Old Dominion Freight Line Inc (ODFL) — Q3 2020 Transcript

Good morning, and welcome to our third quarter conference call. With me on the call today is Adam Satterfield, our CFO. After some brief remarks, we will be glad to take your questions. The OD team delivered strong financial and operating results for the third quarter despite a number of unusual operating challenges related to the effects of the pandemic. After experiencing one of our sharpest ever declines in volumes during the second quarter this year, a sequential increase in volumes during the third quarter was one of the strongest in our history. Through incredibly hard work and dedication, the OD team rose to the challenge and continued to deliver on-time service of 99% while matching our record low cargo claims ratio of 0.1%. We produced record profitability during the third quarter of 2020 by continuing to execute a simple operating plan, which we have described to you many times before. The long-term strategy is focused on delivering a value proposition of superior service at a fair price, which generally creates the capital for us to further invest in the capacity and technology that our customers demand to support their own initiatives. Superior service also goes beyond on-time and claims-free deliveries. Every member of the OD family understands the value of our service and how critical it is for supporting our yield management initiatives. Our long-term approach to managing yields on an account-by-account basis has strengthened the quality of our revenue and profitability over the long-term. We believe customers also appreciate our consistent pricing philosophy, which should continue to be a key factor in our ability to win market share over the long-term. With the pricing environment improving, and expectations for rates to rise further in our industry next year, we believe we are at an inflection point where market share wins can accelerate. While most people may look forward to turning the page on 2020, we will work tirelessly to finish this year out strong, and we'll also use the period to prepare for 2021. We believe the domestic economy and customer demand will continue to improve. So we must ensure that we have the necessary elements of capacity to support our anticipated growth. Given our long-term market share opportunities, we intend to steadily invest in equipment and additional service center capacity that should include the opening of several new facilities before the end of the first quarter next year. We will also continue to invest in our most critical asset, our OD family of employees. We are actively hiring additional drivers and platform employees to balance our workforce with growing demand and shipment trends, and we will continue to provide our team with the training, benefits and opportunities to succeed and support our customers. With our unique position in the market and ability to further invest in ourselves, I am confident in our ability to continue to grow profitably while increasing shareholder value. Thank you for joining us this morning, and now Adam will discuss our third quarter financial results in greater detail.

Thank you, Greg, and good morning. Old Dominion's revenue for the third quarter of 2020 was $1.1 billion, which was a 0.9% increase from the prior year. We operated very efficiently during the quarter and established new company records for our operating ratio and overall profitability. Our operating ratio improved 480 basis points to 74.5% and earnings per diluted share increased 24.8% to $1.71. Our revenue growth for the third quarter may have been modest, but we were pleased to actually return to a positive trend. The increase reflects a 1.3% increase in LTL tonnage that was partially offset by the 0.6% decrease in LTL revenue per hundredweight. This yield metric as well as overall revenue was negatively affected by the significant decrease in the average price of diesel fuel as well as changes in the mix of our freight. Our underlying pricing trends remained relatively consistent during the third quarter, as indicated by the continued strength in our LTL revenue per shipment. On a sequential basis, revenue per day for the third quarter increased 18.1% as compared to the second quarter of 2020, while LTL shipments per day increased 15.4%. Following the steep drop in volumes in April that generally resulted from the initial stay-at-home orders, our shipment levels have steadily increased above our normal sequential trend. At this point, in October, with almost a week remaining in the month, our revenue per day is trending higher by approximately 2% to 2.5% as compared to October 2019. Our shipments per day trended in line with normal seasonality, but our weight per shipment is in the 1,570- to 1,600-pound range, which is lower than the third quarter. While the weight per shipment is still higher on a year-over-year basis as compared to October 2019, the sequential decrease is due to measures we took to limit the number of heavier-weighted LTL shipments in our system as well as improving revenue trends with our smaller customer accounts that generally have a lower weight per shipment than a larger national account. As usual, we will provide the actual revenue related details for October in our third quarter Form 10-Q. Our third quarter operating ratio improved 480 basis points to 74.5%, with improvement in both our direct operating cost and overhead cost as a percent of revenue. We improved the efficiency of our operations and produced increases in our laden load average, P&D shipments per hour and platform shipments per hour when compared to the third quarter of 2019. While we will continue to add drivers and platform employees during the fourth quarter, as Greg mentioned, we believe we can effectively balance our labor-to-revenue trend in line with the normal sequential change in this expense line item by continuing to focus on productivity. We will also maintain our disciplined approach to control discretionary spending and make every effort to minimize cost inflation in other areas. Old Dominion's cash flow from operations totaled $170.2 million and $686.5 million for the third quarter and first nine months of 2020, respectively, while capital expenditures were $46.3 million and $166.5 million for the same periods. We paid $17.6 million of cash dividends to our shareholders during the third quarter, and returned $360.3 million in total capital to shareholders during the first nine months of the year. For the year-to-date period, this total includes $306.8 million of share repurchases and $53.5 million in cash dividends. There were effectively no share repurchases made during the third quarter due to the 6-month accelerated share repurchase agreement we executed in May. We recorded the initial delivery of shares in the second quarter, and the remaining unsettled shares will be delivered in the fourth quarter. Our effective tax rate for the third quarter of 2020 was 24.8% as compared to 24.9% in the third quarter of 2019. Our rate in the third quarter benefited from certain discrete tax adjustments, and we currently expect our effective tax rate to be 25.9% for the fourth quarter of 2020. This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.

