Good morning, welcome to the third quarter 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 719-457-0820. The replay passcode is 8105860. 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 of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Old Dominion's expected 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, expects, and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements 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. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise. As a final note, before we begin, we welcome your questions today. We do ask, in all fairness, that you limit yourselves to just a few questions at a time before returning to the queue. Thank you for your cooperation.
At this time, for opening remarks, I would like to turn the conference over to the company's President and Chief Executive Officer, Mr. Greg Gantt. Please go ahead, sir.
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, the 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 hundred weight.
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 trends.
At this point in October, with almost a week remaining in the month, our revenue per day is trending higher by approximately 2%-2.5% as compared to October 2019. Our shipments per day are trending in line with normal seasonality, but our weight per shipment is in the 1,570-1,600 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.
Thank you. We'll go first to Allison Landry with Credit Suisse.
Good morning. Thanks. Adam, you know, you mentioned weight per shipment, lower sequentially, still up a little bit year-over-year. I was just wondering, is there a weight per shipment that you're targeting to optimize the revenue quality and margins? Also, are you starting to see any spillover freight from tight truckload capacity? Is that, you know, are those some of the shipments that you're turning away?
I don't think that there's necessarily an optimal weight per shipment. You know, certainly we've tended to average in better periods around the 1,600 pound mark. We've, you know, can trend down closer to 1,550 pounds and that still be fine too. You know, some of the lower water marks like we hit in kinda August of last year was about 1,530 pounds. That's generally when the economy may not be as strong and that kinda went hand in hand with some of the slowdown that we had seen in the industrial market last year. We're still pleased. I mean, right now it's kind of, you know, around between the 1,570 and 1,600 pound range, and that's good.
We were starting to see some heavier weighted shipments come in, particularly off the West Coast. 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 balance as well. We took some internal measures there to try to limit, not necessarily exclude all, but to limit some of those shipments kind of around the system. That's why the it's trending a little bit lower. In September, the average was 1,617 pounds. It had been moving back closer to that 1,600 pound mark. You know, there's a couple of good trends in there. Our smaller mom-and-pop customers, the revenue is coming back.
You know, initially in the pandemic, we had stronger performance with our larger national accounts. Our top 50 accounts continue to perform very well. Starting to see some of those smaller accounts come back. I think once we get 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. You know, I know you talked about, you know, just the environment currently being conducive to accelerating market share gains, and it sounds like you're more active on the hiring front. Could you sort of walk us through how you expect headcount trends, you know, to materialize in Q4? Sounded like maybe up a little bit sequentially, but do you think it'll still be down year-over-year?
I think that it will. You know, typically on a sequential basis, the average change in headcount in the fourth quarter is about 2% higher than the third quarter. You know, when you look back at some periods, like 2017, for example, that number was about 4% higher sequentially. You know, we were going through a similar period then with volumes really starting to accelerate. You know, we certainly could see, you know, that number kind of being around that 4%. There's no magic number. We're basically just as we go around the system, trying to figure out where we need people and to keep things balanced.
We may have noticed that we used a little bit of purchased transportation, a little bit more than normal in the third quarter. That was up 20 or 30 basis points. That's some of how we manage when you get a surge in shipments like we saw when we didn't have all the people in the right places. We can certainly go to that purchased transportation market. With truckload rates like they are now, you know, certainly we wanna we would rather have the employees and our own equipment and continue to manage our domestic line haul network 100% in-house like we historically have.
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 that service element to our business. Certainly that's critical to our value proposition of being able to continue the trend of what we've produced historically. We're gonna make sure that we keep adding the people where necessary, you know, to keep up with current demand trends, but also for expectations for a positive growth environment in 2021. It's critical that we get all the people in place. We've certainly got the equipment and we'll be addressing our equipment and our service center needs with our 2021 CapEx plan.
That people piece of the equation right now is important. 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 drivers in particular. That's something that we just wanna make sure that we can catch up and try to get ahead of the demand curve, if you will.
Okay. All right. That's really helpful. Thank you, guys.
You're welcome.
We'll go next to Jordan Alliger with Goldman Sachs.
Yeah. Morning. Just a couple 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 the driver front.
Yeah, 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. We're able to find drivers. Again, just not always at the speed that we'd like to find them. So far so good, but it definitely takes an effort.
We're still able to hire some from competitors. I think that's a good thing that certainly has helped us over time. We'll continue to do what we need to do to keep our service center staffed and ready to go.
