Q3 2020 Old Dominion Freight Line Inc Earnings Call
[music].
Please standby.
Good morning, and welcome to the third quarter 2020 conference call for old Dominion freight line.
Today's call is being recorded and will be available for replay beginning today and three November 4th 2020 by dialing 7194 or 570 820.
The replay pass code is eight 1058 60 Roe.
The replay of the webcast may also be accessed for 30 days at the Companys website.
This conference call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Leading statements among others regarding old Dominion's expected financial and operating performance for this purpose any statements made during this call that are not statements of historical fact may be deemed to be forward looking statements without limiting the foregoing the words believes anticipates plans expects.
And similar expressions are intended to identify forward looking statements.
You are hereby cautioned that these statements may be affected by the important factors among others set forth in old Dominion's filings with the Securities and Exchange Commission and in this morning's news release and consequently, actual operations and results may differ materially from the results discussed in the forward looking statements the company undertake.
Takes no obligation to publicly update any forward looking statements, whether as a result of new information future events or otherwise.
As a final note before we begin we welcome your questions today, but we do ask in all fairness that you limit yourself to just a few questions at a time before returning to the queue. Thank you for your cooperation.
At this time for opening remarks, I would like to turn the conference over to the company's President and Chief Executive Officer Mr., Greg Gantt. Please go ahead Sir.
Good morning, and welcome to our third quarter call first call.
With me on the call today is Adam Satterfield, our CFO.
After some brief remarks, we will be glad to take your questions.
No the team delivered strong financial and operating results for the third quarter.
Bought a number of unusual operating challenges related to the effects of a pandemic.
After experiencing one of our sharper ever declines in volumes during the second quarter. This year.
Sequential increase in volumes during the third quarter was one of the strongest in our history.
Remain incredibly hard work and dedication Jodi team rose to the challenge and continued to deliver on time service not enough are saying well matching our record load cargo claims ratio let.
0.1%.
We produced record profitability during the third quarter of 2020 by continuing to execute a simple operating plan, which we have described to you many times before.
The long term strategy is focused on delivering value proposition of superior service at a fair price, which generally creates the capital for us to further invest in the capacity and technology to our customers demand to support their own initiatives.
Carrier service also goes beyond the old time in claims free deliveries.
Every member of the Eau de family understands the value of our service and how critical it is for supporting our yield management initiatives.
Our long term approach to managing the yield on an account by account basis has strengthened the quality of our revenue and profitability over the long term.
We believe customers also appreciate our consistent pricing philosophy, which should continue to be a key factor in our ability to win market share over the long term.
The pricing environment, improving and expectations for rates to rise further in our industry next year. We believe we are at an inflection point where market share wins can accelerate.
Well most people may look forward to turning the page on 2020, we will work tirelessly to finish this year out strong and we'll also use the period to prepare for 2021.
We believe the domestic economy and customer demand will continue to improve.
So we must ensure that we have the necessary elements of capacity to support our anticipated growth.
Given our long term market share opportunities, we intend to steadily invest in equipment and additional service center capacity that should include the opening of several new facilities before the end of the first quarter next year.
We'll also continue to invest in their most critical assets.
The family of employees.
We are actively hiring additional drivers and platform employees to balance our workforce with growing demand and shipment trends and we will continue to provide our team with the training benefits and opportunities to succeed and support our customers.
Our unique position in the market.
The ability to further invest in our sales I'm confident in our ability to continue to grow profitably, while increasing shareholder value.
Thank you for joining us this morning, and now Adam will discuss our third quarter financial results in greater detail.
Thank you, Greg and good morning.
Old Dominion's revenue for the third quarter of 2020 was $1.1 billion, which was <unk>, 0.9% increase from the prior year.
We operated very efficiently during the quarter and establish new company records for operating ratio and overall profitability Rob.
Our operating ratio improved 480 basis points to 74.5% and earnings per diluted share increased 24.8% to $1.71.
Revenue growth for the third quarter may have been modest, but we were pleased to actually return to a positive trend.
The increase reflects a 1.3% increase in LTL tonnage that was partially offset by the 0.6% decrease in LTL revenue per hundred weight.
This yield metric as well as overall revenue was negatively affected by the significant decrease in the average price of diesel fuel as well as changes in the mix of our free.
Our underlying pricing trends remained relatively consistent during the third quarter as indicated by the continued strength in our LTL revenue per shipment.
On a sequential basis revenue per day for the third quarter increased 18.1% as compared to the second quarter of 2020, while LTL shipments per day increased 15.4%.
I won the steep drop in volumes in April that generally resulted from the initial stay at home orders our shipment levels have steadily increased above our normal sequential trend.
At this point in October with almost a week remaining in the month or revenue per day is trending higher by approximately 2% to 2.5% as compared to October 2019.
Our shipments per day are trending in line with normal seasonality, but our weight per shipment is in the 1500 70 to 1600 pound range, which is lower than the third quarter.
Well the weight per shipment is still higher on a year over year basis as compared to October 2019. The sequential decrease is due to measures. We took the limit the number of heavier weighted LTL shipments and our system as well as improving revenue trends with our smaller customer accounts generally have a lower weight per shipment than a large.
Drew national account.
As usual, we will provide the actual revenue related details for October and our third quarter form 10-Q.
Third quarter operating ratio improved 480 basis points to 74.5% with improvement in both our direct operating cost and overhead cost as a percent of revenue.
We improved the efficiency of our operations and produced increases in or laden load average PND shipments per hour and platform shipments per hour when compared to the third quarter of 2019.
Well, we will continue to add drivers and platform employees during the fourth quarter as Greg mentioned, we believe we can effectively balance our labor to revenue trend in line with the normal sequential change in this expense line item by continuing to focus on productivity.
We will also maintain our disciplined approach to control discretionary spending and make every effort to minimize cost inflation in other areas.
Well dominion's cash flow from operations totaled $170.2 million and 686.5 million for the third quarter and first nine months of 2020, respectively, while capital expenditures were $46.3 million and $166.5 million for the same periods.
We paid 17.6 million of cash dividends to our shareholders. During the third quarter and returned 360.3 million in total capital to shareholders. During the first nine months of the year.
For the year to date period. This total includes 306.8 million or share repurchases and 53.5 million in cash dividends.
