奧多明尼昂貨運 (ODFL) 2020 Q3 法說會逐字稿

Good morning, and 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. And 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, but 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, a sequential increase in volumes during the third quarter was one of the strongest in our history. Through incredibly hard work and dedication, the OD team rose to the challenge and continued to deliver on-time service of 99% while matching our record low cargo claims ratio of 0.1%.

We produced record profitability during the third quarter of 2020 by continuing to execute a simple operating plan, which we have described to you many times before. The long-term strategy is focused on delivering a value proposition of superior service at a fair price, which generally creates the capital for us to further invest in the capacity and technology that our customers demand to support their own initiatives.

Superior service also goes beyond on-time and claims-free deliveries. Every member of the OD family understands the value of our service and how critical it is for supporting our yield management initiatives. Our long-term approach to managing yields on an account-by-account basis has strengthened the quality of our revenue and profitability over the long term.

We believe customers also appreciate our consistent pricing philosophy, which should continue to be a key factor in our ability to win market share over the long term. With the pricing environment improving, and expectations for rates to rise further in our industry next year, we believe we are at an inflection point where market share wins can accelerate.

While most people may look forward to turning the page on 2020, we will work tirelessly to finish this year out strong, and we'll also use the period to prepare for 2021.

We believe the domestic economy and customer demand will continue to improve. So we must ensure that we have the necessary elements of capacity to support our anticipated growth.

Given our long-term market share opportunities, we intend to steadily invest in equipment and additional service center capacity that should include the opening of several new facilities before the end of the first quarter next year.

We will also continue to invest in our most critical asset, our OD family of employees. We are actively hiring additional drivers and platform employees to balance our workforce with growing demand and shipment trends, and we will continue to provide our team with the training, benefits and opportunities to succeed and support our customers.

With our unique position in the market and ability to further invest in ourselves, I am confident in our ability to continue to grow profitably while increasing shareholder value.

Thank you for joining us this morning, and now Adam will discuss our third quarter financial results in greater detail.

Thank you, Greg, and good morning. Old Dominion's revenue for the third quarter of 2020 was $1.1 billion, which was a 0.9% increase from the prior year. We operated very efficiently during the quarter and established new company records for our operating ratio and overall profitability. Our operating ratio improved 480 basis points to 74.5% and earnings per diluted share increased 24.8% to $1.71.

Our revenue growth for the third quarter may have been modest, but we were pleased to actually return to a positive trend. The increase reflects a 1.3% increase in LTL tonnage that was partially offset by the 0.6% decrease in LTL revenue per hundredweight. This yield metric as well as overall revenue was negatively affected by the significant decrease in the average price of diesel fuel as well as changes in the mix of our freight.

Our underlying pricing trends remained relatively consistent during the third quarter, as indicated by the continued strength in our LTL revenue per shipment. On a sequential basis, revenue per day for the third quarter increased 18.1% as compared to the second quarter of 2020, while LTL shipments per day increased 15.4%. Following the steep drop in volumes in April that generally resulted from the initial state-at-home orders, our shipment levels have steadily increased above our normal sequential trend.

At this point, in October, with almost a week remaining in the month, our revenue per day is trending higher by approximately 2% to 2.5% as compared to October 2019. Our shipments per day trended in line with normal seasonality, but our weight per shipment is in the 1,570- to 1,600-pound range, which is lower than the third quarter.

While the weight per shipment is still higher on a year-over-year basis as compared to October 2019, the sequential decrease is due to measures we took to limit the number of heavier-weighted LTL shipments in our system as well as improving revenue trends with our smaller customer accounts that generally have a lower weight per shipment than a larger national account. As usual, we will provide the actual revenue related details for October in our third quarter Form 10-Q.

Our third quarter operating ratio improved 480 basis points to 74.5%, with improvement in both our direct operating cost and overhead cost as a percent of revenue. We improved the efficiency of our operations and produced increases in our laden load average, P&D shipments per hour and platform shipments per hour when compared to the third quarter of 2019. While we will continue to add drivers and platform employees during the fourth quarter, as Greg mentioned, we believe we can effectively balance our labor-to-revenue trend in line with the normal sequential change in this expense line item by continuing to focus on productivity. We will also maintain our disciplined approach to control discretionary spending and make every effort to minimize cost inflation in other areas.