All right. That's helpful. Just one other quick one. Can you touch a little bit more on some of these other, you know, the expense side, the operating supplies, general supplies, et cetera? You know, I'll continue to track on the second quarter and now the third quarter, you know, at a very good run rate relative to normal as a percentage of sales. I'm just curious, are these sort of general 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, you know, just collectively, when you talk about the general supplies and expenses and depreciation, you know, those all kind of fall in the general overhead bucket, if you will. That would include the other big component is a piece of the salary, wages, and benefits, you know, our salaried employees and clerical and so forth. All of those dollars, you know, that's been an area that we've talked about from the first to the second quarter. We certainly saved on dollars in the aggregate due to active measures that we took. Sequentially, we had from the first quarter to the second quarter, some inflation in those aggregate expenses as a percent of revenue.
With the improvement in revenue, we actually were able to generate some improvement there. In the second quarter of this year, those costs in aggregate were about 24% of revenue. They were a little over 21% here in the third quarter. You know, the improvement in revenue certainly helped. The total dollars were about the same that we spent, and that's just ongoing cost control measures that we've got in place. Now certainly, as we start transitioning into 2021, you know, it's kind of a matter of when some of those costs will return.
You know, some things, such as, some of our marketing programs, customer entertainment, travel by our sales personnel, you know, we want to be able to restart those measures. Our sales team's done a phenomenal job having to play the hand that they're dealt right now, of staying in front of our customers, continuing to communicate, talk about customer challenges and customer opportunities as well. Certainly is not as effective when they're out, making, you know, personal sales calls and having face-to-face meetings. You know, we'd like to see that be restored, happily would pay that cost, but, it's one of those things that, you know, we simply have no idea, when it will be safe to really be able to fully restore those programs.
You know, measures like that will come back in due time. Certainly we'd expect to have a much higher revenue base when those are restored as well. You know, we've historically seen our overhead costs kind of average between 20%-25%. You know, coming back to being closer to 21.5% of revenue here in the third quarter, you know, certainly it's a function of cost control, some revenue recovery, but just continuing to be disciplined there and trying to keep those overhead costs as low a as a percent of revenue as we can, will always be our focus going forward.
Great. Thank you so much.
We'll go next to Jack Atkins with Stephens.
Hey, guys. Good morning. Congratulations on a great quarter here. Adam, maybe if I could just kind of think about the third quarter to fourth quarter, you know, seasonality here. Typically, it's about 170 basis points or so of sequential deterioration. You know, you talked about, you know, needing to staff up on the headcount side. You know, obviously, it's such an unusual year in terms of how this year's progressed. You know, do you think that we'll see something more in line with normal seasonality, this year? Given all these different factors here, you know, 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?
Yeah. Certainly, I think the way we'll be looking at it is, we'll look at kind of that normal sequential trend, and then, you know, just sort of compare and contrast there. I think that, you know, with revenue trends that we think can continue, you know, certainly not at the strength of the recovery and the surge we saw in the third quarter, but, you know, with positive revenue trends continuing, that certainly gives us a helping hand, if you will. We've got several outliers when you just look at a simple 10 or five-year average over time. It's usually about a 200 basis point increase.
You know, the fourth quarter can include things like we have an annual actuarial assessment and we rebase a couple of the insurance type liabilities, and that can go one way or the other on us. When you throw out some of those outliers, you know, I think that 200 basis point kind of change will be sort of what we measure against. As you know, we're always looking to try to do better, and if we can outperform a little bit on a revenue basis, then certainly that will lend a helping hand.
You know, I think that in the third quarter, you know, some of the costs that we saw go away temporarily in the second, a big cost element was things like our group health and dental costs. Those kind of restored to normal, and frankly were a little bit higher. When we look at our fringe benefit rate as a % of revenue, the group health and dental costs were a little bit higher than what that normal rate has been. As a result, that fringe rate was a little bit higher than normal. You know, I think that there's some catch up on some cost items. There's some puts and takes going, you know, both ways.
We'll just look to try to balance those. You know, we did want to say that, and said it in the prepared comments, that I think that, you know, the biggest cost element that we have is the salaries, wages, and benefits. Certainly, we're going to continue to keep our focus, one, on providing the very best service in our industry. I'm really proud of what we achieved continuing to deliver in the third quarter with historic low, matching our cargo claims ratio at 0.1% and continue to deliver 99%. I think that we can keep of that 200 basis point change. Kind of about 150 basis points is the typical change in that salaries, wages, and benefits.
If we can manage that kind of in line with normal seasonality, and I think we can, then certainly some of those other cost elements will be more a function of revenue trends, if you will, from the third to the fourth quarter.
Okay. Okay, got it. That makes a lot of sense. I guess for my follow-up question here, you know, I don't wanna put you guys on the spot, but I've been getting this question this morning from some investors. You know, when you kinda think about the long-term goal has always been sort of a 25% incremental margin for, you know, for your business, you know, when we think about this quarter in particular, you guys had obviously a 25.5% operating margin, you know, for the quarter. It kinda feels like we're maybe pushing into a new frontier. You know, 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?
