Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

We have about $1.2 billion assets under our management and we invest in about 20 to 25 companies in our equity strategy at any given time. We look for the top 1% to 2% of companies in terms of quality in the investing universe which sets quite a high standard for companies coming in. I have been observing Old Dominion for a couple of years now and it’s been a fantastic business in recent years.

They recently posted their third quarter cost ratio again and it was under seven.

It’s unbelievable. I know a little bit about your background, but could you give us a bit more detail including your experience in the LTL market?

I’ve been in the LTL market since 1998. I’ve worked my way up from Dock Supervisor to Operations Manager within various companies. I’ve mostly worked in sales, Account Executive type operations so I’ve often come across Old Dominion as a competitor. I have a few friends who have worked for Old Dominion and I’ve heard nothing but wonderful things from them. I have long experience in the LTL industry, having worked in various areas, mainly DFW, and the Bay Area in for California.

We usually hear about what is happening at the corporate level, how the national network is working; what’s it like in the service centers, at the docks, on the doors? Can you give us a little taste of what day-to-day is like for workers?

It’s blowing and going 24/7, and what I mean by that is that there is so much freight and not enough dock space, there is so much urgency to get as much freight as possible on the trucks and out for delivery. It’s a constantly moving machine. The phones ring constantly with customer services always trying to provide the best answer they can with the information they have from the limited technology they have. On the dock, it’s a frenetic pace with everybody trying to move as fast but as safely as they can to get products from trailer to trailer, put it on correctly and then their job is complete and it moves to the next person to do their job. It’s very exciting but it can also be very overwhelming too.

To what extent is corporate culture important to that process?

It’s extremely important because corporate culture trickles down. If you’ve got a really strong corporate culture and the people in upper management understand what the corporate culture is, they can relay that to terminal managers and regional managers and they, in turn, can relay it to the sales representatives and supervisors, they, in turn, relay it to the dock workers and drivers. It’s important that everybody understands what the purpose of doing business is; it’s not just picking up freight and delivering it. Every time you move a piece of freight, you’re moving someone’s reputation. I’ve always tried to relay that to people; moving that piece of freight reflects on you, on me and the sales representative so we really need to strive to do our best at all times. A good, strong corporate culture is contagious and you can tell when your leadership believes it and when they don’t. When they don’t believe it, that’s when morale problems start and this shows in terms of performance.

Given your time in the industry, obviously there has been some technological changes. Can you tell us a bit about that in terms of the changes from when you started to now and how it is different at the docks?

When I started in freight, we had pagers that were used to schedule pick-ups and everything was handwritten. We’ve slowly started to move towards technology with scanning bars to scan the freight bill and computers that tell you what door to put it in; when you get to that door and you try to scan it, if you’re at the wrong door the computer tells you. Technology has come on leaps and bounds from where it used to be. It’s very promising in terms of the problems of mis-deliveries and mis-routing of freight which is a big issue because if something is mis-routed it can take days to recover.

Can you talk a little bit about how the pricing works? When, for example, a customer brings you an item, how do you price that item? Is there something about it that may not be obvious to an outsider looking in?

Everything depends on what the product is and how much space it takes up. In LTL, we ship everything from nails to clothing to boxes to furniture. It has to go on a skid and move well in the system so in order to price something we need to know the dimensions and weight and also the commodity because the National Motor Freight Carrier (NMFC) has detailed listings which assign a class or a density breakdown.

The way a class works is that class 50 is the lowest and cheapest class and it goes up to class 500 which is the most expensive. Class 500 freight is very light and takes up a lot of space, for example an aircraft wing. Class 50 is more likely to be, for example, a box of nails, a sheet of metal, a hammer. It’s dense, it weighs a lot but you could put a lot of them on a trailer and whilst it would weigh a lot, it wouldn’t be as expensive to move. Ultimately, you’re still filling up a trailer, whether it’s one class 500 or 25 skids of class 50. In the LTL, market class 500 is going to take up much more space than class 50 so not so many people’s bills can be put on that trailer. If you’re taking up more space, it’s important to make sure that you’re charged correctly for that.

In terms of trying to identify the price, you start with the zip you’re collecting from to the zip you’re delivering to. This information, together with the class, will give what is known as a hundred-weight; a hundred-weight could be anything from $1 to $400. You take the weight, multiply it by one hundred and then apply the discount. For example, $1,000 hundred-weight with a 98% discount would mean the charge would be $200. You then need to add in things such as the fuel surcharge – which at the moment is around 49% – plus any accessorials that need to be added, such as lift gates, appointment delivery, limited access, residential. There are a myriad of accessorials that can be added on the delivery side, so you need to ask the customer what the delivery will entail. Will they have a dock or need lift gate, if a power jack is required, if they want the freight moved inside their facilities. Taking things to warehouses usually require pallets to be downstacked – as we call it ‘sort and segregated’ – so all the light items are put together. That tends to be a long and arduous process so there is another fee for that.

