Old Dominion Freight Line Inc
NASDAQ:ODFL
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
168.305
231.84
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Old Dominion Freight Line Inc
You don't have any saved screeners yet
Good morning and welcome to the Old Dominion Freight Line, Inc. third quarter 2021 earnings conference call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded.
I would now like to turn the conference over to Drew Anderson. Please go ahead.
Thank you Gary. Good morning and welcome to the third quarter 2021 conference call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through November3, 2021, by dialing 877-344-7529, access code 10160197. 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, that are 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 ask in fairness to all that you limit yourselves to just a couple of questions at a time before returning to the queue. Thank you in advance 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.
Thank you. 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.
During the third quarter, he Old Dominion team produced strong profitable growth that included new company records for quarterly revenue and profitability. The third quarter of 2021 was our third straight quarter with double digit revenue growth and the fifth straight quarter of double digit growth in earnings per diluted share. While our revenue results reflect the unprecedented demand for our best-in-class service, our ability to grow at these impressive rates is the result of our long term commitment to consistently invest in capacity.
We continue to have available network capacity as well as best-in-class service, both of which are qualities that differentiate us within our industry and provide a distinct competitive advantage for Old Dominion. These qualities have also supported our ability to win market share and produce profitable growth over the long term. With continuing strength in the macroeconomic environment and limited industry capacity, we believe demand for transportation services will continue through the fourth quarter of this year and into 2022.
As a result, we expect our business level momentum that began in the third quarter of 2020 will also continue. To take advantage of these opportunities and produce further profitable growth we believe that it will be important for us to continue to execute on the long term strategic plan that we have operated under for many years. This strategy focused on delivering a value proposition of superior service at a fair price to our customers, which generally creates the capital for us to further invest into capacity and technology to support our customer supply chain needs.
Our most important investment, however, will continue to be in the OD family of employees. Our people are critical to our success as they work tirelessly each day to provide service value to our customers. We added over 1,000 new full-time employees between June and September of this year. These additions resulted in a 20.9% increase in our average full-time headcount as compared to the third quarter of 2020. While we have grown the OD family this year, the capacity of our people continues to be our biggest need to support future growth.
As a result, we expect that we will continue to add new full-time employees to our team during the fourth quarter and next year. We believe further additions will be necessary to prepare for anticipated growth and to also reduce the use of third-party purchase transportation. We expect to use third-party purchase transportation during the fourth quarter at levels similar to the third quarter. While we would like to reduce this level of utilization, we must continue to supplement the capacity of our people and our fleet in support of our topline revenue performance.
We hold the third parties that we work with to the same standards of excellence and our team remains fully committed to providing best-in-class service to our customers. Our customers' expectations for excellence do not change, regardless of how we move their freight and given the supply chain challenges that many of them are currently facing, we want them to have complete confidence in our ability to deliver. Old Dominion set the standard in our industry with our ability to provide superior service and service center capacity to support our customers' growth. As a result, we believe we are in a better position than any other carrier to win additional market share and further increase shareholder value over the long term.
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 grew 32.3% in the third quarter to $1.4 billion and our operating ratio improved to 72.6%. The combination of these changes led to a 44.4% increase in earnings per diluted share to $2.47 for the quarter. Our revenue growth was balanced between LTL volumes and yield, both of which were supported by the strong domestic economy and capacity issues within the industry.
Our LTL funds increased 13.7% and LTL revenue per hundredweight increased 15.7%, which also reflects the impact on our fuel surcharge program from the increase in diesel fuel prices. Excluding fuel surcharges, LTL revenue per hundredweight increased 10.1% as a result of the continued success with our yield improvement initiatives as well as changes in the mix of our freight. On a sequential basis, third quarter LTL shipments per day increased 3.2% over the second quarter 2021 as compared to a 10-year average sequential increase of 2.9%. LTL tons per day increased 1.0% as compared to the 10-year average sequential increase of 1.9%. These 10- average trends exclude our 2020 metrics for a more normalized comparison. At this point in October, with only a few work days remaining in the month our revenue per day has increase by approximately 33% to 35% when compared to October 2020. We will provide the actual revenue related details for October in our third quarter Form 10-Q.
