Q2 2025 Earnings Call Transcript

Good morning, and welcome to the Old Dominion Freight Line Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jack Atkins, Director of Investor Relations. Please go ahead.

Thank you, Wyatt. Good morning, everyone, and welcome to the Second Quarter 2025 Conference Call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through August 6, 2025, by dialing 1 (877) 344-7529 access code 8056479. The replay of the webcast may also be accessed for 30 days 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 may -- 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 are cautioned that these statements may be affected by the important factors, among others, set forth in Old Dominium's filings with the Securities and Exchange Commission, and in this morning's news release. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements.

The company undertakes no obligation to publicly update 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 that you limit yourself to just one question at a time before returning to the queue. At this time, for opening remarks, I would like to turn the conference over to Old Dominion's President and Chief Executive Officer, Marty Freeman. Marty, please go ahead.

Good morning, and welcome to our second quarter conference call. With me on the call today is Adam Satterfield, our CFO. After some brief remarks, we will be glad to take your questions. Old Dominion second quarter financial results reflect continued softness in the domestic economy.

Although our revenue decreased in the quarter due to a decline in our volumes, our yields improved as our best-in-class service continues to support our disciplined approach to pricing. I want to thank our outstanding team for their unwavering dedication to our customers and continued commitment to executing the core elements of our long-term strategic plan. Although the challenging economic environment has persisted for longer than we anticipated, we have remained focused on what we can control as we work to ensure Old Dominion continues to deliver superior service to our customers while also operating efficiently.

In addition, our ongoing investments in our network, technology and our OD Family of employees puts us in an unparalleled position to respond to an inflection in demand when it materializes. Delivering superior service at a fair price to our customers is the cornerstone of our strategic plan and has been central to our success for many, many years. Doing so consistently through the ups and downs of the economic cycle has strengthened our customer relationships over time and allowed us to keep our market share relatively consistent over the extended period of slower economic activity. As a result, we were pleased to once again provide our customers with 99% on-time performance and a cargo claims ratio of 0.1% in the second quarter.

This consistency of our execution and our commitment to creating value for our customers doesn't happen by accident. It is a product of our unique culture and the result of hard work of the OD Family of employees. Across our company, our team is focused every day on adding value for our customers. By keeping our promises to our customers, we help them create value for their own customers.

Our commitment to service excellence continues to support our long-term yield management initiatives with a focus on individual account level profitability, our approach to pricing is designed to offtick -- offset cost inflation and support our ongoing investments in our network, our fleet and our people. Although these investments have created headwinds to our profitability in the short term, we are confident that our consistent reinvestment back into our business for growth is the right long-term approach. We know that having available capacity to grow with our customers and support them during periods of stronger demand is an important component of our value proposition.

We also believe that these investments are critical to stay ahead of what we expect to be favorable long-term demand trends for our industry. I'm very proud of our team and how they continue to find ways to reduce cost and operate as efficiently as possible during the period of uncertain demand. Given that our first priority is to uphold our commitment to delivering superior service to our customers, it can lead to increased operating costs due to the loss of operating density when volumes do decrease. While that was the case in the second quarter, we continue to believe that our business model contains meaningful operating leverage, and we remain confident in our ability to improve our operating ratio over the long term.

We expect this to become more apparent as the demand environment improves, and we are able to leverage our investments in our fleet, our service network and our technology. Over time, our customers have recognized the value of our service by giving us more of their business, which has allowed us to win more market share over the last decade than any other LTL carrier. Looking forward, we believe that the consistency of our execution, unique culture and our team's daily commitment to excellence will allow us to be the biggest market share winner over the next decade as well. Our position is as strong as ever to respond to an improvement in the demand environment.

As a result, we are confident in our ability to produce profitable revenue growth and drive increased shareholder value over the long term. Thank you very much for joining us this morning, and now Adam will discuss our second quarter in greater detail.

Thank you, Marty, and good morning. Old Dominion's revenue totaled $1.41 billion for the second quarter of 2025, which was a 6.1% decrease from the prior year. Our revenue results reflect a 9.3% decrease in LTL tons per day, that was partially offset by a 3.4% increase in the LTL revenue per hundredweight. On a sequential basis, our revenue per day for the second quarter increased 0.8% when compared to the first quarter of 2025 with LTL tons per day increasing 0.1% and LTL shipments per day increasing 0.8%.

For comparison, the 10-year average sequential change for these metrics includes an increase of 8.2% in revenue per day, an increase of 5.3% in LTL tons per day and an increase of 6.0% in LTL shipments per day. The monthly sequential changes in LTL tons per day during the second quarter were as follows: April decreased 3.7% as compared to March, May increased 0.5% as compared to April and June decreased 0.6% as compared to May. The 10-year average change for these respective months is a decrease of 0.7% in April, an increase of 2.5% in May and an increase of 2.1% in June. For July, our current month-to-date revenue per day is down 5.1% when compared to July 2024, with a decrease of 8.5% in our LTL tons per day.

