Old Dominion eyes operating ratio in the 60s

LTL carrier Old Dominion Freight Line raised its long-term margin target on Wednesday. The company now expects its operating ratio to improve to 70% (30% operating margin) over time, potentially dipping into the 1960s, from the previous target of 75% (operating margin 25%).

The new margin forecast is well ahead of what Old Dominion’s competitors are realizing. In comparison, the LTL carrier Saia (NASDAQ: SAIA), which implemented initiatives to increase returns and improve costs, posted an OR of 85.4% for 2021 on Wednesday. Old Dominion’s full-year OR was 73.5 % in 2021, or 390 basis points better year-on-year.

Former Dominion (NASDAQ: ODFL) on Wednesday reported fourth-quarter earnings of $2.41 per share before market open. The result was 50% higher year-over-year and 15 cents higher than the consensus estimate.

“We do not anticipate any near-term changes in our customer demand trends and believe that our service and capacity advantages will continue to support our ability to gain additional market share throughout 2022.” said Greg Gantt, President and CEO, in a press release.

A 31% year-over-year revenue increase to $1.41 billion was evenly split between higher volumes and pricing. Daily tonnage increased by 14% during the fourth quarter with revenue per quintal, or yield, up 16% (9% more excluding fuel surcharges).

The strong growth trends continued through January, with revenue up 26% year-over-year, tonnage up 8% and yields up 17%.

Table: Old Dominion Key Performance Indicators

Cost inflation was again more than offset by higher yields in the fourth quarter, resulting in ROC of 73.6%, 270 basis points better year-over-year. The sequential change from the third to the fourth quarter was only a 100 basis point margin decline, which was better than the historical downgrade of 200 basis points to 250 basis points.

Average headcount increased 20% year-over-year to 23,610 as the business expands to meet rising volumes. However, wages, salaries and benefits as a percentage of revenue fell 380 basis points. Operating supplies (primarily fuel) increased 200 basis points, while purchased transportation (primarily third-party transportation capacity) increased 85 basis points. Revenue growth per shipment (14%) outpaced cost per shipment growth (10%) by 400 basis points during the period.

High freight demand coupled with favorable pricing dynamics is pushing carriers to raise their long-term expectations. On Tuesday, competitor ArcBest (NASDAQ: ARCB) raised its outlook, after record results in the fourth quarter. The company expects revenue to potentially double by 2025 with asset-based margins capping at 15%.

Old Dominion generated $1.2 billion in free cash flow from operations in 2021. The company had $550 million in net capital expenditures during the year and expects that number increases to $825 million in 2022 to support growth initiatives.

The capital budget includes $300 million for real estate projects, which include adding or expanding eight to 10 facilities. The company also plans to spend $485 million on tractors and trailers during the year, a figure it says would be higher without production delays at manufacturers.

Old Dominion’s board of directors increased the quarterly dividend by 50% to 30 cents per share.

ODFL shares were up 4.4% at 12:14 p.m. Wednesday against the S&P 500, which was up 0.5%.

the FREIGHTWAVES TOP 500 The list of for-hire carriers includes Old Dominion (No. 9), Saia (#16) and ArcBest (#26).

Click for more FreightWaves articles by Todd Maiden.

Watch: Operator Update – February 2, 2022

Sallie R. Loera