So were effectively no share repurchases made during the third quarter due to the six month accelerated share repurchase agreement. We executed in May we recorded the initial delivery of shares in the second quarter and the remaining unsettled shares will be delivered in the fourth quarter.
Our effective tax rate for the third quarter of 2020 was 24.8% as compared to 24.9% in the third quarter of 2019.
Our rate in the third quarter benefited from certain discrete tax adjustments and we currently expect our effective tax rate to be 25.9% for the fourth quarter of 2020.
This concludes our prepared remarks. This morning, operator, we'll be happy to open the floor for questions at this time.
Thank you if you would like to ask a question. Please signal that pressing star followed by the one on your telephone keypad.
Hey, Ryan using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment. Once again that is star one.
And we'll go first to Allison Landry with credit Suisse.
Oh good morning. Thanks, So Adam you know you mentioned weight per shipments lower sequentially still up a little bit year over year.
I was just wondering is there a weight per shipment that that you're targeting two to optimize the revenue quality and margins.
And also are you are you starting to see any spillover freight from tight truckload capacity and is that you know it does some of the shipment that you're turning away.
Yeah, I don't think there's necessarily an optimal weight per shipment you know.
Certainly, we've we've tended to average and better periods around 1600 pound Mark.
And we can trend down closer to 1500, 50 pounds and that still be fine to Ah some.
Some of the lower watermarks like we hit and kind of August of last year was about 1500 30 pounds that generally when the economy may not be as strong and and that kind of went hand in hand with some the slowdown that we've seen in the industrial market last year, but but we're still pleased I mean right now it's kind of.
Around between the 1500 70, Sixsix hundred pound range and that's good we were starting to see.
Some heavier weighted shipments come in particularly off the west coast some.
Some really just large transactional business that that we wanted to make sure we weren't getting over run with and to try to keep the network is balanced as well so we.
We took some some internal measures there to try to limit not necessarily exclude all but to limit.
Some of those shipments kind of around the system and so that's why the it's trending a little bit lower in September. The average was 1600 17 pounds.
So it had been moving.
Back closer to that 1600 pound Mark and you know there is a couple of good trends in there are smaller mom and pop customers are starting to the revenue is coming back.
Initially in the pandemic we had.
Stronger performance with our larger national accounts, our top 50 accounts continue to perform very well, but starting to see some of those smaller accounts come back and I think once we get.
The election, and some of the uncertainty that's out there hopefully we will see those continued to trend even more favorably as we transition into 21.
Okay, and then you know I know you talked about yes, the environment currently being conducive to accelerating market share gains and it sounds like your more active on the hiring side, but could you just sort of walk us through how you expect headcount trends you know to materialize and.
Q4 product, maybe up a little bit sequentially, but do you think it'll still be down year over year.
I think that it will typically on a sequential basis the average.
Change in head count in the fourth quarter is about 2% higher.
And then the third quarter and you know when you look back at some periods like 2017 for example.
That number was about 4% higher sequentially as you know we were going through a similar periods in with volumes really started to accelerate so yeah, we certainly could see.
You know that that number kind of being around that 4% Theres Theres no magic number we're basically just as we go around the system I'm trying to figure out where we need people.
And to keep things balanced we may have noticed that we use a little bit of purchased transportation is a little bit more than normal in the third quarter that was up 20 or 30 basis points and that's some of how we.
Manage when you get a surge in shipments like we saw.
When we didn't have the all the people in the right places.
We can certainly go to that purchased transportation market, but with truckload rates like they are now certainly we want them, we would rather have the employees in our own equipment and continue to manage our domestic line haul network, 100% in house.
Like we historically have and we only use that extra PT when when absolutely necessary because it that's where I think we get the the advantage from a claims standpoint by having that total control. We can control that service element to our business and certainly that that's critical to our value proposition.
And being able to continue the trend of.
What we've produced historically, so we're going to make sure that we keep adding the people were necessary.
To keep up with current demand trends, but also.
For expectations for a positive growth environment in 21, so it's critical that we get all the people in place. We've certainly got the equipment and we'll be addressing our equipment and our surface in her needs with our 21 Capex plan, but ER.
But that that people piece of the equation right now is important and given the effects of the pandemic is not something that you can solve quickly it takes a little bit more time to process and on board drivers in particular, and so that's something that we just want to make sure that we can catch up and try to get ahead of the demand curve. If you will.
Okay, Alright, Thats really helpful. Thank you guys.
No.
Well go next to Jordan Alexander with Goldman Sachs.
Hi, Good morning, just a couple of questions just following up on the driver headcount right.
So in the truckload sector, they talk a lot about.
Interesting difficult to come by and just curious your experience in the LTL world on Dravet. So.
Yeah, Jordan Great question. It they are hard to come they're a little little more difficult to find now than they have been in the past, but we're having success as Adam mentioned since the pandemic. It so it's a little bit harder to onboard people and it used to be because of some of the issues and.
Some of the government offices and that kind of thing we were not getting records checks back as timely as we are used to.
Some of the things that you do to process, a driver or taking a little bit longer than we're used to but were able to find drivers.
Again, just not always at the speed that we'd like to find them, but so.
So far so good but but it's definitely takes an effort.
We're still able to hire some competitors and I think that's a good thing that certainly has helped us over time. So we'll continue to do what we need to do to keep our search.
Service Center staffed and ready to go.
All right. That's helpful. And then just just one other quick one.
That's a little bit more on on some of these that are on the expense side, the operating supplies Zhao supplies et cetera. They all continue to track on the second quarter and now the third quarter.
At a very good run rate revenue.
Normalized percentage of sales I'm just curious is this.
Just sort of general supply other opex expenses 10, and they stay you did or do they have to come back overtime as well as the labor.
I think some of those just collectively lead.
Talk about the general supplies and expenses and depreciation those all kind of fall into the general overhead.
Bucket, if you will and that would include the other big component is a piece of the salary wages and benefits.
Our salaried employees.
And clerical and so forth but.
But all of those dollars you know that's been an area that we've talked about from the first to the second quarter, We said certainly saved.
On $1 in the aggregate due to to active managers that we cook, but sequentially.
Sequentially, we had from the first quarter to the second quarter some inflation.
And those aggregate expenses as a percent of revenue, but with the improvement in revenue, we actually were able to generate some improvement there. So in the in the second quarter of this year those cost an aggregate or about 24% of revenue they were little over 21%.