Adam, you mentioned that the weight per shipment decreased sequentially but is still slightly higher compared to last year. I was curious if you have a specific target for weight per shipment that you think would enhance revenue quality and margins. Additionally, are you beginning to notice any spillover freight due to tight truckload capacity, and are these some of the shipments that you're choosing to turn away?

Yes. I don't think there's a specific optimal weight per shipment. We've generally averaged around 1,600 pounds during stronger periods, and we can also go down to about 1,550 pounds, which works fine too. Some lower periods, like in August of last year, were around 1,530 pounds, which typically corresponds with a weaker economy and aligns with the slowdown we experienced in the industrial market last year. However, we're still satisfied. Currently, it's around the 1,570 to 1,600-pound range, which is good. We have been noticing heavier shipments coming in, especially from the west coast, due to large transactional business. We wanted to manage these to maintain balance in our network, so we implemented some internal measures to limit, but not entirely exclude, those shipments across the system. That's why the weight is trending a bit lower. In September, the average was 1,617 pounds, moving back closer to 1,600 pounds. There are some positive trends as our smaller mom-and-pop customers are beginning to recover. Initially, during the pandemic, our larger national accounts performed better, but our top 50 accounts continue to do well, and we're seeing smaller accounts improving. After the election and once some uncertainty is resolved, I hope those trends will continue to improve as we move into 2021.

Okay. And then I know you talked about the environment currently being conducive to accelerating market share gains, and it sounds like you're more active on the hiring front. But could you sort of walk us through how you expect headcount trends to materialize in Q4? It sounded like maybe up a little bit sequentially, but do you think it'll still be down year-over-year?

I believe that typically, the average change in headcount in the fourth quarter is about 2% higher compared to the third quarter. Looking back at periods like 2017, that change was around 4% higher sequentially. We are experiencing a similar situation now with volumes starting to pick up. We could see the headcount change being close to that 4%. There isn’t a specific number we’re aiming for; we are assessing our needs throughout the organization to maintain balance. We did utilize a bit more purchased transportation than usual in the third quarter, which increased by 20 to 30 basis points. This is part of how we manage when there’s a surge in shipments but not enough personnel in the right areas. We can turn to the purchased transportation market, but given the current truckload rates, our preference is to use our employees and equipment while managing our domestic line haul network entirely in-house, as we have always done. We only resort to additional purchased transportation when it’s absolutely necessary because having complete control helps us manage claims effectively and ensures we maintain our service standards, which is crucial to our business value. We are committed to adding personnel where needed to keep pace with current demand trends and prepare for a positive growth environment in 2021. It’s essential that we secure the right talent. We already have the equipment and will address our equipment and service center needs in our 2021 capital expenditure plan. However, the hiring aspect is critical right now, and due to the pandemic's impact, it's not a quick fix. Onboarding drivers takes more time, and we aim to catch up and stay ahead of the demand curve.

Just a couple of questions. Just following up on the driver headcount front. Obviously, in the truckload sector, they talk a lot about drivers being difficult to come by. I'm just curious, your experience in the LTL world on driver headcount.

Jordan, great question. They are hard to come by. They're a little more difficult to find now than they have been in the past. But we're having success, as Adam mentioned. Since the pandemic, it's a little bit harder to onboard people than it used to be because of some of the issues and some of the government offices and that kind of thing. We're not getting records checks back as timely as we're used to. Just some of the things that you do to process a driver are taking a little bit longer than we're used to, but we're able to find drivers. Again, just not always at the speed that we'd like to find them. But so far, so good, but it definitely takes an effort. We're still able to hire some competitors. And I think that's a good thing that certainly has helped us over time. So we'll continue to do what we need to do to keep our service center staffed and ready to go.