The operating ratio for the third quarter improved 190 basis points to 72.6% as a result of the operating leverage created by our revenue growth as well as our continued focus on operation efficiency. Many of our cost categories improved as a percent of revenue during the quarter, although our operating supplies and expenses increased 200 basis points, due primarily to the rising cost of diesel fuel and other petroleum-based products. As a percent of revenue, salaries, wages and benefits improved 320 basis points between the periods compared. Our productive labor cost within this expense category improved 200 basis points which more than offset the 130 basis point increase in purchase transportation.
Old Dominion's cash flow from operations totaled $364.3 million and $872.6 million for the third quarter and first nine months of 2021, respectively, while capital expenditures were $178.69 and $384.7 million for the same periods. We noted in our release this morning that our capital expenditures are now estimated to be $565 million for this year. The $40 million decrease from our prior estimate is mainly due to the timing on large real estate projects that will be pushed into next year. We will provide further details about 2022 capital expenditure plan with our fourth quarter earnings release, but at this time we expect to increase our expenditures to support our ongoing market share initiatives and to reduce the average age of our fleet.
We continued to return capital to shareholders during the third quarter through our dividend and share repurchase programs, including the $250 million accelerated share repurchase agreement that will expire no later than March 2022. For the first nine months of this year, the cash utilized for shareholder return programs included $599 million for share repurchases and $69.4 million of cash dividends.
Effective tax rate for the third quarter 2021 was 25.2% as compared 24.8% in the third quarter 2020. We currently anticipate our effective tax rate to be 25.8% for the fourth quarter.
This concludes our prepared remarks this morning. Operator, we will be happy to open for the floor for questions at this time.
[Operator Instructions]. Our first question today comes from Chris Wetherbee with Citigroup. Please go ahead.
Hi. Thanks good morning guys. Maybe to start off, the tonnage trends, Adam, you mention, the tonnage trends of the quarter. I mean you are a little bit below sequentially what is normal. And clearly, we saw a little bit of a deceleration in August before it seems like September picked back up. So could you talk a little bit about sort of business conditions in the quarter and maybe what we saw intra-quarter and how that's played out as moves here into early October.
Sure. One of the things driving the change in shipments versus tonnage for as well to point out is the fact that we continue to have a little bit lower wait for shipment rather. And that's the change that we talked about in recent quarters as we continue to focus on more traditional LTL shipments and try to work out some of these larger, harder to handle type of shipments that are more transactional in nature generally within our system. So that had a little bit of an impact overall and that discrepancy, if you will, between the tons and the shipments. When we look at shipments, they were on a sequential basis just above what the 10-year trend would have been at 3.2% versus the 2.92%, a little discrepancy there.
But back to the point of your question, when we look at really the volumes in general but tonnage and shipments as we work through the quarter, we were right in line with normal sequential trends in July versus June but then had a pretty big step back in August. Our tons per day in August, decreased 1.6% from July. The 10-year average changes is 0.5% increase there. And a big reason for that was the fact that we started seeing across the country the rise in COVID cases and just the ongoing labor issues that are affecting many customers and warehouses throughout the country. That certainly had an effect on business directly and indirectly, really.
So that was an issue that caused us, in some cases, to not be able to pickup freight when we couldn't be able to deliver it And so there was certainly a ripple effect, I think, throughout the economy and reflected in our business results as well. But as cases started to improve, some of that pickup back in the labor participation rates, we saw significant recovery. Really, it began towards the end of August but really accelerated through the month of September, such that our tons per day in September were up 5.2% over August versus the 10-year average change of 3.7%. So it certainly made up for that and so as we accelerated through the end of the quarter.
Okay. That's very helpful day. And it seems like revenue per day in October would suggest that maybe that trend has continued. So kind of curious about that. But as a follow-up, I kind of wanted to get a sense of, with the context of tonnage and obviously with very strong pricing environment, but obviously you are hiring at a rapid clip. I would imagine, there's some inflation on that side. How do we think about the normal sequential cadence of operating ratios as we look through the fourth quarter?
