Morning, and welcome to the Q3 2020 Conference Call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through November 4, 2020, by dialing 719-457 for 0820. The replay passcode is 8105,860. For the replay of the webcast may also be accessed for 30 days at the company's website. This conference call may contain forward looking statements within the meaning by the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Old Dominion's for its financial and operating performance.
For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward looking statements. Without limiting the foregoing, the words believes, anticipates, plans, for specs and similar expressions are intended to identify forward looking statements. You are hereby cautioned that these statements for the company's call and may be affected by the important factors, among others, set forth in Old Dominion's filings with the Securities and Exchange Commission and in this morning's news release. And consequently, actual operations and results may differ materially from the results discussed in the forward looking statements. For the company.
The company undertakes no obligation to publicly update any forward looking statements, whether as a result of new information, future events or otherwise. For As a final note before we begin, we welcome your questions today, but we do ask in all fairness that you limit yourself to just a few questions at a time before returning to the queue. Thank you for your cooperation. At this time, for opening remarks,
for the company. I would like to
turn the conference over to the company's President and Chief Executive Officer, Mr. Greg Gantt. Please go ahead, sir.
For Q3. Good morning and welcome to our Q3 conference call. With me on the call today is Adam Satterfield, our CFO. For questions. The OD team delivered strong financial and operating results for the Q3 despite a number of unusual operating challenges related to the effects of the pandemic.
For the Q3 of 2019. After experiencing one of our sharpest ever declines in volumes during the Q2 this year, the sequential increase in volumes during the Q3 was one of the strongest in our history. Through incredibly hard work and dedication, the OD team rose to the challenge for the Q1 of 2019 and continue to deliver on time service of 99%, while matching our record low cargo claims ratio for fiscal 2020. We produced record profitability during the Q3 of 2020 by continuing to execute a simple operating plan, which we have described to you many times before. At a fair price, which generally creates the capital for us to further invest in the capacity and technology that our customers demand to 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. For
fiscal 2020.
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 for philosophy, which should continue to be a key factor in our ability to win market share over the long term. For for future growth. We believe we are at an inflection point where market share wins can accelerate.
For the Q1. 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 for 2020 1. We believe the domestic economy and customer demand will continue to improve. For fiscal 2020. So we must ensure that we have the necessary elements of capacity to support our anticipated growth.
Future quarters. Given our long term
market share opportunities, we intend to steadily invest in equipment and additional service center capacity for future quarters. We will also continue to invest in our most critical asset, for 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 to succeed and support our customers. Our unique position in the market and ability to further invest in our sales, for future growth. I am confident in our ability to continue to grow profitably while increasing shareholder value.
For joining us this morning. And now Adam will discuss our Q3 financial results in greater detail.
For questions. Thank you, Greg, and good morning. Old Dominion's revenue for the Q3 of 2020 was $1,100,000,000 for our operating ratio and overall profitability. Our operating ratio improved 480 basis points to 74.5 percent for the
Q3 and earnings per diluted share
increased 24.8 percent to $1.71 Our revenue growth for the 3rd quarter may have been modest, for 2019, but we were pleased to actually return to a positive trend. The increase reflects a 1.3% increase in LTL tonnage for 2019 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. For Q3. Our underlying pricing trends remained relatively consistent during the Q3 as indicated by the continued strength in our LTL revenue per shipment.
For the Q3.
On a sequential basis, revenue per day for the Q3 increased 18.1% as compared to the Q2 of 2020, for the Q1, while LTL shipments per day increased 15.4%. Following the steep drop in volumes in April for additional orders that generally resulted from the initial stay at home orders, our shipment levels have steadily increased above our normal sequential trend. For the Q1
of 2019.
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 are treated in line with normal seasonality, but our weight per shipment for the Q3 of 2019. The range is in the 1570 to 16 100 pound range, which is lower than the 3rd quarter.
For the 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 for further growth in our system as well as improving revenue trends with our smaller customer accounts that generally have a lower weight for shipment than a larger national account. As usual, we will provide the actual revenue related details for October in our Q3 Form 10 Q. Our 3rd quarter operating ratio improved 480 basis points to 74.5 percent with improvement in both our direct operating cost and overhead cost as a percent of revenue. We improved the efficiency of our operations and for continued increases in our latent load average, P and D shipments per hour and platform shipments per hour when compared to the Q3 of 2019. While for the Q4.
While we will continue to add drivers and platform employees during the Q4, 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. Future quarters. We will also maintain our disciplined approach to control discretionary spending and make every effort to minimize cost inflation in other areas.
For the quarter.
Old Dominion's cash flow from operations totaled $170,200,000 686,500,000 for the Q3 and 1st 9 months of 2020, respectively, while capital expenditures were $46,300,000 160 $6,500,000 for the same periods. We paid $17,600,000 of cash dividends to our shareholders during the Q3 for shareholders during the 1st 9 months of the year. For for the year to date period. This total includes $306,800,000 of share repurchases and $53,500,000 in cash dividends. For the Q3 due to the 6 month accelerated share repurchase agreement we executed in May.
For the Q3. We recorded the initial delivery of shares in the Q2 and the remaining unsettled shares will be delivered in the Q4. Our effective tax rate for for the Q3 of 2020 was 24.8% as compared to 24.9% in the Q3 of 2019. For the Q3. Our rate in the Q3 benefited from certain discrete tax adjustments, and we currently expect our effective tax rate to be 25.9 percent for the Q4 of 2020.
This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.
For
questions. For questions. And we'll go first to Allison Landry with Credit Suisse.
Good morning. Thanks. For the Q1. So Adam, you mentioned weight per shipment lower sequentially, still up a little bit year over year. For the Q1.