That's helpful. Can you provide more details about the expenses related to operating supplies and general supplies? I'm monitoring the run rate for the second and now the third quarter, which appears to be good compared to normal as a percentage of sales. I'm wondering if these general supply and other operational expenses can remain low, or if they will need to increase again over time, along with labor costs.

I believe that the general supplies, expenses, and depreciation all fits into the overhead category. This also includes a significant portion of salaries, wages, and benefits for our salaried employees and clerical staff. Overall, we have discussed this transition from the first to the second quarter, where we managed to save in total due to proactive measures we implemented. However, we did experience some inflation in these expenses as a percentage of revenue from the first to the second quarter. Fortunately, with the rise in revenue, we were able to see some improvement. In the second quarter, these costs comprised about 24% of revenue, while they dropped to just over 21% in the third quarter, thanks to the revenue increase. While the total amount spent remained relatively unchanged, we are maintaining ongoing cost control measures. As we prepare for 2021, we anticipate that certain costs will return, including our marketing programs, customer entertainment, and travel for sales personnel. We are eager to resume these initiatives, as our sales team has been doing an excellent job adapting to the current situation by staying in touch with customers and addressing their challenges and opportunities, though personal interactions are far more effective. We are looking forward to restoring these programs when it is safe to do so, and we expect to have a significantly higher revenue base at that time. Historically, our overhead costs have averaged between 20% and 25%, and now it is inching back closer to 21% to 21.5% of revenue in the third quarter. This improvement reflects our cost control efforts, revenue recovery, and our commitment to keeping overhead costs as low as possible as a percentage of revenue moving forward.

Congratulations on a great quarter here. So Adam, maybe if I could just kind of think about the third quarter to fourth quarter seasonality here. Typically, it's about 170 basis points or so of sequential deterioration. You talked about needing to staff up on the headcount side. Obviously, it's such an unusual year in terms of how this year has progressed. Do you think that we'll see something more in line with normal seasonality this year? Or given all these different factors here, should we think about it being one way or the other, maybe a little bit worse than normal seasonality or maybe a little bit better? Just can you kind of help us think through that for a moment?

Yes, I think we'll evaluate the normal sequential trend and compare it to past performance. We expect revenue trends to continue positively, although not at the same strength as the surge in the third quarter. This ongoing positive trend supports us. Typically, when we look at a 5- or 10-year average, we can expect about a 200-basis-point increase, though the fourth quarter brings variable factors, including our annual actuarial assessment and adjustments to insurance liabilities. Excluding outliers, we will aim for a 200 basis point change as a benchmark. We continuously strive for better performance, and any additional revenue will be beneficial. In the third quarter, some costs are expected to normalize after temporarily increasing in the second quarter, particularly our group health and dental costs, which have been higher than usual. This has raised our fringe benefit rate as a percentage of revenue. There are adjustments to be made on both sides, and we will work to find a balance. I emphasized earlier that our largest cost component is salaries, wages, and benefits. We remain focused on delivering excellent service in our industry. I'm proud of maintaining a low cargo claims ratio at 0.1% while delivering 99%. I believe we can manage salaries, wages, and benefits to align with typical changes of about 150 basis points. If we maintain that alongside normal seasonal trends, the other costs will largely depend on revenue trends moving from the third to the fourth quarter.

Okay. Okay. Got it. That makes a lot of sense. And so I guess for my follow-up question here, I don't want to put you guys on the spot, but I've been getting this question this morning from some investors. But when you kind of think about the long-term goal has always been sort of a 25% incremental margin for your business, when we think about this quarter, in particular, you guys had, obviously, a 25.5% operating margin for the quarter. So it kind of feels like we're maybe pushing into a new frontier. Has there been any change to how you guys are thinking about the incremental margin potential of the business as we sort of look forward? Or is 25% still the right number to use?

