Old Dominion Freight Line, Inc. (ODFL) Earnings Call Transcript

Good day, and welcome to the Old Dominion Freight Line Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jack Atkins, Director of Finance and Investor Relations. Please go ahead.

Thank you, Dave. Good morning, everyone, and welcome to the Third Quarter 2026 Conference Call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today through November 4, 2026, by dialing 1 (855) 669-9658 access code 1955363. A 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 and 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. They ask that you limit yourself to just 1 question at a time before returning to the queue. At this time for opening remarks, I would like to turn the conference over to our President and Chief Executive Officer, Marty Freeman. Marty, please go ahead.

Good morning, everyone, and welcome to our third quarter conference call. With me on the call today is Adam Satterfield, our CFO. And after some brief remarks, we will be glad to take your questions. Old Dominion produced strong financial results in the third quarter that include a 13.1% increase in revenue and a 28.9% increase in earnings per diluted share. In addition, our operating ratio improved by 280 basis points to a 71.5%. While the underlying macroeconomic environment remains stable, demand for our service continued to improve during the quarter, and our LTL tons per day increased on a year-over-year basis in September. The strength of our third quarter results is due to hard work and dedication of our OD family of employees who continue to execute on the fundamental aspects of our long-term strategic plan. I want to thank our outstanding team for their dedication and commitment to our customers and our company. Our ongoing focus on providing our customers with superior service at a fair price is the cornerstone of our long-term strategic plan. our ability to consistently deliver the highest standard of service through the ups and downs of the economic cycle has created an unmatched value proposition in our industry. And this is something that we take tremendous pride in. As a result, in the third quarter, we were pleased to once again provide our customers with on-time service of 99% and a cargo claims ratio of 0.1%. That said, we also know that there is much more to providing best-in-class service to our customers than simply picking up and delivering freight on time and without damages. During its annual survey of shippers and logistics professionals, Mastio & Company measures 28 different service and value-oriented attributes. We were honored earlier this month to be named the #1 national LTL provider for the 17th consecutive year. In addition, we finished first in 24 of the 28 categories that Mastio evaluates, and we increased our already sizable advantage against our competition. I would like to thank our customers for this recognition and for trusting us with their business. I also would like to congratulate our OD family of employees on this incredible accomplishment. Our teams remain highly motivated to continue delivering superior customer service every single day. We know that the strength and consistency of our service drives value for our customers and differentiates us from our competitors. It also supports our long-term pricing initiatives. Our disciplined approach to yield management, which focuses on individual account level profitability is designed to offset our cost inflation over the long term while also supporting our ability to make strategic investments back into our business. Our ability to take a long-term approach to the investments in our network, our people and our technology provides us with significant flexibility to respond quickly to changes in the operating environment. This flexibility allows us to support our customers with the capacity that they require, while also continuing to effectively manage our cost. As a result, we once again generated strong operating leverage on our incremental revenue this quarter. We produced strong third quarter results by remaining focused on executing our long-term strategic plan. Due to our disciplined execution and consistent investment, we have all the necessary elements of capacity in place to effectively handle incremental volume opportunities, while also continuing to operate efficiently. In addition, our business model contains significant operating leverage, which will allow us to further improve our profits as we regain density in our network. As a result, we continue to believe that we are uniquely positioned within our industry to win market share, generate profitable revenue growth and increase shareholder value over the long term. Thank you for joining us this morning. And now I will turn it over to Adam to discuss our third quarter in greater detail.