As usual, we will provide the actual revenue-related details for July in our second quarter Form 10-Q. Our operating ratio increased 270 basis points to 74.6% for the second quarter of 2025, as the decrease in our revenue had a deleveraging effect on many of our operating expenses. This contributed to the 160 basis point increase in our overhead cost as a percent of revenue. Within our overhead costs, depreciation as a percent of revenue increased 80 basis points while our miscellaneous expenses increased 40 basis points.

The increase in our depreciation cost as a percent of revenue reflects the ongoing execution of our long-term capital expenditure program which we believe will support our ability to grow with customers in the years ahead. Our direct operating cost also increased as a percent of revenue despite our team's best efforts to manage these variable costs. The 110 basis point increase in these costs was primarily due to higher expenses associated with our group health and dental plans. As a result, our employee benefit cost increased to 39.5% of salaries and wages during the second quarter of 2025 from 37.2% in the same period of the prior year.

Overall, we continue to be pleased with how our team has remained focused on controlling what we can until the demand environment improves. The OD team has continued to deliver best-in-class service while operating very efficiently and we've also managed our discretionary spending. We will, however, continue to make the investments that we believe are necessary to ensure that our business remains well positioned for the long term. Old Dominion's cash flow from operations totaled $285.9 million for the second quarter and $622.4 million for the first 6 months of 2025, respectively, while capital expenditures were $187.2 million and $275.3 million for those same periods.

We utilized $223.5 million and $424.6 million of cash for our share repurchase program during the second quarter and first 6 months of 2025, respectively, while our cash dividends totaled $59.0 million and $118.5 million for those same periods. Our effective tax rate for the second quarter of 2025 was 24.8% as compared to 24.5% in the second quarter of 2024. We currently expect our effective tax rate will be 24.8% for the third quarter. This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.

[Operator Instructions] Our first question will come from Chris Wetherbee with Wells Fargo.

Appreciate the comments. Maybe we could just start with your thoughts around the operating ratio. Obviously, it's a challenging environment from a tonnage perspective, at least year-over-year. Kind of how do you think about sort of the normal progression from 2Q to 3Q on the OR, and maybe kind of how you feel like you can fare given the circumstances we're in from a macro backdrop?

Sure. Yes. The 10-year average is for us is typically flat to up 50 basis points from the second quarter to the third. But that's typically based on sequential revenue growth of about 3%, which is what we typically see.

So obviously, given the demand environment, what you just said, we've not really seen that positive inflection yet, unfortunately, with our revenue this year. But -- so I'm kind of thinking that revenue per day, if it continues to stay flattish on a per day basis, pretty much what we saw in the second quarter, if that continues into the third that we'll probably see an increase in the operating ratio, somewhere in the 80 to 120 basis point type range. So a little worse than what our normal sequential change would be. But just a couple of things to point out for that.

I'm expecting that we'll see an increase in our salary wages and benefits line. And some of that, as you know, we give a wage increase that's the 1st of September every year. So that's always in there, but we typically have that revenue that offsets a little bit. But I'm also expecting that we'll see continued pressure with our fringe benefit costs.

So I'm thinking that, that will be part of the driver. I also think that we'll see our operating supplies and expenses will probably tick up a little bit. And our overhead cost, that was something they were higher in the second quarter than what I initially expected. And we talk about that a lot, but I'm expecting that our overhead cost in aggregate will be up a little bit further in the third quarter.

They were about $310 million in the second quarter. We've been running about $305 million. So I'm expecting that we'll see those tick up even further in the third quarter, probably some pressure in the miscellaneous expenses line will continue. But obviously, the overhead cost is revenue dependent.

So I'm anticipating if it's flattish revenue, then those costs will tick up a little bit further. But if we can see some revenue start to come in a little bit better. And obviously, we'll continue to give a mid-quarter update then that's something that eventually over time will get leverage on.

Our next question will come from Eric Morgan with Barclays.

I wanted to ask about the market share commentary. Just if we look at the ATA's shipment index, actually turned positive the past couple of months, at least for April and May. So I don't know if that's kind of the best data to use, but it's what we have and obviously, it's a bit different from what we're seeing from you as well as your publicly traded peers. So I guess just curious if you have any thoughts on what's happening among the private carriers, where we have kind of less real-time insight, how they've been responding to this downturn, if that's changed at all in recent months and just how you get your competitive positioning here?

Yes. The best data that we probably get from an industry standpoint that includes the private carriers is really from transport topics. And so that's the data you'll see most typically quote in the 10-K about the size of the industry and so forth. And so you really only give an annual read on some of those carriers without the month-to-month trend.

And the ATA is good, but I think it typically has always had a much higher report of revenue for the entire industry, and it includes I believe, some ground business from some of the other parcel carriers. So that's why we typically have used transfer topics. But I think when we look at that information, Transport Topics just published recently, and we saw a pretty consistent trend for market share for us. And we've got granular level detail that we get through a proprietary database that's out there as well.

