Old Dominion's Yield Management Skills Face Headwind Of Weak Less-Than-Truckload Conditions

Old Dominion Freight Line Inc.'s ODFL yield management prowess, which helped the less-than-truckload (LTL) carrier blast through second quarter macroeconomic weakness and post record quarterly earnings per share, revenue and operating ratio, will be tested in coming months as flat-to-down traffic trends are expected to persist.

If the Thomasville, North Carolina-based company's springtime traffic figures are any indication, broad-based LTL demand is not in the best of shape. Old Dominion reported a 6.3 year-over-year decline in tonnage in the quarter, along with a 2.6 percent drop in shipments and a 3.8 percent drop in weight per shipment. In addition, July tonnage is trending below seasonal levels, Chairman and CEO Greg Gantt said on a July 25 call with analysts to discuss the company's second quarter results. "It still feels a little bit soft," Gantt said, adding that "we don't expect our tonnage to flip to positive" in the very near future.

CFO Adam Satterfield said there were some noisy cross-currents in July that might influence tonnage trends when the final numbers are tallied, and that August tonnage may come in above seasonality. Neither executive would comment in detail on the outlook for the balance of the quarter, and both stayed far away from forecasting into 2020.

LTL pricing remains stable industry-wide, and Old Dominion's contract renewals are within the company's comfort zone, the executives said. LTL pricing stayed firm during 2017 and 2018 as industrial and retailing demand remained solid. However, as business slowed at the turn of the year, analysts expressed concern that carriers were starting to fall into the practice of rate-cutting that got the LTL sector into deep trouble during and after the Great Recession. Old Dominion was conspicuous by its decision at the time not to follow the herd, a move that held it in good stead when the U.S. economy and LTL demand picked up in 2011 and the carrier didn't have to dig out of a deep rate hole.

The U.S. industrial economy, which is the LTL carriers' bread-and-butter, has performed erratically in recent months. Industrial production was unchanged in June, according to Federal Reserve data, following a 0.4 percent increase in May and a decline in April. Gantt said that Old Dominion's customers remain busy, with few reporting any discernible idleness. Old Dominion's retail segment continues to do well as American consumers continue to spend, he said. The U.S.-China trade war has been a topic of conversation with retail customers, but it hasn't impacted the company's business, he added.

If there is any LTL carrier capable of adjusting to, and ultimately weathering, macro storms, it's Old Dominion. The company has long been considered the sector's best-run operator, and the case can strongly be made that no trucker runs a tighter ship. Few competitors have a deeper understanding of the balance between cost to serve and the rates needed to remain solidly profitable. Old Dominion has a reputation for rarely, if ever, underpricing its services and for running reliable, claim-free routes. As a result, its yields are typically the strongest in the LTL sector.

Its expertise proved instrumental in the second quarter to overcome the slowing demand. Second quarter diluted earnings per share came in at a record $2.16, an 8.5 percent increase over year-earlier figures, $0.05 per share above median estimates of analysts polled by Barchart. Revenue rose 2.6 percent to nearly $1.07 billion, also a quarterly record. Operating income increased 6.4 percent to $234.5 million, while net income increased 6.5 percent to $174 million.

Operating ratio, the ratio of revenues and expenses and a key measure of a carrier's efficiency, dropped to a record 77.9 percent from 78.7 percent in the 2018 quarter. Effectively, Old Dominion spent 77.9 cents for every $1 in revenue in the quarter. Satterfield said the company has leeway in the short term to further reduce its operating ratio, albeit modestly.

The revenue gains were propelled by a 9.5 percent increase in revenue for every 100 pounds hauled. Known in industry lingo as revenue per hundredweight, it is an important determinant of an LTL carrier's profitability, and another example of the company's yield management capabilities.

Analysts who may have underestimated Old Dominion's earnings power in the quarter came away impressed. "This is what `amazing' looks like,'" was the heading of the research note from Deutsche Bank's Amit Mehrotra shortly after the results were published.

Nearly half of the company's $480 million in 2019 capital expenditures is earmarked for real estate and service center expansion, the company said. Old Dominion has 235 service centers across the country, with another 40 on the drawing board. Satterfield said the company will continue to expand its service center network in spite of the current sluggish market conditions. It did the same during the last two downturns, in 2009 and 2015, and it paid off each time when the cycle changed, volumes increased and the fresh capacity was available to accommodate it, he said.

Old Dominion is fully staffed with drivers, and expects to convert its tractors from Automatic On Board Recording Devices (AOBRDs) to Electronic Logging Devices (ELDs) well before the December 2019 deadline, Gantt said. Drivers and fleets with AOBRDs at the time the federal ELD mandate took effect in December 2017 were given two additional years to convert to ELD equipment.

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