A couple of years ago, we indicated that our long-term goal was around 25%, which translates to a 75% operating ratio. Once we reach that target, we will reassess our internal benchmarks. This doesn’t preclude us from exceeding that in any given quarter, and we believe we can, as we've demonstrated in the past. Our cost structure consists of approximately two-thirds variable costs. If we can manage these variable costs effectively and leverage our fixed costs, we can generate strong results. Until we achieve the 75% annual operating ratio, we will maintain that goal and then think about what comes next. We are confident in our ability to further enhance the operating ratio as we continue to execute our basic plan. Achieving long-term improvements in operating ratio requires a focus on density and yield. The density aspect has presented some challenges this year, but despite significant fluctuations between the first, second, and third quarters, we have risen to those challenges, operated efficiently, and managed our costs effectively. We have successfully addressed these issues, and yield remains critically important. Maintaining a long-term, consistent approach that outpaces cost inflation has contributed to our operating ratio improvement over time. We are confident that we can continue to surpass expectations, and we may see quarters where margins hit 35% or even 40%, as we have done previously. Our cost structure has improved, making our opportunity for growth even stronger as we move forward. However, we do not want to be limited by that. Instead of focusing solely on incremental margins, our priority is achieving long-term profitable growth. In order to capture the market share opportunities ahead of us, we must invest and incur costs. We will continue to make the necessary investments to maintain the long-term profitable growth we've achieved, ultimately enhancing shareholder value.

Adam, I want to discuss the employee aspect a bit more since you've demonstrated the most improvement in labor efficiencies. Six to ten months ago, your team was already operating with a small workforce. How did you manage to handle the current freight volume with fewer employees? What insights did you discover that might not have been obvious?

Some of the efficiencies we achieved were not just in our productive labor but also in areas like supervision and clerical work. When we faced tight conditions, we discovered factors we could manage without, leading us to make the cuts we deemed necessary at that time. We haven't fully reinstated those positions. While some circumstances have changed, we haven't required the extra labor we initially reduced last spring. Each location has its own needs, and now we're working to gradually meet those staffing requirements. As previously mentioned, we're preparing for 2021, which we expect to be a strong year, and we'll continue to ramp up our staffing as needed.

And Greg, you mentioned also investing in technology that customers demand to support their initiatives. Can you give us some examples of what that is? And has that also allowed you to be more productive from a labor efficiency standpoint?

In some cases, it has. However, most customers primarily seek feedback on their shipments. They want to know where their shipments are and how to receive them faster. We continue to enhance our communication regarding shipments and incorporate the feedback we get from our customers to enable quicker tracing and provide better information. This way, they can plan more effectively, and we can also plan better. It's a mutual process. We are maintaining our focus on these efforts, and they are starting to yield positive results.

That's definitely helping. So thank you very much, David.

I was interested in the daily revenue trends from September to October. I'm trying to understand the weight per shipment and its fluctuations. Perhaps you could provide insights on the pricing aspects or the revenue per hundredweight to help understand how the mix and core pricing are influencing this.

Yes. I mean, the yields are going to continue. Certainly, if you're looking at revenue per hundredweight with the shipment sizes, weight per shipment decreasing a little bit. That certainly would cause the revenue per hundredweight to increase slightly as well. So that's been a strong number, I think, when you look at the sequential increase in our yield metrics from the second to the third. Just looking at it on a hundredweight basis, I think that certainly some of the mix impacted things; the higher weight per shipment in the third, a little bit longer length of haul as well. That's certainly contributing. But that will continue. And we feel like some of the feedback we're hearing is that yields are continuing to increase in the industry as well. And a lot of times, what you'll see is, especially some of our competitors that use a little bit more purchase transportation and truckload services to run some of their internal line haul, certainly will start facing cost inflation when the truckload rates are inflecting as positive as they are right now. And that's typically a good thing that creates historically an inflection point where we start seeing really a higher need or a need rather for higher rates for our competitors that are offsetting those costs as their cost inflation is increasing. And so that's supportive of our ongoing yield initiatives internally as well as it usually will create some freight opportunity for us as well when that piece of cost for our competitors is increasing certainly much faster than what our cost inflation would look like. So those are a couple of good trends that we feel positive about as we start thinking about finishing out 2020 and then turning the page to '21.

Okay. That's helpful. And I guess you talked about inflection points in the prepared remarks and also in the answer to my question. So thinking about market share opportunities as maybe you sort of cross over into 2021, you guys have always done a good job growing in excess of the market. But can you give us maybe some bigger picture thoughts on sort of LTL industry growth opportunities and then what your opportunity is within that and maybe sort of frame it in the context of next year or the year after? Just want to get a sense of sort of how you're still seeing that opportunity, how big it is?