You know, I think what we said maybe a couple of years ago was 25% was kind of our long-term goal. You know, that would imply working towards a 75 operating ratio. When we achieve that goal, then we'd kind of update the internal number, if you will. That doesn't mean that we certainly can't do better than that in a quarterly period. I think we certainly can, and we've proven it in the past. When you think about our cost structure, you know, with sort of two-thirds or around there of our costs being variable, if we can continue to manage those variable costs and produce leverage on those fixed costs, then we can produce some really strong numbers.
You know, until we achieve the 75 annual operating ratio, then I think we'll keep that goal out there. We'll update it and start thinking about sort of what's next. You know, what we feel is a lot of confidence on the ability to continue to improve the operating ratio even further. We know we've got opportunity of just continuing to execute on a basic plan. To achieve long-term operating ratio improvement, it's a focus on density and yield. Certainly the density piece of that has been a challenge this year.
You know, when you look at some of our operating metrics, despite the significant changes from first to second and then second to third, you know, we've met those challenges, operated very efficiently, and been able to control our costs. We've done all the things there. That yield piece is critically important as well. Just having a long-term consistent approach that is focused on outperforming our cost inflation, that's led to and helped us improve the operating ratio over the long term. There's certainly, we feel confident saying that we can continue to beat it. You know, will we have some quarters where, you know, we might be 35 or even up to 40%?
I mean, we've done some of those numbers in the past, and certainly, the cost structure has improved, when you think about our direct cost as a % of revenue. That, that creates an even stronger opportunity for us as we move forward. We're not gonna let that be a limiting factor either. We don't necessarily focus on incremental margins internally. What we're focused on is producing long-term profitable growth. To achieve the market share opportunities that we think are out there in front of us, it requires investments and doing things that create some cost.
We're gonna continue to make all the necessary investments we need to make and try to continue the string of the long-term profitable 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.
Yeah.
We'll go next to David Ross with Stifel.
Yes. Good morning, gentlemen.
Dave.
Adam, I just wanted to talk a little bit more about, I guess, the employee side because the labor efficiencies is where you show the most leverage. Six months ago, 10 months ago, you guys were already very lean. I guess, where did you cut? How did you know, how were you able to move the amount of freight that you're moving now with, you know, with fewer people? What was the fat that you found that may not have been apparent?
Dave, some of that, some of that fat was not necessarily in our productive labor, but, you know, in some of our supervision, clerical, and the different areas, not just necessarily productive drivers, dock, and those folks. You know, when things got really tight, you know, we found some things that we were able to manage without. You know, we made the necessary, what we felt like were necessary cuts at the time. We have not added all of those folks back by any means. Some things have changed, and we have not needed that additional labor that we were able to reduce back, you know, in the spring, back in April and May.
You know, now we, every location's a little bit different, and the needs are a little bit different by location. Now we do have some needs that we're continuing to fill, to ramp back up just to make sure we're staffed. And as Adam had mentioned before and as I mentioned in my earlier commentary, you know, trying to prepare for 2021, which we expect to be a pretty robust and promising year. We'll continue that ramp up as needed.
Greg, you mentioned also investing in technology that customers demand to support their initiatives. Can you give us some examples of what that is? Has that also allowed you to be more productive from a labor efficiency standpoint?
In some cases, David, it has, but for the most part, you know, the biggest thing that customers are looking for is feedback on their shipments. They wanna know where it is and how do they get it and how do they get it quicker. Those are 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, you know, in order to provide quicker tracing and better information so they can better plan and so we can better plan. You know, 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. Thank you very much.
David.
We'll go next to Chris Wetherbee with Citi.
Yeah. Hey, thanks. Good morning, guys. Was curious about the revenue per day cadence from September to October. I guess I'm trying to get a sense of, you know, 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 hundredweight side. Do you get a sense of how mix and kinda core pricing are impacting that as well?
Yeah. I mean, the yields are going to continue. You know, certainly if you're looking at revenue per hundredweight, with the shipments, shipment sizes, weight per shipment decreasing a little bit, that certainly would cause the revenue per hundredweight to increase slightly as well. You know, 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. You know, just looking at it on a hundredweight basis, I think that, you know, 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. You know, that will continue.
We feel like, you know, some of the feedback we're hearing is that yields are continuing to increase in the industry as well. You know, a lot of times what you'll see is, especially some of our competitors that use a little bit more purchased 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. 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.
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. 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 2021.