Here in the third quarter. So you.
The improvement in revenue certainly help the total dollars were about the same that we spent and that's just ongoing cost.
Control measures that we've got in place certainly as we start transitioning into to 21, you know, it's kind of a matter of when some of those costs will return.
You know something such as some of our marketing programs on customer entertainment travel buyer sales personnel, we want to be able to restart those measures. Our sales team has done a phenomenal job having to play the hand that they're dealt right now staying in front of our customers continuing to communicate.
Talk about customer challenges and customer opportunities as well, but.
Certainly is not as effective when they're out.
Taking a personal sales calls and have them face to face meetings, so we'd like to see that be restored I'm happily.
Naturally would pay that cost, but it's one of those things that we simply have no idea.
When it will be safe to really be able to fully restore those programs. So measures like that we'll we'll come back in due time, but.
But certainly we would expect to have a much higher revenue base when when those are restored as well and you know weve historically seen our overhead cost kind of average between 20% to 25%.
Coming back to being closer to the 21 21, 21.5%.
Revenue here in the third quarter, certainly, it's a function of cost controls some revenue recovery, but just continuing to be disciplined there and trying to keep those overhead cost as low as a percent of revenue as we can.
We'll always be our focus going forward.
Great. Thank you so much.
Well go next to Jack Atkins with Stephens.
Hey, guys. Good morning, and congratulations on a great quarter here I'm, sorry, Adam made maybe if I could just kind of think about the third quarter to fourth quarter.
You know it's seasonal.
Seasonality here typically it's it's about 170 basis points or so of sequential deterioration.
You talked about needing to staff up on the headcount side.
Yeah.
Obviously, it's such an unusual year in terms of how this year's progress yeah.
You know deep do you think that well see something more in line with normal seasonality this year or given all these different factors here you know should we think about it being one way or the other maybe a bit worse than normal seasonality, maybe little bit better. Just can you count can you kind of help us think through that for a moment.
Yes, certainly I think the way we'll be looking at it is we will look at it kind of that normal sequential trend.
And then just sort of compare and contrast, there I think that.
With.
With revenue trends that that that we think can continue.
Certainly not at the strength of the recovery in the surge we saw in the third quarter, but.
With positive revenue trends continuing that certainly gives us a helping hand, if you will the average we've got several outliers. When you just look at a simple a 10 or five year average overtime, but it's usually about a 200 basis point increase in the fourth quarter can include things like.
We have an annual actuarial assessment, we rebase a couple of the insurance pipe liabilities and that can go one way or the other.
On us and so when you throw out some of those outliers you know I think that 200 basis point kind of change will be sort of what we measure against but as you know we're always looking to try to do better and if we can outperform.
Outperform a little bit on a revenue basis, then certainly that that will win a helping hand, I think that in the third quarter.
Some of the cost that we saw all go away temporarily in the second.
Big cost element was were things like our.
Group health and dental costs, those kind of restored to normal and frankly were a little bit higher when you look at our fringe benefit rate as a percent of revenue.
The group called the dental costs were a little bit higher than than what that normal rate has been and as a result that fringe rate was a little bit higher than normal. So I think that there's some some catch up on some cost items. So there is some puts and takes going.
Both ways and and we'll just look to us to try to balance those but we did want to say that said it in the prepared comments that I think that the.
The biggest cost element that we have is the salaries salaries wages and benefits and certainly we're going to continue to keep our focus one on providing the very best.
Service Center industry, and Im really proud of what we achieved continued to deliver in the third quarter with historic lows.
Matching our cargo claims ratio at <unk>, 0.1% and.
Continuing to deliver nine 9%, but I think that we can keep of that 200 basis point change kind of about.
150 basis points is the typical change in that salaries wages and benefits. So if we can manage that kind of in line with normal seasonality and I think we can.
There's certainly some of those other cost elements will be more function of revenue trends. If you will from the third to the fourth quarter.
Okay. Okay got it that makes that makes a lot of sense and so I guess for my follow up question here.
I don't want to put you guys on the spot, but I've been getting this question. This morning from some investors, but you know when you kind of think about the long term goal has always been sort of a 25% incremental margin for for your business.
You know when we think about this quarter in particular, you guys that is obviously up a 25.5% operating margin for the quarter. So it kind of feels like we're maybe pushing into a new frontier.
Has there been any change to how you guys are thinking about the incremental margin potential of business as we sort of look forward or is 25% still the right number to use.
Yeah, I think what Weve said, maybe a couple of years ago was plus 25% was kind of our long term goal and.
That would imply working towards a 75.
Operating ratio one one we achieved that goal then then we can update.
The internal number if you will and that doesn't mean that we certainly can't do better than that in a quarterly period and I think we certainly can and we've proven it in.
In the past and when you think about our cost structure.
What sort of two thirds around there of our costs being variable. If we can continue to manage those variable costs and produce leverage.
On those fixed cost and then we can produce really strong numbers, but you know until we achieve the 75 annual operating ratio I think we will keep that goal out there.
And then we'll update it and and start thinking about sort of what's next but you know what we feel is a lot of confidence on the ability to continue to improve the operating ratio. Even further we know we've got opportunity of just continuing to execute on the basic plan to achieve long term operating rate.
Show improvement, it's a focus on on density and yield and then certainly the density pizza that has been a challenge this year, but.
When you look at some of our operating metrics. Despite the significant changes from from first to second and then second to third.
Yeah, we've met those challenges operated very efficiently and been able to control our costs. So.
So we've done all the things there, but that yield piece is critically important as well and just having a long term consistent approach that that is focused on outperforming our cost inflation that's.
Thats led to and helped us improve the operating ratio over the long term so.
There's certainly we feel confident saying that we can continue to beat it and well we have some some quarters where.
We might be 35, or even up to 40% I mean, we've done some of those numbers in the past and certainly the cost structure has improved when you think about our direct cost as a percent of revenue so that creates an even stronger opportunity for us.
As we move forward, but we're not going to let that be a limiting factor either we don't necessarily focus on incremental margins internally. What we're focused on is producing long term profitable growth and so to achieve the market share opportunities that we think are out there in front of us it requires investments.
And doing things that create some cost and so we're going to continue to make all the necessary investments, we need to make and try to continue to string goes above the long term profitable growth, we've been able to deliver to that ultimately leads to increase shareholder value.