Old Dominion's cash flow from operations totaled $170.2 million and $686.5 million for the third quarter and first 9 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 9 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.

(Operator Instructions) And we'll go first to Allison Landry with Crédit Suisse.

So Adam, 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? 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 in better periods around the 1,600-pound mark, and we can trend down closer to 1,550 pounds, and that still be fine, too.

Some of the lower watermarks like we hit in kind of August of last year, was about 1,530 pounds, 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 industrial market last year. But we're still pleased. I mean right now, it's kind of around -- between the 1,570- and 1,600-pound range, and that's good. We were starting to see some heavier weighted shipments coming 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. So 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.

And so that's why it's trending a little bit lower. In September, the average was 1,617 pounds, so it had been moving back closer to that 1,600-pound mark. And there's a couple of good trends in there. Our smaller mom-and-pop customers are starting to -- the revenue is coming back. Initially in the pandemic, we had stronger performance with our larger national accounts. Our top 50 accounts continue to perform very well. But starting to see some of those smaller accounts come back. And I think once we get at 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 '21.

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

I think that it will -- typically, on a sequential basis, the average change in headcount in the fourth quarter is about 2% higher than the third quarter. And when you look back at some periods like 2017, for example, that number was about 4% higher sequentially. And we were going through a similar period then with volumes really starting to accelerate. So we certainly could see 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 purchase transportation, a little bit more than normal in the third quarter. That was up 20 or 30 basis points. And 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 purchase transportation market. But with truckload rates like they are now, certainly, we want to -- 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, and we only use that extra PT when absolutely necessary because that's where I think we get the advantage from a claims standpoint. By having that total control, we can control 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.

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 '21. So 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 '21 CapEx plan. But that people piece of the equation right now is important. And 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. 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 we will.

We'll go next to Jordan Alliger with Goldman Sachs.

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

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

All right. That's helpful. And then just one other quick one. Can you touch a little bit more on some of these other -- the expense side, the operating supplies, general supplies, et cetera? I'll continue to track on the second quarter and now the third quarter 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 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, those all kind of fall in the general overhead bucket, if you will. And that would include -- the other big component is a piece of the salary, wages and benefits, our salaried employees and clerical 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 certainly saved on dollars in the aggregate due to active measures that we took. But sequentially, we had, from the first quarter to the second quarter, some inflation and those aggregate expenses as a percent of revenue. But with the improvement in revenue, we actually were able to generate some improvement there. So 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. So 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.

Certainly, as we start transitioning into '21, it's kind of a matter of when some of those costs will return something such as 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. Staying in front of our customers, continuing to communicate, talk about customer challenges and customer opportunities as well. But certainly, it's not as effective when they're out making personal sales calls and having face-to-face meeting.

So we'd like to see that be restored and happily would pay that cost, but that's one of those things that we simply have no idea 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 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 coming back to being closer to 21% -- 21%, 21.5% of revenue here in the third quarter. 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 as a percent of revenue as we can will always be our focus going forward.

We'll go next to Jack Atkins with Stephens.

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

Yes. Certainly, I think the way we'll be looking at it is we'll look at kind of that normal sequential trend. And then just sort of compare and contrast there. I think that with revenue trends that we think can continue, certainly not at the strength of the recovery and the surge we saw in the third quarter. But with positive revenue trends continuing, that certainly gives us a helping hand, if you will.

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 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. And so when you throw out some of those outliers, 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 outperform a little bit on a revenue basis, then certainly that will win to help in hand.

I think that in the third quarter some of the costs that we saw will go away temporarily in the second. A big cost element was -- were things like our group health and dental costs. Those kind of restored to normal, and frankly, we're a little bit higher when we look at our fringe benefit rate as a percent of revenue. The group health and dental costs were a little bit higher than what that normal rate 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 some puts and takes going both ways, and we'll just look to try to balance those. But we did want to say that -- I said it in the prepared comments, that I think that the biggest cost element that we have is the salaries, wages and benefits. And certainly, we're going to continue to keep our focus, one, on providing the very best service in our industry. And 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%. But I think that we can keep that 200 basis point change kind of about 150 basis points, is the typical change in that salaries, wages and benefit. So 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. And so I guess for my follow-up question here, I don't want to put you guys on the spot, but I've been getting this question this morning from some investors. But when you kind of think about the long-term goal has always been sort of a 25% incremental margin for your business, when we think about this quarter, in particular, you guys had, obviously, a 25.5% operating margin for the quarter. So it kind of feels like we're maybe pushing into a new frontier. Has there been any change to how you guys are thinking about the incremental margin potential of the business as we sort of look forward? Or is 25% still the right number to use?