Okay. Okay, no, that's helpful. I guess, you know, you talked about inflection points in the prepared remarks and also in the answer to my question. You know, thinking about, you know, market share opportunities as, you know, maybe you sort of cross over into 2021, you guys have always done a good job growing in excess of the market. 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 wanna get a sense of sort of how you're still seeing that opportunity, how big it is.
Yeah. You know, when you look at LTL, it has been growing faster than just general GDP. We think that the industry overall will continue to see good growth. You know, I think that there's some longer term tailwinds at play with things like for example, the e-commerce trends that are pushing more retail related freight, you know, into the system. Right now we're seeing good trends with the retailers. You know, it's different. The demand is that type of freight than certainly some of our legacy industrial related business, which is still 55%-60% of our revenue.
Certainly, you know, it's been nice to have a good mix of retail related business that performed pretty strong for us, particularly in the second quarter when everything else was really weak. That's a trend that I think will continue to be a tailwind for LTL, creating, you know, smaller shipment sizes as fulfillment centers continue to be built closer to population areas and shipment size is more conducive to LTL versus truckload. You know, I think it gets back to, you know, right now capacity may not be as big of a factor, at least, you know, this year going through some of the weakness that the overall market has seen.
You know, when you get back to the long-term trend that we've been talking about before, the pandemic effect, you know, we've been consistently investing in real estate capacity, growing our network, and building out, the doors to process freight. That's what's required in the LTL space, the door capacity is very critical, and certainly could be a limiting factor to growth, and it's why we stay or try to stay so far ahead of the demand curve there. There really hasn't been 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. Certainly some have added to their systems and grown in different areas and whatnot.
Nevertheless, I think we've been one of the biggest winners for market share in some cases because we continue to invest and have the capacity. We have a service advantage by offering best-in-class service. We have a capacity advantage, and we think that will continue to play in our favor as the market continues to recover. You know, we've certainly seen some improving trends. I think that some of our industrial customers will continue to improve. You know, ISM and some things like that have certainly been positive the last couple of months. I don't think we're anywhere near full recovery for most manufacturers. Our manufacturing type business has not been as strong as some of our retailers.
You know, those customers will continue to recover. I think we'll continue to see 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. Okay. That's helpful color . I appreciate it. Thank you.
We'll go next to Ravi Shanker with Morgan Stanley.
Morning. Thanks, gents. 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 TL market's 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, you know, RFP contract negotiations coming forward? Kind of how are you thinking about the timing of the next GRI, based on what your customers are telling you right now?
Yeah, Ravi, I'd expect that we would take our next increase pretty much at, you know, annually like we typically do. Typically it's a year out, and I would expect next spring that we would take our typical seasonal increase based on our cost and how they are trending, which we will, you know, we'll look at closer to that time. But there has been, and I think we mentioned it earlier, you know, there has been a lot of demand for the bigger shipments, particularly as Adam mentioned off the West Coast. We've seen that, which certainly, you know, it changes how you respond to customers' needs and whatnot. You know, we're not a truckload carrier.
You know, if you're not careful, sometimes when the demand changes like it did this, you know, this early this fall, when you start to see those things, you have to make some adjustments, which we did. I, you know, I think customers are certainly, from what we can tell, they're positive going into next year. Again, the pandemic I think, you know, has some impact on that. As we continue to recover and hopefully positively so, I think we'll certainly go into 2021, with big expectations. That's certainly what we're aiming towards at this point.
Great. 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?
You know, I think we've got a long-term approach, Ravi, that we look at our cost inflation every year. Then we sit across the table from our customers and talk about what are our costs, how they're changing, and then what we need in terms of rate. Certainly, you know, the way we really manage the business is looking at customer profitability on a account-by-account basis. 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, you know, may go into the equation that'd be a little bit lower than the average. It just kind of depends on each customer situation, and we'll look at those.
You know, we've been pretty consistent the last few years with a general rate increase of around 5%. That kind of becomes the proxy for what we talk to customers on average about for the need. We've been successful in achieving our contractual increases throughout this year. That kind of gets back to the heart of the true customer relationship that you have. You know, our industry is a relationship business. It's critical that we continue to talk with our customers and have that two-way open and honest communication about things. Certainly we're willing to do that.
It makes more sense when you can have a cost-based discussion versus the industry is tight, we need a double-digit increase this year, the industry is loose this year, so we're gonna give you some of that back next year. You know, the rollercoaster ride that maybe some customers go on with when they make a decision other than select an Old Dominion. You know, we're really proud of kind of these long-term customer relationships that we have, and certainly we'll think that will continue. You know, next year, just looking out, you know, certainly that's kind of the 4% to 5%. When you look at our long-term revenue per shipment, we've kinda averaged really between 4.5% and 5%.