Can you talk about how the sales process works when a new service center is opened in a region?

In a new region, you usually have a new sales person, and hopefully the customer base in that area has been canvassed beforehand. If it’s a brand-new area it’s kind of an open book and you have no idea where you are going. If it’s a place you’ve been servicing before through other service centers, you usually already have an established customer list, so the first thing the sales people do is reach out to those established customers to let them know that their service will be improved and to see if more business can be gained from them. Usually, businesses surround other businesses so you can target those other businesses as well. The organic growth takes a bit of time but there is usually a huge push, not just from the new service center, but also from the surrounding service centers and people in that region to get that new center up and running. The last thing you want to do is open up a new service center and not have enough business for them to handle.

In terms of both sides of the transactions – those shipping and receiving items – to what extent is the service center working with the recipients of freight, such as the major retailers in the area?

They work with them a lot. The big box stores tend to automate their interaction, so they have websites that you log into to schedule appointments therefore that is the majority of the interaction we have with the receivers. For residential and day-to-day business recipients, this tends to be more phone calls or emails, mostly to check availability for delivery.

Are there situations where the receivers have preferred shippers that they want their suppliers to use?

Yes, all the time.

If I was shipping an item to a large big box retailer and I’m using one of the preferred shippers and something happens to the items along the way, is the big box store then going to come down on the shipper or on the customer of the supplier?

That’s a great question. I think the big box store usually comes down on the supplier unless they insisted on the use of a particular carrier and it was that carrier who damaged or lost the good. In that case, they usually have internal customer relations people for each of the carriers that help resolve these kind of issues. At AAA Cooper we did a lot of Amazon business and we had dedicated Amazon customer service staff and Amazon operations staff who focused solely on making sure the Amazon freight was where it needed to be. Amazon was coming down on the carrier at that time.

It seems like over the past decade or so there have been three or four carriers who have accounted for all the growth in LTL, with FedEx being the largest and then Old Dominion and Saia. What is it about those particular companies that make them stand out in the LTL space?

With regard to growth, I was really surprised when Saia started to move into the North East as that was always an area they said they would never expand into. I think their organic growth is also new; usually they expand through purchasing existing customers or regional carriers in an area and enveloping them into their region. I think they had a change of mindset and realized that, in order to compete with the likes of FedEx and XPO or Old Dominion, they had to become a nationwide carrier and they needed to have full fifty-state serviceability.

I don’t know the corporate culture of Old Dominion very well but I do know they have always been very aggressive when it comes to expanding and growing their market and ensuring their service is premier. I think they have identified places where they are not doing well, dense areas where they could improve service if they added another service center. We’re providing a service, picking up from point A and delivering to point B and making sure it’s not damaged; that is the main thing that all the carriers are doing.

You mentioned earlier about services. There is pricing on the freight and then there are services that are being offered. It seems like that is becoming a bigger part of the package for the LTL customers. Can you talk a little more about the services?

The main service difference is in terms of expedited and/or guaranteed delivery service, because even though technically we’re post-Covid, Covid is still going on, and service standards went out the window during the pandemic. Previously, within Conway or XPO deliveries were 97% on-time; 3% would fail but, for the most part, everything is going to get there. If you really want something delivered, mark it guaranteed. Saia has two different levels for this; by, noon and by 5pm. FedEx has lots of options, they are very strong with their service offerings. There is also the lift-gate service, the residential delivery service; some carriers don’t want that type of business because they don’t have the necessary equipment for it.

A company like Central Transport tends to stay away from residential deliveries because they only have two or three lift-gates in their whole terminal but you need a lift-gate, bobtail or box truck to deliver that freight on. Companies like RNL or AAA Cooper focus a lot on residential deliveries because they have the equipment available on most of their trucks. In terms of Old Dominion, I’m not 100% sure of their lift-gate situation.

I’ve seen a couple of carriers offering an expedited, almost airplane-type, service to compete with the air freight companies in the LTL market. Some also offer a ‘white glove’ service, taking the freight past that threshold of the front door or the garage.

From an outsider’s perspective, it seems like at one time there was a wide difference in terms of service quality among the carriers. Is that still true or have they now figured out that quality, on-time deliveries with no claims is the way to go, so they are improving? Has the service difference between the best and the worst carrier shrunk or is it the same?