Yes. The LTL sector has been outpacing general GDP growth, and we expect the industry to maintain a positive growth trajectory. There are several long-term factors contributing to this, such as the rise of e-commerce, which is increasing the amount of retail-related freight in the market. Currently, we are seeing favorable trends with retailers, and managing this type of freight differs from our legacy industrial-related business, which still constitutes 55% to 60% of our revenue. Having a balanced mix of retail-related business has been beneficial, especially in the second quarter when other areas were struggling. This trend is likely to persist as more fulfillment centers are established near population hubs, leading to smaller shipment sizes more suited for LTL rather than truckload. At present, capacity is not as significant an issue, despite the overall market challenges this year. However, focusing on the long-term trends we've discussed prior to the pandemic, we have been actively investing in our real estate capacity, expanding our network, and increasing our door capacity to handle freight. This door capacity is crucial in the LTL sector, and we strive to stay ahead of demand. There has not been a notable change in the number of service centers among other public carriers over time, despite some expansion by a few. We believe we've gained significant market share because of our continued investments and capacity, which translate into a service and capacity advantage. As the market begins to recover, we have observed positive trends. Some of our industrial clients are showing signs of improvement, with positive indicators from ISM and similar metrics over the past couple of months. However, many manufacturers and related businesses are still not at full recovery, lagging behind the stronger performance of our retail clients. We anticipate ongoing positive trends in our retail-related business, which should collectively contribute to our success as we approach 2021.

So just maybe as a follow-up from that question. Can you just give us a sense into what your customer conversations are like right now? I mean, clearly, the LTL market is super tight. There's a long way to go in the demand cycle. Are your customers looking ahead to 2021? And are they panicking? Do you see kind of RFP contract negotiations coming forward? Kind of how are you thinking about the timing of the next GRI based on what your customers are you right now?

Yes, Ravi, I expect that we will implement our next increase on an annual basis as we usually do. Typically, this occurs about a year after the previous increase, and I anticipate that next spring we will apply our usual seasonal increase based on our costs and their trends, which we will evaluate closer to that time. There has been significant demand for larger shipments, especially as Adam noted, from the West Coast. This has certainly influenced our response to customer needs. We are not a truckload carrier, and when demand shifts, as it did early this fall, adjustments are necessary, which we made. Based on what we can observe, our customers appear positive as we approach next year. The pandemic has had some impact on this, but as we continue to recover, hopefully in a positive manner, we look forward to entering 2021 with high expectations, which is our current focus.

Great. And just kind of on that, again, if you just give us a little bit of a framework on what big expectations mean. I mean, typically, your GRI is in the mid-single-digit range. Will you be pushing for double digits?

I think we've got a long-term approach, Ravi, that we look at our cost inflation every year. And then we sit across the table from our customers and talk about what our costs, how they're changing and then what we need in terms of rate. And certainly, the way we really manage the business is looking at customer profitability on an account-by-account basis. So there may be some customer accounts that we'll have to maybe be more aggressive with. And then there's other long-term customer accounts that may go into the equation that be a little bit lower than the average. So it just kind of depends on each customer situation, and we'll look at those. But we've been pretty consistent the last few years with a general rate increase of around 5%. And then that kind of becomes the proxy for what we talk to customers on average. About for the need, and we've been successful in achieving our contractual increases throughout this year. But that kind of gets back to the heart of the true customer relationship that you have. And our industry is a relationship business. And so it's critical that we continue to talk with our customers and have that 2-way open and honest communication about things. And certainly, we're willing to do that, and it makes more sense when you can have a cost-based discussion versus the industry is tight and we need a double-digit increase this year. And the industry is loose this year, so we're going to give you some of that back next year and the rollercoaster ride that maybe some customers go on with when they make a decision other than select an Old Dominion. But we're really proud of kind of these long-term customer relationships that we have, and certainly, we think that will continue. And next year, just looking out, certainly, that's kind of the 4% to 5%. When you look at our long-term revenue per shipment, we've kind of averaged really between 4.5% and 5%, and that's been 75 to 100 basis points above our cost per shipment inflation. And we've already established a 3% wage increase that went into effect the 1st of September. So that's a big element of our cost inflation every year. And has been pretty consistent as well. So we already know some of those factors, and that'll kind of frame things up for us. But we'll look. And the yield numbers themselves, some of it will really depend. There's going to be some weird comparisons as we transition into next year with weight per shipment that might make your revenue per hundredweight look a little bit stronger than maybe that 5% type of number. So we'll just have to balance all of those. But underlying contract and general rate increase, I would expect that we'll see it kind of consistent with what our long-term trends have been.

