Amit Mehrotra: Thanks, operator. Hi, everybody. Adam, I just wanted to go back to the OR comment on the second quarter. I mean, it’s — if I just look at revenue per day, I assume it should accelerate given maybe easier comps rest of the quarter. So you’re growing maybe revenue, mid- to high single digits in the second quarter. And so the implied incrementals on that are like 25% to 30% to get to the OR in 2Q? And I would just imagine with all the pricing that’s been taken in the industry and the front-end loaded nature of the cost, like we could do better than that. I don’t know if that’s a fair view or not, but I’d love to get your opinion on that. And then maybe more higher level on the OR, you’ve got I think right now, probably 18% of your revenue is direct cost, if I’m doing my calculations right, and it’s been as low as maybe 16%.
So you got a couple of hundred basis points there. And then there’s obviously leverage on mix and variable costs. Can you just talk about kind of the levers to improve margins over the next couple of years if we do get a recovery because there is this view that there’s not much more to go when you’re already doing a 72,73 OR?
Adam Satterfield: Well, if you remember, we have done a 69.6 and 69.1 in the second and third quarters of 2022 when we had more revenue growth going on and felt like we had room to go from there. So nothing’s changed with respect to where we feel like we can take the operating ratio long term is part of the reason why we repeated the goal of being able to achieve a sub-70 annual operating ratio. But there’s a few things to try to unpack from that question. And I would say that when we’re initially in the upswing, get into the environment where we start seeing revenue growth again, eventually, when you get into it, that’s periods of higher incremental margins for us, but you got to get to the point where you’ve got enough revenue to kind of recover some of the fixed overhead costs that – and the growth that improvement – or increase rather in some of the other variable costs that go along with preparing for growth.
And we’ve already instituted some of those costs. For example, we’ve added about 500 people since September of last year. We were averaging 51,000 shipments per day in September last year, and now we’re at about 48,000. So we’ve tried to continue to do all the things to get ahead of anticipated growth, and we’re having to manage all of those costs, and we do. We manage the efficiency of all elements of our operation and trying to manage and match all of those costs with our revenue trends. But I would say that the uncertainty with the second quarter is just whether or not revenue will continue to accelerate or what we end up seeing. If we continue to improve from here, that’s going to be an improvement in operating density, and that will drive further improvement in our direct cost performance.
If you pull our operating ratio in the first quarter apart I think you may have said it in the inverse, but our direct cost, which are all the costs associated with moving freight, most of which are variable, we’re about 53% of revenue. Our overhead costs, which are more fixed in nature, is between 20% to 21% of revenue. So those costs are somewhere around $300 million, a little bit higher than that in the first quarter. That $300 million is going to be there in the second quarter and it’s probably going to be closer to $305, plus or minus. So you’ve kind of got that base cost to bounce around. But on a – and those being at 20% to 21% to one of your other points, yes, that’s been as low as 16% in the past when you’re really leveraging up, in particular, all the investments that we’ve made in capital expenditures and driving improvement there.
On the direct cost side, though, that 53% just as late as the third quarter of last year, those costs were around 51%. And that was still in a tough operating environment. So we definitely have got further room for improvement from a direct cost basis. And then obviously, there’s a lot of leverage there on the overhead side. And those factors are what gives us confidence that we can get the operating ratio back to sub-70. But we’re not going to make decisions that would help cost in the short run that may jeopardize the opportunity in the long run. The reason we’ve been able to outgrow our competitors in strong growth periods like 2018, 2021, where our tonnage growth can be 1,000 basis points or more higher than the industry is because of the decisions we make in tougher times.
We’ve got the financial strength to be able to invest in service center growth to be able to invest in our equipment to invest in employees and do all the things to be ready for that growth. And that’s why oftentimes in those strongest growth periods, we’re growing double-digit volumes and a lot of our competitors are flattish in those periods. So all those same strategic advantages, the pre-investment ahead of the growth curve, all of those continue to be in place, and we’ll get the most leverage on them when we get into a real accelerating and growth environment again.
