Logistics Management Group News Editor Jeff Berman recently spoke with Adam Satterfield, CFO of Thomasville, North Carolina-based national less-than-truckload (LTL) carriers Old Dominion Freight Line about various industry trends and themes, including: the current state of the LTL market, the freight economy, rates and pricing, and supply chain shifts, among others. Their conversation follows below.
QLogistics Management (LM): How do you view the current state of the freight economy, given all these different factors that obviously are impacting freight flows and volumes, like inflation, retail sales, and industrial production/manufacturing, among others?
AAdam Satterfield: Freight generally leads the economy out and is one of the leading indicators as things start to turn. I would say, going back to probably September or October of last year, we felt like we were starting to see things get to a point where we'd see stabilization. And we had been telling investors that we anticipated that we would get back to a sequential growth environment in the spring of what is now 2023 and we've kind of seen that play out so far. We haven't published any kind of updates, in terms of our March numbers, but we thought we would get to somewhat of a base level of operations from a shipments-per-day standpoint by the end of December. We anticipated that the winter months—January and February—would be sort of flattish there and then start to see a little recovery in March, which typically happens. That, so far, has played out. Our December number actually outperformed normal seasonality a bit and then we saw a slight increase in our shipments-per- day from December to January just on a month-over-month basis, and then a slight increase from January into February. A lot of that has just played out like expected and now we're just kind of waiting to see. March is always an important month for the first quarter, and then we hope to see some growth here on a sequential basis, and then, hopefully, that continues throughout the second quarter as well. We felt like that that was the way we were reading the tea leaves. But even looking back at prior periods of economic weakness, like 2009 and 2016, in both of those years we had sequential growth from the first quarter to the second quarter, and that's somewhat what we're anticipating. It may not be at our normal 10-year average sequential trends, just due to the fact that the economy is still weaker overall. But we do expect that freight will start flowing again after we've seen month-over-month trends of either being negative or flat since April 2022 through December 2022.
QLM: What do you see as the key factors that will drive freight flows? Will it be a resilient consumer, coupled with steady demand, or other things like the ongoing return to a services-based economy?
ASatterfield: Well, certainly the consumer drives the U.S. Economy. I think that the resiliency of the consumer over the last couple of years has certainly supported what we have seen, where we've produced more than $2 billion of cumulative revenue growth over 2021 and 2022. We've provided an update for February. That was the first month in which our year-over-year revenue was down a bit. We were down 2.9% overall in February 2023 versus February 2022, and we saw our shipments-per-day down 10%. We are probably looking at the worst of it, from a year-over-year standpoint, but getting back to the belief that we'll see some freight movement again. We have two factors that we will continue to watch. We pay a lot of attention to the ISM [manufacturing] index, and it has been below 50 (a reading of 50 or higher indicates growth is occurring) for several months now. But historically, that spurt had been to five-to-seven months. So, we're kind of getting to the end of what a normal average down cycle might be…and would look to start seeing some industrial strength returning. And industrial related revenue is about 60% of our overall revenue base. But, I think, right now, we're going to start seeing some things turn around with our retail customer, base as well, which is about 30% of overall revenue. And we still believe, in looking at things like the inventory-to-sales ratio, that inventory levels are low. They are still below where we were before the pandemic, and then we've had feedback from customers that kind of supported our belief of freight flowing again, suggesting that that they're going to see an increase in their shipment levels this year. So, you know, it's somewhat reading the economic tea leaves, but really a lot of our base level forecasting comes from feedback that we get from our customer base. In the fall each year, we go through a robust forecasting process and build a bottoms-up forecast, taking data that our sales team are able to get from our customer base. And, so, it's taking all that information into account as we go through our planning process.
QLM: Are you seeing a shift in inventory management planning and processes by your customer base, with them starting to keep more stock available, in case something unexpected occurs?
ASatterfield: Well, I think it's something in which we are still seeing a normalization, from an inventory base, and just working through the supply chain. The last couple years so many customers have faced issues. Whether it was labor problems…getting parts and supplies needed to complete the production process, having so many boats sitting out on the West Coast and product there that they couldn't get into their own supply chain where it was stuck. I think some of the opportunity costs…many shippers are considering whether it was a product that wasn't on the shelf as a missed sales opportunity or increased cost of production, because that that part or piece wasn't available. And, so, we have heard conversations and believe that we'll see inventory balances probably settle at a point that is higher than we were before the pandemic. With this concept of just-in-time moving into sort of a just-in-case type of mentality, I think that you've got many people that that have got to think through that opportunity cost and what was lost by these issues that many have faced over the last couple of years. So, it's probably more of a strategy and a concept right now that that people are trying to build into their supply chains. But I still think that we're just getting to the point of seeing some type of a normalization at this point.