That's insightful. May I ask a follow-up regarding fuel? It seems we are currently in a period of consistently low fuel prices. Historically, the fuel surcharge has positively influenced your yield metrics. Are you considering adjustments to your market strategy or changes to how the fuel surcharge is calculated?

We have been facing fuel prices that are down by 20% or more, as seen in the most recent quarter, where we achieved a 74.5% operating ratio. When we evaluate the contribution from fuel alongside the overall yield, it becomes a variable pricing component that we continually analyze. As contracts expire, we reassess the fuel base. Over the past few years, our fuel strategy has been quite effective. A while back, when fuel prices initially dropped significantly, we realized that our baseline wasn't appropriate, and we took some time to make necessary adjustments with our customers. If fuel prices remain stable and don't decrease further, we would prefer a slight increase, as that would positively impact our revenue figures. However, if fuel stays around $2.40 a gallon, we expect it to impact our results negatively in the fourth quarter and into the first quarter of next year, before possibly returning to normal levels after the decline began in the second quarter of this year. It would certainly be beneficial if fuel prices were a bit higher, as that would enhance our revenue outlook. Each day, we assess previous revenue figures, and comparing those results with and without the impact of fuel highlights a stronger position without considering fuel. While it would be ideal for that to be the overarching figure, we will continue to adapt to the circumstances we face.

Positive side of that, Ravi, is obviously, we don't need high fuel prices to produce a record low OR. So I think that's the positive side of that.

Quickly when you look at the surge in freight that we've seen that came on in the summer, what are your customers telling you in terms of where it's coming from? I mean, clearly, there's been some restocking, but there is some underlying demand. I'm just curious what they're saying. How strong is this going to be and for how long?

Certainly, when you look at inventory levels overall, they continue to be low, so I think that some of that will continue, but the consumer continues to consume. And I think that people are spending money in different ways. And you get down to it, that's still 70% to 80% of the overall economy. So as people continue to purchase things and there's got to be the production of those things and ultimate delivery and positioning for them to be able to buy them. So certainly, there's been some obvious changes in the retail landscape related to the pandemic and probably have seen e-commerce growth probably pulled forward a couple of years at least in terms of the change of e-commerce in terms of total retail sales. So that's been something that, as we talked about before, it creates some opportunity for the LTL industry. That's certainly not an overnight kind of phenomenon, and you don't build fulfillment centers overnight, but that's something that's certainly continuing to change, and we think we can benefit from. And we're going to do everything we can to make sure. But hinted at earlier, there's certainly some operational challenges that come along with managing more that freight and balancing, you're right, equipment pools and just the service demands can be different as well. So we've got to make sure that we keep all of that balanced as we flex and see more growth with our retail-related business. But I think that certainly, we can see those trends continue and take advantage because the other big piece of that retail-related growth on the e-commerce side is the demand for superior service is even greater. As they're managing inventory levels, and inventory is tight, then certainly you can't afford to. And in many cases, when you deliver into many of the big-box retailers that have got programs in place that that will have penalties for vendors if their carriers aren't delivering on time and in full. Certainly, when you make the selection of choose an Old Dominion, we're going to deliver on time 99% of the time and our damages as a percent of revenue of 0.1%. So we certainly can meet that demand and service expectation for our customers and help them avoid charges down the line where the total cost of service is cheaper for them, even though they might pay a little bit more upfront for Old Dominion.

That's good color. I have a follow-up on technology. I mean, you guys have always been at the forefront investing in technology, going back in my 20-plus years of covering you. How should we look at Old Dominion in their foray into potential alternative fuel-type or alternative-technology trucks? Is this something you're looking at?

Certainly, Jason. We always aim to stay ahead with any new equipment available. We've discussed this in previous calls, and we're exploring electric vehicles and similar technologies. However, at this moment, there aren’t any production electric vehicles ready for use. We're simply not there yet. I believe there will be a time when we will advance as the technology evolves and opportunities arise. But for now, these vehicles are not out there for us to integrate into our system. We have a lot of challenges to tackle, and while I am confident we will eventually reach that point, we're just not there yet.

So it feels like we're a couple of years away then?

I think so.

Adam, on your comments regarding the cost structure, especially on the overhead side, I guess that implies direct costs or variable costs of 53% to 53.5% of revenues. Do you think you can hold the line on that, I guess, variable piece of the cost structure in 4Q in terms of percentage of revenue? Or is there anything that may drive, I guess, a bit of the match between how that's evolved versus shipments has actually been quite close. I'm just wondering if there's any perspective mismatch there between variable costs and shipments that we should think about as you go into the fourth quarter?