That's been 75 to 100 basis points above our cost per shipment inflation. You know, we've already established a 3% wage increase that went into effect the first of September. That's a big element of our cost inflation every year. It's been pretty consistent as well. We already know some of those factors, and that'll kinda frame things up for us. You know, we'll look. The yield numbers themselves, you know, some of it will really depend. There's gonna be some weird comparisons as we transition into next year with weight per shipment that might, you know, make your revenue per hundred weight look a little bit stronger than maybe that 5% type of number. We'll just have to balance all of those. But, you know, underlying, contract and general rate increase, I would expect that we'll see it kinda consistent with what our long-term trends have been.
That's great color. If I can just sneak in one follow-up to that. The one area which I think you may not have mentioned is fuel. Obviously, kind of we appear to be in an environment of like prolonged subdued fuel prices. 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?
Well, you know, we've been dealing with fuel that's been down 20% or more. That's what it was down in this most recent quarter, and we produced a seventy-four and a half operating ratio. I, you know, I think when we balance that fuel contribution with the overall yield, you know, that's just a variable component of pricing. It's something that we continue to look at. As a contract turns over, we look at the fuel base. I think that we've been pretty successful with our fuel strategy really over the last couple of years.
You know, it's been several years ago where when 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. You know, as long as fuel continues to stay consistent, it doesn't really go much lower. You know, we'd like to see it come back a little bit 'cause that certainly helps the top line number. You know, we're gonna be if fuel continues to stay in this range where it is around $2.40 a gallon, that's it's gonna be down in the fourth quarter.
That would be down in the first quarter and really be the second quarter of next year before it kind of comes back to par. That was when fuel started dropping in 2Q of this year. You know, we'll see. It'd be nice if it was a little bit higher because certainly that optically make, you know, our revenue numbers. When we come in every day and we look at what the revenue from the previous day was, and then we look at the revenue, we can say growth now. Looking at it with and without the fuel, you know, the without the fuel certainly looks much stronger, and it'd be nice if that was the overall number. You know, you play the hand that you're dealt 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 to produce a record low OR. I think that's the positive side of that.
We'll go next to Jason Seidl with Cowen.
Thank you, operator. 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 restocking, but there is some underlying demand. I'm just curious what they're saying, you know, how strong is this gonna be and for how long?
Well, certainly, you know, when you look at inventory levels, overall, they continue to be low. You know, so I think that some of that will continue. The consumer continues to consume. I think that people are spending money in different ways. You know, you get down to it, that's still 70%-80% of the overall economy. It's just people continue to purchase things, then there's gotta be the production of those things and ultimate delivery and positioning for them to be able to buy them.
you know, certainly there's been some obvious changes in the retail landscape related to the pandemic and probably have seen e-commerce growth, you know, probably pulled forward a couple of years at least in terms of the change of e-commerce in terms of total retail sales. you know, that's been something that as we talked about before, it creates some opportunity for the LTL industry. It's certainly not an overnight kind of phenomenon and you don't build fulfillment centers overnight. That's something that's certainly continuing to change and we think we can benefit from and we're gonna do everything we can to make sure.
You know, I hinted at earlier, there's certainly some operational challenges that come along with managing more of that freight and balancing your right equipment pools and just the service demands can be different as well. 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. You know, I think that certainly we can see those trends continue and take advantage, 'cause 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, 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 will have penalties for vendors if their carriers aren't delivering on time and in full. Certainly when you make the selection of choosing Old Dominion, we're gonna deliver on time 99% of the time, and our damages as a percent of revenue of 0.1%. 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.
You know, that's good color. I have a follow-up on technology. I mean, you guys have always been at the forefront in investing in technology going back my 20+ years of covering you. How should we look at Old Dominion and their foray into, you know, potential alternative 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 of new equipment that's out there. I think we talked about this in one of the prior calls. You know, we're looking at and exploring electric vehicles and that kind of thing. Jason, honestly, right now, nobody has a production any type of a production electric vehicle. We're just not there yet. I'm sure there'll come a time and, you know, we'll progress as the technology and the opportunities for that progress. Right now, they're just not out there and available. You know, we certainly have to balance all that from a cost standpoint and everything else. You know, they're I'm sure that's gonna be a big thing as we go forward.
Right now, they're just not production vehicles out there to be had to run in our system. There's lots of issues, lots of hills left to climb, if you will. Again, I'm sure we'll get there, but just not there yet.
It feels like we're a couple years away then?
I think so.
Okay, perfect. Gentlemen, I appreciate the time as always. Everyone be safe.
Okay, bye.
We'll go next to Amit Mehrotra with Deutsche Bank.
