LTL operator’s focus on expansion and profitability stems from a simple ethos.
By Eric Johnson
In the less-than-truckload market, Old Dominion Freight Line has become a darling of analysts.
There’s good reason — the company has grown responsibly and profitability in the past decade and is able to squeeze more value from operations than its competitors.
That was exemplified once again in early August, when the company reported record revenue and profit margin for the second quarter and first half of 2012, capping a string of impressive financial performances despite the U.S. economy being caught in a profound malaise. The carrier earned $136.8 million in first half operating profits, a 33.4 percent increase on the same period in 2011.
For Chip Overbey, senior vice president of marketing, pricing and strategic development at Thomasville, N.C.-based Old Dominion, 1998 marked a distinct turning point.
“Like a lot companies, we were growing a little bit, we made it through deregulation and expanded a bit,” Overbey said. “But when David Congdon became president and chief operating officer (in 1998), we got together and asked ‘where do we want this thing to go? From a strategic point, what do we want to become?’
“Ultimately, we decided we wanted to be the premier transportation company domestically and globally. In order to have that, we needed a national footprint and, ultimately, a global footprint.”
Congdon was well prepared for the challenge — he was a grandson of Old Dominion founder Earl Congdon Sr., and took over as chief executive officer in 2008 from his father.
In recent years, the company’s LTL business has expanded significantly, to the extent that it now has 100 percent coverage of the continental United States (it previously only operated in 16 states). It has also developed global components that feed into its LTL business, or as Overbey called it, “the mothership.”
Around 93 percent of Old Dominion’s revenue is derived from LTL, so the ancillary services it has been gradually, yet persistently developing are considered complementary to LTL.
“We’ve come to realize that we’re a piece of a supply chain, and everyone has made a promise to the next person down the line in a supply chain,” Overbey said. “We asked ourselves, ‘how do we get involved in every piece of the supply chain?’ It’s taken a long time to do this. All that came from what we wanted to do domestically.”
Analysts have taken note. The investment bank Stifel Nicolaus has consistently lauded the performance of Old Dominion relative to its LTL peers, noting the company’s profitability.
“OD is not immune to industry pressures, but management has shown that they can navigate through difficult times and weather storms better than the competition,” David Ross, transportation analyst for Stifel Nicolaus, told American Shipper
Investors seem to agree. Old Dominion’s market capitalization is multiples higher than some of its publicly-traded competitors, and even 50 percent higher than LTL provider Con-way Freight. Its debts are a third of Con-way’s and less than one-fifth that of beleaguered YRC.
In an Aug. 2 note on Old Dominion, Stifel Nicolaus crystallized the operator’s inherent advantages.
“Old Dominion continues to march along as the best-run public LTL carrier, benefiting from both market share gains and an improving LTL pricing environment,” the bank’s transportation and logistics research group said. “Market share gains came in all regions of the U.S. and in all lengths of haul.
“The company’s long-standing focus on price discipline and understanding its costs and controlling its costs, as well as its strategic investment in an integrated multi-regional network, has given it what we believe to be a significant sustainable margin advantage over its peer group,” the bank added. “Put simply, by running a better business than competitors, it can offer a better service at a competitive price and retain more of the revenue for shareholders.”
In an April note on Old Dominion, Stifel Nicolaus called Old Dominion the “best growth story in the public trucking space.”
“Management’s goal remains to hit $3 billion in annual revenues in 2015, which implies roughly a 12 percent top-line (compound annual growth rate) from year-end 2011,” the bank said. “In addition to growing faster than its competition, Old Dominion also is a superior operator, consistently reporting (higher margins than its) public peers. We do not believe most other LTL carriers truly understand: 1) what it costs them to move freight for their customers; 2) how to best move freight, and/or; 3) the importance of earning (at least) their cost of capital.”
||“If you’re in a service business, it’s a crime if you’re not providing service. But if you’re providing the service and not telling everyone about it, it’s a sin.”
|— Chip Overbey,
senior vice president of marketing,
pricing and strategic development,
Old Dominion Freight Line
Overbey said Old Dominion has built its network by focusing on “blocking and tackling.”
“There’s always a market for quality,” he said. “Profitability comes from several years of putting technology and systems in place. When you know what your costs are, you can communicate it to customers and employees. This is the house you’re asking us to build, and this is what it will cost to build that house. You can charge a fair price as long as you give them what they’re asking for, and then some. In today’s environment, you’ve got to know what your costs are.”
He also said Old Dominion has been focused on not implementing services for the masses: “We look at every account individually.”
That customer focus can be traced back to the origins of the company, Overbey said, when truck drivers were virtually family members.