Sure. Well, Greg mentioned in our prepared remarks, we will continue to focus on bringing on new employees as we go through the fourth quarter. And it's something that frankly we have been doing all year. If you look at the change in our volumes and change in people, we have exceeded what our normal sequential trends have been, I think, for five straight quarters. So that's something that we think will continue given the strength of the demand environment that we certainly feel very confident that that will extend into the 2022. So it's important for us to continue to really build up all the elements of capacity that we need in our business and that people, fleet and the service center side to be able to accommodate our customers' expectations for growth and to be able to continue to deliver best-in-class service to them.
With that said, I still feel good about the performance in the third quarter. We were pretty much right in line to sequential operating ratio performance, it was right in line with normal trends. And that factored in a lot of calls that are coming onboard. We still face some of those cost challenges. But we would expect to be right in line with what our normal sequential change is from 3Q to 4Q. And that's typically in the 200 to 250 basis point increase from the third quarter. I think that we should be able to be in that range while we will have some calls continuing to come at as, both in relation to the investment in new employees. We are still taking delivery on some equipment. So we have got some cost pressures there. But we have still got incredible topline revenue performance that's helping to offset those and certainly yield performance has continued to be strong. But as you alluded to, with the change in our volumes and overall revenue for October, we are performing well above what the normal sequential trends would otherwise be on the volume inside and pricing strength is certainly continuing as well.
Great. That's very helpful. Thanks for the time. I appreciate it.
The next question is from Jordan Alliger with Goldman Sachs. Please go ahead.
Hi. Yes. Just a follow-up, I guess, on some of the headcount related things. When you think about volume growth, whatever the expectations are in the headcount need, should it roughly track once we get past this year, headcount and volumes? Or do you need less headcount relative to volume growth? Thanks.
Yes. Jordan, I think it will continue to tract, to some extent. But you have got to remember, ewe have really chasing it for the most part all year. As our growth has accelerated, we continue to chase our needs and continue to play catch-up to some degree. But I do think that we will start to moderate and level back out to more normal type pace going forward. At least that's what we hope.
Okay. And then I assume, as others, you are seeing in order to get the people and you have had good success, obviously and the need to push up the wage per employee or cost per employee, however you want to look at it.
Yes. We have done the same thing this year that we have done in years past. We gave our annual rate in September and in some cases we have had to increase starting wages. We have had some places where we have had referral bonuses and those kind of things. So we have had lock-up matching in quarters past. We are having success. We just have to work a little harder at it and do things a little bit differently, whatever it takes to get the folks onboard. But you were having success and I expect we will continue to do so.
Thank you.
Your next question is Ravi Shanker with Morgan Stanley. Please go ahead.
Thanks. Morning, all. So maybe the first question is along that similar trend. You guys are well known to keep your 25% excess capacity. How does that trend over the next several quarters, do you think? Is now the right time to build that buffer, given the higher cost of building capacity in the current environment? And also what are your competitors doing? Are they batten the hatches and trying to get price? Or everybody in the industry also trying to build capacity?
Ravi, we are still at about 15% to 20% excess capacity and that's in the service center network which is the most important in the LTL businessman. I mean it certainly takes people in trucks but that's the longest term form of capacity and the hardest to put in place. And we have been consistent with our investments over the years and we will continue on that front as we finish out this year and then transitions into next year. But that's about at the same point that we were when we finished last quarter as well. So despite the strong sequential volume performance that we had in 3Q, we have been able to keep that excess capacity level at about the same spot. So we are going to keep after it and keep adding to those capacity levels.
And certainly, as Greg mentioned, we have got to really continue to be focused in the short term on continuing to add people into the mix. And that's probably been in our biggest need all year as we work through the balance of the year. But it really takes all three forms. And we came into this year, we don't really know exactly what our competitors' strategies are but we came into this year believing that we had more capacity than anyone. And that really goes back to our 10-year investment that we have made. We have expanded our door count by over 50% over the last 10 years.
We have seen very little investment from some of the others, maybe a service center here and there but nothing at any major scale. And so that has created an environment for us to be able to win more market share than anyone else. And certainly, we believe we still got best-in-class service. So we have got a service advantage in the marketplace and we have got more capacity than anyone else. And that gives us the capacity advantage in the marketplace and that usually produces pretty phenomenal results when we get into the strong demand periods like we have been in this year and what we expect to see for next year as well. So it gives us a lot of confidence to say, we are the best positioned carrier to continue to produce profitable growth and increase shareholder value, even from the levels from which we are currently operating.