I was just wondering, is there a weight per shipment that you're targeting to optimize the revenue quality and margins? For the Q1. And also are you starting to see any spillover freight from tight truckload capacity? And is that are those some of the shipments that you're turning away?
Yes. I don't think that there's necessarily an optimal weight per shipment. Certainly, we've tended to average for the next quarter and we can trend down closer to 15.50 for Pounds and that still be fine too. Some of the lower watermarks like we hit in kind of August of last year was about for £15.30 that's generally when the economy may not be as strong and that kind of went hand in hand with some of the slowdown that we had seen in the for the commercial market last year, but we're still pleased. I mean, right now, it's kind of around between the 1570 and 16 100 pound range and that's good.
We were starting to see some heavier weighted shipments come in, particularly off the West Coast, for some really just large transactional business that we wanted to make sure we weren't getting overrun with and to try to keep the network in for the balance as well. So we took some internal measures there to try to limit, not necessarily exclude all, but to limit some of those shipments for some of the most recent quarters of the year. And so that's why it's trending a little bit lower. In September, the average was £1617 for the next quarter. So it had been moving back closer to that 16 100 pound mark.
And there's a couple of good trends in there. Our smaller mom and pop customers are for the quarter. The revenue is coming back. Initially in the pandemic, we had stronger performance with our larger national accounts. For the next few years.
Our top fifty accounts continue to perform very well, but starting to see some of those smaller accounts come back. And I think once we get for the past the election and some of the uncertainty that's out there. Hopefully, we'll see those continue to trend even more favorably as we transition into 2021.
Okay. And then I know you talked about just the environment currently being conducive to accelerating market share gains and it for the Q4. It sounds like you're more active on the hiring front, but could you sort of walk us through how you expect headcount for trends to materialize in Q4, sounds like maybe up a little bit sequentially, but do you think it will still be down year over year?
I think that it will. Typically on a sequential basis, the average change in headcount in the 4th quarter is about 2% for higher than the Q3. And when you look back at some periods like 2017, for for the Q1. For example, that number was about 4% higher sequentially and we were going through a similar period then with volumes really starting to for for the Q1. There's no magic number.
We're basically just as we go around the system trying to figure out where we need people for And to keep things balanced, we may have noticed that we used a little bit of purchase transportation, a little bit more than normal in the Q3. That was up 20 or 30 basis for some
of the key
points and that's some of how we manage when you get a surge in shipments like we for the future. We saw when we didn't have all the people in the right places, we can certainly go to that purchase transportation market. But for truckload rates like they are now, certainly, we want to we would rather have the employees and our own equipment and continue to manage for our domestic line haul network 100 percent in house, like we historically have, and we only use that extra PT when absolutely necessary because that's where I think we get the advantage from a claim standpoint by having that total control. We can control for that service element to our business and certainly that's critical to our value proposition and being able to continue the trend of what we've produced historically. For the Q1.
So we're going to make
sure that we
keep adding the people where necessary to keep up with current demand trends, but also for expectations for a positive growth environment in 2021. So it's critical that we get all the people in place. We've certainly got the equipment and we'll be addressing for our equipment and our service center needs with our 2021 CapEx plan, but that people piece of the equation right now is important. And for the Q1 of 2019.
Given the effects of
the pandemic, it's not something that you can solve quickly. It takes a little bit more time to process and onboard for drivers in particular. And so that's something that we just want to make sure that we can catch up and try to get ahead of the demand curve, if you will.
Okay. For questions.
We'll go next to Jordan Alliger with Goldman Sachs.
For Yes, hi, morning. Just a couple of questions, just following up on the driver headcount front. Obviously, in the truckload sector, they talk a lot about for drivers being difficult to come by. I'm just curious your experience in the LTL world on the driver's side.
For you. 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
for some of
the issues and some of the government offices and that kind of thing. We're not getting records for some of the changes that you do to process a driver are taking a little bit longer than for future drivers. Again, just not always at the speed that we'd like to find them, but for the Q1. 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 for the company.
So we'll continue to do what we need to do to keep our service center staffed and And ready to go.
All right. That's helpful. And then just one other quick one. Can you touch a little bit more on some of these other for the company's financial statements. The expense side, the operating supplies, general supplies, etcetera, I'll continue to track on the Q2 and now the Q3 for the Q1 of 2019.
At a very good run rate relative to normal as a percentage of sales. I'm just curious, is this are these sort of general for supply other OpEx expenses. Can they stay muted or do they have to come back over time as well as the labor?
I think some of those just collectively, when you talk about the general supplies and expenses and depreciation,
for the Q1 of 2019. Yes, those all kind of fall in the general overhead
bucket, if you will. And that would include the other big component
for the quarter.
It is a piece of the salary, wages and benefits, our salaried employees for clarity and clarity and so forth. But all of those dollars, that's been an area that we've talked about from the first to the second quarter. We for certain quarters. We certainly saved on dollars in the aggregate due to active measures that we took, but sequentially we had from the Q1 to the Q2 some inflation in those aggregate expenses as a percent of revenue. But with the improvement in revenue, we for the Q2 of this year, those costs in aggregate were about 24% for revenue.
They were a little over 21% here in the Q3. For the quarter. The improvement in revenue certainly helped. The total dollars were about the same that we spent and that's just ongoing cost for additional control measures that we've got in place. Certainly, as we start transitioning into 2021, for the Q1
of 2019. It's kind of a
matter of when some of those costs will return. Some things such as for some of our marketing programs, customer entertainment, travel by our sales personnel. We want to be able to restart those measures. Our sales team has done a phenomenal job having to play the hand that they're dealt right now, for staying in front of our customers, continuing to communicate, talk about customer challenges and customer opportunities as well, but for the next several quarters. Certainly, it's not as effective when they're out making personal sales calls and having face to face meetings.