Okay that makes a lot of sense. Thanks again for the time.
Debt.
Well go next to David Ross with Stifel.
Yes, good morning, gentlemen.
Hey, Adam I, just wanted to talk a little bit more about I guess the employee side because the labor efficiencies is where you showed the most leverage.
Six months ago 10 months ago, you guys were already very lean so I guess, where did you cut how did you do.
We're able to move the amount of freight they are moving now is with fewer people. What was what was the fact that you found that may not have been apparent.
Hey, some of that.
That that was not necessarily in our productive labor, but.
Some of our supervision.
Clerical and the different areas.
Necessarily productive averaged often those loads, but we found some when things got really tight we found some things that we were able to.
Managed without and.
We made the necessary what we felt like were necessary cuts at the time.
We have not added all of those folks back by any means some things have changed and we have not needed that additional labor that we were able to reduce back.
In spring back in April and May.
So you know now we did every location is little bit different nature, a little bit different by location, but now we do have some names that were continuing to feel.
To wrap back up just to make sure. We're staffed and is Adam as mentioned before as I mentioned in my.
Earlier commentary trying to prepare for 21, which we expect to be.
Pretty robust and promising year.
We will continue that ramp up as needed.
And Greg you mentioned also investing in technology that customer demand.
To support their initiatives.
Can you give us some examples of what that is and he has that also allowed you to be more productive from labor efficiency standpoint.
But in some cases.
David It has but but for the most part that you know the biggest thing that customers are looking for is feedback on their shipments they want to know where it is and how do they get it and how do they get it quicker and those are the things that we continue to try to work on the communication shipment communication of the feedback that we get.
From our customers the information that we get back from them.
In order to provide.
Quicker tracing and better information better so they can better plan and and so we can better plans.
It's a two way street from from that standpoint, but we're continuing to focus on work on those things.
And they are definitely starting to happen.
That's definitely helping so thank you very much.
David.
Well go next to Chris Wetherbee with Citi.
Hey, Thanks, good morning, guys.
Curious about the revenue per day cadence from September to October I guess, I'm trying to get a sense of.
You talked about weight per shipment a little bit in the fluctuations there maybe you get a sense, what's gone on the pricing side or the revenue per hundredweight side, you get a sense of how mix and kind of core pricing are impacting that as well.
Yeah, maybe the yields are going to continue.
Certainly if you're looking at a revenue per hundred weight.
The shipments shipment sizes weight per shipment decreasing.
A little bit that certainly what caused the revenue per hundred weight to the increased slightly as well. So you know.
That's been a strong.
Number.
Number I think when you look at the sequential increase in our yield metrics from the from.
From the second to the third and it is looking at it on a 100 weight basis I think that.
Certainly some of the mix impact of things does the higher weight per shipment in the third.
A little bit longer length of haul.
Well that certainly contributing but you know that that will continue and we feel like.
Some of the feedback we're hearing is that yields are continuing to increase.
In the industry as well and a lot of times, what you'll see is especially some of our competitors that use a little bit more purchase transportation.
And truckload services to run some of their internal line haul certainly will start facing cost inflation when the truckload rates are inflecting as positive as they are right now and.
And Thats typically a good thing that creates historically.
An inflection point, where we start seeing.
Really a higher need or need rather for higher rates.
For our competitors that are offsetting those cost as their cost inflation is is increasing and so that's that's supportive of our ongoing yield initiatives.
Internally as well it is it usually will create some freight opportunity for us as well.
When that piece of cost for our competitors is increasing certainly much faster than than what our cost inflation what looked like so those.
Those are a couple of good trends that.
That we feel positive about as we start thinking about finishing out 2020, and then turn the page to 21.
Okay. Okay. That's helpful.
And I guess, you talked about inflection points in the prepared remarks and also in answering my question. So you know thinking about market share opportunities as maybe you sort of cross over into 2021, you guys have always done a good job growing in excess of the market, but can you give us maybe some bigger picture thoughts on sort of LTL industry.
Growth opportunities and then what your opportunity is within that and maybe sort of frame. It in the context of next year or the year. After just want to get a sense of sort of how you're still seeing that opportunity how big it is.
Yes, Yeah when me.
When you look at that LTL it has been growing faster.
And just general GDP in and we think that.
The industry overall, we'll continue to see good growth and I think that theres some longer term tailwinds at play.
With things like for for example that E commerce trends that are pushing more retail related freight.
You know into the system and right now we're seeing.
Good trends with the retailers.
You know and as different demand is that type of freight.
There has been certainly some of the.
Our legacy industrial related business, which is still 55% to 60% of our revenue but.
But certainly it's been nice to have a good mix of retail related business that performed pretty strong for us, particularly in the second quarter. When everything else was was really weak. So that's a trend that I think will continue to be a tailwind for for LTL, creating smaller shipment.
Sizes fulfillment centers contain.
Continue to be built to closer to the population areas and.
Shipment sizes more conducive LTL versus truckload, but I think it gets back to you know right now capacity.
May not be as big of a factor.
At least this year going through some of the weakness that.
The overall market is seeing but when you get back to the long term trend that we've been talking about before the pandemic effect.
We've been consistently investing in real estate capacity growing our network.
In building out the doors the process freight and that's what's required in the LTL space the door capacity as the is very critical.
It certainly could be a limiting factor to growth and that is why we stayed or try to stay so far ahead of the demand curve there.
There really hasn't been a at least a significant change in the number of service centers in the other public carriers.
When you look over a longer period of time and certainly some of added to their systems and grown in different areas and whatnot, but but nevertheless, I think we've been one of the biggest winners for market share in some cases, because we continue to invest and have the capacity. So we have a a service advantage by offering best in class service we.
Having capacity advantage and we think that will continue to play in our favor as the market continues to recover.
We've certainly seen some improving trends.
I think that some of our industrial customers will continue to to improve you know I ask them and some things like that have certainly.
Been positive the last couple of months, but but I don't think were anywhere near full recovery for most manufactures in or manufacturing type.
Hi business is not been as strong as some are retailers. So.
Those will those customers will continue to recover I think we will continue to see favorable trends with the retail related business as well and all that can kind of come together hopefully for us as we transition into the 21.