Thanks, operator. Hi, Greg. Hi, Adam. Adam, on your comments regarding the cost structure, especially on the overhead side, I guess that implies, you know, direct costs or variable costs of 53% to 53.5% of revenues. Do you think you can hold the line on that, you know, I guess, variable piece of the cost structure in 4Q in terms of percentage of revenue? Is there anything that may, you know, 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 prospective mismatch there between variable costs and shipments that we should think about as you go into the fourth quarter?
Yeah, I mean, we were talking earlier about, you know, some of the labor costs and that salary, wages, and benefits line, and that's typically where that normal sequential deterioration in the operating ratio that's about 200 basis points. The majority of that comes from the salary, wages, and benefits line. You know, and most of those costs are gonna be our productive labor costs. We'll see how that balances as we transition. Typically, you know, like I said, you'd see that inflate a little bit, and we're certainly gonna do what we can and believe that we can keep those costs kind of in line with what that normal sequential trend will be.
Some of it will just depend on kind of what the, you know, the revenue base and how that trends, you know, through the fourth quarter compared to where we just were in the third. That'll have more of an impact, you know, really on some of those more fixed types of costs.
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, in three, four, five years, assuming, you know, no major change, I guess, in the, in the growth and, and how the mix of revenue is trending, could we be looking at 17%-18%, you know, overhead, as you guys continue to leverage the line haul? The last one I had is just, if you could just provide a little more color around September tonnage. That's obviously important between the breakdown between shipments and weight per shipment on a year-over-year basis. I don't know if you can help us with that in terms of how the quarter ended in September. Thanks.
Yeah, you know, in terms of long term, where overhead costs might go, you know, over the long run, we've seen those costs trend between that 20%-25% type of range. The reason for that is really 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, which will require continued investment in assets. As we continue to invest, you know, certainly that depreciation line will continue to stay, you know, more as a bigger component, if you will, versus getting to the point where there's not growth left and you can create leverage on that.
We feel good about what the market share opportunities are and continuing to look at investing, you know, 10%-15% of our revenues back into our CapEx programs every year that will then drive the increase in depreciation. Some of those overhead costs too, you know, are more variable in nature. You know, there's some elements that are bad debt expense. There's some performance-based compensation that's in there. There's other things that are more variable. You know, that 20%-25%, you know, maybe 5%-8% of revenue is kinda more variable in nature that it's sort of within that overall element. Those will obviously continue to increase.
Certainly there's gonna be opportunities out there, and we certainly are always looking to do what we can to minimize those costs. What that means over the long run is that the improvement in the operating ratio is coming out of our direct costs. You referenced line haul a couple of times, and we put line haul, that's a direct operating expense. You know, there's a fixed nature of running our line haul operations. When we add new service centers, 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 our pickup delivery workforce, if you will, closer to our customers and minimizing the time to our first stop.
You know, there's different trade-offs as we continue to grow and add to the overall footprint. I think that, certainly there's opportunities for us to continue to be efficient there and drive further efficiencies. When you sort of break down our operations, we're at about 240 service centers now. When you look at the available capacity that we have in the network, that's the opportunity. Whereas we increase density in one particular service center, that helps that service center's operating ratio. When you're doing that across the spectrum of those 240, 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. You've got a bigger pool that they're working on some type of improvement program.
That's really at the heart of why we got confidence in saying we can continue to drive the operating ratio even lower than where it is today.
Can you address the September question as well on the breakdown between shipment, weight per shipment and shipments?
Yeah. I thought with that long-winded response you might forget about that one. With September, let's see. The overall Do you want the year-over-year for September?
Yeah. If you're gonna give me both, I'll take the year-over-year and sequential. That'd be great.
For weight, year-over-year, tonnage was up 3.6%. Sequentially, September's tonnage was up 4.3% over August. 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.
Thanks a lot. Appreciate it. Yep.
Okay.
Got it.
We'll go next to Todd Fowler with KeyBanc Capital Markets.
Great. Thanks, and good morning. Adam, just on the comments around, you know, the network growth into 2021, I guess first to start, you know, can you share roughly where you think the available capacity is in the network? Second, as you think about, you know, what you're targeting, is it mostly on the door side or is it on rolling stock? 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 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?
Yeah. The overall capacity of the service center network is probably between 25% and 30% now. You know, we'd gotten above that 30% threshold when things really weakened and I think we're kind of back in that type of range now, which is good for us, especially as we transition to next year. As Greg mentioned earlier, we've got several facilities that we think will be opening just between now and the end of the first quarter. I think that we'll see some openings in 2021, but there will also be some facilities that we either just expand or we move into a larger facility and out of another one.