Honestly, I would say it’s still the same. You’re going to get strong and good service from the likes of Old Dominion, Conway, Saia, FedEx just because they are charging more for better service. The other difference is about how each of those companies started. Saia, Old Dominion, Conway and FedEx were all regional, and have expanded those regions but kept that mindset of having really strong service. Carriers like YRC and ABF have always been large carriers so they have good strong long-haul service – coast-to-coast – because that is their ‘bread and butter’, but if you have freight to move within the region, there are better providers for that. You have to know your carrier. I know that Yellow have a few regional carriers inside their network that are similar to Saia in the regional scope, they do a strong job in that area. Old Dominion started out regional and have expanded but kept the same ethos.

One of the companies I have noticed is Road Runner which has really tried to turn around what they are doing. They understood where their service issues were coming from because they don’t have assets in every location across the country, so they were using partner carriers or agents to deliver. In places where they didn’t have strong agent partners they’ve just stopped operating there. That has really helped with their service because, where you have to use a partner carrier, you lose control. You can ask as nicely as possible that they get the freight delivered but if it’s not in their best interest at that moment in time, they are not going to do it. Overall, I feel like service levels have started to get closer but there is still disparity between the carriers. The top two carriers are providing great service and demanding the cost for it and as you go down, you get less service and accountability.

It’s been a bizarre five years or so in the freight markets in general and one of our concerns is that the rates that companies have been able to charge over the last couple of years are simply not sustainable. As truckloads, especially on the spot market, comes down it could impact the LTL rates. I don’t know if the LTL market is small enough to absorb some of that?

That’s a million dollar question; what are we looking for towards 2023? I really feel it’s all going to hinge on how the economy does. Are we going to continue to stay on the cusp of a recession, are we going to hit a recession and is that recession going to cause labor to go down? Back in 2008, 2009 in the last recession, unemployment spiked at 10% and that’s where Old Dominion really made their mark at the time. All the other carriers were doing what they could to get business through discounts but Old Dominion went in the exact opposite direction. They chose to hold their line, to get the freight they wanted to get without giving up their rates. At the time, they were providing decent service and they got better at it.

I’m hoping we don’t have a huge recession where we start to lose the labor market. If that happens, all the businesses are going to have to give away margins. When truckload capacity starts to go down, that’s when we start to see a lot of larger shipments show up at the LTL carriers. I know when Covid happened, that happened all the time and, all of a sudden, the customers that would give us four or five skids were giving us half a trailer every time, sometimes two, and we didn’t have the capacity for it so we had to be very careful in terms of what we would agree to in terms of collections. With online pick-ups and the ability to circumvent people, that became very difficult to handle at times. At the time, I was running the city P&D, pick-up and delivery, so I would have to spot those huge orders to see if we had the capacity for it and make phone calls to the shippers.

In your experience, has there been a point where someone who would have shipped on LTL is able to get much better rates in the truckload market? Perhaps in 2019 for example, when truckload rates came down and it worked out much cheaper to send half a trailer on a truckload versus going through LTL?

It tends to be a different ball game; it really depends on what you are shipping. For a large order, it can still be cheaper to move LTL. A lot of the carriers move things on 28-foot trailers which can only take 14 to 16 skids, so an order of that size is better to send truckload because the LTL carrier will charge for using the whole trailer. If you’re moving something of around five to eight skids, you’ll definitely find better rates on the LTL side.

Most carriers have volume rates, for example FedEx does a great job with their volume rates. They take the release value of the product and drop it down to around 50 cents, and they take the service standard and basically eliminate it. They’ll move it for you at a reduced rate, without a doubt, but it’ll take five to 10 days to get where it needs to go.

We’ve been monitoring the autonomous truck technology and it seems like the best fit for it would be the line hauls; they return to the service center every day, same route. To what extent do you think autonomous trucking is feasible and how do you think it will best fit in the LTL industry?

I don’t have a lot of experience with this, so this is 100% speculation. I think it’s a good idea but, firstly, the regulations would have to be removed so you don’t need a driver in a truck. Once that happens, then it will definitely impact a lot of carriers. Will there be enough trucks available for someone to actually move the freight? I still think a driver will be needed at some point to maneuver a truck; I don’t see an autonomous truck being able to negotiate a facility. If you’ve ever been on a freight facility at night, it’s dark and there are trucks going by constantly, you have to wear safety equipment so you’d definitely need somebody to handle that truck and get it where it needs to go.

