Mario Harik: Stephanie, we won’t expect to change the timeline because we think of these openings as being an investment for the next 10-plus years. And we are prioritizing markets that are capacity constrained for us today. I mean you hear us talk about the markets like Las Vegas, for example, or Brooklyn, New York or Houston, Texas. These are markets where we don’t have enough doors as things stand. So they get OR accretive very, very quickly. And the second area is around cost efficiency. I mentioned earlier on the Goodlettsville site, as an example. It’s not that we are ramping variable costs associated with that. Just to give you an example, for the first phase of a dozen terminals we’re opening up here in the second quarter, we’re adding a total of 30 or so headcount to be able to support those service centers because we already have the labor in those markets and we’re just splitting the teams between the new service centers or relocating from one service center to another.
So we don’t see the macro as impacting our cadence of opening these. We expect to open 12 in the — up to 12 by the first — by the second quarter, another 11 to 12 in the back half of the year and the remaining five or so sites in early 2025.
Stephanie Moore: Great. I’ll leave with that with my one question. Thank you.
Mario Harik: Thanks, Stephanie.
Operator: Thank you. Our next question is coming from Tom Wadewitz with UBS. Please proceed with your question.
Tom Wadewitz: Hi, yes, good morning, and congratulations on the really strong results. I — let’s see, I want to ask you a question kind of related to that momentum you have. How much sensitivity do you think that your volume and pricing trend has to just what the overall freight market does? Obviously, your service improvement is a big factor, but it’s hard to think there’s no impact from the actual freight market trends. So maybe just a thought on that kind of volume and price, how sensitive are you to freight if it gets weak or whatever? And then I guess the second part would be how sensitive is your OR improvement to the volume side? I know it’d be sensitive to price, but volume comes in 2 points weaker than you think, are you still going to be able to do similar margin improvement to what we’re talking about? Thank you.
Mario Harik: Yes. Thanks. Thanks, Tom. I’ll start with the first one in terms of market sensitivity. I mean, obviously, we’re not immune to the market if things slow down a lot in the back half of the year, then that’s — we’re going to be impacted. But this said, we do expect to outperform. And the reason why is that our strategy is working. Our service product is improving and customers are rewarding us with higher pricing. We’re launching new premium services, and these are resonating in the market. And we’re growing our local sales force, and that comes at a higher margin. So we’re doing a lot of things that are company-driven to counter whatever comes from a macro perspective. I mean if you look at the first quarter, it was a very muted freight market.
We are still in a freight recession, yet we are delivering great numbers given that our strategy is working and the team is executing on that strategy. But again, we will — if the volume environment goes down, also, we’re going to be under pressure from a volume perspective, but we expect to gain market share as we go along. And from a pricing perspective, a lot of the initiatives we have that are driving pricing are based on all the things I just mentioned, which enabled us to also deliver a good pricing number as a whole.
Tom Wadewitz: And what about the second part being like if you get 2 points less, whatever, pick a number of volume growth, is the OR improvement sensitive to that or not particularly so?
Ali Faghri: So Tom, this is Ali. As Mario mentioned, we’re not immune to the macro, but within our baseline outlook, we’re assuming very modest assumptions around tonnage growth. You saw here in 1Q and also in 4Q, as well with relatively modest tonnage growth on a year-over-year basis in that low-single-digits range, we were able to deliver 400 basis points to nearly 400 basis points of year-over-year OR improvement. As you roll forward into the second quarter, we’re assuming tonnage up in that low to mid-single-digit range. We expect 400-plus basis points of OR improvement. So for us, specifically, while there is some sensitivity to the tonnage outlook, what we’re focused on is driving yield growth, driving cost efficiency, and we have a lot of control over our own destiny and a lot of company-specific levers we can pull to drive both yield growth and cost efficiencies to drive stronger OR improvement, even in a softer macro environment.