And overall, I'd like to think that our market share, when you look through this downturn, our strategy is that we want to maintain market share in periods of economic weakness, while also getting increases in our yields. And I think when we go back and look at kind of where things were in '21, '22, that's effectively what's happened. And it always moves up or down a little bit here and there. But the key will be continuing to execute our strategy like we've done in the past and then make hay while the sun is shining, I mean that's what our model is based on.

I still feel like we're in a better position than anyone else when the demand environment does eventually inflect back to the positive. And I think we're probably better positioned than we've ever been. But if you think back to the cycle increases that we saw in 2014, 2015, same thing with '17 and '18. We've been able to outperform the market from a tonnage growth standpoint anywhere from 1,000 to 1,200 basis points. So we just need a little help from the economy to get back to where we really see that demand environment inflecting back to the positive.

And obviously, some macro factors are starting to settle a little bit with respect to the tax bill, trade. Hopefully, at some point soon, we'll get an interest rate decrease. I think once -- some of those measures of certainty come back into the market, it will create opportunities for our customers that will create opportunities for us to start growing our volumes again.

Our next question will come from Jonathan Chappell with Evercore ISI.

Adam, one of the things you mentioned in response to Chris' question was you expect pressure on operating supplies and expenses. You said the same thing in April and operating supplies and expenses have actually improved by 80 basis points as a percentage of revenue in 2Q. So did something happen in 2Q that really helped you on that cost line item that you expect to reverse in 3Q? Or how do we kind of match up the pretty big sequential improvement in 2Q to ongoing pressure expected in 3Q?

Yes. I would say that we continue to see really good performance from our repairs and maintenance. Our team has done a great job, I think, with managing those costs. And I had the expectation that we would see some pressures there from 1Q to 2Q anticipating that some of our park costs might be increasing due to the impact of tariffs and so forth.

But I think what we've seen is just some continued changes with our fleet. We've continued to take some of our older equipment out that would have had really high repair cost, if you will. And so we've continued to pare back some of our fleet in that example. And then just in general, our cost per mile, we've seen improvement this year in.

And if you go back the last few years, we were up double digits from a cost per mile standpoint, in '22 and '23. So I think that was some of the better sequential performance that we had if you will, from 1Q to 2Q. But I'd say part of that driver is -- that I'm thinking from 2Q to 3Q, right now or at least in the second quarter, our average price per gallon for fuel was like $3.56, and we're seeing that elevated right now. So I think that's something where those costs as a percent of revenue. If fuel kind of continues to hold at about the range where we are now, fuel is obviously a big driver in that operating supplies and expense line.

Historically, what you see and probably the comment on why I wanted to give both of those together. We always talk about as fuel changes usually, you'll see corresponding increase. I'd like to look at our direct cost in total and how we manage through those. So in the short term, if you see -- if the fuel surcharge goes up, our fuel expenses as a percent of revenue might also go up, but you would see the direct labor cost, in particular, kind of an offsetting decrease there.

And typically, the second quarter to third quarter, too, that's where you kind of see those costs all in or kind of flattish, if you will. But I'm expecting to see some continued pressure there in the salary, wages and benefits line. Somewhat like I mentioned, we've got the wage increase. We'll get one month of that for the full quarter.

Typically, we have a little bit of sequential revenue growth that will help offset that. And we may still have that for this coming quarter. But if we've got flattish revenue growth and that puts a little pressure on that line item. But we've also seen higher fringe benefit costs for the past few quarters, and I'm expecting that trend to continue and to probably be even a little bit higher in the third quarter than what we just saw in the second.

So those couple of factors and as well as the miscellaneous expenses, some of the miscellaneous expenses back to kind of making changes on the fleet. As we've been selling off some of this older equipment, we've had some losses, and that goes into that line item. So I think we may see some more losses, if you will, coming through on that line even in the third quarter to put a little bit more pressure overall, I would just say, in that big bucket of overhead cost.

Our next question will come from Jordan Alliger with Goldman Sachs.

So just sort of curious sort of you gave some color and commentary around the OR revenue per day sort of flattish. I mean given the easy comps, I think, that are coming up, both in terms of tonnage per day and revenue per day. I'm assuming as we look forward from July, those trends on a year-over-year basis, I would think have the opportunity to get quite a bit better, but just curious your thoughts on the latter half of this quarter against those comps.

Yes, they would, Jordan. In the second quarter, for the full quarter, we were down, just call it, 6%, 6.1%. Right now, I would say, July, just call it, were down 5%. So it's already getting a little bit better.

If we stay -- the second quarter per day average was about $22 million revenue per day. So if we stay in that same ballpark, then we'd be down a little over 4%. If you just sort of held revenue at that $1.4 billion that we just did in the second quarter, if you say that was exactly the same, that's kind of what the trend would be. Now I'll say that the July performance so far when I look at kind of where our tons are and just the revenue per day level, July is normally a weak month from a tons per day standpoint, we're usually down about 3% versus June.