I think what we've said maybe a couple of years ago was 25% was kind of our long-term goal. And 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. And that doesn't mean that we certainly can't do better than that in a quarterly period. And I think we certainly can, and we've proven it in the past.

And when you think about our cost structure, with sort of 2/3 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. But until we achieve the 75% annual operating ratio, and I think we'll keep that goal out there. And then we'll update it and start thinking about sort of what's next. But 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. And to achieve long-term operating ratio improvement, it's a focus on density and yield. And certainly, the density piece of that has been a challenge this year. But when you look at some of our operating metrics, despite the significant changes from first to second and then second to third, we've met those challenges, operated very efficiently and been able to control our costs. So we've done all the things there. But that yield piece is critically important as well. And 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.

So there's certainly -- we feel confident saying that we can continue to beat it. We'll have some quarters where we might be 35% or even up to 40%. 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 percent of revenue. So that creates an even stronger opportunity for us as we move forward. But we're not going to 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. And so 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.

And so we're going to 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.

We'll go next to David Ross with Stifel.

Adam, I just want to talk a little bit more about, I guess, the employee side because the labor efficiencies is where you've shown the most leverage. 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 with fewer people? What was -- what was the fat that you found that may not have been apparent?

Dave, some of that fat was not necessarily in our productive labor, but in 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 tight, we found some things that we were able to manage without, and 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 in the spring, back in April and May. So now we -- every location is a little bit different. The means are a little bit different by location. But now we do have some needs that we're continuing to feel 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, trying to prepare for '21, which we expect to be 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?

In some cases, David, it has. But for the most part, the biggest thing that customers are looking for is feedback on their shipments. They want to know where it is and how do they get it, how do they get it quicker. And 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 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 2-way street from that standpoint. But we're continuing to focus and work on those things, and they are definitely starting to help us.

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

We'll go next to Chris Wetherbee with Citi.

I was curious about the revenue per day cadence from September to October. I guess I'm trying to get a sense of -- you talked about weight per shipment a little bit in the fluctuation there. Maybe you get a sense of what's going on, on the pricing side or the revenue per hundredweight side to get a sense of how mix and kind of core pricing are impacting that as well?

Yes. I mean the yields are going to continue. Certainly, if you're looking at revenue per hundredweight with the shipment sizes, weight per shipment decreasing a little bit. That certainly would cause the revenue per hundredweight to increase slightly as well.

So that's been a strong number, I think, when you look at the sequential increase in our yield metrics from the second to the third. Just looking at it on a hundredweight basis, I think that certainly some of the mix impacted things; the higher weight per shipment in the third, a little bit longer length of haul as well. That's certainly contributing. But that will continue. And we feel like some of the feedback we're hearing is that yields are continuing to increase in the industry as well.

And a lot of times, what you'll see is, especially some of our competitors that use a little bit more purchase transportation and truckload services to run some of their internal line haul, certainly will start facing cost inflation when the truckload rates are inflecting as positive as they are right now. And that's typically a good thing that creates historically an inflection point where we start seeing really a higher need or a need rather for higher rates for our competitors that are offsetting those costs as their cost inflation is increasing.

And so that's supportive of our ongoing yield initiatives internally as well as it usually will create some freight opportunity for us as well when that piece of cost for our competitors is increasing certainly much faster than what our cost inflation would look like.

So those are a couple of good trends that we feel positive about as we start thinking about finishing out 2020 and then turning the page to '21.

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

Yes. When you look at that LTL, it has been growing faster than just general GDP. And we think that the industry overall will continue 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 good trends with the retailers. And it's different to manage that type of freight than certainly some of the -- our legacy industrial-related business, which is still 55% to 60% of our revenue. But certainly, 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.