Got it. That's great detail. Maybe just follow-up on the capacity thing. Just on new trucks, do you feel like you are going to get all the trucks that you need in 2022? Or does that look like something that happens in 2023 or maybe in 2024?
We think we are going to get what we have asked for. At this point in time, there is no indication that we will not. So we will have to wait and see, obviously, but so far the outlook for a truck standpoint is good.
Very good. Thank you.
The next question is from Jon Chappell with Evercore ISI. Please go ahead.
Thank you. Good morning. Greg, in the last call you mentioned hopes for maybe nine new terminals by the end of this year, although acknowledging that some will definitely pushed into 2022. Can you give us an update on the pace for the remainder of this year? What you have line of sight on for early 2022? And if we can even take a step further and think about, holistically, the next 12 months, what's your kind of ideal on additional capacity as it relates to either terminal count or door count?
Yes. The terminal count, Jon, I think we have got another three or four that we expect to open in this calendar year. And we have numerous others that we are working on for next year. I can't give you an exact number but I am going to say, we are in about the eight to 10 range for next year, something like that. So we have got a lot of projects that we were in the middle and then we have got an awful lot on the list to start as we go forward. But just remember, lot of those things, they take time, what's like pulling teeth, if you will, in some cases. But we are working on locations where we need help and where we think we know we could be capacity constrained. So with all that and hope to continue to be able to accomplish whatever, wherever our needs are.
Okay. And my follow-up will be along the same lines. I think when some people here, capacity expansion or terminal expansion, their immediate thought goes to start-up costs and potentially weighing on the aggregate margin. Given the size of your network today, is there just better scale of onboarding a new terminal so that the immediate tonnage impact from that has a pretty de minimis impact on the aggregate operating ratio of the entire firm?
Yes. We certainly start out, I mean we are covering all markets today. So when we open a new facility, it already starts with a good book of business, if you will and is pretty much profitable immediately. And so that also frees up some capacity in the existing service center that we move ZIP Codes and freight out of into the new location. So that's been part of our expansion process over the years and certainly we have invested a lot of dollars in expanding our network and that 50% increase in door count that I talked about earlier. But that kind of all goes into it and it's why when we talk about our yield management philosophy that we focus on getting an increase every year in our revenue per shipment to exceed what our cost per shipment inflation will be, but also to support the continued investment in our service center network.
And as supply chains become more sophisticated, customers are leveraging our network to their benefits as we are processing freight through our network of about 250 service center today. So it's something that we are effectively purchasing real estate capacity on behalf of our customers and we want to be only that's really making the type of material investments that we have. So it's important for us to continue to keep that within the context of yield management so that we can afford these service centers that are becoming more and more expensive as we are competing with different parties to go out and find the real estate to continue to support our growth.
But certainly, we have had great success in the past. We got a good team detail that's always trying to stay ahead of the growth curve and at the levels where we are, we feel like we have got us probably stay a little bit further ahead of the curve than we have had in years past. But we have got a good plan. We got a list of about 35 to 40 service centers that we think we want to add to the network in due time and probably won't stop there.. We feel like we have got a very long runway for growth ahead of us, given what our expectations for growth in the industry, given the consolidation in the industry and general lack of investment by the carriers it's certainly a great spot for us to be in to continue to be in a good position to win market share.
Yes. Absolutely. Thanks so much Adam. Very helpful. Thanks Greg.
Yes, sir.
The next question is from Tom Wadewitz with UBS. Please go ahead.
Yes. Good morning. So I wanted to ask you first maybe just on kind of broader supply chain constraints and how you think they affect you? Or perhaps they just don't? But obviously, there is a lot of discussion around the ports. And it's pretty clear there, truck load is constrained, wage is constrained intermodal as well. Is there any effect to your business to get some spillover freight? But just how do you think that some of the broader labor constraints and supply chain noise affect you? Is there some tonnage that's constrained or maybe some cost pressure? Or are you very pretty much immune to it?