We're trending down about a little over 2% right now. So we're a little bit better than what our normal sequential trend is. Now I'm not ready to make a call to say that things will turn around and we'll get the acceleration that we typically would see in August and September. But I think that gives us a little bit sense of cautious optimism to say it's outperformance kind of on the downside while we see some of that acceleration come through.

I think that remains the question. And I think it will get answered as we go through the quarter and we give our mid-quarter updates and so forth. So if we were to perform at normal seasonality, and I think that's a big if right now, I'm not saying that, that would be a case then that number would come back more in comparison to revenue with the third quarter last year. I think that full seasonality, we'd be down about 1.5%.

So we'll just continue to monitor it, and maybe we'll be somewhere in that 1.5% to 4%, just depending on how things continue to materialize as we make our way through the quarter.

Our next question will come from Tom Wadewitz with UBS.

So I wanted to see if you could offer a little more perspective just on pricing and kind of how you think about revenue per hundredweight ex fuel in 3Q. And just whether the pricing, I mean your commentary is pretty consistent over time that you see stability and discipline in the market, but is anything changing on that front? Is there any kind of areas where you see increased competition as the downturn extends?

Yes, I would say, overall, just really we've got to go by whatever one reported in the first quarter. But I think most carriers, the reported yields have continued to be positive overall. And I mean, obviously, we continue to execute on our plan. And I think our plan is different.

We look at things from a cost base standpoint, and we want to be consistent through the cycle. And feel like getting those consistent cost-based increases are obviously important to the long-term operating ratio improvement that we've had. So right now for the third quarter, I'm kind of looking at -- I think that number will probably be that the yield ex fuel will probably be up in the 4% to 4.5% range, and that's about where we are in July. So I think we'd expect to see consistent sequential increase in that reported number, but it will probably come in a little bit, and that's not a reflection on any kind of change or anything like that.

It's just a function of kind of where we were last year and -- but we continue to expect to see increases, and we're getting increases when we go through renewals. And that's one of the things that's been tough about this environment back to thinking about that market share question from earlier. But as we're going through our renewals, we're continuing to win business. We get reporting for our national accounts, the business that we've won or business that we've lost.

And -- we're continuing to keep customers and get increases on those accounts that we're keeping. But we're also winning some new business. Overall, obviously, the volumes are down. But I think that, that wins itself to maybe a quick turnaround, if you will, when we do see that volume environment reflect back to the positive.

And I think a lot of people believe that that's coming sooner than later. And obviously, we felt like it was coming before we've had a few head takes from an economic standpoint. But now that some of the bigger picture things are being resolved from a macro standpoint. I feel like some of the optimism that we saw late last year and kind of saw it in the improvement in ISM in the early part of this year.

We hope to see kind of that turn back around on that optimism come back to the market and lend itself to increase freight opportunities. But I think that's part of our value proposition is having capacity. And while capacity is not at a premium right now, just given how weak demand has been for so long, we have heard commentary from customers about some competitors that aren't able to make pickups consistently in some markets. And they're increasingly calling us.

And so I feel like when you have a true demand recovery, those inbound calls will likely accelerate, and that's what we've seen in the past. And I referenced some of those periods earlier, but you go back to 2014 when we grew tons at 17%. The market is up 5%. In '18, we're up 10%, the market is up 1.5%.

And what we did through the '21 and '22 cycle, where we put $2 billion of cumulative revenue growth on the books in. So we feel like we're sitting in a great position to capitalize. We just need a little bit of help from the economy right now.

And our next question will come from Daniel Imbro with Stephens Inc.

Adam, maybe following up on that last discussion just on competition out there. I mean, you guys specifically have been a leader in a lot of the high service parts of the industry, whether it's SMB or grocery, kind of anything with the most arrived by date. But a lot of your peers are talking about trying to grow here. So I guess, are you seeing the better offerings from some of your peers making any encouragement on your business as you go to market?

And I guess, if not, what do you think the public markets underappreciate about why that will be harder for others to take from you guys being the leader there?

No, I think that any customer that we have, obviously, we've got a target on our back, if you will. And -- but we're competing with every account, we're competing with the other carriers, and we have been for years. So I don't think anything has changed with that. I think there's this perception that we've got some secret segment of the market that the other carriers haven't figured out until now.

And that's just not the case. I mean we're competing with all the other national carriers in some markets with the regional carriers as well. So our service product, when you think about the 15 years of Mastio wins. There's more to service than just being able to pick up and deliver on time and without damages.

And we do those core things better than anyone else, but it's continuing to figure out ways that we can add value to our customers. And ultimately, that's the business that we're in. It's how do we work with our customers, create win-win scenarios where we can help each other and add value. And so I think those are the things that we'll continue to look at and leverage.

We've got about 12% market share, and there's a tremendous amount of share opportunity out there within an industry that we think continues to have tailwinds for it. So we continue to believe that e-commerce effect on supply chains will continue to shrink shipment sizes and have truckload to LTL conversion. I think if near shoring and reshoring opportunities continue to play out that creates inbound and outbound opportunities for us as well. And just supply chain sophistication with the interest rates higher today, there's a cost of carrying inventory.