Operator: Thank you. Our next question is coming from Brian Ossenbeck with J.P. Morgan. Please proceed with your question.
Brian Ossenbeck: Hey, good morning. Thanks for taking the question. Just wanted to maybe get your thoughts on competition, both with other LTLs, some of which are expanding their footprint as well. But also some of the last question from Tom, in terms of the freight market, we have seen probably a bit more weight from a weaker truckload market, but you’re also seeing better weight per shipment in your trend. So doesn’t seem like you’re as exposed as maybe some others. So maybe you can walk through the details on that.
Mario Harik: Yes. I’ll first start actually with the back half on weight per shipment or back half of your question. For us, weight per shipment has sequentially improved. A lot of that goes back to the — we are being very disciplined on the type of freight we are taking into our network to make sure it fits the profile of an LTL network, and it’s OR accretive and from an overall margin perspective. Now when you look at the move of freight potentially from LTL to truckload, we — I had the team run an analysis here recently for us, and it’s roughly around 0.5 point of shipments that are those heavy LTL shipments that we have seen effectively go down more than the corresponding other parts. And that’s driven predominantly by the truckload rates being lower.
But it’s not a meaningful number, but we’re seeing some of that in terms of the LTL to TL shift. The good news there is as soon as the truckload market tightens, that becomes a tailwind for LTL and we see it coming back. In terms of the overall industry dynamics, when you look at the capacity in our industry, you go back a year ago, all of the Yellow service centers were up and running. And now about half of them have been sold. So look about 80%, 90% of these are coming back to LTL carriers. In a year from now would be at 94%, 95% of the industry capacity that was running just a short year ago. And when you look at the overall, we are in a freight recession. So when you look in how our LTL industry and you look at all the publicly-traded LTL carriers, you can see that from a baseline of 2021, shipment count in our industry is down in the teens since the post-COVID environment.
And it’s not that 2021 was a particularly strong year, it was even less shipments in LTL than 2019 or 2018 or 2017. So the best way to think about it is that that capacity went out at a time when freight markets were down in the teens. About half of it is coming back. But yet, we haven’t seen yet any meaningful shipment recovery. So from an industry capacity perspective, as soon as we see any meaningful form of recovery, you would see that we don’t have enough capacity in the LTL space as a whole.
Brian Ossenbeck: Just to quickly follow-up on that then, looking into later half of this year and probably more like next year, what are some of the incremental margins you would expect, I guess, the new facilities in particular, especially in some of the bigger areas with more density? Should that be similar to what we saw this quarter was around 40% or so or maybe a little bit less, and of course, it would depend on the pace of the macro. But I just wanted to get your sense in terms of how those assets would fit when the recovery does come back.
Ali Faghri: Sure, Brian. This is Ali. We do expect very strong incremental margins on these new service centers. As you saw here in 1Q, we delivered very strong incremental margins. In 2Q, if you look at what we’re implying for OR that implies incremental margins north of 50%. And as we cycle into the second half of the year and into 2025, as these new service centers come online, we would expect to maintain that very strong performance in incremental margins comfortably above 40%.
Operator: Thank you. Our next question is coming from Jason Seidl with TD Cowen. Please proceed with your question.
Jason Seidl: Hey, thanks to Mario, team, congrats on the strong quarter. One question, one more follow-up here. How should we think about this push to the more local accounts as an impact on the overall yield? And I understand how the margin impact works. I was just curious if there’s any impact on yields. And then, Kyle, I wanted to follow-up. You mentioned being at the “higher end” of the OR target range. And I’m assuming you meant the better end, but the lower OR. I just want to clarify that.
Kyle Wismans: Yes. Hey, Jason. So I’ll take the first part of the question, too. So when you think about the local account strategy and a move from 20% to 30% of the book. When we talk about our overall opportunity from a yield perspective, we said we had probably the mid-teens gap at times. When you think about growing the local accounts, we think that’s 2 to 3 points of what that gap could be just from growing that local business.