So we'd like to see that for the next several years. We'll be able to be restored and happily we'll pay that cost, but it's one of those things that we simply have no idea for when it will be safe to really be able to fully restore those programs. So measures like that will come back in due time, but certainly we'd expect to have a much for higher revenue base when those are restored as well. And we've historically seen our overhead costs kind of average between 20% to 25% and for coming back to being closer to 21%, 21.5% of revenue here in the 3rd quarter. For the Q1.
Certainly, it's a function of cost control, some revenue recovery, but just continuing to be disciplined there in
for the Q and A. And trying to
keep those overhead costs as low as a percent of revenue as we can, will always be our focus going forward.
For the
next question.
We'll go next to Jack Atkins with Stephens.
Hey, guys. Good morning and congratulations on for a great quarter here. So Adam, maybe if I could just kind of think about the Q3 to Q4 for the Q1 of 2019. Typically, it's about 170 basis points or so of sequential deterioration. You talked about for the Q1 of 2019.
Obviously, it's such an unusual year in terms of how this year has progressed. For the Q1. Do you think that we'll see something more in line with normal seasonality, this year or given all these different for 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 Can you kind of help us think through that for a moment?
Yes. Certainly, I think the way we'll be looking at it is we'll look at kind of that normal for sequential trend and then just sort of compare and contrast there. I think that for the Q3 with revenue trends that we think can continue, certainly not at the strength of the recovery and for the Q3, but with positive revenue trends continuing that certainly gives us a helping hand, if you will. For the quarter. The average, we've got several outliers when you just look at a simple 10 or 5 year average over time, but it's usually about a 200 basis point increase.
And the 4th quarter can include things like we have an annual actuarial assessment for the company. We rebase a couple of the insurance type liabilities and that can go one way or the other on us. And when you throw out some of those outliers, for the next quarter. I think that 200 basis point kind of change will be sort of what we measure against. But as you know, we're always looking to try to do better.
And if we can for the Q3. Outperform a little bit on a revenue basis, then certainly that will win a helping hand. I think that in the Q3, for some of the costs that we saw go away temporarily in the second, a big cost element was were things like our group health for dental costs. Those kind of restored to normal and frankly were a little bit higher when we look at our fringe benefit for the Q1 of 2019. The group held the dental costs were a little bit higher than what that normal rate for the next quarter.
Has been and as a result, that fringe rate was a little bit higher than normal. So I think that there's some catch up on some cost items. So there's for some puts and takes going both ways and we'll just look to try to balance those. But we did want to say that and said it in the prepared for comments that I think that the biggest cost element that we have is the salaries, wages and benefits. For the next several years.
And certainly, we're going to continue to keep our focus, 1, on providing the very best service in our industry and I'm for the quarter. We're now seeing a number of factors that we're seeing in our cargo claims ratio at 0.1% and continue to deliver 99%. But I think that we can keep of that 200 basis point change for kind of about 150 basis points is the typical change in that salaries, wages and benefits. So if we can for management and staff kind of in line with normal seasonality, and I think we can. Then certainly some of those other cost elements
for questions. 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. For 2019. But when you kind of think about the long term goal has always been sort of a 25% incremental margin for your for the quarter. When we think about this quarter in particular, you guys had obviously a 25.5% operating 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 for questions. And then just a follow-up question about the incremental margin potential of the business as we sort of look forward or is 25% still the right number to use?
I think what we said maybe a couple of years ago was 25% was kind of our long term goal and for the Q1. That would imply working towards a 75% operating ratio. And when we achieve that goal, then we kind of update for the internal number, if you will. And that doesn't mean that we certainly can't do better than that in a quarterly period. And I think we for the Q1.
We certainly can and
we've proven it in the past.
And when you think about our cost structure, with sort of 2 thirds around there for the remainder of our cost being variable. If we can continue to manage those variable costs and produce leverage on those fixed costs, for the Q1 of 2019. And then we
can produce
some really strong numbers. But until we achieve the 75% annual operating ratio, I think we'll keep that goal out there for the next quarter. And then we'll update it and start thinking about sort of what's next. But for the Q1. What we feel is a lot of confidence on the ability to continue to improve the operating ratio even further.
For the Q1 of 2019. We know we've got opportunity of just continuing to execute on a basic plan and to achieve long term operating ratio improvement, for the Q1. It's a focus on density and yield. And certainly, the density piece of that has been a challenge this year. But for the Q1.
When you look at some of our operating metrics, despite the significant changes from 1st to second and then second to third, for the year. We've met those challenges, operated very efficiently and been able to control our costs. So we've done all the things there. For the Q1 of 2019.
We're pleased to have a strong performance on our
cost inflation that's led to and helped us improve the operating ratio over the long term. So for the Q1. There's certainly we feel confident saying that we can continue to beat it. We have some quarters where We might be 35% or even up to 40%. We've done some of those numbers in the past, and for the Q1.
Certainly, the cost structure has improved when you think about our direct cost as a percent of revenue. So that creates an even stronger opportunity for us for 2019 as we move forward, but we're not going to let that be a limiting factor either. We don't necessarily focus on for incremental margins internally. What we're focused on is producing long term profitable growth. And so to achieve the market share opportunities that we think are out for the company's call.
It requires investments and doing things that create some cost. And so we're going to growth we've been able to deliver because that ultimately leads to increased shareholder value.
Okay. That makes a lot of sense. Thanks again for the time.
For today's call.
We'll go next to David Ross with Stifel.
Yes. Good morning, gentlemen.