So that's a trend that I think will continue to be a tailwind for LTL, creating smaller shipment sizes as fulfillment centers 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 has seen. But when you get back to the long-term trend that we've been talking about before the pandemic effect, we've been consistently investing in real estate capacity, growing our network and building out the doors to process freight.

And 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. And there really hasn't been at least a significant change in the number of service centers and 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. But 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. So 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.

We've certainly seen some improving trends. I think that some of our industrial customers will continue to improve. ISM and some things like that have certainly been positive the last couple of months. But I don't think we're anywhere near full recovery for most manufacturers and -- manufacturing type businesses, as they've 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 favorable trends with the retail-related business as well, and all that can kind of come together, hopefully, for us as we transition into '21.

We'll go next to Ravi Shanker with Morgan Stanley.

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

Yes, Ravi, I'd expect that we would take our next increase pretty much 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 look at closer to that time. But there has been, and I think we mentioned it earlier, 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 changes how you respond to customers' needs and whatnot. We're not a truckload carrier. And if you're not careful, sometimes when the demand changes like it being this -- early this fall, when you start to see those things, you have to make some adjustments, which we did. So I think customers are certainly what we can tell, they're positive going into next year. Again, the pandemic, I think, has some impact on that. But as we continue to recover and hopefully positively so, I think we'll certainly go into '21 with big expectations, and 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 big expectations mean. I mean, typically, your GRI is in the mid-single-digit range. Will you be pushing for double digits?

I think we've got a long-term approach, Ravi, that we look at our cost inflation every year. And then we sit across the table from our customers and talk about what our costs, how they're changing and then what we need in terms of rate.

And certainly, the way we really manage the business is looking at customer profitability on an account-by-account basis. So there may be some customer accounts that we'll have to maybe be more aggressive with. And then there's other long-term customer accounts that may go into the equation that be a little bit lower than the average.

So it just kind of depends on each customer situation, and we'll look at those. But we've been pretty consistent the last few years with a general rate increase of around 5%. And then that kind of becomes the proxy for what we talk to customers on average. About for the need, and we've been successful in achieving our contractual increases throughout this year. But that kind of gets back to the heart of the true customer relationship that you have.

And our industry is a relationship business. And so it's critical that we continue to talk with our customers and have that 2-way open and honest communication about things. And certainly, we're willing to do that, and it makes more sense when you can have a cost-based discussion versus the industry is tight and we need a double-digit increase this year. And the industry is loose this year, so we're going to give you some of that back next year and the rollercoaster ride that maybe some customers go on with when they make a decision other than select an Old Dominion. But we're really proud of kind of these long-term customer relationships that we have, and certainly, we think that will continue.

And next year, just looking out, certainly, that's kind of the 4% to 5%. When you look at our long-term revenue per shipment, we've kind of averaged really between 4.5% and 5%, and that's been 75 to 100 basis points above our cost per shipment inflation. And we've already established a 3% wage increase that went into effect the 1st of September. So that's a big element of our cost inflation every year. And has been pretty consistent as well.

So we already know some of those factors, and that'll kind of frame things up for us. But we'll look. And the yield numbers themselves, some of it will really depend. There's going to be some weird comparisons as we transition into next year with weight per shipment that might make your revenue per hundredweight look a little bit stronger than maybe that 5% type of number. So we'll just have to balance all of those. But underlying contract and general rate increase, I would expect that we'll see it kind of consistent with what our long-term trends have been.

That's great color. If I can just sneak in 1 follow-up to that. Kind of the 1 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. 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?

Well, we've been dealing with fuel that's been down 20% or more. And that's what it was down in this most recent quarter, and we produced a 74.5% operating ratio. So I think when we balance that fuel contribution with the overall yield, that's just a variable component of pricing.

And it's something that we continue to look at. And as a contract turns over, we look at the fuel base. 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 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.

So as long as fuel continues to stay consistent, 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 we're going to be -- if fuel continues to stay in this range where it is, around $2.40 a gallon, that's -- it's going to 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.

So 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 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, without the fuel certainly looks much stronger, and it'd be nice if that was the overall number, but you play the hand that you're dealt, and that's what we'll continue to do.

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

We'll go next to Jason Seidl with Cowen.