I don't know if we are immune to anything that's going on in the marketplace. But, Tom, we do see continued strength off the West Coast. I mean obviously there is a lot of stuff sitting out there in the water and as it continues to get into the warehouses and whatnot, we are seeing and feeling that strength in those markets. But certainly, was not immune to anything. And any change or any change of strategy or whatever by our suppliers or our customers will change some of the things that we have to do and possibly where the freight comes to, goes from, whatever. But right now, we adjust as is necessary. And so far, I would say, the impact has been somewhat minimal, if you will. Again, not immune to anything that's going on, but not a huge impact.
Yes. Okay. I appreciate it. Another pretty high level question. And then what about tonnage growth? I guess you talked about revenue per day in October. I don't know if you want to comment a bit more about tonnage. But how do you think about the ballpark for tonnage growth might be in fourth quarter? And what it potentially could be in 2022? Do you kind of go back to like mid single digit or high single digits next year? Or how do you broadly think about the framework for tonnage growth in 4Q? And I know it would be high-level for next year.
We don't want to give any specific guidance per se. But the balance of the revenue growth in October is pretty consistent, pretty split evenly between yield and tonnage like it was in the third quarter. Those two numbers were pretty close. On the yield side, obviously recently fuel prices have continued to increase, so that overall revenue per hundredweight metric will continue to reflect that number. But again, we are still seeing considerable strength on the volume side as well. Certainly, as we go through the period we think about the comparisons, the comparisons certainly get a little tougher each month as we work through the fourth quarter.
It was last year, our volumes were accelerating month after month, such that the third quarter was a bit of really strong outperformance versus what our normal trends have been. Typically, we see strong performance for five or six quarters like that and then kind of revert to normal sequential trends which, by the way, reflect a whole lot of market share gain over the past 10 years. When you think about our shipments per day, they are averaging about 50% increase versus where we were 10 years ago. So there is a lot of market share gains that are in those numbers.
But overall, I think if you just were to say that we operate on d normal sequential trends, that us with some pretty strong numbers on the volume side next year. And we don't want to say that's what the forecast is. But right now, we haven't seen any letdown with respect to demand. So it's hard to call that we are going to see any slowdown. And certainly based on customer conversations and everything that we see and read, we feel like this unprecedented level of demand that we have seen this year will continue into next year, especially if other carriers are continuing to be capacity constrained.
That certainly could continue to just push more and more volumes our way. And so, we just got to be in a c position to continue to bring it onboard and make sure we are focused on profitable growth, which is what our long term focus has been and continue to take care of our customers in offering them solutions in various ways, be it handling all their LTL shipments, using out truckload brokerage division to help them out with any truckload moves as that's put and then the grades division that we have in our non-LTL as well which is mainly focused in the Southeast is seeing a lot of strength there. So it all comes back to building a relationship with your customer and trying to continue to serve them as best you can. And we are going to continue with that focus as we transition into 2022, but not keeping our eye off the ball with respect to the fourth quarter as well. We still got a lot of work to do to finish out this year with strength.
It sounds like your resource additions, your headcount, you are set, it seems line, you are planning for pretty good growth next year as well, just what you are doing on headcount. Is that fair?
Fair. Yes, sir. We still got to try to reduce this purchase transportation. We like to get back to managing the business completely in source from a line haul standpoint. And that's what we have done in the past and we are using it to supplement the team right now, again just getting back to being able to serve our customers. But certainly that's the focus. And it will take our headcount exceeding our shipment count. Over the long term, those two numbers are really aligned, the change in headcount, the change in shipments. But we have got to catch back up with things and we have been under the shipment growth, if you will, for the past year and year-and-a-half. And so it's going to take a period to sort of regain that to not only catch up with our business overall but really to be anticipating the growth that we are likely see next year.
Okay. Thanks for the time. I appreciate it.
The next question is from Scott Group with Wolfe Research. Please go ahead.
Hi. Thanks. Good morning guys.
Good morning Scott.
So you guys will clearly be sub-75% on operating ratio for the calendar year? I can't imagine you want to put a timeline on it. But do you feel like you have got line of sight to getting to about 70% or sub-70% OR over for the next several years?
I think that's something that we just got to continue to work at. When you look over the past two years, the improvement that we have had in the operating ratio, the two-year performance really has only been exceeded by the two-year performance back in 2010, 2011, coming out of the depths of the recession. So we are really proud of what we have achieved over the last few years and we feel confident to say that we know we have got room for further improvement. I think we will wait until we get to the fourth quarter to really start talking about kind of what our next target will be. But again, if you look over the long term, we have averaged 100 to 150 basis point improvement in the operating ratio each year and that's sort of gets back to that delta between our revenue and cost per shipment.