For
Adam, I just wanted to talk a little bit more about, I guess, the employee side because the labor efficiencies is where you showed the most leverage. For the Q1 of 2019. 6 months ago, 10 months ago, you guys were already very lean. So I guess where did you cut? How did you how were you able to move the amount of freight that you're moving now for future people.
What was the fact that you found that may not have been apparent?
For the
Q1. Dave,
some of that fat was not necessarily in our productive labor, but for some of our supervision, clerical and the different areas, not just necessarily productive drivers dock and those folks, but we found some when things got really for the next time. We found some things that we were able to manage without and we made the necessary what we felt like were for the full year. We have not added all of those folks back by any means. Some things have changed and we for
the quarter. We have not
needed that additional labor that
we were able to reduce back in the spring, back in for April May.
So now we
every location is a little bit different and the needs are a little bit different by for the next question. But now we do have some needs that we're continuing to feel to wrap back up just to make sure we're staffed. And for 2019. And as Adam had mentioned before and as I mentioned in my earlier commentary, trying to prepare for 2021, which we expect to be for a pretty robust and promising year. So we'll continue that ramp up 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?
For the next question. In some cases, David, it has. But for the most part, the biggest thing that customers are looking for is feedback for the Q1 of 2019. They want to know where it is and how do they get it quicker. And those for the things that we continue to try to work on the communication, shipment communication, the feedback that we get from our customers, the information that we get back from them in order to provide quicker tracing and better information, better So they can better plan and so we can better plan.
So it's a two way street from that standpoint, but we're continuing to focus and work on those things And they are definitely starting to help us.
It's definitely helping. So thank you very much.
We'll go next to Chris Wetherbee with Citi.
Hey, thanks. Good morning, guys. I was curious about the revenue per day cadence from September to October. I guess I'm trying to get a sense of for You talked about weight per shipment a little bit and the fluctuations there. Maybe you get a sense of what's going on, on the pricing side or the revenue per 100weight side to get a sense of how mix and kind of core pricing or impacting that as well.
Yes. I
mean, the yields are going to continue. Certainly, if you're looking at for revenue per 100 weight with the shipment sizes, weight per shipment decreasing for a little bit. That certainly would cause the revenue per hundredweight to increase slightly as well. So that's been a strong for a 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 for a 100 weight basis. I think that certainly some of the mix impacted things, the higher weight per shipment in the third, for a little bit longer length of haul as well that's certainly contributing, but that will continue for the Q1.
And we feel like some of the feedback we're hearing is that yields are continuing to increase in the industry as well. And for a few years. A lot of times what you'll see is, especially some of our competitors that use a little bit more purchase transportation for truckload services to run some of their internal line haul. Certainly, we'll 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 for really a higher need or a need rather for higher rates for our competitors that are offsetting those costs as their cost inflation for future growth.
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 for We feel positive about as we start thinking about finishing out 2020 and then turning the page to 2021.
For Okay. Okay. That's helpful. And I guess you talked about inflection points in the prepared remarks and also in answering my question. So thinking about for 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 for 2019. 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 for the 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. When we look at LTL, for the Q1 of 2019. It has been growing faster than just general GDP, and we think that the industry overall will for continued to see good growth. And I think that there are some longer term tailwinds at play with things like, for example, the e commerce trends that are pushing more retail related freight into the system. And right now, we're seeing for good trends with the retailers.
And it's different. Demand is that type of freight than certainly some of the for our legacy industrial related business, which is still 55% to 60% of our revenue. But certainly, it's been nice to have a good for a mix of retail related business that performed pretty strong for us, particularly in the Q2 when everything else was really weak. So for
the Q1 of 2019.
That's a
trend that I think will continue to be a tailwind for ELTL, creating smaller shipment sizes as fulfillment centers for the next several years. Continue to be built closer to population areas and shipment sizes more conducive to LTL versus truckload. But I think it gets back to right now capacity may not be as big of a factor, at least this year going through some of the weakness that the overall market is seeing. But for further growth. We're actively investing in real estate capacity, growing our network and building out the doors to process freight and that's what's for the Q1 of 2019.
The door capacity is very critical and certainly could be a limiting factor to growth and it's for the Q1 of 2019. We're also seeing a significant change in the number of service centers, and for at least a significant change in the number of service centers in the other public carriers, when you look over a longer period of time. For certainly some have added to their systems and grown in different areas and whatnot. But nevertheless, I think we've been one of the biggest winners for market share for the Q1 of 2019. We continue to invest and have the capacity.
So we have a service advantage by offering best in class service. We have a for capacity advantage and we think that will continue to play in our favor as the market continues to recover. For the next quarter. We've certainly seen some improving trends. I think that some of our industrial customers will continue to improve.
For ISM and some things like that have certainly been positive the last couple of months, but I don't think we're anywhere for near full recovery for most manufacturers and our manufacturing type businesses for the quarter. It has not been as strong as some of our retailers. So, those will those customers will continue to recover. I think we'll continue to see for favorable trends with the retail related business as well and all that can kind of come together hopefully for us as we transition into 2021.
Okay. That's helpful color. I appreciate it.
Thank you.
For the next question.
We'll go next to Ravi Shanker with Morgan Stanley.
Good morning. Thanks, gents. For So just maybe as a follow-up on that question, can you just give us a sense into what your customer conversations are like right now? I mean, clearly, the TL market is super tight. There's a long way to go in the demand cycle.
Are your customers looking ahead to 2021? And for 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 for GRI based on what your customers are doing right now.
Yes. Ravi, I'd expect that we would for the Q1 of 2019. Our next increase pretty much annually like we typically do. Typically, it's for a year out and I would expect next spring that we would take our typical seasonal increase based on our for the Q1 of 2019, which we'll look at closer to that time. But there has been and I think
for the quarter. We mentioned it earlier.