Thank you, Marty, and good morning. Old Dominion's revenue increased 13.1% to $1.59 billion for the third quarter of 2026, while our operating ratio improved to 71.5%. The combination of these factors resulted in a 28.9% increase in our earnings per diluted share to $1.65. The improvement in our revenue for the quarter was primarily due to a 13.3% increase in LTL revenue per hundredweight. While our LTL tons per day decreased 0.1% for the third quarter, we were pleased with the continued improvement in demand for our service that contributed to a 1.6% year-over-year increase in our LTL tons per day for the month of September. On a sequential basis, our revenue per day for the third quarter increased 2.4% when compared to the second quarter of 2026, with LTL tons per day increasing 1.2% and LTL shipments per day increasing 2.4%. For comparison, the 10-year average sequential change for these metrics includes an increase of [ 4% ] in revenue per day a decrease of 0.2% in LTL tons per day and an increase of 1.2% in LTL shipments per day. The monthly sequential changes in LTL tons per day during the third quarter were as follows: July decreased 0.5% as compared to June. August decreased 1.6% as compared to July and September increased 3.9% as compared to August. The comparative 10-year average change for these respective months is a decrease of 3.0% in July, flat in August and an increase of 3.1% in September. While there are still a few workdays remaining in October, our month-to-date revenue per day has increased by approximately 22% when compared to October 2025. This includes an increase in our LTL revenue per hundredweight as well as an increase in our LTL tons per day of 1.6%. Based on these results, I currently anticipate revenue of $1.54 billion to $1.58 billion for the fourth quarter, which would be above our normal seasonality. As usual, we will provide the actual revenue related details for October in our third quarter Form 10-Q. Our operating ratio improved 280 basis points to 71.5% for the third quarter of 2026, with improvements in both our direct operating costs and our overhead expenses as a percent of revenue. Within our direct operating costs, improvement in our salaries, wages and benefits as a percent of revenue more than offset an increase in our operating supplies and expenses. Our team has continued to leverage the quality of our revenue growth, while also operating very efficiently to support this improvement. The increase in our operating supplies and expenses as a percent of revenue was primarily due to the increase in the cost of diesel fuel and other petroleum-based products. The improvement in our overhead cost as a percent of revenue was primarily due to the overall decrease in our depreciation expense that's attributable to the decrease in size of our fleet as compared to last year. With that said, we are confident that we have -- that we continue to have plenty of service center and equipment capacity to accommodate additional growth opportunities. The improvement in our overhead costs also reflects the leverage gain from our revenue growth as well as a continued focus on controlling our discretionary spending. Old Dominion's cash flow from operations totaled $469.5 million for the third quarter and $1.1 billion for the first 9 months of 2026, respectively, while capital expenditures were $67.1 million and $206.7 million for those same periods. We utilized $160.9 million and $400.6 million of cash for our share repurchase program during the third quarter and the first 9 months 2026, respectively, while our cash dividends totaled $60.0 million and $180.7 million for those same periods. Our effective tax rate for the third quarter of 2026 was 24.5% as compared to 24.8% in the third quarter of 2025. We currently expect our effective tax rate to be 24.8% for the fourth quarter of 2026. This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.

[Operator Instructions] Our first question comes from Chris Wetherbee with Wells Fargo.

I guess maybe we could start off with some thoughts around maybe operating ratio progression as we think about the fourth quarter. in the context of what sounds like it's maybe a little bit better than normal seasonality from a revenue standpoint for the fourth quarter. Can you maybe just help us sort of bridge that gap?

Yes, sure. So normally, the operating ratio, we have a sequential increase of about 200 to 250 basis points, at least that's the 10-year average change and that excludes any impact from the annual actuarial analysis that we conduct in the fourth quarter of each year. I always look at that as just a reconciling item to whatever we give for our guidance there. Based on what we've seen in October so far, I'm anticipating a few cost headwinds. But I still think that the low end of that normal range is appropriate for a target if our revenue trends continue to hold steady, and we continue to outperform seasonality there from a top line standpoint. So that would put us at around 7.5% for the quarter. overall, but I would add a plus or minus 20 basis points to maybe give us a little flexibility. So above seasonality top line and kind of at the low end of our seasonality from an operating ratio standpoint or maybe even slightly better.

The next question comes from Scott Group with Wolfe Research.

Adam, can you give us a little bit more color on some of the revenue trends. So we got tonnage. Can you help us maybe break down the yield trend in October with fuel without fuel and just the -- it sounds like revenues better than normal seasonality, just give us -- how is tonnage trending relative to normal as well, if you can?