And so that's the value add that we can have where our customers know they can rely on our own time and claims free service. So it's figuring out how to go into each and every customer account, figuring out the problems that they're having and delivering a solution for that customer. That's what we -- I think we do better than anyone else. And -- that's why we're so confident in what our long-term market share opportunities are.

Daniel, as you referenced in the retail industry, including grocery, there's a penalty if the spread is not on the shelf on time and in full, they're called fines. And many of our competitors, they can go out and talk about meeting those expectations with fancy marketing material and so forth. But until they can stop those fines in our customers' pocket books, nothing is going to change, and we figured out how to do that many, many years ago, especially in the grocery industry. So we don't see anybody getting close to what we can offer from a service standpoint in the retail industry.

Our next question will come from Ken Hoexter with Bank of America.

I just want to understand maybe a little bit more on the backdrop here, the stock's down about 8%. Easier comps are coming up, right? Revs are down 5% in July. Do you expect to get that to maybe flat for the quarter?

Others reported a deceleration in tons and pricing despite easier comps. Peer mentioned this morning they're implementing an early GRI. So I think you mentioned a deceleration in yields at 4% to 4.5%. So that's also a deceleration versus history.

Are we getting a more competitive environment that just consistently is beating this market while we're in a decelerated market? I just want to understand your view of the backdrop. And then the holding share, I'm still confused by that one because every public carrier reported stronger percentage gains. Does that mean we're looking at just the private guys?

I want to revisit that question earlier. Is it just the private guys that are losing relative share? Maybe if you can just expand a little more on that.

No, I think that, one, with the respect to the yields, I think what we're looking at will be a continued increase sequentially. And so if we are kind of in the middle of that 4% to 4.5% range, that would be up 1.5% to 2% sequentially. In the last few years, when you look at the 10-year average, the sequential increase there from 2Q to 3Q is a little bit stronger. But when you look at kind of the last 5 years, that really skews that average, so to speak.

So if you kind of look at a 10-year average sort of pre-COVID, it was more in that kind of 1.5% range about where we are thinking about being. So we're not seeing any change with respect to what our thinking is from an overall yield management standpoint. And I think that when you think about the industry as well, I think most carriers have kind of figured out that yields are important, those that you go back over the last 10, 15 years that they've taken a focus off yield, that's had pretty negative impacts on their overall profitability. And so I think that's why we've seen such consistency in the industry over the last 3 years where demand has been soft overall.

From a market share standpoint, I think that since really Yellow closed their doors, I think there's been a lot of choppiness in terms of figuring out where our share is. And we obviously report that and report it by region, overall, in our deck that's out on our Investor Relations website. And so you can kind of see how share may be changing in one region versus the next. But it's something that when we look at the overall market, again, kind of factoring in what I just said about using the data out of transport topics, it looks like our share is relatively consistent with where we've been really over the last couple of years.

And it's not to say that when we've gone through periods in the past of slow markets, that we're flat or could be down slightly whatever. It's about the same. We've continued to execute a plan. We've continued to manage our cost.

Our service has gotten better. And I think we're in a really strong position. It's just overall change that we sort of look at. And so we feel good about where we are, but we feel better about what the opportunities looking forward will be.

And our next question will come from Scott Group with Wolfe Research.

This is a big picture question, maybe it's similar with what you just sort of answered, but if you look at the numbers, you're one of the leaders on yields right now. You're the biggest laggard on tonnage, at least among the public guys. And I guess you might say, hey, that's very normal in a more -- in a softer market that gets a little bit more competitive. We stay more disciplined on price than anybody.

But I guess what feels different is just like the duration of this environment. Like we're 3 years into this, we're now -- we still have tonnage down high single digits. Does that -- does the duration of this change your thoughts at all in any way? Or is it, hey, we're just going to do it, we keep doing, and we'll wait this out and eventually, the cycle will come?

Or because the cycle is lasting so much longer, do you think about it any differently?

Yes. I mean obviously, it's been -- we talked about these numbers from a quarterly perspective, annual perspective. There's a lot of day-to-day that's going on behind the scenes that doesn't get discussed. I mean, every day, we're working with customers and figuring out ways to identify new opportunities.

And -- it's been a tough few years going through the soft demand initially and then you had the big industry event that happened, and so the flux of being down, being up short-lived and then being down again. There's been a lot to try to manage through. I'd love for revenue to be higher. And I'd love for this cycle to turn.

There have been a couple of times that we felt like it was turning and I think back to late 2023. We had started reinvesting, running our truck driving schools and hiring folks to be prepared for what we thought was going to be sustained improvement there. And then kind of hit another roadblock from a demand standpoint. But overall, when I think about our model and how important revenue is, I mean, when you just look at the sequential performance through the second quarter, we don't normally talk about sequential incremental margins. But the reality is, is that a little bit of revenue that we put on the books between the first and second quarter, we had about 60% incremental margins on that business.

