Less-than-truckload carrier Old Dominion Freight Lines (NASDAQ: ODFL) posted a record fourth-quarter operating ratio in the final three months of 2020, with solid increases in revenue and operating income.
The key benchmark for LTL carriers, revenue per hundredweight, also known as yield, rose at a steady pace as well.
ODFL’s fourth-quarter operating ratio was 76.3%, a significant improvement from the 81.3% posted in the final three months of 2019. It helped contribute to an annual OR of 77.4% for the company, also an improvement from the full-year OR of 80.1%
The revenue per hundredweight figure, the most significant benchmark for LTL carriers, rose 4.2% net of fuel. That was notable in that the revenue per hundredweight figure including fuel was up just 1.1%. Fourth-quarter 2020 revenue per hundredweight, excluding fuel, was $20.76. In the fourth quarter of last year, it was $19.92.
“We believe a consistent improvement in yield is necessary to offset our cost inflation while also supporting further investments in capacity and technologies that are designed to improve operating efficiencies and customer service,” Greg C. Gantt, ODFL president and CEO, said in a prepared statement.
The overall financial performance figures released by ODFL showed a 6.4% increase in total revenue for the year, with a 6.2% increase in LTL services revenue, which is the bulk of the company’s operations. Total revenue for the quarter rose to $1.07 billion from just over $1 billion in the fourth quarter of 2019.
Operating income soared, climbing to $254.3 million from $188.2 million in 2019. Net income was up 31.8% to $189.8 million.
In a rapid commentary after the earnings, Keybanc analyst Todd Fowler said Old Dominion’s earnings of $1.61 per share were more than Keybanc’s $1.58 per share estimate. He noted that the $1.61 earnings included a one-time bonus paid out to employees that was a headwind of 6 cents per share.
One area that showed numbers that were largely flat but said a lot about cost containment at ODFL was in wages and salaries. In the fourth quarter of 2020, compensation costs were $543.8 million. In the corresponding quarter of 2019, it was $534 million, a small increase against a revenue increase of more than $60 million.
In a research note published soon after the ODFL earnings were released, the transportation analysis team at Deutsche Bank led by Amit Mehrotra took note of the compensation numbers. “Impressively, despite the company enduring its usual annual wage hike on Sept. 1, wage and benefit costs in the Q were similar to 3Q on a percent of sales basis (i.e., only 20bps of de-leveraging sequentially vs. typical 200bps),” Deutsche said in its note. “This was the biggest source of surprise for us and appears to be a function of both pricing (yields ex. fuel were up 4.2% yoy, which is a significant acceleration vs. 3Q yield ex. fuel growth) and cost control (average headcount was down 2.7% yoy despite a 4.9% increase in tons and 2.4% increase in shipments).”
One area where costs did rise significantly was the use of purchased transportation. In the fourth quarter of 2020, Old Dominion spent about 3% of its revenues on purchased transportation, laying out $32.7 million. In the fourth quarter of last year, that number was $21.4 million and accounted for just 2.1% of revenues.
Sequentially, ODFL turned in a weaker performance than in the third quarter, when the company’s OR was 74.5% (vs. 76.3% in the 4Q) and revenue per hundredweight excluding fuel was $22.74 (vs. $20.76). The Deutsche team noted that the deterioration on profitability was far less than management projections of a normally far bigger deterioration between the third and fourth quarters, “which we attribute to pricing and cost management.”
Old Dominion also announced an increase in its dividend. Dividend payments are not standard in trucking: LTL peers Saia (NASDAQ: SAIA), YRC (NASDAQ: YRCW) and XPO (NYSE: XPO) pay no dividend. After the increase in the quarterly dividend to 20 cents per share, the dividend yield at ODFL will be about 0.4%, based on the company’s current stock price. Peer LTL carrier ArcBest (NASDAQ: ARCB) also pays a dividend, with a yield near 0.67%.