You know, much of the investment will be continuing to add out in some of our larger metro areas where we may add a second, third, fourth or fifth facility. 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 LTL market. I think that certainly we've got opportunities there. Then we'll continue to look at where we have density for end-of-the-line type of locations. 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, but just by getting out closer to our customers.
We generally, you know, wanna make sure that there's enough freight opportunity and density there to support an operation in the market. You know, on the other side, and the other pieces, you know, certainly we've got equipment capacity right now. I think that we haven't finalized our CapEx. We'll give that on next quarter's call. You know, we had a bit of a holiday this year. Because of the overinvestment in equipment in 2018 and 2019, this year we only spent $20 million on equipment. I think that we'll see that number kind of get back to more of a normalized type of range.
We'll expect to see the overall CapEx back in that 10%-15% range, but probably towards the upper end of that. We've still got some things to finalize, you know, as we transition through the fourth quarter and really get to the point of putting orders in place. You know, with all that said, I think that, you know, typically, we can create And especially if we get into a really strong revenue growth environment, we can create leverage there and be able to offset those costs. That just goes back into, you know, maybe the incremental margin conversation we were having earlier.
We certainly, I think can produce some strong incrementals, but a lot of it'll be dependent on the growth expectations for next year. We're still having conversations with customers as we're building up, you know, our forecast for next year and from a bottoms up and a top down basis. There's still some uncertainty, obviously, hanging out there that, you know, we'll see. It may change some people's minds next week, based on the results of the election.
Yeah. Well, we'll definitely in Ohio we're staying tuned on that one, that's for sure. Well, hey, just on my follow-up, you know, I guess kind of a bigger picture question, and Jack kind of hit on this with the incremental margin question earlier. You know, operating at a sub-75 OR here in the third quarter, you know, 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. You know, tonnage was obviously up a lot sequentially, but not a lot year-over-year.
You know, does it feel like that, you know, on a longer term basis, you know, it's sustainable to operate, you know, on a full year basis at a mid 75 or excuse me, a mid 70 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, you know, representative of kinda what you can do longer term?
You know, 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. You know, used to kinda say we needed revenue growth to be able to improve the operating ratio.
The environment was so unusual, you know, we had to take immediate and aggressive action to address some of the cost because of how immediate the drop-off in revenue was and just the unavailability of work that was out there back in April. You know, it's been good as we transitioned through and saw some of the recovery begin back in May, when things sort of stabilized and started improving. You know, we've brought back probably about 1,400 employees compared back to April. You know, we continued to onboard people to keep up with these demand trends. Have really done a good job in balancing all of our costs.
You know, 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 this, you do a lot of evaluation of your processes, your people and systems and so forth. Some of the productivity that we saw, improvements that we made back in the 2008 and 2009 timeframe, you know, those carried forward for years to come. We'd certainly expect that some of this improvement in productivity, as we transition back into a growth environment, start bringing newer people on board, we obviously want to maintain these measurements of productivity. I think that we'll be able to.
Certainly that's encouraging. That's the biggest piece of the cost structure and the most critical element for us to continue to manage those and other true controllable costs as we transition, you know, 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. We certainly, you know, again, we've talked about it before, but we believe we can continue to improve the operating ratio, and it's just based on how that model works. If we can continue to improve the network density, that generally creates productivity opportunities.
If we continue to be disciplined and have a cost-based type of approach to managing our yields, you know, both of those generally require the a positive macro environment to support those initiatives. 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 continue to help on those fronts and we can produce further operating ratio improvement.
Okay. Got it. And thanks for the time too. Nice quarter.
Thanks, Todd.
Yep.
We'll go next to Ari Rosa with Bank of America.
Hey, morning, guys. A nice quarter. 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. Maybe you could just elaborate on that a little bit. You know, I think Adam talked earlier about some of your competitors seeing some cost pressures rising. You know, is it really a function of that, or is it really a function more of kind of what you're seeing in terms of end markets and the conversations you're having with customers? If so, maybe you could elaborate on where you're seeing some strength in terms of those customer conversations.
You know, if we think about other periods where OD has really, you know, seen a strong operating environment, you've been able to grow tonnage into the double digits. You know, 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. Well, I think obviously we're expecting growth next year. We're continuing to, as Adam had mentioned before, we're continuing to expand our capacity, both from a facilities and an equipment standpoint. We're in the process of hiring people. As you know, those are the components of adding capacity. We're actually working pretty hard on all three fronts at this point in time. We've seen strength of late, particularly off the West Coast. I think, you know, we've all seen and heard about the additional imports that are coming in and how busy the ports are out in that part of the country. We've seen that particularly out of California. You know, we've exhibited strength really for the most part, system-wide. We certainly expect that next year.