So it shows, I think, the power of the model once we start getting revenue on the books, but we don't feel like we need to go out and try to chase bad revenue that doesn't fit in our thinking for the long term. And so I think that's what we've done. We've also continued to manage our costs very well. When I talk about splitting our operating ratio apart, the 74.6% that we just did in the second quarter, about -- between 52% and 53% of revenue were our direct variable cost.

That's pretty much the same where we were in the second quarter of 2022 when we did a sub-70% operating ratio. And so we've been able to control what we can control. Our team has done a phenomenal job, I think, of protecting service, managing our cost in a very weak environment. And that's hard to do when you don't have density in the network.

So I'm really pleased with that. Our overhead costs really are what's accelerated, and we just need a bigger revenue base to get leverage on those costs again. But that's part of our model and our strategy, too. We like to invest through the cycle, and we've got more capacity than we probably have ever had right now from a service center network standpoint.

And so yes, we're carrying a lot of excess costs. Our overhead cost as a percent of revenue were about 22% here in the second quarter. Back in 2022, they're about 17%. So therein lies analyze the leverage for the model once we get back to a strong demand environment.

So I'm pleased with everything we've done. Obviously, we'd love to be able to flip the switch and see the demand environment improve. But I think from where we sit, when we look at what the other carriers are doing and kind of how revenue has trended for some of the others, we're hanging in there. We've not seen any true variance in our volumes relative to what the entire industry has done.

If I look and see the industry is down about 15% from where we were in 2022, our performance is pretty much right in alignment with what the industry has done overall on a net-net basis.

Our next question will come from Jason Seidl with TD Cowen.

One clarification. I think you guys mentioned you expect losses on asset sales. Did I catch that correct?

Yes, Jason. We've been trying to reduce the size of our fleet a little bit, just in coordination with where freight volumes are trending. And so -- we had some losses in the second quarter. That was part of the reason why you may have seen our miscellaneous expenses ticked up a little bit higher.

Normally, those costs are about 50 basis points or so. And so we saw those costs trend a little bit higher in the second quarter. They were up to 90. And I'm thinking that we'll see some continued pressure in the third quarter on those.

I was just a little confused because I know other carriers are actually reporting gains on sale. And so maybe you can walk us through the difference between you and them?

Well, while in many cases, we're selling a tractor on average. We use a tractor for 10 years. So there's probably not as much demand for -- that may be more of a truckload thing. But -- there's not as much demand for a 10-year-old million-mile single-axle day cab tractor.

And I guess, you mentioned the sequential move between June and July being slightly better than the historical average. Is any of this due to maybe some pull forward when people were worried about the tariffs potentially resetting again in August? Clearly, we're getting through some of the some deals. But did you get that feedback from any of your shippers that, that was occurring?

Yes, there may be some of that. We've not heard material feedback on that. But like when I look at it by region, it's not like we saw a big change in like outbound business out of California, for example. Most of our regions are trending in about the same kind of range from a revenue performance standpoint. So there's -- I don't know that there's a big outlier that may be driving that.

Our next question will come from Bruce Chan with Stifel.

Maybe a bigger picture question here. We've been hearing pretty regularly in the past couple of quarters from some of the other carriers about AI and dynamic routing. I know that the OD style has always been to kind of quietly implement those things as part of the overall playbook, in many cases, much earlier than peers. But maybe just helpful to get an update on any optimization projects that you've got going on right now.

And generally, how you're feeling about the various systems and your tech stack, anything incremental that we should be thinking about as an opportunity?

Yes. I think, like you said, I mean we're always looking at technology. It's a key part of our business, and I think has been to help us with our operating ratio. And just to kind of keep reminding our operating ratio is about 1,500 basis points better than the company average or industry average, I should say.

So regardless of what the other carriers have got as opportunities, we're still materially outperforming there. And I think that technology has been a key part of that. And you're right. I mean we don't normally try to announce everything and give totally our playbook away, but we're looking at ways to keep getting better.

Continuous improvement is a key component for our foundation of success. And we've always got to look at ways that we can make investments that are really going to drive change from a service standpoint, ultimately or add value through the lens of driving operational efficiencies. And you mentioned line-haul optimization. That's kind of been the holy grail and the buzzword for the 21 years I've been in this industry, and -- but that's something that we continue to look and we've got some tools that we've continued to implement and try to refine to drive some optimization there.

Same thing within our pickup delivery operations and on the dock. And I think our increased use of some of those technologies is part of the reason why we've been able to keep those direct costs. And those direct costs are primarily variable costs, but the direct costs associated with moving freight to think that we've been able to manage those costs basically consistent with where we were. And when our business was running extremely at optimal state at the time back in 2022 with a sub-70 operating ratio, I think is pretty astounding when you think about the loss of density in our network now versus what we had in the network being.

And so there's not just one thing to point to, but I think we've got a great team in the field. And I think we've got a great group and our technology team that's always looking for ways to get better to work with their business, to work with our customers. Another key part of the technology investment is how can we do things differently and add value and add stickiness with our customer base as well that differentiate us from our competition. So all of those things, I think, will continue to be strategic advantages for us and will be part of the story of how we -- we get our operating ratio back towards that 70% threshold, but continue marching forward and drive long-term improvement there in the operating ratio, while we continue to improve density and yield.

