Old Dominion Notes Short-Term Cost Headwinds; Q3 Another Record

Old Dominion Freight Line will see a bit of a cost catch-up over the next couple of quarters given the record growth it continues to experience. The company will continue to expand its network of terminals and add the drivers and workers needed to service them as it looks to grow its share of the robust less-than-truckload market.

The Thomasville, North Carolina-based carrier reported third-quarter earnings per share of $2.47, 10 cents ahead of consensus and 76 cents higher year-over-year, Wednesday before the market opened.

Old Dominion ODFL set a record for revenue in the quarter at $1.4 billion, 32% higher year-over-year, as tonnage increased 14% and revenue per hundredweight excluding fuel surcharges, or yield, was up 10%.

Yield improvement allowed the company to post a 72.6% operating ratio, 190 basis points better year-over-year. Most expense lines saw declines as a percentage of revenue, including salaries, wages, and benefits, which was 320 bps lower.

Operating supplies (fuel) increased 190 bps, and purchased transportation (third-party linehaul truckload capacity) was up 130 bps.

Old Dominion's headcount was up 21% from the 2020 third quarter, and the company plans to continue to add workers in the fourth quarter and into next year "to support our volume growth and reduce our reliance on purchased transportation," Greg Gantt, president and CEO, stated in a press release.

Table: Old Dominion's key performance indicators

On a call with analysts, Gantt said he felt like another round of wage increases would not be necessary given the annual increase it implemented in September. However, the company will need to continue to add employees to keep pace with the growth it's seeing.

The fourth quarter is off to a similar start as October revenue is up nearly 35% year-over-year.

Part of the hiring plan also includes the insourcing of its linehaul transportation. The bulk of its linehaul moves are accomplished in-house, but the carrier has had to rely on third parties more than it would like to meet service commitments as volumes surge.

"We still have to try to reduce this purchased transportation," said Adam Satterfield, CFO. "We'd like to get back to managing the business completely insourced from a linehaul standpoint."

He said it will take headcount exceeding shipment count for a while in order to be able to completely insource capacity again. The company has been hiring above normal trends for five straight quarters now.

However, Satterfield expects higher yields to continue to outpace cost inflation.

In the quarter, revenue per shipment was up 11% compared to cost per shipment, which was up 8%. Excluding fuel, the metrics were closer to parity.

Management sees the strong pricing environment for the industry carrying into next year based on recent customer conversations. That will dictate the company's ability to grow margins, which improve by 100 to 150 bps annually on average.

Assuming normal seasonal trends during the fourth quarter, a 200-to-250-bp deterioration, Old Dominion would post a 74% OR for the year, 340 bps better than 2020, and ahead of its long-term target of 75%.

Management wasn't ready to update the margin goal for the business as short-term cost headwinds persist. It did say it will continue to make the "investments required to drive long-term growth," which includes new service centers.

The company currently has 15% to 20% excess service center capacity, which is central to its ability to capture market share. It has increased its terminal door count by 50% over the past decade, while most of the industry was contracting, and plans to add another 35 to 40 terminals over time and as many as 10 in 2022.

"We came into this year believing that we had more capacity than anyone," Satterfield said. "We've seen very little investment from some of the others [over the last 10 years], maybe a service center here and there, but nothing at any major scale. That's created an environment for us to be able to win more market share than anyone else."

The goal is to get back to carrying 20% to 25% excess capacity in the terminals.

"In the LTL world, it's the doors that really can control the amount of freight that can be processed through the system," Satterfield continued. "We never want our network to be a limiting factor to our growth."

Net cash flow from operations was $873 million through the third quarter. The company has budgeted capital expenditures to total $565 million for 2021: $235 million on real estate and terminals, $290 million for tractors and trailers, and $40 million for IT.

Year-to-date, the company has repurchased $599 million of its shares and paid $69 million in dividends.
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