Old Dominion Freight Line says operating ratio could dip below 70% in second quarter
Management of less-truck carrier Old Dominion Freight Line told analysts on a call Wednesday that demand remained “consistently strong” and it continues to receive customer inquiries “about the general lack of capacity at the within the LTL industry”. The favorable setup could allow the carrier to snag an operating ratio below 70% on the scoreboard during the second quarter.
First quarter revenue of $1.5 billion increased 33% year-over-year (+25% excluding fuel surcharges) as tonnage per day increased 12% and revenue business per quintal, or return, of 17%. The increase in tonnage is the combination of a 13% increase in shipments and a 1% decrease in weight per shipment. Excluding fuel, yields increased by 10% on average over the quarter.
Former Dominion (NASDAQ: ODFL) reported earnings per share of $2.60, 19 cents higher than the consensus estimate and 90 cents higher year-over-year. The company set quarterly records for revenue and EPS in the first quarter, historically the slowest period in all years.
“As we continue to have conversations with our customers and with our sales team, we continue to receive positive feedback regarding the demand for our service,” Chief Financial Officer Adam Satterfield said on the call.
So far, Old Dominion’s daily revenue in April is 28% higher year-over-year. The growth rate is even more impressive when added to the 47% increase in revenue recorded in the second quarter of 2021.
The company posted OR of 72.9% (27.1% operating margin) during the period, 320 basis points better year-over-year and best in the business for all the first trimesters. A network full of freight and higher yields led to improvement. Revenue growth per shipment (16.1%) outpaced cost per shipment growth (10.8%) by 530 basis points.
On a two-year comparison, Old Dominion’s OR was 850 basis points better. The 2020 composition included only a modest negative impact since the start of the pandemic.
Most expense lines saw reductions as a percentage of revenue. Wages, salaries and benefits fell 300 basis points even as the carrier increased the number of employees by 19% year-over-year to 24,277. Only two cost groups saw increases as a percentage of turnover. Operating supplies (primarily fuel) increased 180 basis points and purchased transportation (primarily third-party transportation capacity) increased 40 basis points.
The year-over-year increase in purchased transportation was less than half of that seen in the fourth quarter. The company will continue to increase its workforce in the second quarter to support growth and reduce its reliance on external capacity. However, delays in tractor deliveries force it to continue to use third-party operators.
Q2 OR could crack 70%
Normally, Old Dominion records 350 bps to 400 bps of OR sequential improvement from the first to the second quarter of each year. However, the first trimester was anything but normal. Historically the weakest quarter for freight demand, the strong market fundamentals of the fourth quarter continued into early 2022. While the truckload spot market tightened further in January and February before collapse in March, no such weakness was observed in Old Dominion’s network.
“Our tendencies are good. Our customer feedback is very strong,” said Greg Gantt, President and CEO. “We had two of our top 10 accounts [3PLs] in the building for the past two weeks, and they are both very positive about their business and their customers. Their prospects are very strong right now.
Six of Old Dominion’s top 10 customers are 3PLs. Industry-related freight accounts for 55-60% of its overall turnover.
“When you look at all the industry numbers, they’re all positive for sure and we’re seeing good growth,” Satterfield added. “Our revenue growth in the first quarter was fairly balanced between our industrial and retail businesses.”
Satterfield said it’s best to compare sequential trends in margins from the fourth quarter to the second quarter given the unseasonal outperformance in the first. He noted favorable cost trends to start the year will moderate going forward, but said normal sequential trends imply an OR of 70.2% in the second quarter.
“If we operate anywhere that starts with a 6, if it’s a 69.9, we’ll definitely be very happy to see that kind of number,” Satterfield said. “We sit here like Burt Reynolds and Jerry Reed [Smokey and the Bandit] try to do something they said couldn’t be done and we think we can do it.
The company’s record was set in the second quarter at 72.3%.
Core cost inflation, excluding fuel, is expected to be 4.5% higher year-over-year in 2022. Management expects to continue to capture “cost plus” yield increases. Throughout the cycle, the company aims to improve the GOLD by 100 to 150 basis points per year. The metric improved 390 basis points year-over-year in 2021, prompting management to shift the long-term target to 70% or higher during its fourth-quarter call in February.
Old Dominion generated free operating cash flow of $389 million in the quarter. The company recorded just $94 million in capital expenditures during the period, but maintained its full-year investment guidance of $825 million ($300 million for real estate projects and $485 million). million dollars for equipment), which will support growth initiatives, including the addition and expansion of terminals.
The carrier opened three new service centers during the quarter with hopes of adding eight to ten in total this year. The goal is to operate with 20% to 25% excess capacity in the network, as Old Dominion prefers to add infrastructure before onboarding new accounts. Currently there is only 15-20% slack in the system.
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