So a lot go into each of those two numbers, us managing our cost and continuing to focus on productivity and offsetting all the cost that go along with expanding our model. And that creates some short term cost headwinds but when you look at the long term performance for what we have done over the past 10 years, producing an average of 10% to 11% change in revenue each year and about 25% average annual increase in our EPs, that's driven considerable share value over that 10 year period and we want to continue to do that as we look out into the next 10 year horizon as well. So certainly a lot of opportunity, but of a lot of hard work and focus on execution on our part to make it happen.
Okay. And then I want to ask on the labor side. I know we have touched on headcount. I guess, two things. Do you feel the need for wages or comp per employee to increase more than normal given inflation? And then just any thoughts on vaccine mandate and what your expectations are there? How you are planning for it? Do you think it's going to happen, carve-outs, things like that?
Yes. Scott, as I mentioned before, we have had to do some things a little bit different from a pay and benefit standpoint, pay mainly. We look at benefits every year and see where we can make improvements. And we have done that over the course of time. But I don't think we have got to do anything drastically different from a pay standpoint. We did give an annual increase again this past September as we have done in years past. And again, we have had to do referral bonuses and hiring bonuses in those certain locations where we are really challenged to find folks.
But I don't think it will be significantly different going forward what we have to do. Like I said before and I have said over the years, we can still get people. We just have to work harder at doing it. And I think we will continue with that focus. We are always looking for ways and different avenues to accomplish whatever the hiring needs that we have are. So we will continue to do that.
What was that last question you asked about vaccines?
Yes. I was just asking your thoughts on vaccine mandate and what you are doing to plan for it.
Well, yes, we would love to have some clear line of sight as to just exactly what's coming down the line. I know you have heard the same thing we have heard and there's a mandate supposedly coming. But I am not exactly sure where that is right now. I think you also know that we actually, back about four months ago, we offered our employees an incentive to get vaccinated. And we have had some success with that.
As far as the mandate goes, that would be extremely difficult, in my opinion. It's either get vaccinated or do the testing. We are still working on that and trying to figure out how we can accomplish testing the numbers of folks that we would have to test on a weekly basis. Extremely, extremely difficult to accomplish, I don't want to say impossible. But there are some challenges there that I think are going to be very difficult if it comes to that. And God help our industry, if it does. If you think we have got supply chain issues now across the country, that could really throw it into some kind of a crazy tailspin. But we will see where it goes. But hopefully, clear heads will prevail at some point.
Are you hearing that? Do you have confidence in that? 1 mean everyone says the same thing, it would be a disaster. Are you confident that the government gets that?
Confident that the government gets that? No, not at all. I sure hope at some point in time, I think common sense has to prevail. I know there are some forces in Washington. I think the ATA is working on a couple of different things. And hopefully, we will have some success with that, exempting truckers, whatever the strategy might be. But at some point in time, I think common sense has to prevail. There's a place for that. I am not sure we have used a whole lot of it to this point. But certainly, there is a place for that as it relates to vaccines and mandates and whatnot.
I think the other thing is, fortunately, the numbers we are seeing are moving in the right direction. As far as COVID goes, they are really dropping. I saw something on the news this morning where we are down to a 4%-something positivity rate. Maybe that was just for the state of North Carolina, I am not sure. But the numbers do look a lot better than they did back several months ago. So again, I think if you take that into account with where we are as far as the numbers of cases and those kind of things, surely, at some point, common sense will prevail.
Thank you guys. I appreciate it.
The next question is from Amit Mehrotra with Deutsche Bank. Please go ahead.
Thanks very much. I wanted to follow-up on the long term margin question. Adam, for a while, you have kind of pegged incrementals at 25%. Obviously, it's been much better than that, just given how much shipment growth has outpaced expense growth. But obviously, that's reversing a little bit and incrementals seem to kind of be coming down settling maybe in the low 30% level. And those types of incrementals obviously imply kind of about 70% OR. That's really sort of the plateau for the company versus kind of the very low-70s you are doing now. Is there anything, Adam, in that kind of framework that you would disagree with? Do you think structural incrementals have moved up relative to where you saw them a few years ago? Just talk about kind of how you see that framework evolving.