Okay. Okay. That's helpful color I appreciate it thank you.
Well go next to Ravi Shanker with Morgan Stanley.
Good morning, Thanks Gents.
It doesn't mean the follow up on that question can you just give us a sense into ward your customer conversations are like right now I mean, clearly the deal market Super tight Oh, there's a long way to go in the demand cycle.
Are your customers looking ahead to 2021 and are they already are.
Are they panicking do you see kind of RSP contract negotiations coming forward. How are you thinking about the timing of the next GR right based on what are your customers telling you right now.
Yeah, Ravi I'd expect that we would take our.
Our next increase.
Pretty much you know annually like we typically do typically it's a.
The year out and I would expect next spring that we would take our typical seasonal increase based on our calls.
Cost and how they are trending.
Which we will look at closer to that time.
[music].
There has been and I think we mentioned it earlier there has been a lot of demand.
And for the bigger shipments, particularly as Adam mentioned off the West coast, we've seen that which which certainly.
It changes, how you respond to customers needs and whatnot.
You know, we're not we're not a truckload carrier and if you're not careful sometimes when the demand changes like you did this this.
Early this fall when you start to see those things you have to make some adjustments, which we did so.
I think customers are are certainly.
What we can tell they're positive going into next year again, the pandemic I think you know have some impact on that but.
As we continue to recover and hopefully positively so I think we'll certainly go into 21.
With big expectations, certainly what we're we're aiming towards at this point.
Great and just kind of on that as well.
Well again, if you just give us a little bit of a framework on what big expectations to meet I mean, typically our GL right in the mid single digit range.
Well really be pushing for double digits.
No I think we've got a long term approach Ravi that we look at our cost inflation every year.
And then we sit across the table from from our customers and talk about what what our cost how they're changing and then what we need.
In terms of rate and certainly the way, we really manage the businesses looking at customer profitability on an account by account basis. So.
There may be some customer accounts that will will have to.
Maybe be more aggressive with and then there's other long term customer accounts that that.
May go into the equation that being a little bit lower than the average so it just kind of depends on each customer situation and we'll look at those but we've been pretty consistent the last few years with a general rate increase of around 5%.
In that kind of becomes the proxy for.
What we talked to the customers on average.
About further need and and we've been successful in achieving or contractual increases throughout this year, but.
But that kind of gets back to the heart of the true customer relationship that the that you have been.
Our industry is a relationship.
Business and so it's critical that we continue to talk with our customers.
I have that two way.
Open and honest communication about things and certainly we're willing to do that and it makes more sense. When when you can have a cost based discussion versus.
The industry is tight and we need.
A double digit increase this year and.
The industry is loose this year. So we're going to give you some of that back.
Next year and the roller coaster ride that that may be some customers go on with when they make a decision other than things like an old dominion, but we're really proud of kind of the long term.
Customer relationships that we have and certainly we think that will continue into next year just looking out.
Certainly that's kind of the 4% to 5%.
When you look at our long term revenue per shipment, we kind of average really between four and a half and 5% and that's been a 75 to 100 basis points above our cost per shipment inflation and we've already established a three.
3% wage increase.
That went into effect the first to September so that's a big element of our cost inflation every.
Every year and news has been pretty consistent as well so.
We already know some of those factors and that will kind of frame things up for us but we'll.
Well look in the yield numbers in sales you know some of it will really depend theres going to be some weird comparisons as we transition into next year with.
Weight per shipment that might make.
Make your your revenue per hundred weight look.
A little bit stronger than maybe that 5% type a number so we'll just have to balance all of those but underlying.
Contract in general rate increase.
I would expect that we will see it kind of consistent with what our long term trends have been.
That's great color if I could just sneak in one follow up to that got the one area, which I think you may not have mentioned is fuel. Obviously you got a we appear to be in an environment of like prolong subdued fuel prices than in the past the fuel surcharge has been a nice boost to your use metrics.
Do you feel like you need to change your go to market strategy or maybe changed some of the the formula than how the field yield or the fuel surcharges calculated there.
Well as you know we've been dealing with fuel that's been down 20%.
Or more and that's what it was down in this most recent quarter and we produced a 74 and a half operating ratio. So I think when we once.
That fuel contribution with the overall yield is that's just a variable component of pricing and it's something that would continue to look at it as a contract turns over we look at the fuel base, but.
But I think that we've been pretty successful with our fuel strategy really over the last couple of years.
Been several years ago, where when fuel first really took a big drop that maybe the low end of our scale.
Wasn't appropriate and we waited a little time to.
To go back to some of our customers and have to make some changes on that.
So.
As long as fuel continues to stay consistent.
Doesn't really go much lower.
We'd like to see it come back a little bit because that certainly helps the topline number but we're going to be.
Fuel continues to stay in this range, where it is around 248, a gallon that's a it's going to be down in the fourth quarter that would would be down in the first quarter and really be the second quarter of next year before it kind of comes back to par.
That was what was when fuel started dropping in twoq of this year. So now we'll see it'd be nice if it was little bit higher co certainly that optically make.
Our revenue numbers would come in every day and we look at.
What the revenue from the previous day was and then we look at the revenue we can say growth now.
Looking at it with and without the fuel the without the fuel certainly looks much stronger and it'd be nice if that was the overall number but you know you play the hand that you're dealt and that's.
That's what we'll continue to do.
Awesome. Thank you.
Outside of that Ravi is obviously, we don't need high fuel prices.
Produced a record low bar, so I think I think that's the positive side of that.
Well go next to Jason Seidl with Cowen.
Thank you operator, and gentlemen, thanks for fitting me in here.
[noise] look the surgeons rates that we've seen that came on in the summer what are your customers telling you in terms of where it's coming from I mean, clearly theres been some restocking, but there is some underlying demand I'm just curious what you're seeing how how strong is this going to be.
But certainly when you look at inventory levels overall, they continue to be low wind.
Yeah. So I think that some of that will continue but the consumer continue.
Continues to consume and I think that people are spending money in different ways and you get down to it that's still 70% to 80% of the overall economy. So as people continue to purchase.
Things.
And there's there's got to be the production of those things and ultimate delivery position.
Positioning for them to be able to buy them. So.
Certainly there's been some some obvious changes in the retail landscape related to the pain then they can probably.
I've seen ecommerce growth probably pulled forward to a couple of years at least.