Our next question will come from Bascome Majors with Susquehanna.

Just as a housekeeping item, can you remind us of typical revenue and margin seasonality for the fourth quarter? And Adam, if you look out longer term, not necessarily calling when the cycle will turn, but just thinking about what you think the business will respond like when it does? Can you update us on sort of the incremental margin or really other sort of profile you think you can deliver when we actually get some tonnage to flow through all the cost adjustment work that you've done over the last couple of years?

Yes. So typically, our revenue per day, the 10-year average is a decrease of 0.3%, so 0.3% decrease in revenue per day. And then our operating ratio is typically up 200 to 250 basis points. And obviously, that we always have -- we do an annual actuarial study.

So there could be changes plus and minus on that insurance and claims line in the fourth quarter. And last year, we had a pretty big unfavorable adjustment that we had to take there. But nevertheless, we kind of exclude that from the averages, if you will. So that's what the normal performance is.

And I think from just kind of looking forward in terms of what we can do from an incremental margin I just mentioned that sequential incremental margin. I don't expect 60% to be the norm. But just thinking about our cost structure and what I just laid out from a direct cost versus overhead cost and overhead is mainly fixed, but there are some variable costs in there. Overall, about 70% of our cost or so right now are variable.

And that's how we've been able to protect our margins through this downturn is continuing to manage those. But anyways, the 53% of revenue being our direct variable cost, you kind of do the math, that's how we've been able to do sort of 35% to 40% incrementals when we're coming out of kind of on the early side of that demand inflection. And then eventually, you kind of get back to the point where you've got to add more equipment, you've got to add more people and so forth, and it starts compressing back. Our longer-term average incremental has been 35%.

And so I think that still seems reasonable and that would continue to imply that if you run that out for several years of a recovery in revenue growth that we would get back to that sub-70 type of threshold.

Our next question will come from Ravi Shanker with Morgan Stanley.

I have this topic has been discussed a fair bit, but if I can just hit it again in a slightly different way. You guys have been masters of calling the cycle over the years and have shown your operating prowess as well. But to kind of Scott's point, it's been 3 years of a downturn. And even now, I think some of the TLs and rails are actually sounding a little bit better on volumes in the cycle, even though nobody is going to high fighting here.

How can you guys tell if there is something bigger and more structural going on with the LTL space here rather than just a cycle? Maybe some more permanent share shift to TL, maybe in-sourcing by shippers, changing supply chains? Or your customers telling you that they will definitively be back with the same level of volumes are higher in upcycle?

Yes. What you just said there at the end is the confidence that we have in our long-term market share really is just driven by those customer conversations and how we think supply chains will continue to trend over time. We've seen some market share shift, I think, from LTL to truckload through this cycle. And when you look at some of the statistics in the truckload industry in terms of what they're charging revenue per mile versus cost per mile, it's -- they're willing to operate at breakeven or worse.

And I think that's what you're seeing with some of the operating ratios that have been published as well. So -- but I think that's some of the trend that we've got to continue to watch is as that business starts picking back up, they get busier, the rates start going back up, I think that's when you'll start seeing some of this unwinding effect in some of those truckload carriers that they don't really want to move multiple shipments on the back of their truck and make multiple stops. That's not their preference. And they don't have the network that's set up to really handle it.

They only do it when times are tough and they need some payload to make a truck payment. And so I think you'll see that business move back into LTL. And then we'll continue to see kind of our customers that are continuing to -- if we go through a customer, we're seeing a lot of wins, like I mentioned, from just a customer- specific standpoint and customers are continuing to award us the same lanes of business that they've had before, but their overall business levels might be down. And whether that's just the demand for their product, some we know are taking advantage of this truckload opportunity.

It's kind of going to be multiple items that I think are driving the increase in demand. And I think we'll see more of that share shift back than probably what we've seen in prior cycles. So we feel like we're ahead of it, though, from a capacity standpoint. I mentioned network capacity from a service center standpoint.

But I feel like we're in really good shape in regards to our fleet. We're probably heavy there in all honesty. But I feel like from a people capacity standpoint as well, we've got a team that's in position and ready. And that's the best incremental margin you can get is when we've got a driver that's already making a stop at our customer.

And now instead of picking up 1 shipment, they're picking up 3. And that's typically what we've seen in cycles past and how our volumes can accelerate so quickly on the front end of the inflecting economy, and that's what we'd expect to see whenever this economy does eventually inflect back to the positive.

Our next question will come from Richa Harnain with Deutsche Bank.

I appreciated all the color around your positioning being as strong as it's ever been to respond to an improving environment. And the OD model really make hay when the sun is shining. So maybe you can talk to us -- I guess that we're a little reticent to speak to some of the green shoots given all the headaches you've had. But just customer conversations.