There has been a lot of demand for the bigger shipments, particularly as Adam mentioned off the West Coast. For questions. We've seen that, which certainly changes how you respond to customers' needs and whatnot. For the Q1. We're not a truckload carrier.
And if you're not careful, sometimes when the demand changes like it did
for the Q1 of 2019.
This early this fall, when you start to see those things, you have to make some adjustments, which we did. For So I think customers are certainly what we can tell, they're positive going into next year. For the next question. Again, the pandemic, I think, has some impact on that. But as we continue to recover and hopefully positively so, I think we for 2020.
We'll certainly go into 2021 with big expectations. That's certainly what we're aiming towards at this point.
Great. And just kind of on that, again, if you just give us a little bit of a framework on what for big expectations mean, I mean typically your GRI is in the mid single digit range. Will you be pushing for double digits?
For you. I think we've got a long term approach, Ravi, that we look at our cost inflation every year, and then we sit across from our customers and talk about what our costs, how they're changing and then what we need in terms of rate. And certainly, for the company. The way we really manage the business is looking at customer profitability on an account by account basis. So for the Q1.
There may be some customer accounts that we'll have to maybe be more aggressive with and then there's other for long term customer accounts that may go into the equation that be a little bit lower than the average. So for the Q1 of 2019. 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 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 for our customers.
Our industry is a relationship business and so it's critical that we continue to talk with our customers for and have that two way open and honest communication about things. And certainly, we're willing to do that and it makes more sense for the Q1 of 2019. When you can have a cost based discussion versus the industry is tight and we need a double digit increase this year and for the next quarter. The industry is loose this year, so we're going to give you some of that back next year and the roller coaster ride that maybe some customers for the next quarter. We're really proud of kind of these long term for customer relationships that we have and certainly we think that will continue.
And next year just looking out And 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 for 5% and that's been 75 to 100 basis points above our cost per shipment inflation. And for
the Q1
of 2019. We've already established a 3% wage increase that went into effect the 1st September. For So that's a big element of our cost inflation every year and has been pretty consistent as well. So for the Q1. We already know some of those factors and that will kind of frame things up for us, but we'll look.
And for
the next year. 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 for the quarter. Weight per shipment that might make your revenue per 100weight look a little bit stronger than maybe that 5% type of number. For So we'll just have to balance all of those, but underlying contract and general rate increase, for the quarter. I would expect that we'll see it kind of consistent
with what our long term trends have been.
That's great color. If I can just sneak in one follow-up to that, kind of The one area which I think you may not have mentioned is fuel. Obviously, kind of we appear to be in an environment for like prolonged subdued fuel prices and in the past the fuel surcharge has been a nice boost to your yield metrics. Do you feel like you need to change your go to market strategy or maybe change some of the formulas and how the fuel yield, the fuel surcharge is calculated there?
We've been dealing with fuel that's been down 20% or more and that's what it was down in for the Q1 of 2019. We produced a 74.5 percent operating ratio. So I think when we do that, that fuel contribution with the overall yield, for the Q1. That's just a variable component of pricing, and it's something that we continue to look at. And as the contract turns over, we look at the fuel base.
For the Q1 of 2019. But I think that we've been pretty successful with our fuel strategy really over the last couple of years. It's been several years ago where for fuel first really took a big drop that maybe the low end of our scale wasn't appropriate and we waited a little time to go back to some of our customers and have to make some changes on that. So as long as fuel continues to stay consistent, for the quarter. It doesn't really go much lower.
We'd like to see it come back a little bit because that certainly helps the top line number, but for the Q4. We're going to be if fuel continues to stay in this range where it is around 2.40 for a gallon, that's going to be down in the Q4. That would be down in the Q1 and really be the Q2 of next for the year before it kind of comes back to par. That was when fuel started dropping in 2Q of this year. So Yes, we'll see it'd be nice if it was a little bit higher because certainly that optically make our revenue numbers.
When we come in every day and we look at for the Q1 of 2019. What the revenue from the previous day was and when we look at the revenue, we can say growth now, but looking at it with and without the fuel, for the Q1. Yes, without the fuel certainly looks much stronger and it would be nice if that was the overall number, but you play the hands that you dealt for And that's what we'll continue to do.
Awesome. Thank you.
The positive side of that, Ravi, is obviously we don't need high fuel prices for the Q1 of 2019 to produce a record low OR. So I think that's the positive side of that. For
you. We'll go
next to Jason Seidl with Cowen.
Thank you, operator. And gentlemen, thanks for fitting me in here. 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
for the Q1 of 2019. 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, for the consumer. They continue to be low and so I think that some of that will continue, but the consumer for the future. Continues to consume and I think that people are spending money in different ways and you get down to it, that's still for 70% to 80% of the overall economy. So as people continue to purchase things, for the next several years. And there's got to be the production of those things and ultimate delivery and positioning for them to be able to buy them.
For the Q1. 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, for the LTL industry. It's certainly not an overnight kind of phenomenon for the next quarter. 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, for the next question.
And we're going to do everything we can to
make sure. But hinted at earlier, there's certainly some operational challenges for the company that come along with managing more of 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. For But I think that certainly, we can see those trends continue and take advantage because the other big piece of that retail related for growth on the e commerce side is the demand for superior service is even greater. They're managing inventory levels and inventory for the next quarter.
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 for the customers that will have penalties for vendors if their carriers aren't delivering on time and in full. For shareholders. Certainly, when you make the selection of choosing Old Dominion, we're going to deliver on time 99% of the time and our for 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 in investing in for technology going back my 20 plus years of covering you. How should we look at Old Dominion and their foray into potential alternative for fuel type or alternative technology trucks. Is this something you're looking at?