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

Certainly, when you look at inventory levels overall, they continue to be low and so I think that some of that will continue, but the consumer continues to consume. And I think that people are spending money in different ways. And you get down to it, that's still 70% to 80% of the overall economy. So as people continue to purchase things and there's got to be the production of those things and ultimate delivery and positioning for them to be able to buy them.

So certainly, there's been some obvious changes in the retail landscape related to the pandemic and probably have seen e-commerce growth probably pulled forward a couple of years at least in terms of the change of e-commerce in terms of total retail sales. So that's been something that, as we talked about before, it creates some opportunity for the LTL industry. That's certainly not an overnight kind of phenomenon, and you don't build fulfillment centers overnight, but that's something that's certainly continuing to change, and we think we can benefit from. And we're going to do everything we can to make sure. But hinted at earlier, there's certainly some operational challenges that come along with managing more that freight and balancing, you're right, equipment pools and just the service demands can be different as well. So we've got to make sure that we keep all of that balanced as we flex and see more growth with our retail-related business.

But I think that certainly, we can see those trends continue and take advantage because the other big piece of that retail-related growth on the e-commerce side is the demand for superior service is even greater. As they're managing inventory levels, and inventory is tight, then certainly you can't afford to. And in many cases, when you deliver into many of the big-box retailers that have got programs in place that that will have penalties for vendors if their carriers aren't delivering on time and in full. Certainly, when you make the selection of choose an Old Dominion, we're going to deliver on time 99% of the time and our damages as a percent of revenue of 0.1%. So we certainly can meet that demand and service expectation for our customers and help them avoid charges down the line where the total cost of service is cheaper for them, even though they might pay a little bit more upfront for Old Dominion.

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

Certainly, Jason. We always try to stay in the forefront of any type of new equipment that's out there. I think we've talked about this in one of the prior calls, but we're looking at and exploring electric vehicles and that kind of thing. But Jason, honestly, right now, nobody has a production, any type of a production of electric vehicle. They're just -- we're just not there yet. I'm sure they've come a time, and we'll progress as 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 they're -- I'm sure 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 system. There's lots of issues, lots of poles left to climb, if you will. And again, I'm sure we'll get there, but just not there yet.

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

I think so.

We'll go next to Amit Mehrotra with Deutsche Bank.

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

Yes. I mean that's the -- we were talking earlier about some of the labor costs and that salary, wages and benefits line. It'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. And most of those costs are going to be our productive labor cost. So we'll see how that balances as we transition.

Typically, like I said, you'd see that inflate a little bit, and we're certainly going to do what we can and believe that we can keep those costs kind of in line with what that normal sequential trend will be. And some of it will just depend on kind of what the revenue base and how that trends through the fourth quarter compared to where we just were in the third. So -- but that will have more of an impact really on some of those more fixed types of costs.

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 on the line haul network and the density opportunities there. I mean in 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 17% to 18% overhead, just as you guys continue to leverage the line haul? And then the last one I had is just -- if you could just provide a little bit 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.

Yes. The -- in terms of the long term where overhead costs might go, we've just -- over the long run, we've seen those costs trend between that 20% to 25% type of range. And 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.

And so as we continue to invest, certainly, that depreciation line will continue to stay 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. 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 that will then drive the increase in depreciation.

Some of those overhead costs, too, are more variable in nature. There are 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. So that 20% to 25%, maybe 5% to 8% of revenue is kind of more variable in nature that that's sort of within that overall element. So those will obviously continue to increase. But certainly, there's going to be opportunities out there. 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 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, 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, 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.

And so there's different trade-offs as we continue to grow and add to the overall footprint. But 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.

And 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. But you've got a bigger pool that they're working on some type of improvement program. And that's really at the heart of why we've 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?

Yes. I thought with that long-winded response, you might forget about that one, but with 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 and sequential, that would be great.

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

We'll go next to Todd Fowler with KeyBanc Capital Markets.

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

Yes. The overall capacity of the service in a network is probably between 25% and 30% now. We've 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. But 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.

So I think that we'll see some openings in '21, but there will also be some 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 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. 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 and can add a facility in a market that -- just like I was talking about earlier, that can help us in reducing some of our pickup/delivery cost 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.

