Old Dominion Posts Highest 1Q OR Despite Drop In Revenue

Even as business began to slide in the second half of March, and most measurements of volume were down for the three months, Old Dominion Freight Lines ODFL posted a first quarter in which it reached a record operating ratio (OR) for that calendar period.

The first quarter's OR was 81.4%, a 60 basis point improvement over 2019's 82%. This occurred even as several barometers of volumes all pointed lower: intercity miles (down 2.3%); total tons (down 2.4%); tonnage per day (down 3.9%); shipments (down 3.6%); and shipments per day (down 5.1%).

But revenue barometers were all higher. Revenue per intercity mile was up 2.5%. Other indicators: revenue per hundredweight, up 2.6%; same statistic, excluding fuel, up 3.3%; revenue per shipment, up 3.9%; same statistic, excluding fuel, up 4.6%. 

In a prepared statement accompanying the earning release, President and CEO Greg C. Gantt said demand for ODFL services "declined in the last half of March, however, due to the widespread effects of the COVID‑19 pandemic on the domestic economy."

Wall Street liked the earnings. At approximately 10:45 a.m., ODFL stock was up 7.48%, a gain of $9.59 to $137.84.

Weight per shipment was up 1.3% for the quarter but looked to be rising as the quarter ended and rolled into April. "We experienced a significant increase in our average weight per shipment and this trend has also continued into April," Gantt said.  "While this helped offset the decline in shipments per day, an increase in average weight per shipment generally has the effect of reducing revenue per hundredweight," he said. 

Revenue per hundredweight is known as a less-than-truckload (LTL) company's yield. For the quarter, it was $22.68, up 2.6% from $22.10. But in an interim report published in early March, ODFL said yield through that point in the quarter was up 4.3%. 

In turn, yield is impacted by weight per shipment, which was up 1.3%. The interim report had it down 1.5%. 

In a report after the earnings release, the transportation analysis team at Deutsche Bank led by Amit Mehrotra noted that in its release, ODFL indicated its approach toward pricing was stable. The trend then in yield, Deutsche wrote, "(indicates) this was more mix-driven rather than indicative of deteriorating pricing dynamics."

The Deutsche Bank team also wrote, "The company was very clear in the release that decelerating yield is not a reflection of pricing but rather higher weight per shipment (i.e. higher weight = less $ per hundredweight but it is positive for mix/margin)…which we take as a positive indication of industry pricing trends."

The improved barometers in revenue per hundredweight and shipment even in the face of declining revenue led the company overall to post net income of $133.1 million for the quarter, down just about $150,000 from the first quarter of 2019. Operating income rose to $183.1 million from $178.4 million. Revenue declined to $987.36 million from $990.78 million in the first quarter of 2019. On the company's earnings call, one analyst said she believed it was the first sequential decline in revenue for ODFL in 20 years. 

Salaries, wages and benefits rose to $524.4 million, up slightly from $522.3 million. But in a period in which complaints of rising insurance costs are prevalent in every sector of the trucking industry, Old Dominion's "insurance & claims" expense line actually fell to $9.85 million from $11.17 million in the corresponding quarter of 2019.

Other notable statistics in the earnings report:

• The Deutsche team said the report was better than expectations. "Relative to our expectations…revenue was $13M better while expenses were exactly in line, translating into a $13M/7% underlying EBIT beat." 
• ODFL's cash stockpile dropped to $356.97 million from $403.57 million. Its long-term debt is $45 million, up from essentially zero at the end of last year. 
• Its capital expenditures for the quarter were $52.2 million. That includes a drop in real estate spending of about $50 million in the first quarter, "as certain projects will be deferred to a future period due to the current trend for shipments." Capital expenditures  in 2020 are expected to be $265 million.
• The net income figures do not reflect a $10.1 million bonus paid to drivers as part of a pandemic relief/reward announced in March.