Yes. We were previously discussing some of the labor costs related to salaries, wages, and benefits. Typically, you would see a normal sequential decline in the operating ratio of about 200 basis points, and most of that comes from the salary, wages, and benefits line. The majority of those costs will be related to our productive labor. We'll monitor how this balances as we transition. Generally, you'd expect to see a slight increase, but we're committed to managing those costs in line with the usual trends. However, this will depend on the revenue base and how it trends in the fourth quarter compared to the third. That will significantly impact the more fixed costs.

Yes. Regarding overhead, I would appreciate your thoughts on the long-term potential. There's clearly excess capacity in the line haul network and opportunities for increased density. Looking ahead three to five years, assuming growth remains stable and revenue mix continues trending similarly, do you think we could see overhead in the range of 17% to 18% as you capitalize on the line haul? Additionally, could you provide more details on September's tonnage? It's crucial to understand the breakdown of shipments and weight per shipment compared to the previous year, especially how the quarter wrapped up in September.

In the long term, we expect overhead costs to trend between 20% to 25%. This is mainly influenced by our potential for market share growth, and we believe we have significant room for continued expansion, which will necessitate ongoing investment in assets. As we invest, the depreciation expense will likely increase as a larger component of our costs, instead of reaching a point where growth stagnates and we could optimize expenses. We are optimistic about our market share prospects and aim to reinvest 10% to 15% of our revenues into our capital expenditure programs each year, which will drive depreciation growth. Some overhead costs are variable, such as bad debt expenses and performance-based compensation, representing about 5% to 8% of revenue. These costs are expected to rise, but we are committed to minimizing them where possible. The improvement in our operating ratio has stemmed from our direct costs. We have fixed costs associated with our line haul operations, and while expanding our service centers may introduce some inefficiencies on that side, it enhances the efficiency of our pickup and delivery operations by bringing our workforce closer to customers. As we analyze our operations, we currently operate around 240 service centers. Increasing density in specific service centers boosts their operating ratios, although adding a few centers may temporarily affect others' ratios. Nevertheless, many are undergoing improvement initiatives, which gives us confidence that we can further reduce our operating ratio from its current level. Yes. Regarding the tonnage for September, would you like the year-over-year comparison for that month?

Yes, if you're going to give me both, I'll take the year-over-year and sequential, that would be great.

Okay. So for weight, year-over-year tonnage was up 3.6%. And then sequentially, September's tonnage was up 4.3% over August. On the shipment side, the shipments per day were down 0.5% on a year-over-year basis. So compared to September of last year, shipments in September on a sequential basis were up 4.6% versus August.

Adam, just on the comments around the network growth into '21. I guess, first to start, can you share roughly where you think the available capacity is in the network? And then second, as you think about what you're targeting, is it mostly on the door side? Or is it on rolling stock? And is there anything we need to think about on the cost side? I think it was 2018 maybe where you grew the fleet a little bit in advance of the tonnage growth and the depreciation was out a little bit ahead. Is the thought in '21 that you could see a similar dynamic? Or would it be maybe a little bit better matched with the tonnage coming into the network?

The overall capacity of the service in the network is currently estimated to be between 25% and 30%. We had exceeded the 30% level during some weaker periods, and now we seem to be returning to that range, which is encouraging as we move into next year. As mentioned earlier, we anticipate several facilities will open between now and the end of the first quarter. There will be openings in 2021, and we will also be expanding some facilities or relocating to larger spaces. A significant portion of our investment will focus on further expanding in major metropolitan areas where we can open multiple facilities. This presents a substantial opportunity for market share, particularly in the Midwest, which is the largest LTL market. We will keep exploring areas with sufficient density for end-of-the-line locations to add new facilities, which can help lower our pickup and delivery costs by getting closer to our customers. It's essential to ensure that there is enough freight opportunity and density to support operations in each market. Regarding equipment capacity, we currently have some available. We haven't finalized our capital expenditures yet, but we plan to provide details in the next quarter's call. This year, we only spent $20 million on equipment due to overinvestment in previous years. We expect our capital expenditures to return to a more typical range of 10% to 15%, likely on the higher end. We still need to finalize some decisions as we approach the end of the fourth quarter and get ready to place orders. Overall, we believe we can achieve leverage, especially in a strong revenue growth environment, which can help offset costs. This ties back to our earlier discussion on incremental margins. We are confident we can generate strong incrementals, but much depends on optimistic projections for next year. We are actively engaging with customers to build our forecasts from both a bottom-up and top-down perspective. However, some uncertainty remains, particularly regarding potential impacts from the election results.