Certainly, Jason. We always try to stay in the forefront of any type for the equipment that's out there. I think we had talked about this in one of the prior calls, but we're looking at and exploring for electric vehicles and that kind of thing. But Jason, honestly, right now, nobody has a production, any type of for production electric vehicle. They're just we're just not there yet.
I'm sure there'll come a time and we'll progress as for the next several years. The technology and the opportunities for that progress, but right now they're just not out there and available. So We certainly have to balance all that from a cost standpoint and everything else, but I'm sure for the next question. That's going to be a big thing as we go forward. But right now, they're just not production vehicles out there to be had to run-in our for the system.
There's lots of issues, lots of stuff left to climb, if you will. And again, I'm sure we'll get there, but just
for So it feels like we're a couple of years away then?
I think so.
For today's call. We'll go next to Amit Mehrotra with Deutsche Bank.
Thanks, operator. Hi, Greg. Hi, Adam. For the Q and A. Adam, on your comments regarding the cost structure, especially on the overhead side, I guess that implies for direct costs or variable costs of 53% to 53.5% of revenues.
Do you think you can hold the line on that, for the Q2 of 2019. I guess variable piece of the cost structure in 4Q in terms of percentage revenue or is there anything that may drive, for the Q1 of 2019. The match between how that's evolved versus shipments has actually been quite close. Just wondering if there's any for prospective mismatch there between variable costs and shipments that we should think about as you go into the Q4.
Yes, I mean that's the we were talking earlier about some of the labor costs in that salary, wages and benefits line. That's typically where for that normal sequential deterioration in the operating ratio that's about 200 basis points. For the Q1 of 2019. The majority of that comes from the salary, wages and benefits line and most of those costs are going to be our productive labor costs. For the Q1.
So we'll see how that balances as we transition. Typically, like I said, you'd see that for the Q1 of 2019. We're certainly going to do what we can and believe that we can keep those costs kind of in line with what for 2019. And some of it will just depend on kind of what the revenue base and how that trends through the Q4 compared to where we just were in the 3rd. So but that will have more of an impact really on some of for those more fixed types of calls.
Yes. And then just related to that, I guess, on the overhead side, I'd love for you to comment on the long term opportunity there. Obviously, there's excess capacity in the line haul network and the density opportunities there. I mean, from 3, 4, 5 years, assuming no major change, I guess, in the growth and how the mix of revenue is trending. Could we be looking at for 17% to 18% overhead, just as you guys continue to leverage the line haul?
And then the last one I had is just for I don't know if you can help us with that in terms of how the quarter ended in September. Thanks.
Yes. In terms for the long term, where overhead costs might go. We've just over the long run, we've seen those costs for a trend between that 20% to 25% type of range. And the reason for that is really for what our market share opportunities are for the long term and we feel like we've got a really long runway for continued growth there, for the next quarter, which will require continued investment in assets. And so as we continue to invest, for the quarter.
Certainly, that depreciation line will continue to stay more as a bigger component, for, if you will, versus getting to the point where there's not growth left and you can create leverage on that. For 2019. So we feel good about what the market share opportunities are and continuing to look at investing 10% to 15% of our revenues back into our CapEx programs every year that will then drive the increase in depreciation. Some of those overhead costs for our shareholders. Our more variable in nature.
There's some elements that are bad debt expense. There's for that's in there. There's other things that are more variable. So that 20% to 25%, for maybe 5% to 8% of revenue is kind of more variable in nature that sort of for further growth in that overall element. So those will obviously continue to increase.
But certainly, there's going to be opportunities out there, for the Q1 of 2019. And we certainly are always looking to do what we can to minimize those costs. But what that means over the long run is that for the Q1 of 2019. The improvement in the operating ratio has come out of our direct cost and you referenced line haul a couple of times and we put line haul for the Q1. That's a direct operating expense.
And there's a fixed nature of running our line haul operations. And when we add new service centers, for the next several quarters. Sometimes that creates a little inefficiency on the line haul side, but it drives efficiency within our pickup delivery operations because we're now putting
for
our pickup delivery workforce, if you will, closer to our customers and minimizing the time to our first stop. And for There's different trade offs as we continue to grow and add to the overall footprint, but I think that for us. Certainly, there's opportunities for us to continue to be efficient there and drive further efficiencies. When you sort of break down our operations, for the quarter. We're at about 2 40 service centers now.
When you look at the available capacity that we have in the network, that's the opportunity whereas we for increased density in one particular service center that helps that service center's operating ratio. And when you're doing that across the spectrum for those two forty. It's only the few that you're adding depreciation to every year where you're causing the operating ratio maybe to go the opposite direction,
for the next several quarters.
But you've got a bigger pool that are working on some type of improvement program and that's really at the heart of why we've got confidence for the Q1 of
2019. Can you address the September for questions. Question as well on the breakdown between shipment, weight per shipment and shipments.
For the Q and A Yes, I thought with that long winded response, you might forget about that one. But for September. Let's see. So, the overall do you want the year over year for September?
Yes. If you're going to give me both, I'll take the year over year end sequential, that'd be great.
Okay. So for weight, year over year, tonnage was up 3.6 for the quarter and sequentially, September's tonnage was up 4.3% over August. For the shipment side, the shipments per day were down 0.5% on a year over year basis. For the Q1 of 2019. So compared to September of last year, shipments in September on a sequential basis were up 4.6% versus August.
For questions. Thank you. Thank you. Appreciate it.
Okay.
Got it.
For.
We'll go next to Todd Fowler with KeyBanc Capital Markets.
For the Q1.