Yes. The -- so like I said, the tons are up at least month-to-date, 1.6%. And so that would imply that the revenue per hundredweight with fuel is right around 20% without fuel was between 5.5% to 6%. And some of that -- it's still very strong. It's a little bit below where we were in August. But I think that just slightly, but what we've seen is a further acceleration in our weight per shipment. So to keep that revenue per hundredweight ex fuel pretty steady there, I think, shows the continued strength our pricing philosophy and what we've been able to achieve. It also does reflect our general rate increase went into effect at the first of October this year versus the first of November last year. So continuation of good trends, like we said, demand continues to remain stable. And we'll look for continued revenue growth in the -- quality revenue growth in the fourth quarter as a result.

The next question comes from Tom Wadewitz with UBS.

I wanted to get your thoughts on comp and benefits expense. I think you've had -- I want to see you talked about, Adam, maybe group life and some, I guess, fringe type of pressures. But what does that look like in 3Q. And is there an element that is incentive comp? Or just what are the big pieces that are driving that up? And then how do you look at that kind of 4Q or go forward?

Yes. So if you just look at the total compensation, salaries, wages and benefits on a per employee basis, we continue to see that up on a year-over-year basis. And the majority of that is related to the increase that we continue to see in our fringe benefit cost. We also have increased performance-based compensation. Obviously, we gave a wage increase. That was between 3% to 3.5%. And then just our people are working more hours. If you look overall, our average head count in the third quarter was down 4% comparing favorably to the 2% decrease in shipments per day. So all those factors kind of contribute, but a lot of that increase in the per employee cost is really coming from the fringe benefits. And that was something that we talked about at the end of the second quarter call that we anticipated that, that would be further pressure on our costs in the third quarter, and they were. They came in actually a little bit higher than what I had originally anticipated. So we generally talk about that fringe benefit as a percent of our salaries and wages, and that came in, in the third quarter at 42.8%. Third quarter last year was 39.7%. So that's about a full operating point headwind just based on those costs. And based on -- it's mainly been driven by our health and dental costs. And that's just something that I think overall, not just us, but the entire medical inflation has been pretty significant the last couple of years. And based on what I'm seeing in October, we'd expect that, that's going to be potentially a headwind in the fourth quarter as well. But that's based in -- or baked into the operating ratio guidance that we gave.

Okay. But do you think kind of the type of pressure you're seeing, I guess, obviously, wage is going to be impact, but like the magnitude of pressure from fringe and from incentive comp that's probably similar in 4Q to kind of what you saw in 3Q?

I think so. I think that that's something that don't really see changing much and especially with respect to the fringe cost. But obviously, we continue to manage all of our costs really. But I think looking at the sequential change from 3Q to 4Q, a lot of that normal 200 to 250 basis point progression is in salaries, wages and benefits and then op supplies and expenses. And you may see a little bit of a variance. We've obviously got -- it looks like based on October, some fuel cost pressure. So you might see that those 2 line items combined, I expect them to trend about an average, but probably what normally is more of an increase in salaries, wages and benefits as a percent of revenue. You're probably going to see that more of an increase in our op supplies and expenses and just the reverse, the salaries, wages and benefits as a percent of revenue will probably outperform on a similar basis relative to what our 10-year average change would be. And that's all as a percent of revenue.

The next question comes from Jason Seidel with TD Cowen.

Adam, just one a clarification question and then a question about drivers. You said you have basically plenty of capacity at your service centers. Can you put a number around the excess capacity to sort of give us a feel for the progression. And then two, when you look at the driver market, I mean it's clear that at least on the truckload side of things, it's been tightening and tightening in terms of qualified drivers. Now I know there's not always a direct overlap, but there's always an indirect impact on LTL drivers, especially as we think about wages going forward into '27 and beyond, maybe you could talk to expectations there.