It would not eliminate the need for drivers but it is inevitable, whether it’s 10 or 20 years down the road. The technology needs to get to the point where safety is almost 100%, you’re not going to have accidents or run into cars. In that respect, if you’ve got a robot driving the truck then it’s not going to fall asleep and that’s a wonderful thing, but how does it manage the weather, traffic and so on. I’ve been in a Tesla which drove itself for a little bit and it’s a scary proposition, trusting the car to do it for you. You also have to factor in that it’s moving hundreds and thousands of pounds and if something goes wrong that’s a very dangerous situation, especially moving hazmat freight; I don’t see that ever being done autonomously.

We’ve read also that eventually things will move towards autonomous and electric, but the battery weight compromises the capacity.

Absolutely, the battery is really heavy. You’re already talking about a big rig which weighs, on average, 80,000 pounds total from nose to rear completely full, and that is its maximum possible weight. I know a forklift battery weighs a ton easily so I can’t imagine how much a battery that needs to move a diesel truck would weigh. Just to generate the torque enough to get a tractor up and running is a lot.

It’s going to be a major technological change for sure and it seems to me that the opportunity may not be in having completely autonomous trucks going from service center to service center like the current model. I think you have to re-imagine what the service center looks like, but it’s most likely an opportunity for the driver to go on autopilot after the pull out and before they pull in, a bit like an airplane where the pilot takes over at the beginning and end. It seems like that is the more likely scenario which wouldn’t necessarily do a lot for labor savings.

If you can eliminate the driver altogether then I can see it in terms of going in and out of the major service centers without a doubt. But with the smaller service centers, it might not be as easy. We call those ‘end of line’ terminals. I can see that autonomous movement between the end of line and the smaller terminals might be good or just between large facilities where you buy purchased transportation. Instead of us sending a driver with two pups, we’d fill up a van and he would drive it two days to California and get that unloaded. I definitely can see it being utilized for that, if you remove the need for a driver and when it gets to the yard a driver unloads it, that would be interesting.

In terms of yard space, where would you offload the product? Or have the changeover point between the driver and truck? There would likely be a parking issue as well. The majority of freight yards are always full with empty or full trailers waiting for appointments, space is usually a premium.

Some of the LTL companies talk about their union versus non-union employees and that having non-union employees are an advantage. Can you help us understand how a non-union labor-force helps in terms of day-to-day operations?

I’m definitely pro a non-union labor-force. My first job was at Yellow which is a union company. I was a part-time dock supervisor. When there was nobody else there, I was always able to do whatever was needed to get the job done, so if a customer showed up and wanted his freight loaded onto his truck then I could do that. However, if there was a driver there, I was considered to be ‘stealing his work’ if I did that, even though he may already be doing something else, such as unloading or loading his trailer. Essentially, if there was a driver present, he was the one that had to go and do that.

Union staff also have strict guidelines about what jobs they will and won’t do. For example, a forklift driver will only drive a forklift and won’t unload freight, which means you have to hire somebody else to unload the freight. I had one instance where I had a line haul driver come in from another facility and didn’t know how to hook up a set of truck pups and needed somebody to do it for him. Luckily, I had another driver come in who did it for him. I worked at the non-union carrier Conway where if a job needs to be done, it doesn’t matter who does it but the job will get done to the customer’s satisfaction. That’s definitely the biggest difference I see. A union carrier says they want to have customer satisfaction but, ultimately, they really don’t have that same enterprise understanding that a non-union carrier does.

With the union carrier, everything worked on a wheel, so on a Monday if there was extra work over the weekend it didn’t always go to the top seniority. When I went to Conway it was the exact opposite; the union always had to ask the top guy if he wanted the job and then go down the line. The non-union staff tend to want the best of both worlds so they tend to be a little more flexible, certainly within smaller facilities. I’ve heard many stories about working at larger facilities where if a union driver feels that money has been taken from him, he has the ability to file a grievance. Most of the time, that grievance is heard by the union representative who approves it, and the union company then has to pay that person, so it can put a lot of limitations on the ability to do the job. Changing to become a union carrier is definitely something I would not recommend and I wouldn’t want to work for that type of company because of the stipulations and clamps they put on the ability to do business.

In 2032, 10 years from now, if we were to look back and the LTL space and industry at large has struggled, is there anything beyond the macro-economic situation that might impact that, or is it just the volumes coming through the system that really matter in the end?

If the freight is moving, the economy is good. I’ve always noticed that when the economy starts to downturn a little bit, freight size goes down so less things are being shipped; it may mean more shipments are moving out but the tonnage is less. The tonnage is usually a good indicator of how things are going. The only caveat to that is that the mix of freight seems to have begun to change a lot. The Dallas market, which is where the majority of my experience is, is very warehouse-centric and the freight coming in and out is very consumer-heavy; people buying and moving things.