Sure. One, we have said this before, but we don't manage the company to the incremental margin. That's just the calculation of all the work that we do in sort of building out the balancing the revenue growth and margin improvement opportunities. We had used that long term target of 25% really as an inverse to say we were working towards a 75% operating ratio goal. And that's really more of what we talk about within the company for where we think we can take the operating ratio. So I think we will give a little bit more color on that when we get to our fourth quarter call.
Obviously, based on kind of what I mentioned earlier about the target for the fourth quarter, that puts us at an annual operating ratio somewhere around 74%. So it certainly looks like we will be able to beat that 75% OR target this year. And as it comes down to incremental margins, I think this will go down as our biggest incremental margin year in our history. And when we have talked about the cost structure with you before, we have laid out kind of the cost structure as balanced between our variable and fixed costs and how we can operate at a 35% to 40% incremental margin in a particular quarter in a short period of time.
But we don't want to get overly fixated on incremental margins because, again, we are focusing on the investments that are required to drive long term growth. We don't measure the success of our business based on how strong an incremental can be. It's really some of those longer term numbers that I referenced earlier. And we want to be able to repeat that because we think there's a lot of growth opportunity left within our business. And so that's going to be the focus. But it requires investment and that can create some short term headwinds.
And if that's the only lens that you look at things through, you miss out on a ton of opportunity to drive shareholder value. And so we are going to keep that long term focus, continue to make al the necessary investments. And if that drives the incremental down a little bit, one, I am pretty pleased with 33%. I don't think that's anything to sneeze at for the quarter and producing a very strong 72.6% operating ratio. But based on that cost structure breakdown, we feel confident in saying that we certainly can drive the operating ratio meaningfully lower.
And whenever we get to whatever that next threshold might be, we will continue to look at managing the business and how the algorithm works. And it's not to say that whatever the next stopping point will be the final stopping point. We think that there's a lot of opportunity left here. So we will keep marching forward. The algorithm certainly has worked for us in the past and we think can continue to work for us into the future.
Sure. Yes, that makes sense. Thank you. And just as a quick follow-up. You were helpful in providing tonnage for October or at least kind of at a high level. But obviously, when you deconstruct tonnage, weight has been a decent drag to tonnage. When do you think that cycles through because obviously that’s implications for headcount relative to shipment growth? But when do you think like the cycling through of the weight per shipment drag happens and it's a little bit more of a neutral to the tonnage number?
Yes. If you go back to the first quarter of this year, we were still at sort of a 1,600-pound range average. That dropped to 1,570 in the second quarter. And so I feel like we are probably likely to settle in this 1,550-pound range, kind of plus or minus 20 pounds or so. And so we will still have a little bit of a drag, if you want to call it that, with the first quarter comparison. But by 2Q, you should start to see that of next year more normalize and see the shipment and tonnage performance more comparable with one another.
Okay. Thank you very much. I appreciate it.
The next question is from Jack Atkins with Stephens. Please go ahead.
Ho Greg, good morning and thank you for taking my question.
Hi Jack.
I guess just to kind of think about pricing and yield momentum here for a moment, just based on the commentary that you guys have around the momentum in the business from a demand perspective and the expectation for that to continue into 2022. Can you maybe speak to the pricing momentum that you are seeing maybe in the second half of the year versus the first half of the year? And as you sort of look out into 2022, with truckload carriers talking about potentially double digit contractual rate increases. How should we be thinking about maybe the core price increases in the LTL market more broadly? Not speaking to OD specifically, but just kind of thinking about the potential for further yield acceleration in 2022.
Well, I think for the industry, if we continue to see this supply and demand imbalance, in the past, many of the carriers that are out of capacity certainly use the environment to push prices meaningfully higher and try to take advantage and improve the margin. So certainly, that type of environment is supportive of our pricing initiatives. For us, it's more of a long term consistent approach and one that we think is fair but equitable.
It's one that we can sit down with our customers and talk about what our cost inflation is and what our needs are in terms of reinvesting in the business to either improve customer service or investing in ways that ultimately are going to reduce cost. So it's a win-win situation for both us and our customers. And so we try to target our cost inflation and then some and we have been pretty successful with that. And so that will continue to be the focus.