Great. Thanks and good morning. Adam, just on the comments around network growth into 2021, I guess first to for the Q1. 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 for 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 for the Q1. Is the thought in 2021 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 center network is probably between 25% 30% now. For the Q1. We've gotten above that 30% threshold when things really weakened and I think we're kind of back in that type of range for now, which is good for us, especially as we transition to next year. But as Greg mentioned earlier, we've got several facilities that we think will be opening just between now and the end of Q1. So I think that we'll see some openings in 2021, but there will also be some for facilities that we either just expand or we move into a larger facility and out of another one.
Much of the investment will be continuing for the Q1 of 2019. I think that there's tremendous market share opportunity there. We've seen that play out in the Midwest in particular, which is the largest for LTL market. And so I think that certainly we've got opportunities there. And then we'll continue to look at where we have density for end of the line type of locations for the Q1.
We can add a facility in the market that just like I was talking about earlier that can help us in reducing some of our pickup delivery costs as well just by getting out closer to our customers, but we generally want to make sure that there's enough freight opportunity and density there to support an operation in the market. For the Q1. On the other side and the other pieces, certainly we've got equipment capacity right now. I think that we haven't finalized for our CapEx. We'll give that on next quarter's call.
But we had a bit of a holiday this year because of the overinvestment in for equipment in 2018 2019. This year, we only spent $20,000,000 on equipment. So I think that we'll to see that number kind of get back to more of a normalized type of range and we expect to see the overall CapEx for 2019. Kind of back in that 10% to 15% range, but probably towards the upper end of that. But we've still got some things to finalize as we kind of transition through the Q4 and really get to the point of putting orders in place.
But with all that said, I think that for the company. Typically, we can create and especially if we get into a really strong revenue growth environment, we can create leverage there
for the Q1
of 2019 and be able to offset those costs and that kind of just goes back into maybe the incremental margin conversation we were having earlier. We certainly, I think can produce some strong incrementals, but a lot of it will be dependent on for the growth expectations for next year. And we're still having conversations with customers as we're building up our forecast for next year and from a for a bottoms up and a top down basis. And there's still some uncertainty obviously hanging out there that we'll see. It may change some people's minds next week for
the next question.
Yes. Well, definitely in Ohio, we're staying tuned on that one, that's for sure. So for 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 for the Q3. Operating at a sub-seventy 5 OR here in the Q3, 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 purchased transportation that moved up, tonnage was obviously up a lot sequentially, but not a lot year over year. Does it feel like that for the Q4. On a longer term basis, it's sustainable to operate on a full year basis at a mid-seventy five excuse me, for mid-seventy 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 for longer term.
So, I think we've talked about being able to operate in this type of range on an annualized basis for some time and certainly made a lot of progress this year. Used to for the Q1 of 2019. We had to take for immediate and aggressive action to address some of the costs because of how immediate the drop off in revenue was and just for the Q1 of 2019. The unavailability of work that was out there back in April. And so it's been good as we transitioned through and saw some of the for the Q1 of 2019.
The recovery began back in May when things sort of stabilized and started improving. And we brought back for probably about 1400 employees compared back to April. And so we continue to onboard for people to keep up with these demand trends and but have really done a good job in balancing all of our costs. And for I think what we've seen in the past and trying to take that forward as we move into the future, is a lot of times when you go through a period like for the Q1 of 2019. You do a lot of evaluation of your processes, your people and systems and so forth.
For some of the productivity that we saw improvements that we made back in the 'eight and 'nine time frame, for years to come. And so we'd certainly expect that some of this improvement in productivity as we transition back into a growth environment and start bringing newer people on board. We obviously want to maintain these measurements of productivity and I think that we'll be able to. And so certainly that's encouraging. That's the biggest piece for the future.
The most critical element for us to continue to manage those and other true controllable costs as we transition back into more of a normalized growth environment in terms of what our expectations have been and what we've been able to produce in the past. For
the Q1.
So, we certainly again, we've talked about it before, but we believe we can continue to improve the operating ratio. And this is based for further details on how that model works. If we can continue to improve the network density, that generally creates productivity opportunities. And if we continue for us to be disciplined and have a cost based type of approach to managing our yields. And both of those generally require for the Q1 of 2019.
We've done it when the macro environment wasn't good, but certainly we think as we transition to more of a positive one, they'll for continued to help on those fronts and we can produce further operating ratio improvement.
Okay, got it. Hey, thanks a lot for the time today. Nice quarter.
For questions. Thanks,
Todd. Yes.
We'll go next to Ari Rosa with Bank of America.
For questions.
Hey, good morning guys and nice quarter. So my first question, I wanted to talk about, Greg, you mentioned you think we're at an inflection point on where OD
can go in terms of
market share. For the next question point on where OD can go in terms of market share. Maybe you could just elaborate on that a little bit. I think Adam talked earlier about for some of your competitors seeing some cost pressures rising. But is it really a function of that or is it really a function more of for kind of what you're seeing in terms of end markets and the conversations you're having with customers.
And if so, maybe you could elaborate on where you're seeing some strength in terms of for those customer conversations. And then if we think about other periods where OD has really seen a strong operating environment, for 2020. You've been able to grow tonnage into the double digits. And so maybe you could talk about the extent to which you think that's feasible for 2021, given kind of where you are in terms of resources and what you're looking to add?
Sure. I think obviously we're for the next year. We're continuing to, as Adam mentioned before, we're continuing to for further expansion and expand our capacity both from a facilities and an equipment standpoint. And we're in the process of hiring people. For the Q1.