In terms of the change of E Commerce.
And in terms of total retail sales. So yeah, that's been something that as we talked about before it creates some opportunity for the LTL industry.
It's certainly not an overnight kind of phenomenon and and you don't build fulfillment centers overnight, but thats something that certainly continuing to change and we think we can benefit from.
And we're going to do everything we can to make sure but hinted.
Hinted at earlier, there's certainly some operational challenges that come along with with managing where that freight and balance and you're right. It equipment Poles and and just the service demands can be different as well. So we've got to make sure that we keep all that balance as we flex and see more growth.
With our retail related business, but.
But.
I think that certainly we can see those trends continue and take advantage.
The other big piece of that retail related growth on the ecommerce side is.
The demand for superior service is even greater.
Is there managing inventory levels and inventory.
Is tight and certainly you can't afford to and in many cases when you deliver into many of the big box retailers that have got programs in place that will have penalties for vendors if their carriers are delivering on time in full.
Certainly when when you make the selection of choose an old Dominion, we're going to deliver on time, 99% of the time and are damages as a percent of revenue will 0.1%.
So we certainly can can meet that.
Demand in service expectation.
For our customers and help them avoid charges down the line, where the total cost of service, it's cheaper for them, even though they might pay a little bit more upfront for old Dominion.
That's good color I I have a follow up on technology. I mean, you guys have always been at the forefront and investing in technology going back My 20, plus years is covering you.
How should we look at old Dominion, and therefore rated to potential alternative fuel type or alternative technology.
Trucks.
Is this something you're looking at.
[noise] certainly Jason Lee.
We always try to stay in the forefront.
Front of.
Any type of new equipment, that's out there.
I think we talked about this and one of the prior calls but it.
We're we're looking at and exploring electric vehicles in that kind of thing that Jason honestly right now nobody has a production.
Any type of a production electric vehicle there just were just not there yet.
Im sure Theyve come a time and you know it will progress as the technology and the opportunities for that progress but.
Right now, they're just not out there and available so.
We certainly have to balance all that from a cost standpoint, and everything else but.
You know there there's I'm sure that's that's going to be a big thing as we go forward, but right now they're just not production vehicles out there to be had to run in our system. There's there's lots of issues lots of health left to climb if you will and again I'm sure we'll get there but just.
Just not there yet.
So it feels like we're a couple of years away from.
I think so.
Okay, perfect gentlemen, I appreciate the time as always I want to be so.
Okay. Thanks.
Well go next to Amit Mehrotra with Deutsche Bank.
Thanks, Operator, Hi, Greg Hi, Adam.
Adam on your comments regarding the cost structure.
Especially on the overhead side I guess that implies you know direct costs are variable costs of 53% to 53.5% revenues do you think you can hold the line on that you know I guess variable piece of the cost structure in Fourq you in terms of percentage revenue or is there anything that may you know drive.
I guess a bit of the.
The match between how that's evolved versus shipments has actually been quite close just wondering if there's any prospective mismatch there between variable costs and shipments that we should think about as you go into the fourth quarter.
Yeah, I mean, that's the we were talking earlier about.
Some of the labor cost and that salary wages and benefits line, that's typically where.
That normal sequential.
Deterioration in the operating ratio that's about 200 basis points. The majority of that comes from the salary wages and benefits line and in most of those costs are going to be our productive labor cost. So we'll see how that balances as we transition typically you know like I said you see that.
In fleet, a little bit and we're certainly going to do what we can and believe that we can keep those cost kind of in line with what that that normal sequential trend will be and in some of it will just depend on kind of what the you know the revenue base and how that trends.
You know through the fourth quarter compared to where we just were in the third or so.
But that will have more of an impact it really on some of those more fixed types.
Types of cost.
Yeah, and then just just related to that I guess on the overhead side I'd love for you to comment on the long term opportunity there obviously.
Theres excess capacity on the line haul network and the density opportunities there I mean in three four or five years assuming.
You know no major change I guess in the in the you know the growth and have a mix of revenue is trending could we be looking at 17% to 18% you know overhead just get as you guys continue to leverage the line haul and then the last one I had is just if you could just provide a little bit more color around September tonnage.
That's obviously important between the break down between shipments and weight per shipment on a year over year basis. I don't know if you can you can help us with that in terms of how the quarter ended in September. Thanks.
Yes the.
In terms of the long term where overhead costs.
Might go.
We've just the over the long run we've seen those cost trend between that 20% to 25% type of range and and the reason for that is really what our market share opportunities are for the long term and we feel like we've we've got a really long runway for continued growth there.
Which will require continued investment.
In assets and so as we continue to invest.
Certainly that depreciation line will continue to stay.
More as a.
Bigger component, if you will versus getting to the point, where there's not growth left and you can create leverage on that so we feel good about what the market share opportunities are and continuing to look at investing 10% to 15% of our revenues back into our capex.
Programs every year that will then drive.
The the increase in depreciation some those overhead costs too.
You know are more variable in nature, you know, there's some elements that.
Our bad debt expense there.
There's some performance based compensation.
In there.
Theres other things that are more variable so that 20% to 25% you know maybe 5% to 8% of revenue is kind of more variable in nature that sort of.
Within that overall element. So those will obviously continue to increase but but certainly there is there's going to be opportunities out there.
And we certainly are always looking to do what we can to minimize those calls, but what that means over the long run is the the improvement in the operating ratio is coming out of our direct cost and you referenced line haul a couple of times and we put lying all well that's a direct operating expense and there is a.
Fixed nature of running.
Our line haul operations and when we add new service centers.
Sometimes that creates a little inefficiency on the line haul side, but but it drives efficiency within or pick up delivery operations, because we're now putting.
Our pickup delivery workforce, if you will closer to our customers and.
Minimizing the time to our first stop in so theres different trade offs as we continue to grow and add to the overall footprint, but I think that certainly theres opportunities for us to continue to be.
Efficient there and drive further efficiencies when you sort of break down our operations were at about 240 service centers now when you look at the available capacity that we have in the network.
That's the opportunity, whereas we increased density in one particular service center that helps that service centers operating ratio and when you're doing that across the spectrum of those 240. It's only the few that you are adding depreciation to every year, where your calls and the operating ratio maybe to go the opposite direction.