Yes. Well, first, the spare capacity number that we generally talk about is really just on the real estate side, and that number continues to be north of 35%. So we're in great shape when it comes to real estate capacity. We're in great shape when it comes to equipment capacity as well. We've trimmed the fleet back a little bit, as mentioned earlier and that's helped us from an overall depreciation standpoint, the depreciation dollars were down actually on an absolute basis in the third quarter versus third quarter of last year. But we continue to have plenty of power and trailing equipment capacity. From a [indiscernible] capacity standpoint, I think we're in great shape there as well. Our head count has been pretty flat all year. somewhere a little over 20,000 full-time employees. And if you think about where we are from a volume standpoint in the third quarter versus where we were in the first quarter, we've been able to keep our head count steady and our volumes are up 5%, 6% if you compare just those 2 quarterly periods. So we've been kind of holding steady all year there. But that's intentional, and that's always part of our strategy as we try to keep our people employed and keep as many drivers as we can to make sure when we come out on the other side, we've got plenty of capacity there. So hours worked had been trending back a little bit on average. And now you're starting to see some of those step up. And like I mentioned earlier, that's why the average wage per employee is up a little bit as we're just seeing more hours worked on average. But we've got plenty of capacity to be able to step up. We've got drivers in some cases that are trained to have their CDL that they're working on the platform, and we can put them right back in the truck when dictated. We continue to take advantage of our truck driving schools. We produce the majority of our own drivers internally. We train them internally. So that's a big benefit for us. And when demand dictates, we can always go to the market. But where we've needed to hire, you may have some spotty issues here and there. But overall, given the culture that we have and the quality of wage, generally paying a wage at the top of the industry, we've not had any major issues attracting employees when drivers when we've needed them.

Jason, also keep in mind that LTL versus truckload, our turnover ratio is less than [indiscernible]. Full truckload, it's probably in your high 90s to 100% turnover. So but we're not having any issues hiring drivers when we need them.

That's good to hear. And Adam, just to follow up on your comments there about sort of the fleet. So if we just have normalized growth into '27, should we expect sort of an increase in CapEx as we move throughout '27 for purchases?

Well, we haven't finalized that at this point yet. We're in a few weeks, we'll be going through our annual strategic planning process to really fine-tune what our plan for next year will be. But I would anticipate, just like we saw this year, that will likely -- our total CapEx will likely be lower than the 10% to 15% of revenue spend that we typically see just based on the size of the fleet that we can grow into. But of course, we're going to -- we have a normal replacement cycle that we go through every year and then we'll continue to have and evaluate real estate opportunities that's on the scale that we look at what's our growth potential look like not just next year, but what does our market share look like over the next 10 years. And we've been the biggest market share winner over the past 10 years, and I'm confident that we'll be the biggest market share winner over the next 10. So it's always about where are the right places to add real estate capacity along that spectrum of growth that we would anticipate seeing. And when does it make sense to add it? When do you get the opportunity in some high-demand markets evaluating all those things that will go into the real estate strategy when we think about '27.

Gentlemen, that's great color. Appreciate it, and nice job in the quarter.

The next question comes from Jordan Alliger with Goldman Sachs.

I just wanted to come back. I know I think you mentioned demand seems fairly stable. It reflected positive, which is certainly good news. So maybe just share some thoughts on the overall tenor of demand other than maybe comping against easy comps, as weight per shipment still being positive a couple of percent for a few quarters? Are we indicative of that maybe a true firmer market is upon us?

Yes. The weight per shipment, that's continued to be positive, and I don't know if I gave a number, but in October, the weight per shipment is up about 3% compared to October of last year. So we continue to see that flexing up. And that generally is a positive indicator for demand I think that just based on customer conversations that we've had throughout the year, but even recently, we just continued to see stable demand trends and feel like that potential is there. Obviously, there's a lot going on in the world and with the broad economy that our customers are managing through when they think about inventory trends and whatnot. But that's something that we just continue to stay in front of. We feel like we're seeing some good market share opportunities as we go through bids and sands, seeing customers asking about multiyear contracts. Things that when you read the tea leaves are more indicative of an improving demand environment. And obviously, we've continued to see the industrial economy with positive through the year, it's been in kind of the low to mid-50s, but it's been an expansion territory. So that's been good. So other macro figures that continue to be positive but just balancing those with customer conversations. We've been above seasonality when you think broadly about it. all year. And certainly, we've seen some months that have -- when you look more granular, some months have been above seasonality, some months below. October tonnage is below what the normal seasonality is, but I fully expect just based on the broader trend that we'll continue to see kind of that up down, up, down trend that we've seen throughout the year and think that as we go through November and December that we can see that trend being above seasonality.

And the next question comes from Brian Ossenbeck with JPMorgan.

