Old Dominion held the line on costs, has slight uptick in OR even as volume dropped

Less-than-truckload (LTL) carrier Old Dominion Freight Lines (NASDAQ: ODFL) turned in a second quarter that saw it actually improve its operating ratio (OR), though several metrics on the volume side of the ledger were down.

Total revenue for the company was down 15.5% to $896.2 million from $1.06 billion, a drop of 15.5%. The LTL services revenue line of $884.0 million made up the bulk of that, down 15.6% from the year-ago period.

Operating income fell at a pace roughly in line with the decline in revenue. Operating income was down 15.1% to $199.1 million, down from $234.4 million. But the company’s OR ticked up 10 basis points to 77.8% from 77.9%. 

Where Old Dominion saw big changes was in its costs. Operating expenses for salaries, wages and benefits dropped to $460.9 million from $532.5 million, a decrease of 11.7%. Since such expenses are generally viewed as “sticky,” that sort of decline against a revenue drop of 15.5% is a significant accomplishment. 

The numbers on average full-time employees tell the story – there were 17,911 employees in the second quarter of 2020 and 20,735 in the second quarter of 2019. 

The transportation analysis team at Deutsche Bank was impressed. In a quick analysis of the earnings put out soon after the Old Dominion numbers were released, the team led by Amit Mehrotra wrote that ODFL “exhibited very strong cost performance in a very difficult top-line environment,” the Deutsche Bank report said. The overall cost decline was 15.6% against a drop in revenues of 15.5%, allowing for the slight improvement in OR. 

The Deutsche report noted that the cost line of “operating supplies and expenses” was just 8.4% of sales, which the report said is likely the smallest in company history. Operating supplies and expenses plummeted to $75.4 million from $122.4 million, a drop of a whopping 38%.

“Clearly ODFL took a hard line on discretionary costs in the quarter, which together with best-in-class management of the other aspects of its cost structure, equated to a nice bottom-line beat,” Deutsche wrote.

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