“The real difference with us is we’re all on the same page here,” he said. “Every Monday of every week, if you’re a manager you’re in a meeting. We don’t have multiple companies with multiple agendas. The culture here is a family culture. It’s been that way since Mr. Condon Sr. started the company and it’s been virtually infused here.”
But there’s also been a focus on expansion, including recent service center openings in Seattle; Oakland; Benson, Minn.; and Hawaii, as the company filled gaps in its network.
“The largest portion of our revenue is domestic LTL, but products like OD Expedited and OD Global are complementary to that,” Overbey said. “There’s going to be a supply chain related to that LTL shipment. We can dray, we can move products to 30 countries — it all helps feed the mothership. We can fly it if you want, but our transit times are so quick, you don’t have to fly. All that does is feed LTL domestic. These value-added services help support that, and the IT runs it all.
“We built those components as sub-brands for a reason. As we were adding these services, it was a little confusing. It’s like going to a diner and the menu isn’t organized. This helps codify services for the customers, and helps feed the mothership. We’re continuing to follow that expansion process.”
When developing new products, Old Dominion eyes the best practices of its competitors as a benchmark to meet and eventually try to surpass.
“FedEx, UPS, and Con-way — we respect those folks and watch what they do,” he said. “When we try a product, we look at who does things the best.”
Overbey said the LTL market is presently in an “okay” place.
“You can see in the carriers’ numbers it’s in a better place than ’08, ’09 or even 2010,” he said. “It’s more at an equilibrium point in terms of capacity and pricing. An okay economy is the new good. I don’t know where it needs to be long term. The industry still has some recovering it needs to do, like decisions on adding capacity, but a lot will hinge on the economy. The barriers to enter this industry are tough — it’s expensive.”
He added, as many other trucking executives have pointed out, that the industry is facing uncertain times, with onerous hours of service and safety regulations and a looming driver shortage.
“We have GDP growth of about 2 percent,” he said. “If that warms up to 3, 3.5 percent, then that can be a concern in terms of a driver shortage. There’s a fallout of drivers, especially among owner-operators, mostly because of the cost of equipment. They also have to be CSA (Carrier Safety Administration) compliant. A lot of these people say, look I’m going to get out of the market because hiring requirements are getting more stringent. All those things come in to play.
“Our workforce is changing — drivers want to be home with their families on a regular basis. I think this driver shortage in time can become very real.”
Overbey said a driver shortage could have significant impacts on the way shippers structure their supply chains.
“Our supply chains in the U.S. have become very just-in-time oriented,” he said. “The money is in the inventory. The more you can cut your inventory, the more competitive your prices can be. If you have to go back to having more stock, it could make a difference.”
But if a driver shortage materializes, Old Dominion could find itself in a better position than truckload carriers.
“Our turnover is very low,” Overbey said. “The LTL environment is better than TL — you’re home at night, it’s more scheduled. But there are several different things hanging out there that could change things. Most of these issues are external issues. But we don’t have integration issues, or financial issues, or people issues. If you don’t have to deal with those things, you can stay focused on service and monitoring the external issues, and then maybe it’s not quite as bad.”
Noel Perry, senior consultant of the transportation analyst FTR Associates, said in his company’s State of Freight webinar in late July that the trucking market is delicately poised. If, as Overbey indicated, the economy picks up, a driver shortage is likely.
But if the economy slows down even 1 percent, that could significantly hamper the trucking industry.
“When GDP growth runs 2.5 percent or more, truck freight tends to grow more rapidly than GDP,” he said. “In 2011, when GDP grew only 0.5 percent, truck freight went almost to zero. The economy is growing at 2 percent or more. But a little more trouble in the economy, and truck freight will drop back to 1 percent or 0 percent growth. We’re on the cusp of a possible negative outcome, and it’s worth all of our attention.”
Overbey pointed out as well that Old Dominion still has lots of “headroom” to grow in a very fragmented domestic LTL industry, where it has about 7 percent of the market.
He noted that because the company’s international products — most notably its Pacific Promise guaranteed delivery time, ocean-LTL service from Asia — have a relatively small share of the market, there’s still room to expand despite somewhat stagnant demand on the transpacific.
“Because we’ve tried to build all aspects, it gives us a lot of options with products that we can take to customers,” he said. “We can do the dray, we can do the warehouse. If the customer says, ‘hey OD, we want you to deconsolidate,’ those deconsolidated pieces become LTL, so it gives us additional opportunities to feed LTL.”
Ross, of Stifel Nicolaus, noted the company’s growing density.
“They are still mainly focused on LTL, which is the core business and a very good business for them,” he said. “But their geographic expansion has been a positive as they now offer service in the 48 contiguous states and are just building density now.”
Now the goal is to build the brand in line with service.
“If you’re in a service business, it’s a crime if you’re not providing service,” Overbey said. “But if you’re providing the service and not telling everyone about it, it’s a sin.”