For the most part, our customers are extremely positive. Again, you know, Adam mentioned before, you know, what happens next week, certainly could have an impact on where we are and where we go. So far we're, you know, we're expecting, we're expecting a good year. Obviously, we're spending money like, we're expecting a good year. I think, I think we, certainly hope that it continues down that path. You know, we're just based on the feedback that we're getting, we're hoping for big things. I hope that makes sense.
No, that's no, absolutely. That's, that's helpful directionally, certainly. Then just a little bit of minutiae, but the free cash flow number, it looked like the cash from operating activities at about $170 million was a bit below what it has been typically, and so obviously very strong on the income statement line. Maybe you could talk about what was going on there with the operating cash flow.
The operating cash flow. Well, you've always got, you know, some changes and things, that, you know, maybe are deferred, that get paid. When I think when you look on an overall basis, you know, from a year-to-date standpoint, we produced a really solid cash flow from operations. So I've been pleased with that. From a quarterly standpoint, it could just be the timing effect of some of the deferred taxes that, you know, somewhat related to the CARES Act that was passed earlier this year that helped on some of those payroll taxes and whatnot, and just some other changes, and the timing effect of things.
You know, really strong, I think cash flow performance, if you will, in terms of where we are. It's probably a little below on a year-to-date basis, you know, last year. Overall, it's approaching $700 million of cash from ops this year. Really strong and we'll continue. We've got it kind of in hand to be able to put to work as we think about, you know, our CapEx. As you know, our first priority for capital allocation's investing in ourselves. You know, the CapEx plan was a little bit lower this year. A big piece of that was the equipment as we talked about earlier. We'll be evaluating that as we transition next year. It certainly will probably be a much larger number for CapEx than what we've 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. The October rev per day deceleration, is that entirely weight per shipment or is there any other piece of that?
No, it's weight per shipment driven, Scott. Like we mentioned before, the shipments are trending in line in October. You know, as you know, typically our business kind of builds up and September is usually the strongest month of the year for us. You know, we saw that again, and those shipments continue to be really strong there. In fact, we're back to about 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. You compare September shipment levels to March, which is really before things began, you know, to really be affected by the pandemic.
We're kind of in line with the normal trend there of, you know, kind of you look back over time where September would be versus March. Seeing good trends there. You know, the October, the shipments per day, you know, right in line right now at this point with what the longer term, the 10-year average sequential trend would be. Just a little bit softer on the weight per shipment side, which is not totally unexpected. We believe that that would continue to sort of come back as our smaller customers continue 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.
Nevertheless, the, those smaller accounts are continuing to perform well and coming back. That's certainly beneficial. You know, yield trends continue to be solid and it's really just a function of that weight per shipment is dropping a little bit on us. Some of that, you know, like we mentioned, was us taking control and getting some of the transactional freight out of our business right now.
Just given your views around share gains, you wouldn't have thought that shipments would be outperforming seasonality now?
Well, you know, again, I think that when you just look and think about from a customer standpoint, and how they're getting freight out, you know, September is gonna be the build up. You know, when you look over the past 20 years, a normal sequential trend is down about 3%. There's really been only 1 October in the past 20 years that's been positive versus a September. You know, obviously, we've got a week left in the month, and we're just talking about numbers that aren't finalized. This is about where, frankly, we thought we would be, and we're managing to.
It's not been a surprise, especially with the fact that, you know, again, we have limited some shipments out of the system. It would have been slightly better, but very normal and expected to see even as things were building up, that we'd see a little bit of a drop-off in October versus the September trend there. That's just really a function, when you look across the spectrum of all of our customer accounts, the way they're managing, you know, their business and their shipment trends and so forth. You know, not unexpected to see it at all.
Just lastly, on the OR. If you look at most years, the OR is similar with, if not better than third quarter the prior year. I guess what I'm trying to say is like, 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're not ready to call next year's operating ratio. You know, I think that certainly as revenue plays out, like we hope it will transitioning then, you know, that obviously creates an opportunity. We generally on average have been produced or improving the operating ratio, you know, 80-100 basis points kind of on average each year. You know, just taking kind of where we are from a year to date basis, then obviously we're a little bit better than that at this point than that longer term trend, despite the fact that revenues have been affected like they have been.
You know, we'll see where we end up next year, but we're not ready to give any specific color on it. But certainly in an improving revenue environment, it makes the ability to improve operating ratio easier than certainly what we've seen and had to deal with this year.
Makes sense. Thank you, guys. Appreciate it.
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. Thanks. Have a great day.
And that concludes today's conference. Thank you for your participation. You may now disconnect.