Old Dominion leaning on cost controls, yield management amid tonnage declines

As demand continues to underperform normal seasonal trends, Old Dominion Freight Line said it remains focused on controlling costs and maintaining service levels. Industry-leading service metrics have enabled the company to achieve higher yields, which, combined with cost reductions, have helped mitigate margin degradation.

The Thomasville, North Carolina-based less-than-truckload carrier reported earnings per share of $1.28 for the third quarter, 6 cents above analysts’ expectations but 15 cents lower year over year. (The third-quarter consensus estimate came down 10 cents heading into the print as analysts lowered forecasts on peak season concerns.)

(A Higher tax rate was a 3-cent drag on EPS in the quarter.)

Revenue of $1.41 billion was slightly ahead of the consensus estimate but 4% lower y/y.

Tonnage fell 9% y/y, which was partially offset by a 5% increase in yield (revenue per hundredweight). The tonnage decline was the combination of an 8% decline in shipments and a 1% dip in weight per shipment. The yield metric benefitted from the lower shipment weights, but a 1.5% decline in length of haul offset the benefit.Table: Old Dominion’s key performance indicators

Tonnage remains subseasonal, management says demand drop not accelerating

Old Dominion’s (NASDAQ: ODFL) third-quarter y/y tonnage decline was on top of an easier comp from a year-ago (down 5% y/y). Tonnage was down 2.9% from the second quarter, which was 340 basis points worse than normal seasonality.

The tonnage declines accelerated in October to down 11.6% y/y, even with an easier year-ago comp (down 9.1% y/y in October 2024). The 20.7% two-year-stacked decline is the worst of the downturn. (Weight per shipment is down 2.3% so far in the month.)

Management noted continued softness in the industrial (55-60% of revenue) and housing markets on a Wednesday call with analysts. It also said volumes from 3PLs have been weak and that some shippers are consolidating LTL shipments into full truck loads.

But it doesn’t believe demand has materially weakened as September tonnage was 200 bps below normal seasonality (sequentially), with October holding the same subseasonal trend (down 5% from September versus a 3% decline historically).

Yield improvement (up 9.3% on a two-year-stacked comp excluding fuel surcharges) has helped limit the revenue declines. Revenue per day in October is down approximately 6.5% to 7% y/y. Management said if the current subseasonal demand trend holds, fourth-quarter revenue would be $1.29 billion, which is 4% light of the current consensus estimate.SONAR: Longhaul LTL Monthly Cost per Hundredweight, Class 125+ Index. Less-than-truckload monthly indices are based on the median cost per hundredweight for four National Motor Freight Classification groupings and five different mileage bands. To learn more about SONAR, click here.

OR could touch 77%, a post-pandemic nadir

Old Dominion reported a 74.3% operating ratio (inverse of operating margin), 160 bps worse y/y but 30 bps better than the second quarter. The company normally sees no change to 50 bps of deterioration from the second to the third quarter, and management previously flagged the potential for 80 to 120 bps of sequential deterioration this year (implying a 75.6% OR at the midpoint).

Story Continues

Salaries, wages and benefits expenses (as a percentage of revenue) ticked 80 bps higher y/y even as head count was down 6% y/y to 21,073 (2.5% lower sequentially). Head count peaked at 24,893 in the 2022 second quarter.

Volume weakness again weighed on labor efficiency as shipments per employee declined 2% y/y. Benefits costs remain elevated and the company implemented an annual wage increase in early September. It’s also carrying more than 35% excess terminal capacity, which is well above the 20% it normally holds.

Cost per shipment was up 6.2% with revenue per shipment up just 3.4%, a 280-bp negative spread, but 110 bps better sequentially.

Old Dominion normally sees 200 to 250 bps of sequential margin degradation in the fourth quarter, but is forecasting 250 to 350 bps of deterioration this year due to the subseasonal tonnage trends. That implies a 77.3% OR (at the midpoint), 140 bps worse y/y and the worst since the second quarter of 2020, which had the overhang of Covid-related shutdowns.

The company said it wins market share during upturns and that the excess door capacity it has currently will allow it to onboard new customers when the market inflects positively. It believes that some carriers could quickly become capacity constrained in the next upcycle and raise rates, which it believes will provide it with a market share opportunity.

Old Dominion recently announced a 4.9% general rate increase to various tariff codes effective Nov. 3. The increase is level with the headline percentage increase taken last year but the implementation date is one month earlier. The GRI is expected to touch approximately 25% of its revenue.

Shares of ODFL were up 3.8% at 1:45 pm EDT on Wednesday, compared to the S&P 500, which was up 0.2%.

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