Yes. Well definitely in Ohio we're seeing tuned on that one. That's for sure. So, just on my follow-up, I guess, kind of a bigger picture question, and Jack kind of hit on this with the incremental margin question earlier. But operating at a sub-75% OR here in the third quarter, are there any bigger picture takeaways as you think about the business? I mean, you did it in an environment that was pretty volatile. You had purchase transportation that moved up. Tonnage was obviously up a lot sequentially, but not a lot year-over-year. Does it feel like that on a longer-term basis, it's sustainable to operate on a full-year basis at a mid-75 OR? Or are there other pieces or other things that we need to think about that really contributed to this performance in the quarter that may not be representative of kind of what you can do longer-term?

I believe we've discussed our ability to operate within this range on an annualized basis for a while and have made significant progress this year. Previously, we mentioned that revenue growth was essential for improving the operating ratio, but the current environment was unique. We had to respond quickly and decisively to manage costs due to the rapid decline in revenue and the lack of available work back in April. As we adapted and started to see recovery in May, when things began to stabilize, we brought back around 1,400 employees compared to April. We're continuing to onboard new staff to meet demand trends, and we've effectively balanced our costs. Historically, during such periods, we often reevaluate our processes, people, and systems. The productivity improvements we achieved in 2008 and 2009 have had lasting effects. We anticipate that the productivity enhancements as we transition back into a growth phase and integrate new personnel will be maintained. This is encouraging, as managing costs, particularly controllable ones, is crucial as we return to a more normalized growth environment consistent with our expectations based on past performance. We reaffirm our belief in our capability to improve the operating ratio. This will depend on enhancing network density, which typically opens up productivity opportunities. A disciplined, cost-based approach is necessary for managing our yields, which both initiatives usually need a supportive macro environment. We've succeeded in less favorable conditions, but we are optimistic that a positive macro environment will further aid these efforts and enable additional improvements in our operating ratio.

Great quarter. My first question is about your insight regarding the potential for market share growth for OD. Could you expand on that? Adam mentioned earlier that some competitors are facing cost pressures. Is the situation primarily influenced by that, or is it more about the trends you're observing in the end markets and the discussions with customers? If it’s the latter, could you provide details on where you’re noticing strength in those conversations? Additionally, in previous instances where OD experienced robust operating conditions, you managed to achieve double-digit tonnage growth. Could you discuss the likelihood of achieving something similar in 2021, considering your current resources and any plans for expansion?

Sure. We are anticipating growth for next year. As Adam previously mentioned, we are working on expanding our capacity regarding facilities and equipment, and we are in the recruitment process. These are key elements in increasing capacity, and we are actively focused on all three areas at this time. Recently, we have seen strong performance, especially on the West Coast, where there have been reports of additional imports and busy ports, particularly in California. Overall, we have demonstrated strength throughout the system and expect that to continue next year. Most of our customers are very positive. As Adam mentioned, developments next week could influence our prospects, but for now, we are looking forward to a strong year. We are investing as if we expect a good year ahead, and based on the feedback we are receiving, we have high hopes for significant achievements.

No, absolutely. That's helpful directionally, certainly. And then just a little bit on minutiae. The free cash flow number looked like the cash from operating activities at about $170 million was a bit below what it has typically been. It’s obviously very strong on the income statement line. But maybe you could discuss what was happening with the operating cash flow?

Yes, on the operating cash flow front, there are always some changes related to deferrals that eventually get settled. Overall, from a year-to-date perspective, we've generated solid cash flow from operations, which I'm pleased with. However, quarterly results might be affected by the timing of some deferred taxes connected to the CARES Act regarding payroll taxes and other timing fluctuations. Still, our cash flow performance remains strong. It may be slightly lower year-to-date compared to last year, but it’s approaching $700 million from operations this year. We're well-positioned to use this cash as we plan our capital expenditures. Our top priority for capital allocation is investing in sales. This year's CapEx plan is somewhat lower, largely due to equipment considerations we discussed earlier. We'll reassess this as we transition into next year, which will likely see a significantly larger CapEx figure than this year.

Thank you all for your participation today. We appreciate your questions. And please feel free to give us a call if you have anything further. Thanks, and have a great day.