But you've got a bigger pool that are working on some type of improvement program and that's really at the heart of why we've got confidence in saying, we can continue to drive the operating ratio.
Even lower than where it is today.
Can you address the September.
A question as well on the on the break down between shipment weight per shipment and and and shipments.
Yeah, I thought with that long winded response, you might forget about that one but [laughter].
The Denver, let's see so.
The overall do you want the year over year per.
For September.
Yeah, if you're Gonna give me both I'll take the year over year and sequential thatll be great.
Okay, so for for weight.
Year over year.
On it was up 3.6%.
And sequentially.
Numbers tonnage was up 4.3% overall August.
The shipment side.
Shipments per day were down 8.5% on a year over year basis compared to September of last year.
Shipments in September on a sequential basis were up 4.6%.
Versus August.
So when they will actually hit it yeah.
Okay got it.
Well go next to Todd Fowler with Keybanc capital markets.
Great Thanks, and good morning.
Adam just on the comments around skin the network growth into 21, I guess first to start.
All right you know can you share roughly where you think the available.
It's the thought in 21 that you could see a similar dynamic or would it be maybe a little bit better matched with the tonnage coming into the network.
Yeah the.
Overall.
Capacity of the service Center network is probably between 25 and 30% now yeah, we'd gotten above that 30% threshold when things really weakened and that I think we're kind of back.
And that type of range now, which is good for us, especially as we transition to next year, but as Greg mentioned earlier, we've got several facilities that we think will be opening.
Between now and the end of the first quarter. So I think that we will see some some openings in 21, but there will also be some facilities that we either just expand or we move into a larger facility in out of another one.
Most of the investment will be continuing to.
To add out in some of our larger metro areas, where we may add a second third fourth or fifth facility I think that theres tremendous market share opportunity. There we've seen that play out in the Midwest in particular, which is the largest.
LTL market in so I think that certainly we've got opportunities there and then we'll continue to look at where we have density for end of the line type of locations.
I can add a facility in the market that just like I was talking about earlier that can help us.
Reducing some or pick up delivery cost as well, but just by getting out closer to our customers, but generally you don't want to make sure that there is enough rate opportunity and density there to support an operation in the market.
On the other side and the other pieces you know certainly we've got equipment capacity right now I think that we haven't finalized our capex will give that on on next quarter's call but.
Yeah, we had a bit of a holiday this year because of the over investment in equipment in 18 and 19. This year. When we spent $20 million on equipment. So I think that we will see that number kind of get back to more of a normalized.
Type of range and you expect to see the the overall capex.
Got it back in that 10% to 15% range, but probably towards the upper end of that but we've still got some some things to finalize a you know as we kind of transition through the fourth quarter and really get to the point of putting orders in place, but with all that said I think that.
Typically a weak.
We can create an especially if we get into a really strong revenue growth environment, we can create leverage there.
And be able to offset those costs and and that kind of just goes back into maybe the incremental margin conversation we were having earlier we certainly.
I think Ken can produce some strong incrementals, but lot of it will be dependent on the growth expectations for next year, and we're still having conversations with customers as we are building up.
Our forecast for next year and from a bottoms up and the takedown basis and there's still some uncertainty obviously are hanging out there that you.
We'll see.
It may change some People's minds next week based on the results of the election.
Yeah, we'll definitely Ohio or stay tuned on that one that's for sure. So wait just on my follow up you know I I guess kind of a bigger picture question, Angie I kind of hit on this with the incremental margin question earlier, but.
Operating at a sub 75 Ole are here in the third quarter are there any bigger picture takeaways as you think about the business I mean, you did it in an environment that was pretty volatile you had purchased transportation that moved up you know tonnage was obviously up a lot sequentially, but not a lot year over year.
No. It does it feel like that you know I'm on a longer term basis, you know its sustainable to operate you know on a full year basis at the mid 75 are achieving a mid.
Mid 70 O R or are there other pieces or other things that we need to think about that really contributed to this performance in the quarter on that may not be representative of kind of what you can do longer term.
So you know I think we've talked about being able to operate.
This type of range on an annualized basis for some time and then certainly made a lot of progress. This year, you know used to kind of say when needed revenue growth to be able to improve the operating ratio, but this environment. It was so usual.
We had to take immediate and an aggressive action.
To address some of the costs because of how immediate the drop off in revenue was and just the unavailability of work.
That that was out there back in April and so it's been good as we transition through and solve some of the recovery began back in May and.
Things sort of stabilized and started improving and we've brought back probably about 1400 employees compared back to April and so we can continue to own board people to keep up with what these demand trends and and but theyve really done a good job in balancing all of our call.
Yeah, I think what we've seen in the past and trying to take that forward as we move into the future is a lot of times. When you go through a period like this you do a lot of evaluation of.
Your processes are people and systems, and so forth and and some of the productivity that we saw improvements that we made back in the late no nine timeframe. You know those carried forward for you for years to come and so we'd certainly expect that some of this improvement in productivity as we transition back into.
Growth environment start, bringing new people on board, we obviously want to maintain these measurements of productivity and I think that we'll be able to and and so certainly that's encouraging that's the biggest piece of the cost structure and the most critical element for us to continue to manage those and.
Other true controllable cost as we transition back into more of a normalized growth environment in terms of what our expectations have been and what we've been able to do so in the past.
We certainly.
You know again, we've talked about it before but we believe we can continue to improve the operating ratio is based on on how that model works. If we can continue to improve the network density that generally creates.
Productivity opportunities and if we continue to be disciplined in have a cost base type of approach to managing our yields in both of those generally require the positive macro environment to support those initiatives. We've done it when the macro environment wasn't good but certainly we think as we transition to more of a positive one okay.
Revenue to help on those fronts and and we can produce further operating ratio improvement.
Okay got it I think at the time say nice quarter.
Thanks Todd.
Yeah.
Well go next to Irene Rosa with Bank of America.
Hey morning, guys and nice quarter.
So my first question I wanted to talk about Greg You mentioned, you think we're at an inflection point on on where O.D. can go in terms of market share. Maybe you can just elaborate on that a little bit I think Adam talked earlier about.
Some of your competitors seeing some some cost pressures are rising but is it really a function of that or is it really a function more of kind of what you're seeing in terms of end markets and the conversations you're having with customers and if so maybe you could elaborate on where you're seeing some strength in terms of those customer conversations.