So as you know, those are the components of adding capacity. So we're actually working pretty hard on all three fronts at this point in time. But for the Q1 of 2019. We've seen strength of late, particularly off the West Coast and I think for the next quarter. We've all seen and heard about the additional imports that are coming in and how busy the ports are for the rest of the country and we've seen that particularly out of California.
But we've for the most part system wide and we certainly expect that next year. For the most part, our customers are extremely positive. Again, Adam mentioned before, what happens next week, certainly could have an impact on where we are and where we go. But so far, we're
for the Q1 of 2019.
We're expecting a good year. Obviously, we're spending money like we're expecting a good year. So I think we certainly hope that it continues down that path and we're just Based on the feedback that we're getting, we're hoping for big things and hope that makes sense.
For questions. No, absolutely. That's helpful directionally, certainly. And then just for a little bit of minutiae, but the free cash flow number, it looked like the cash from operating activities for the Q1 of 2019. At about $170,000,000 was a bit below what it has been typically.
And so obviously very strong on the income statement line, but maybe you could from the line, but maybe you could talk about what was going on there with the operating cash flow?
The operating cash flow, well, you've always got for some changes and things that maybe are deferred that get paid. But when I think when you look on an overall basis, from a year to date standpoint, we produced really solid cash flow from operations, And so I've been pleased with that. But from a quarterly standpoint, it could just be the timing effect of some of the deferred for services that are somewhat related to the CARES Act that was passed earlier this year to help on some of those payroll taxes and whatnot and just some other changes for the Q1 of 2019 and the timing effect of things, but really strong, I think, cash flow performance, if you will, in terms of kind of where we are. It's probably a little below on a year to date basis for the Q1 of 2019. Last year, but overall, it's approaching $700,000,000 of cash from ops this year.
So for really strong and we'll continue. We've got it kind of in hand to be able to put the work as we think about our CapEx. And for 2019. As you know, our first priority for capital allocation is investing in our sales and the CapEx plan was a little bit lower this year, but a big for the Q1 of 2019. So we'll be evaluating that as we transition next year, but it certainly will probably be a much larger number for CapEx than what we had this year.
Okay, great. Thanks for the time, Adam and Greg.
We'll go next to Scott Group with Wolfe Research.
Hey, thanks. Couple of quick ones. So the October rev per day deceleration, is that entirely wafer shipment or is there any other piece of that?
It's weight per shipment driven, Scott. Like we mentioned before, for the quarter. The shipments are trending in line in October. And as you know, typically, our business for the next quarter, kind of builds up and September is usually the strongest month of the year for us. And so for the Q1 of 2019.
And we saw that again and those shipments continue to be really strong there. In fact, we're back to about for kind of where when we put our forecast together for the beginning of the year back to where we thought we'd be, in September, but took an unusual route to get there. And for the Q1 of 2019. You compare September shipment levels to March, which is really before things begin to really be affected for the Q1 of 2019. We're kind of in line with the normal trend there of kind of you look back over time where September would be versus March.
For the Q1. So, we're seeing good trends there. But the October, the shipments per day, right in line right now for the quarter. At this point, what the longer term, the 10 year average sequential trend would be. And, but just a little bit softer on the weight per for shipment side, which is not totally unexpected.
We believe that that will continue to sort of come back as our smaller customers continue to to sort of get back to their normalized level. The mix is still slanted a little bit heavier to our larger national accounts than kind of historical trends by a couple of points probably, but nevertheless those smaller accounts are continuing to for the Q1 of 2019. So that's certainly beneficial. But yield trends continue to be solid and it's really just for the full year. The function of that weight per shipment is dropping a little bit on us.
But some of that, like we mentioned, was us taking control and getting some of the transactional for freight out of our business right now.
But just given your views around share gains, you wouldn't have Thought that shipments would be outperforming seasonality now?
Again, I think that for the quarter. When you just look and think about from a customer standpoint and how they're getting freight out, September is going to be the buildup. For the Q1 of 2019. When you look over the past 20 years, the normal sequential trend is down about 3%. There's really been only one for October in the past 20 years that's been positive versus September.
So obviously, we've got a week left in the month for the Q and A session. We're just talking about numbers that aren't finalized, but this is about where frankly we thought we would be and we're managing to. So for the Q1 of 2019. It's not been a surprise, especially with the fact that, again, we have limited some shipments out of the system. So it would have been for a very normal and expected to see even as things were building up that we'd see a little bit for a drop off in October versus the September trend there.
And that's just really a function for the Q1 of 2019. When you look across the spectrum of all of our customer accounts, the way they're managing their business and their shipment trends and so forth. Not unexpected to see it at all.
Okay. And then just lastly on the OR. So If you look at most years, the OR is similar with, if not better than Q3 the prior year. So So I guess what I'm trying to say is that it feels like next year should be a year where you get to that 75 OR, if not better. Do you think we're missing anything there?
Well, I mean, we just we're not ready to call next year's operating ratio, but for the next question. I think that certainly as revenue plays out like we hope it will transitioning, for That obviously creates an opportunity. We generally on average have been producing or improving the operating ratio for 80 basis points to 100 basis points kind of on average each year. And just taking kind of where we are from a year to date basis, for the Q1 of 2019. Obviously, we're a little bit better than that at this point, than that longer term trend despite the fact that
for the quarter.
Revenues have been affected like they have been. So, we'll see where we end up next year, but we're not ready to give any specific for some color on it, but certainly in an improving revenue environment, it makes the ability to improve operating for the future easier than certainly what we've seen and had to deal with this year.
Makes sense. Thank you, guys. Appreciate it.
And that concludes today's question and answer session. I'd like to turn the conference back over to Mr. Greg Gantt for closing remarks.
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. For
today's conference call. Thanks and have
a great day. And that concludes today's conference. Thank you for your participation. You may now disconnect.