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Old Dominion Smashed Through The 80 Mark In Its Second Quarter Operating Ratio

Old Dominion Smashed Through The 80 Mark In Its Second Quarter Operating Ratio

LTL carrier Old Dominion Freight Line (NASDAQ: ODFL) did something almost unprecedented in the trucking industry in the second quarter: it posted an operating ratio less than 80 percent.

 Image: SONAR chart showing Old Dominion stock price year-to-date

Image: SONAR chart showing Old Dominion stock price year-to-date

Old Dominion already had one of the more enviable ORs in the industry, generally hovering in the low 80's. On a conference call with analysts after the release of its earnings Thursday, CFO Adam Satterfield said the operating ratio of 78.7 percent was the lowest in the company's history and was the first quarter it had ever dropped below the 80 mark.

It did this even as it added between 900 and 1,000 employees during the three months that ended June 30, as part of an overall increase of about 3,000 employees since the start of the year. What that means is that a big group of new employees with lower productivity as they move up the learning curve joined the company, and it still managed to post an OR less than 80.

Greg Gannt, the company's recently appointed president and CEO, said Old Dominion had lost "some" productivity in the company's dock and P&D—pickup and delivery—operations compared to the second quarter of 2017 as they brought on new employees. But in other areas, performance was strong, Gantt said. "Our line haul laid and load average actually improved, and our operations remain very efficient overall as evidenced by our operating ratio," Gantt said, according to a transcript of the conference call supplied by SeekingAlpha. "While our number one priority will continue to be maintaining our superior service and meeting our promises to our customers, I am confident that we will also regain this lost productivity in due time."

Among the key operating statistics compared to the second quarter of last year: LTL revenue per hundredweight was up 7.4 percent with fuel surcharges, and 4.1 percent without them. LTL tons per day were up 14.6 percent, LTL shipments per day were up 11.2 percent and weight per shipment was up 3.1 percent.

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The difference in the significant growth in total shipments and weight was addressed on the call. On some LTL earnings calls, the possibility of normal truckload traffic bleeding into the LTL market has been raised, with the driver squeeze particularly acute in the truckload sector. CFO Satterfield said on the call that some of that may have been happening and Old Dominion is pushing back against it. "We've made some changes in certain places and with certain pricing initiatives to also prevent some of the very heavy-weighted items that we were seeing to a small scale to make sure that we don't have significant weighted items taking up too much of our capacity," he said. "We want to make sure that we're continuing to handle LTL freight and not truckload freight and so that has been intentional."

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Other than that, the drop in weighted shipments was not considered a preliminary sign of any weakening. Satterfield said it had continued to occur from June into July "than what we normally might see, but…some of that is intentional and is the result of actions that we have taken."

Among some of the other highlights in the call:

  • While Old Dominion's biggest  product haul has tended to be industrial products—about 60 percent of the business—Satterfield said that customers whose coding identifies them as retail customers had growth of about 28 percent in the second quarter, faster than the rest of the company. "A lot of this comes in the form of large retailers that every retailer has got to have an e-commerce strategy," Satterfield said. "But as supply chains become more sophisticated, as large retailers implement programs that charge back and fine shippers for not getting the freight delivered on-time and without damage, it really creates tremendous opportunity for us and that's the opportunity that we're seeing now."
  • Satterfield declined to be pinned down on rates. He said a general rate increase went into effect in June at 4.9 percent. That June move was earlier than in 2017, when it was in September.
  • The furious hiring pace of the past year, with the addition of 3,000 employees, is not likely to continue, Gantt said. "We're much closer to the desired number of folks that we need than we had been in the past, so I feel good about where we are," Gantt said. "I think you'll see those hirings level out quite a bit from here forward. There will still be some in some locations where we have some needs, but much less than what we did through the second quarter."
  • Executive chairman David Congdon took the role in this call that somebody this quarter has taken on every other call: the one to declare how good things are. "This economy right now is, it's got to be the best out there I can remember in my career right now," Congdon said. "When you look across nearly every economic indicator, from the inventory sales ratios, GDP, industrial production, ISM, construction spending, retail sales, you name it, the macro economy is strong and certainly, we do – everyone's – there's a notion out there in the most recent days that we've reached some kind of a peak and everything's going to go to hell or something. I don't know but I don't believe it."

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Posted-In: FreightEarnings News