You talked about maybe fatigue on the tariff side, reactions to the recent bill that passed in Washington to spur growth, interest rate cuts, like what are shippers telling you about their appetite to give you more business in the future. And then if you can maybe parse out kind of what industries you're maybe more optimistic about versus industries where you're really seeing normally set in or more negative trends?

Yes. I think that it's been the uncertainty that's been hanging out there over the economy that I think has resulted in just the lack of freight volumes overall. Again, I mentioned industry volumes are down about 15% from where we were back in '21, '22. So it's something that everyone had to contend with. But I think we saw kind of going back to the fall of last year, we saw some initial optimism with respect to the industrial economy.

And 55% to 60% of our revenue is industrial related, so that's important to us. And we saw that acceleration in the ISM in December and then it was positive for a couple of months. But then all the tariff conversation started, and then that just created more uncertainty that seem to kind of throw cold water on what we're developing at the time. And it's hard from a -- if you're a manufacturer, for example, to figure out what the cost structure is going to be when you don't really know what the final tariff cost might be.

And so I think that's something that we've had a lot of customers trying to figure out and solve for. And in some cases, you just try to wait things out. And so that's why we've got a little cautious optimism now that we've seen the tax deal be finalized and the bonus depreciation is something that I think can spur some further investment here. If we start seeing some trade deals come to fruition.

And that will be something that provides a little bit more confidence for our customers. And I think the final piece will be do we get some relief on interest rates. And so customers that are going through all of their financials and figuring out do they invest or not and what kind of return can we expect on their investment. All those -- once you get clarity on those big picture items, I think that's what it's going to take to really kind of spur the economy forward.

So we feel like we're closer to that. Now that we're getting clarity on some of these items and -- but we want to turn that feeling into true freight and see it coming on board. And I mentioned that we're seeing a little bit better performance right now in July. And we'll just continue to watch and see, because that really manifest in to seeing some sequential improvement versus just what our business has been like for the last 3 years of kind of flattish to down month over month.

Our next question will come from Stephanie Moore with Jefferies.

Just one real quick here. Look, any thoughts on where the LTL industry fits in, in general, with this potential transcontinental railroad or potentially too? Obviously, most are talking about these deals -- deal impacting line-haul truckload, but where does LTL sit here at all, I would love your perspective?

Yes. I don't know that I would expect to see any material impact on LTL overall. I mean -- something that it could be ultimately downstream, something we'll continue to watch and engage with customers on. But I think that's kind of on the other end of the supply chain, not necessarily seeing changes with respect to the rail industry kind of filter down to where we can find a correlation to any changes in our business levels.

Our next question will come from Ariel Rosa with Citigroup.

So I know in reference to Bascome's question, you mentioned the normal seasonal trends from third quarter to fourth quarter. I was just wondering, it's been such a weird year, we've obviously seen some abnormal seasonal trends so far year-to-date. I'm wondering how you think about your ability to outperform normal sequential trends, I guess, as we move into the back half of the year, especially in the fourth quarter. And then also how the wage increases play into that?

And kind of how much discretion you have around that? And what's kind of plan, how much how much pressure that puts on the OR?

Yes. I mean, obviously, our costs will be going up with respect to the wage increase. And that's part of what we normally see that 200 to 250 basis point deterioration from the third to the fourth quarters. You get one month of it in third quarter, and then you've got the full quarter effect in 4Q, but that's usually 1 point, 1.5 points type of increase.

If you look at that 250 change, that's going to be a big driver there. And -- but keep sounding like a broken record, I think it's just going to be revenue dependent. The fourth quarter, if we can kind of continue to maintain our revenue per shipment -- net revenue per shipment, but just revenue per day rather in the same realm of where we are. We'll continue to manage our cost like we have.

And I think by the fourth quarter, I would hope to see some of this increase that we've had in overall cost -- overhead costs, rather, start to come in a little bit. And so those are some other things that can help. But it's just continuing to manage our cost, manage our operating efficiencies, which our team is doing a great job of kind of mentioned before we're controlling our variable cost. We've got to continue to do that.

And typically, you see volumes a little bit softer in 4Q. So it just presents even more of a challenge to our ops team. But we just got to continue to stay disciplined, really throughout all areas of the operation. And everybody's got to participate and we've got to continue to manage our discretionary spending.

And think through if we're spending $1, what is the purpose behind it? And is it going to improve customer service? Is it going to help us over the long term? And those types of investments we're willing to make even though we're trying to protect the short term, we've really got to think and we do think bigger picture and longer term for what's going to be to the best benefit of Old Dominion over the long run.

And that's why you've continued to see us make investments and continue to execute on our CapEx program. And I've mentioned this 3-year down cycle, by the end of this year, we'll spend probably close to $2 billion on capital expenditures and to do so in a soft environment that's created its fair share of cost headwinds, but it's something that we've managed through. And I think we'll be happy that we've done these when we get on the other side of this economy. And you'll see that the leverage that can come through just like what we saw in the second quarter for that short-term benefit.

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

All right. Well, thank you all for participating today. We appreciate your questions, and feel free to call us if you have anything further. Thanks, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.