Even the gold standard of less-than-truckload (LTL) carriers can’t escape the effects of the freight downturn triggered by the weakness in the nation’s industrial production.
Old Dominion Freight Line, Inc. (NASDAQ:ODFL) reported October 24 diluted third-quarter earnings of $2.05, down 7 cents a share from a year ago and six cents below estimates of analysts polled by Barchart. LTL revenue, which accounts for virtually all of Old Dominion’s total revenue, fell 0.6% year-on-year, the first decline in more than three years. Earnings before interest and taxes took a 5 cent a share hit due to $4.9 million in pre-tax losses from property and equipment disposals.
Operating income fell 4.8% to $217.5 million, while net income declined 5.4% to slightly more than $164 million.
Daily tonnage declined 5.2% while weight per shipment fell 1% sequentially. Revenue per each hundred pounds of freight hauled, known as “revenue per hundredweight,” rose 5.8%. The latter number excludes the impact of fuel surcharges. Including those, revenue per hundredweight rose 4.4%, reflecting the declines in diesel fuel prices and lower surcharge levels. Revenue per hundredweight is a key metric of LTL profitability.
Old Dominion’s operating ratio, the ratio of revenues and expenses, rose to 79.3% from 78.4% in the 2018 quarter. The higher ratio was due to higher overhead costs that couldn’t be efficiently leveraged due to the drop in revenue, Old Dominion said.
Old Dominion’s fourth-quarter daily revenue is down 1.5% to 2%. The company said that October revenues have stabilized as it regains business that may have gone elsewhere due to lower prices. The current month is producing the best top-line number that Old Dominion has seen of any first month of a quarter since the middle of last year, executives said.
Old Dominion has telegraphed the top-line weakness for many months. Executives have said they don’t see an appreciable upturn at least through the end of the year. (The company did not issue 2020 guidance.) The key factor is the weakness in U.S. industrial production, which is LTL’s bread and butter. The Federal Reserve reported last week that industrial production fell 0.4% in September, the first year-over-year decline in three years. The decline was caused by weakness in mining, lower auto production due to a United Auto workers’ strike at General Motors Corp. (NYSE:GM), and lower world oil prices.
Industrial traffic accounts for about 55% to 60% of Old Dominion’s mix. About 30% is retail. Its business was not adversely affected by the strike at GM, President and CEO Greg Gantt told analysts.
The industry’s top-line weakness has been offset by a resilience in pricing power, as carriers benefit from continued cost discipline and the effect of market concentration that discourages price wars. In 2018, the top 10 carriers controlled about 73 percent of the total market, according to data from Ship Matrix, a consultancy. Old Dominion’s contract rate renewal levels are running on the high side of the mid single digit range, executives said
CFO Adam Satterfield said the company had beefed up its fleet in 2019 in anticipation of higher density levels that never came. As a result, its fleet costs are running higher than normal, Satterfield said. The fleet investments will be welcomed once volumes return to normal levels, Satterfield said.
In an telling comment of the increasing role that third-party logistics (3PL) providers are playing in Old Dominion’s business, the company said 3PL traffic is growing at a faster rate than the company’s traditional stable of direct shippers. “Our 3PL customers are doing significant business with us,” said Gantt.
Old Dominion is considered by most who are either in or who follow the industry as its best-run carrier. Its stature will likely lead analysts to give it the benefit of the doubt on the third-quarter results. Benjamin Hartford of Baird said the company’s core results were “roughly in line with muted expectations.” Amit Mehortra of Deutsche Bank began his early-day note with the heading of “Old Dominion: Not Superhuman All The Time.”
Financial markets also shrugged off any noise from the quarterly results. Shares closed up 86 cents to end the day at $183.84 a share.