Slight improvements in volume and yield along with strict cost management allowed less-than-truckload (LTL) carrier Old Dominion Freight Line (NASDAQ: ODFL) to post its best-ever operating ratio (OR) during the third quarter of 2020.
The Thomasville, North Carolina-based carrier’s 74.5% OR, expenses as a percentage of revenue, was the result of a modest revenue increase, 1% higher year-over-year with LTL revenue excluding fuel up approximately 4%, and lower expenses as a percentage of revenue across most cost buckets.
The employees’ compensation expense line was down 130 basis points year-over-year as a percentage of revenue with operating supplies declining 270 basis points. The company operated with 8% fewer active full-time employees compared to the third quarter of 2019 even though revenue increased modestly.
Old Dominion’s third-quarter earnings of $1.71 per share came in 19 cents per share better than the consensus estimate and 34 cents per share higher than the year-ago period.
Gearing up for 2021
On a Tuesday morning call with analysts, management said pricing is improving and it expects 2021 to be a “robust” year. Lean inventories in need of restocking and consumer spending on hard goods makes Old Dominion confident in its belief that the “market share wins can accelerate.”
As such, management is continuing to invest in capacity, both equipment and new terminals. It expects to open “several” new facilities by the first quarter of 2021. The expansion activity will include adding facilities in large markets as well as replacing terminals Old Dominion has outgrown with larger ones. Management expects to invest 10% to 15% of revenue back into the business moving forward, likely at the upper end of the range.
“We’re spending money like we’re expecting a good year,” President and CEO Greg Gantt said on the call.
Some costs will begin to bleed back in as operations ratchet higher. Old Dominion has started bringing on more drivers and dockworkers and implemented an annual wage increase of 3% in September. Management said finding drivers has been a little more difficult during the pandemic, noting delays with background checks at government agencies, but “so far so good,” said Gantt.
Health and dental costs have already started to increase and travel and entertainment expenses as well as marketing costs will start to come back. A portion of the prior staffing cuts were supervisory and clerical, some of which will not return.
Management said the long-term annual OR goal remains at 75%. When asked why management isn’t increasing the target given the third-quarter outperformance, it said Old Dominion will update the goal once the company is able to attain the current operating level on a full-year basis.
Demand for linehaul movements is increasing. Management sees this as a positive sign for rates as most carriers rely more heavily on third-party capacity than Old Dominion. It said increases in truckload rates will force most LTL carriers to pay higher linehaul rates, something carriers will look to recapture through higher pricing, causing industry-wide rate inflation.
Management expects to implement its annual general rate increase, historically around 5%, in the spring.
In October, revenue per day is up a little more than 2% year-over-year so far, with flat shipments and a modest increase in weight per shipment.
Tonnage increased 1.3% year-over-year during the quarter. Revenue per day was 18% higher than the second quarter with shipments climbing 15% sequentially. Revenue per hundredweight, or yield, dipped 0.6% year-over-year on lower fuel surcharges. Excluding fuel, yield increased 2.6%. Tonnage turned positive on a year-over-year comparison in August.
Old Dominion generated $170 million in net cash flow from operations during the quarter, $687 million for the first three quarters of 2020, ending the period with $420 million in cash. The company expects total 2020 capital expenditures of $240 million, which includes outlays of $195 million for real estate and terminal expansions, $20 million on tractors and trailers and $25 million for technology projects.
The IT budget was cut in half from the guidance provided in the company’s second-quarter report. The company plans to invest more on the fleet in 2021 compared to this year. Old Dominion had a bit of a reprieve in equipment spending this year as it overbought in 2018 and 2019.
Shares of ODFL are off nearly 2% in midday trading compared to the S&P 500, which is flat on the day.