QLM: Do you think things are at a point, or approaching a point, of some type
of supply chain normalization or a supply chain reset, of sorts?
ASatterfield: I think so, and what we learned is that it is driven by service. We're known for providing superior service at a fair price, and I think that we're seeing shippers maybe value service a little bit more than perhaps they did pre-pandemic. For that reason, we've seen that happen—as the economy has been weaker—going back to April 2022. And we've seen really good trends overall with our customer base, as customer contracts are coming due as we are going through the bidding process. We have seen good customer trends and are keeping our customers, but our numbers are down, because orders for our customers products have been down. So, you know, as some of this normalization happens, I've been particularly pleased to see that continuity within our customer base, where they've kept us in place and are certainly looking at the overall value that we can offer within their supply chain and continue to leverage. We certainly take the approach that we are always trying to anticipate growth, and we've grown significantly over the years. We've doubled our market share over the last 10 years, and I think we can be the biggest market share winner over the next 10 years as well, just by making sure that we keep that focus on service first and foremost with our customers. We've got a secret weapon with our employee base, and a culture that I think is unmatched, and our employees are motivated and rewarded to do the right thing, in terms of taking care of our customers, giving 99% on-time service performance claims ratio of only 0.1%. And we're just more and more of that shipper community that's certainly appreciating that value proposition that that we can offer that no one else can.
QLM: How do you discuss, or explain, the importance of both
the value of service, as well as collaboration with your customers?
ASatterfield: Well, I think it's important for us to make sure that we're having a conversation with customers about value. A price doesn't always equal cost. And if you've got someone that that's using a competitor—and I think the average industry claims ratio is 1%-to-1.5%—versus our 0.1%, they've got a lot of damages that they're dealing with. The carrier is a representative of the carrier’s customer’s brand. So, we want to think of ourselves as partners, and we don't want to go show up at our customer’s customer location with damaged freight, and are afraid that it's late. We want to be on time and in full, and be a good representative, and so I think that you know that's certainly the approach that we take and the conversations that we try to have. It's one thing to look at the cost of a shipment from us versus what someone may be able to get from brand X. But if you start factoring in that there so many damages involved that you have a returns process and a frustrated customer—it is a poor reflection on you as a shipper because of the carrier you selected. Those are the types of conversations that we want to have. That's the value offering that that we can present. In the retail sector, there's so many big retailers that have on-time and in-full programs, where there are chargebacks or fines that are issued if you're not meeting those requirements for the retailer that, in some cases, those fines and charge backs can significantly exceed the cost on a per shipment basis for us maybe being a little bit higher up front than some of our competitors. But, at the end of the day, it all comes back to the value offering that we have in shippers understanding that value as part of the supply chain. There's more to it than just the on-time service and claims. But it goes back to thinking through the supply changes that many have faced over the last couple of years. We had 19.5% growth in shipments in 2021, and we were only able to take on that kind of growth because of the investment we make ahead of the growth curve. Having capacity in place to take on our existing customers' freight, and to make sure that that we protect them at a time where others in the industry had widespread embargoes, couldn't always make timely pick-ups, or make the timely delivery. You know that was something that was certainly important to us, and I think solidified our position for many customers, in terms of what that value offering really means.
QLM: Shifting gears, how do you approach the current state of LTL pricing? A lot has been discussed, of late, about things like classifications and eBOL, among other things.
ASatterfield: We certainly would love to connect more with our customers through technology. We have API connectivity, and we're continuing to try to drive that process, and we feel like it's something where it can help lower our cost if that data comes in electronically and can complete that billing process, if you will. But putting data in our system earlier, can give us access to start building different load plans. So, I think that's something that can be a win-win and across the board that improves service, as well as mitigate some costs over time. But we will certainly continue to motivate our team. We have discussions with our sales team about talking with their customers to drive that connectivity and somewhat automation through some of the back-office processes that we have by getting that data directly from our customer. We have rolled out…we're kind of testing and rolling out what we call “One Rate One Time,” which is basically just one all-in rate that that a customer could give us. But there's some requirements that we'll have to participate in that type of program. We are sort of taking a slow approach, in terms of how we're rolling this out, but it will be a simplified process. We would have to have data upfront about origin and destination require that electronic connectivity. But the idea behind it is that a customer gets you one price for a shipment, and you wouldn't look at any type of balance, or due statement. That price would include the fuel and any other accessorial that would otherwise be assessed. How that benefits the shipper is they don't have to worry about auditing freight bills and trying to figure out if an accessorial is appropriate or not. They knew what the cost was going to be. They pay that that bill, and then just move on. They don't have to have one of the third-party audit firms in place to look at their bills.