Just the kind of the 2-parter here. I wanted to hear a little bit more about the GRI stick rate, obviously, another great year in Mastio with high value for high service. So I want to see how that's being accepted, I guess, in the current market? And are you seeing any benefit from truckload spillover? Obviously, rate has been up for a while now. So I would expect that there is something in there that you might be seeing at this point? And then just maybe to wrap it up, just a broader commentary on density and the network, how to think about incremental margins as we start to see, hopefully, a more continued rate of volume and tonnage and shipment improvement.

Yes, there was a lot in there to try to unpack. But maybe I'll leave the last one for someone else. But I'd say from a GRI standpoint, we have a pretty simple philosophy of being cost based. And when you think back over time, we generally target getting around a 5% increase, and our GRI has been 4.9%. That's been pretty consistent year in and year out for about as long as I can remember. So I think when you've got a simple strategy like that, it's pretty effective to be able to go in and sit across the table and asked for an increase to help offset the cost inflation that we're seeing in our business. And frankly, in the third quarter, at least, cost inflation when you look on a per shipment basis, has been trending higher than what we anticipated. We thought core inflation would be 5% to 5.5% this year, and we've seen that trending a bit higher. But -- so that's been steady. I think that supports when you look at our overall revenue per hundredweight excluding fuel and the full quarter was at 5.1% revenue per shipment, which is really how I think about revenue per shipment and cost per shipment has been trending higher, but some of that reflects the fact that we're seeing higher weight per shipment. Our length of haul was a little bit higher in the third quarter as well. So all of those are favorable and lead ultimately to long-term operating ratio improvement. So those have been good trends to continue to see, and we'd expect to see that same type of consistency as we move forward.

The next question comes from Eric Morgan with Barclays.

I guess I'll just ask one on fuel. I was curious if there is a lag impact in the third quarter that maybe you could quantify, I don't know if that presents a tailwind sequentially in 4Q. I think the surcharge as a percent of base revenue moved down a little from 2Q, even though I think diesel prices were higher. So just curious how to think about any catch-up in 4Q and that's baked into the margin guidance?

Yes. Our surcharge program resets every week. So there's always a little bit of lag effect there, if you will. And certainly, that is baked into the guidance that we gave for the fourth quarter, both from a revenue standpoint and margin standpoint. And it looks like it continues to be a fuel prices continue to be elevated. And I think that's something that we need to see come down, and that's what we're hoping for. At some point, we've got to have some resolution on this to help the broad economy. But I think that the way we talk about the surcharge is we -- most of our large contractual customers, they give us the fuel scale that we have built our rates around. And surcharge just becomes a variable component of pricing. And in a perfect world, whether it goes up or it goes down, we've got the same type of profit contribution regardless. And I know there's some broad concern about the fuel, and I've given some of these examples before. But for example, in the -- from the fourth quarter of '25 to the first quarter of this year, fuel sequentially went up 10%. Our fuel count, our shipments per day, those were consistent between those 2 quarterly periods, and our profitability was consistent. So it worked in that regard. But I think there's some broad concern that read out there about when fuel eventually unwinds. And I guess I would point people back to 2015, that's at least in the past 15 years, the last period where we had the biggest change in fuel price per gallon that year was down 29%. We had good tonnage growth that year. We still produced about 6.5% revenue growth and our earnings per share are up 15% that year. So I think those are a couple of the broader examples where the variability in fuel, if we've done our job appropriately in terms of how we've priced out and built our base rates, we can see that come down and be just fine from an overall profitability standpoint.

The next question comes from Jonathan Chappell with Evercore ISI.

Adam, I just want to go back on something you noted earlier. I know we've talked about salaries, wages and benefits. I know you talked about operating supplies, we've even spoken about fuel. But if revenue is going to come in above normal seasonality, yield ex fuel, up 5.5% to 6%, which is a great number like you said, only maybe [indiscernible] worse in August, but otherwise really strong. Why would the OR still be at the low end of the range? You mentioned a few cost headwinds you're expecting in 4Q? Is that just fuel, which conceivably should be offset with the fuel surcharge mechanism? Or is there something else that's kind of timing or more just kind of inflationary pressure where the OR shouldn't also be following the revenue down a path of better-than-normal seasonality?