On the other side and the other pieces, 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. But we had a bit of a holiday this year because of the overinvestment in equipment in '18 and '19. This year, we only spent $20 million on equipment. So I think that we'll see that number kind of get back to more of a normalized type of range, and we expect to see the overall CapEx 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 fourth quarter and really get to the point of putting orders in place. But with all that said, I think that 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. 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 the good 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 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 based on the results of the election.

Yes. Well definitely in Ohio we're seeing tuned on that one. That's for sure. So just on my follow-up, I guess, kind of a bigger picture question, and Jack kind of hit on this with the incremental margin question earlier. But operating at a sub-75% OR here in the third quarter, are there any bigger picture takeaways as you think about the business? I mean you did it in an environment that was pretty volatile. You had purchase transportation that moved up. Tonnage was obviously up a lot sequentially, but not a lot year-over-year.

Does it feel like that on a longer-term basis, it's sustainable to operate on a full year basis at a mid-75 -- or excuse me, 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 representative of kind of what you can do longer term?

Well, 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 kind of say we needed revenue growth to be able to improve the operating ratio, but this environment was so unusual.

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. And so it's been good as we transitioned through and saw some of the recovery began back in May when things sort of stabilized and started improving. And we brought back probably about 1,400 employees compared back to April. And so we continue to onboard people to keep up with these demand trends. And -- but have really done a good job in balancing all of our costs.

And I think what we've seen in the past in 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. And some of the productivity that we saw improvements that we made back in the '08 and '09 time frame, those carried forward for years to come.

And so we certainly expect that some of this improvement in productivity as we transition back into a growth environment and start bringing newer people onboard, 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 of the cost structure and 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.

So we certainly -- 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. And if we continue to be disciplined and have a cost-based type of approach to managing our yields, both of those generally require the 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.

We'll go next to Ari Rosa with Bank of America.

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. Maybe you could just elaborate on that a little bit. I think Adam talked earlier about 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 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 those customer conversations.

And then if we think about other periods where OD has really seen a strong operating environment, 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. 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, and we're in the process of hiring people.

So as you know, those are the components of adding capacity. So we're actually working pretty hard on all 3 fronts at this point in time. But we've seen strength of late, particularly off the West Coast. And I think we've all seen and heard about additional imports that are coming in and how busy the ports are out in that part of the country. And we've seen that particularly out of California. But we've exhibited strength really, 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 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, to hope that makes sense.

No, that's -- no, absolutely. That's helpful directionally, certainly. And then just a little bit on 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. But maybe you could talk about what was going on there with the operating cash flow?

Yes, operating cash flow. Well, you've always got some changes in 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, could just be the timing effect of some of the deferred taxes that are somewhat related to the CARES Act from -- that was passed earlier this year that helped from some of the payroll taxes and whatnot.

And just some other changes in 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 last year, but overall, it's approaching $700 million of cash from ops this year. So 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 our CapEx.

And as you know, our first priority for capital allocation is investing in our sales, and that the CapEx plan was a little bit lower this year. But a big piece of that was the equipment, as we talked about earlier. 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.

We'll go next to Scott Group with Wolfe Research.

A couple of quick ones. The -- so 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, and as you know, typically, our business kind of builds up and September is usually the strongest month of the year for us. And so 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. And you compare September shipment level to March, which is really before things begin to really be affected by the pandemic.

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. So we're seeing good trends there. But the October, the shipments per day right in line right now at this point with what the longer-term -- the 10-year average sequential trend would be and -- but 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. But nevertheless, those smaller accounts are continuing to perform well and coming back. So that's certainly beneficial. But 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. But some of that, like we mentioned, was us taking control and getting some of the transactional 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?

Well, again, I think that when you just look and think about from a customer standpoint and how they're getting freight out, September is going to be the build-up. And when you look over the past 20 years, a normal sequential trend is down about 3%. There's really been only one October in the past 20 years that's been positive versus September. So obviously, we've got a week left in the month, and 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 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 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. And that's just really a function 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. So 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, third quarter the prior year. So I guess what I'm trying to say is, it feels like next year should be a year where you can 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 I think that certainly, if revenue plays out like we hope it will, transitioning then that obviously creates an opportunity. We generally, on average, have been produced or improving the operating ratio, 80 to 100 basis points kind of on average each year. And 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 hadn't been.

So 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.

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. Thanks, and have a great day.

And that concludes today's conference. Thank you for your participation. You may now disconnect.