And then if we think about other periods, where OTI is really you know seen a strong operating environment, you've been able to grow tonnage into the double digits and so you know.
Maybe you could talk about the extent to which you think that's feasible for 2021.
Given kind of where you are in terms of resources and what you're looking to add.
Sure.
I think obviously we're expecting.
Next year, we are continuing to it as Adam mentioned before we're continuing to expand our capacity both from a facilities on an equipment standpoint.
And we're in the process of hiring people. So as you know those are the components of adding capacity. So we're we're actually working pretty hard on all three fronts. At this point in time, but we are seeing stress.
Of late particularly off the west coast enough I think.
You know, we've all seen and heard about the additional imports that are coming in and how busy the ports are out in that part of the country and we've seen that particularly out.
Out of California, but we know weve exhibited stress really.
The most part system wide.
At least and we certainly expect that next year.
For the most part our customers are extremely positive again, you know Adam mentioned before you know what happens next week certainly could have an impact on where we are and where we go but.
So far we're you know we're expecting a.
Expecting a good year, obviously, where we're spending money like we're expecting a good year. So.
Like.
I think we certainly hope that that it continues down that path and.
Yeah, we're just based on the feedback that we're getting where we are.
We're hoping for big things.
Since.
Yes, no that's that's.
No absolutely. That's that's that's helpful. Directionally, certainly and then just a.
Little bit of my new shape, but.
Free cash flow.
Number it looks like the cash from operating activities.
At about $170 million was a bit below what it has been typically in so obviously very strong on the income statement line, but maybe you could talk about what was going on there with the.
What would the operating cash flow.
The operating cash flow well, you've always got.
You know some changes and things that maybe are deferred they get paid but when I think when you look on an overall basis.
You know from a year to date standpoint, we produced a really solid cash flow.
From operations and and so I've been pleased with that but.
From a quarterly standpoint could just be the timing effect of some of the deferred taxes that somewhat related to the carriers that a firm that was passed earlier this year that help from some of those payroll taxes and whatnot and just some other changes and the timing effect of things, but really start strong.
I think cash flow performance, if you will.
In terms of kind of where we are or its probably a little below on a year to date basis, you know last year, but but but overall, it's approaching $700 million of cash from ops.
This year, so I really strong and will continue we've got kind of a in hand to be able to put to work as we think about your capex and as you know our first priority for capital allocation is investing in our sales and and you know that the Capex plan was a little bit lower this year, but a big piece of that was.
The equipment as we talked about earlier, so we'll be evaluating as we transition next year, but it's certainly.
We'll probably be a much larger number.
For for Capex than than what we are.
Had this year.
Okay, great. Thanks for the time, Adam and Greg.
Well go next to Scott Group with Wolfe Research.
Hey, Thanks, a lot.
Couple of quick ones the up so the October Rev per day deceleration. That's an is that entirely weight per shipment or was there any other piece of that.
Oh, it's.
Its weight per shipment driven Scott like we mentioned before the the shipments are trending.
In line in October and as you know typically our business kind of builds up and and in September is usually the strongest month of the year for us and so we saw that again and those shipments continue to be really strong there.
In fact, we're back to about kind of where when we put our forecast together for the beginning of the year back to where we thought we'd be on in.
In September but took an unusual route to get there and you compare September shipment levels. So the March which is really before things began.
You know to really be affected by the painting. It we're kind of in line with what the normal trend there of kind of you look back over time, where September would be versus more so.
I'm seeing good trends there, but you know the October the shipments per day.
Right in line right now at this point with what the longer term the 10 year average sequential trend would be.
And but just a little bit softer on the weight per shipment side, which is not totally unexpected we believed that that would continue to sort of come back.
As our smaller customers continue to sort of get back to their normalized level. The mix is still slanted a little bit heavier to our larger national accounts than been kind of historical trends.
By a couple of points, probably but but but nevertheless, those.
Smaller accounts are continuing to perform well in coming back so a so that certainly beneficial but yield trends continue to be.
Solid and on it's really just a function of that weight per shipment is dropping a little bit on us, but but some of that you know like we mentioned was was us taking control and getting some of the transactional freight out of our business right now.
But just given your views around share gains you wouldn't have thought that shipments would be outperforming seasonality now.
Oh, you know again I think that when you just look and think about from a customer standpoint, and how they're they're getting freight out.
September is going to be the build up.
You know when you look over the past 20 years, the normal sequential trend is down about 3%, there's really been only one October in the past 20 years that's been.
Positive versus the September so obviously.
Obviously, we've got a week left in the month and we're just talking about numbers that aren't finalized, but but this is about where frankly, we thought we would be and we're managing too. So it's not been a surprise, especially with the fact that you know.
Again, we we have limited some shipments out of the system. So.
It would have been slightly better, but very normal and expected to see even as things were building up that we see a little bit of a drop off in October versus the September trend, there and that's just really a function.
When you look across the spectrum of all of our customer accounts the way they are managing.
You know their business and their shipment trends and so forth. So.
Yeah, not unexpected to see it at all.
Okay, and then just lastly on the old War. So if you look at most years or the DLR is similar with if not better than than third quarter. The prior year. So I guess I'm trying to say is it feels like next year should be a year, where you can get to that 75 or if not better as you think we are missing anything.
There.
Well I mean, we just were not ready to call next year's operating ratio, but you know I think that certainly.
Certainly as the revenue plays out like we hope it will transitioning than than you know that that obviously creates an opportunity. We generally on average had been produced or improving the operating ratio.
You know 80 to 100 basis points kind of on average each year and.
Yeah, just taking a kind of where we are from a year to date basis, and obviously, we're a little bit better than than that at this point than that longer term trend. Despite the fact that revenues have been affected like they have been so.
Yeah, what we'll see where we end up next year, but we're not ready to give any specific.
Color on it, but but certainly in an improving revenue environment. It makes the.
Ability to improve operating ratio easier than than certainly what we've seen and had to deal with this year.
Makes sense. Thank you guys appreciate it.
And that concludes today's question and answer session I'd like to turn the conference back over to Mr., Greg Dan for closing remarks.
Thank you all for your participation today, we appreciate your questions and please feel free to give us a call. If you have anything further thanks and have a great day.
And that concludes today's conference. Thank you for your participation you may now disconnect.