You can definitely see when the pandemic happened and the stimulus checks happened to try to prop the economy back up with consumerism. We felt that here in Dallas because of all the business that was stored here waiting for people to place orders to get it to where it needed to be. I feel that in 10 years from now, it will depend on how the economy is going. If manufacturing has grown in the US, then I feel that freight will definitely be taking off. If it has declined, certain areas of the country will be fine but you will start seeing declines in places that just don’t have the capacity to hold that product.

How much of the mix has changed in your time? It seems like, historically, it was primarily industrial and has increasingly become more consumer/retail; do you think that’s correct?

It is. It’s different in different areas of the country. I was in the Bay Area and northern California is definitely retail. Here in the Dallas marketplace, it’s still definitely retail. The only way I can really compare it is that at the time in the Dallas market we would move as much freight as someone in the Cleveland/Pittsburgh/Ohio area but their trailers were 10,000 pounds heavier on average than ours. We moved the same number of trailers, but they had 10,000 pounds more freight on theirs and, at the time, all of our matrix were based on load average. Therefore, it looked like we weren’t doing great, but our revenue was high and our load capacity was really strong. We had a number of different KPIs to look at but the one thing people focused on was the load factor; how heavy the trailer was. For the Dallas market, we would have a hard time getting that business. I definitely feel that if the manufacturing market continues to grow then freight will be very strong.

Do you believe that the retail shipments are sticky, that this isn’t just a passing thing?

No. There are not enough truckload carriers to meet their supply so the big box companies – Walmart, Amazon – have had to acknowledge that, in order to manage their freight and keep their customers happy, they have to use the entire network which includes the LTL. Unfortunately, that tends to block up the network too. AAA Cooper are one of Amazon’s primary providers; they don’t necessarily do the end delivery to the warehouses but they do all the consolidation for them.

All the Amazon shipments get picked up, arrive at various service centers and then get loaded on actual Amazon trailers and then either Amazon collect them or they are dropped at the Amazon facility, and that took up a lot of capacity. It was the same with Home Depot; either half of our trailers were at the Home Depot facility being unloaded or were full of Home Depot freight waiting at the Home Depot facility to be unloaded.

Correct me if I’m wrong, but the rise of retail in the LTL space increased the shipments but the price came down because the packages that were being put on board were not as valuable as, for example, industrial machinery?

Exactly. There ends up being a lot more shipments but the amount of space it takes up could be 100 shipments and if that was retail, it only took up 20 shipments in the past. You have to make more money from the retail and they tend to be smaller, less expensive shipments. It sometimes averages out well but, for the most part, it reduces capacity but drives revenue up.

I imagine that the drivers and the companies are okay with the retail costing less because it keeps the network busy?

Yes, it’s a loss leader without a doubt. It keeps the trucks moving and when the trucks are continuing to move, the other freight that pays really well gets to move with them.

You mentioned earlier that ODFL held the line on pricing in 2008, 2009 which is true. Do you think that the other players in the industry saw that and wanted to hold the line next time, and what would cause them to break and drop prices to keep freight moving?

If that does come to fruition, I think everybody is going to try to hold the line. If we then end up sending drivers home because we don’t have enough business and the top line revenue starts to go down, it’s a quick and easy fix to increase prices by, say, 10% in order to get shipments in. I think they will most likely drop their stance and do that.

Is there anything we haven’t covered that you think someone on the outside should be aware of, that’s happening either right now or industry-wide?

The labor numbers on how many CBL drivers are coming in to the market, that’s a definite indicator on how we’re going to look in 10 years. If there are a lot less drivers coming into the market, then there will continue to be a capacity issue which will keep rates higher than you want.

Do you expect more CBL drivers to come into the market? We saw an increase in 2020, 2021 when the rates were really good but we’ve also read that the average age of a driver is over 50 and a lot of them dropped out of the market during Covid.

It’s really hard to gauge and I’m not very involved in recruiting but I know if we can keep the rates up high and it remains a lucrative job where you can make $70,000 to $100,000 driving a truck, people will still join. If we can get the younger generation away from the phobia of being a truck driver then it’ll continue to grow. I think there is always going to be a truck driver out there to move freight, someone is going to do it. Whether or not they get the right training or how they go about getting their training is another point.

It is definitely a skill and is something I know I couldn’t do; there’s a reason I’m on this side. When I rode with my drivers, I used to praise them about how amazing they are at what they do; it is a difficult job and you have to have a great mindset. It is a tough job. They definitely deserve all the accolades anybody can bestow on them.