QLM: How do you manage shipper expectations when it comes to fuel prices?
How do you plan for fluctuations in fuel prices?
ASatterfield: Fuel is certainly a big element of costs, and it’s because of the surcharge program becoming a variable component of pricing that we obviously need to pay very close attention to it—and we do. We've got a fuel scale that's in place, but many customers give us their fuel scale that we have to build our base rates around. Whether it's fuel, whether it's transportation or new equipment costs, or insurance costs, at the end of the day, it is about understanding our costs to handle each customer’s freight and then trying to make sure we’ve got appropriate revenue in place that is going to provide an overall level of profitability for each customer that drives us forward supports further returns to justify further investment in our service and in our network. That's really our approach to pricing, in general, in that we want to cover our cost and then support the investment cycle that we go through. When a contract is coming due, we're looking at what the current fuel levels are generally. And then we try to stress-test that both up and down to figure out if fuel goes up X percent over the next 12 months, what would that look like from a revenue contribution standpoint? And then how do we anticipate cost for this particular account would change. And then we do it for the same way on the downside. If fuel goes down, how much revenue do we lose through the surcharge and how would the cost basis change? This is just to make sure that we have coverage. At the end of the day, the fuel surcharge program needs to be fair to us and the shipper. Ultimately, if it is perfectly designed and the fuel scales work as they should, there really should be no bottom-line impact, whether fuel goes up or down.
QLM: Shifting back to the economy, there is sentiment that the second half of the year will be stronger than the first half.
Do you see it playing out that way?
ASatterfield: It feels like we are getting to the point of turning the corner. I feel like we established the base when we look at historical trends, and history tends to repeat itself in our business quite a bit. A lot of times when we go through a down cycle like this, it is about a year-to-a-year-and-a- half of being down. We are at about a year, at this stage. The fourth quarter 2022 market the fourth straight quarter where we underperformed our 10-year average seasonal trends. I feel like we are just getting to the end of that cycle, if you will. There are certainly some reasons to optimistic about seeing some freight coming back in. Like I mentioned earlier, freight sort of leads the way out. We just want to look and see sequential growth, more so than worrying about it on a year-over-year basis. There's certainly a lot of economic risk out there that we and our customer base need to contend with. If we can start seeing some freight coming back into the system and then the overall economy starting to improve later in the year, then I think we will just continue to position ourselves, building up incremental capacity and being ready for when the next big wave of freight does come at us. It is for that reason why we have a capex plan to spend $800 million. We generally spend 10%-to-15% of our revenue on capex, but despite the fact that we are down double-digits on volumes right now, we are looking at this investing ahead of anticipated growth and, when the market turns, being able to take care of growth opportunities. We grew 19.5% in 2021, while the industry, at least the public carriers, on average, grew 4%. A lot of times our business model shines the brightest when we get into these periods, where the economy is inflecting back to the positive and gets really strong. And, so, we are making sure we have the real estate capacity, the people capacity, and the fleet capacity take advantage of those growth opportunities when they come at us.
QLM: Part of your annual capex allocations go towards new or expanded national LTL service centers.
How are things progressing on that front these days?
ASatterfield: We opened up four facilities last year and are now at 255 total across the U.S. Our capex plan includes $300 million for real estate expansion this year. Some of that will be land opportunities, and some of it will be projects that are already in place, in terms of new facilities, and some will just be expanding existing locations. We continue to execute on that type of strategy, because we are confident in our long-term market share opportunities. And it takes time to complete some of those projects. For us, we continue to build and invest. Right now, we probably have about 25% excess capacity in our service center network. If we get a little bit above that is kind of our target zone and is OK, because freight will come back to us. We were in that same position at the end of 2019, and we continued to invest through 2020 during the pandemic. The $2 billion in revenue we were able to see in 2021 and 2022 combined would not have been possible had we not continued that investment cycle during the slower times.