that we hear in bids and so forth, as you can imagine, it's the larger accounts with widespread operations and some of the larger national non-union carriers that we compete more with on a national basis just because they're larger accounts, and those are the ones that you hear more feedback on. Don't have anything to offer on what some of the smaller carriers are doing right now and what their financials look like.

Fair enough. Thanks. The next question is from Ari Rosa with Citigroup.

Please go ahead. Hey, good morning.

Adam, I wanted to stay on the volume piece of things and just kind of the macro environment. Maybe a little bit more color there on some of the optimism or what's underlying some of the optimism. Because if we look back historically, as you had mentioned, right, it's not uncommon for OD to grow tonnage at that rate of mid-single digits, maybe even high single digits on a year-over-year basis. Is this macro environment or some of the things you're seeing in the macro, could it support that over the next couple of quarters, or would we need to see an acceleration of the macro to get there? Just a point of clarification, if I could.

The gain on sale, could you just give us a little bit of color on what that was from, and if there's anything more to expect or more to come there? Thanks. The gain on the sales, we've mentioned over the last few years that we've finished construction on some projects and have just kind of kept them in ready reserve.

We've been depreciating those projects as we finish them, and they were available for operations, but we just didn't turn those points on in the network. A few of those were service center moves. Our service center count in total stayed the same. Basically, we moved into a different facility, sold the old ones, and I think there were 3 of those in the quarter that resulted in that $17 million net gain. I wouldn't expect any more this year. There's still a few more out there, meaning service centers that are in ready reserve still, and we may have a few more dispositions this year.

That's something that, as it happens, if it's material, we'll talk about it. We don't have anything, I don't think, with the same type of material gain that would be there if it does happen this year. That's just something that our ops team is constantly looking at the network balance and where it makes most sense from a cost standpoint to turn points on. Hopefully we'll be turning some of those on because of the volume. To kind of bridge into your next question, as the volumes come in, similar to what we did through 2019, 2020 and through that 2022 period, we'll be turning on some of these new service centers, finishing construction of some others to continue to improve our network overall. Again, that's part of the value proposition. Hey, look, we're winning market share right now.

As I mentioned, we're already if you just sort of go month by month, we're tons per day is above what normal seasonality would have suggested from the beginning of this year. I'd say that the challenges to the economy, the economy's in a good spot. Obviously, ISM has been positive, but it's not like we've had ISM knocking on the door of 60 or being above 55. I still think there's opportunity out there on the retail side. I believe looking at inventory to sales ratio, that's a precursor. When you look back in history, it's as low as it's been, maybe going back to 2021. That should kick off some volume and market share opportunities.

I think the domestic economy as a whole has just got the inflation concerns and world events that have probably been keeping a little bit of a lid on things. It's positive, but it's not red hot, so to speak. We're not in the type of environment yet that's, say a 2018 or a 2021. But I feel like some of the metrics makes it seem like that inflection point is coming, and that's partly why we want to be ready for it. We're not going to get out over our skis, if you will, in terms of getting too far ahead of the growth curve. We're far enough ahead to keep going through the balance of this year. We definitely have got plenty of service center and equipment capacity and continuing to look at the headcount is just something that we'll manage more closely.

That's great. Thanks for the time.

The next question is from Scott Group with Wolfe Research. Please go ahead. Hey, thanks.

Good morning. Adam, just want to clarify one thing on the 10% revenue growth for Q3. Does that assume sort of normal tonnage seasonality in August, September or anything better or worse? Just sort of maybe longer term, you tend to be very sort of measured in your comments and you talked about pretty easy to map out a sub 70. I think you said at one point, you can get a good amount better than a sub 69 or something. That's, I'm obviously really optimistic around the margin. Probably, what's the timeline or line of sight to how quickly you can get to these sorts of numbers?

Scott, we've never put a timeline on any of our goals. Just for the sake that you don't want to make decisions that are trying to achieve an arbitrary goal. I think that if we did that, like right now, we've got the sub 70 operating ratio goal, and that's been hanging out there. We probably wouldn't have invested $2 billion over the last three years in capital expenditures because of all the cost that that created. I can tell you, we're better positioned than any other carrier because of those investments and all the things that we've done. When I look at our cost structure now, like I mentioned, for the second quarter of this year, for our direct operating cost to be at 50% versus the 52%, and some change in both periods, going back to that second quarter of 2022.

A lot of that with a significant decrease in volumes between those two periods compared, I think it shows the strength of our team. It shows the commitment that we've had to getting good yield increases throughout this whole freight recession. To be 200 basis points, 250 basis points better now than we were then with maybe 10,000 less shipments per day just speaks to the strength of our team. It also speaks to investments that we made in technologies to help our team be more efficient. I think that now that we're on the precipice of tonnage turning back positive, and if we keep having this positive tonnage and shipment growth sequentially coming into our system, there's a tremendous amount of leverage there for further improvement in direct operating cost. Then it's mapping out, just taking the revenue up.

Some of our overhead costs are variable in nature, the overhead cost dollars will likely continue to grow as well. That's when you can start swinging that pendulum back the other way. If we were at 16%-17% overhead cost as a percent of revenue in the second quarter of 2022 and kind of where we've been trending in the, just say in recent periods in kind of the 22%-23%, we were right at 20% in the second quarter. We already made a little headway, but there's 300, 400 basis points of incremental opportunity there. I think we continue to do the right thing in managing our cost, controlling under discretionary spending. First and foremost is making sure that service is first and foremost in the minds of our people.

We've made all those cost changes while we've improved our service, that's why it was important what Kevin said in his prepared remarks. We're continuing to improve transit times. Anything our customers are asking us for, we're delivering. We've done all that in a low volume environment. It's pretty easy to kind of pencil out where things can get to. Yeah, we don't want people to expect that it's coming next quarter or even the beginning of next year. It's going to be a consistent, methodical approach, which is what we've always done. You look back over history, it tends to rhyme in our industry. When you get into that first big year of revenue growth, those are the types of years where we've been able to produce 300, 400 basis points a year-over-year improvement in our operating ratio.

If we can get a big year, there's no reason why we can't produce some similar type of numbers like we've done in the past.

Very helpful. Thank you, Adam.

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

Thank you all today for your participation. We appreciate all your questions and please feel free to give us a call if you have anything further. Thanks, and I hope you have a great day.

The conference is now concluded. Thank you for attending today's presentation.