But with that said, we are always focusing on the individual account profitability. And so when you are in these types of environments, there are some accounts that their operating ratios are not as good as others. And those are the types of accounts that really over the last couple of years that we have had to address some issues and there's different ways to improve yield. It's not always through price.
And so that's where you sit down and you build on your relationship together and work through different initiatives that ultimately can create the same results of yield improvement there. So certainly, given the expectation that the demand trends will remain very strong and given the lack of capacity that we believe is in the industry and that's mainly grounded in the feedback that we are getting from customers, we certainly expect there to be a strong pricing environment for the industry next year, for which we will be able to benefit.
Okay. That's great. And I guess just maybe following up. Greg, kind of going back to a comment that you had in the press release around length of haul extending out on a year-over-year basis. Could you maybe talk a little bit about what's driving that? Is that a function of comps? Is that a function of maybe some changes to your own business mix? Just would be curious if you could maybe expand a little bit on that comment? And if that's maybe more of a structural change for you?
Jack, as I mentioned before, I think we are seeing an awful lot of strength right now off of the West Coast. And obviously, all those containers sitting out there, that freight has got to move in, at some point. And I think that's why we are seeing the small increase in our length of haul. I don't know that there's anything else that would contribute to that.
Okay. All right. That makes sense. Thanks again for the time.
The next question is from Todd Fowler with KeyBanc Capital Markets. Please go ahead.
Great. Thanks and good morning. Adam, to the comments on the OR progression in the fourth quarter, I guess it's pretty encouraging that the expectation is to be in the historical range because it seems like that maybe headcount growth would be a little bit higher than what you typically have seen and purchase transportation is going to be elevated. So what are the things that are helping you stay within the normal range despite maybe adding a few more heads than you typically would in 4Q and running a little bit more PT?
Well, I think that, one, the topline performance certainly helps offset a lot of cost. And we will see how the rest of the quarter shapes up, if you will. But typically, we see a little bit of softness, if you will, just about 0.5% to 1% drop in our revenue per day performance from 3Q to 4Q. And so based on the current performance, we are definitely outperforming October, if you will. So we will see where that puts us for the end of the quarter.
But we are doing a lot of things with respect to managing costs. We talk a lot about the labor cost and that's probably 65% of total cost in our salary, wages and benefits line. And we have seen a lot of productivity this year, especially within our line haul and our pickup delivery operations. We have lost some productivity on the dock. So I think that the fourth quarter and the first quarter, that will be some opportunity that we continue to focus on. It's not that we haven't been focused on it. But I think that that's something that will help on the labor front if we can reduce the levels of purchase transportation and manage more freight with our people and our equipment.
Certainly think that that will be beneficial as well, given the rates that we are having to pay. And we are using about the same level in October as we were in the third quarter. We hope that we will be able to reduce that level of utilization a little bit. But at this point, the topline trends have dictated all year. I think every quarterly call, we have had for the last four quarters, we have talked about wanting to be able to reduce that expense category. But the topline trends have really dictated that continued utilization.
So we will see where that balances out. But there's just a lot of cost management that is here within the business and that we are focused on as well as continuing to see that strong topline performance that will help offset some of this inflation as we are bringing on new people. We will continue to see our benefit costs in the third quarter were higher and expect that that will likely continue as we are continuing to balance out the number of hours worked by our employees. As we increase that workforce, there's certainly going to be more incremental benefit costs that will be incurred. But we feel good about all the other contributing factors to help offset some of that cost inflation.
Okay. Yes. That helps and all that makes sense. Just for my follow-up, I know that the timing of equipment deliveries can have an impact on particularly the depreciation side. This year, it looks like depreciation is going to run pretty much flat with last year. Do you look at 2022 as kind of being a catch-up where you see more depreciation come in based on timing of equipment deliveries? And I would expect there will be a little bit of put and take with PT probably coming down. But just any thoughts about how depreciation trends into 2022, just given the cost kind of tail that that can have?
Yes. Certainly, we have seen the equipment deliveries delayed a little bit this year. We haven't finished completely with the delivery cycle at this point. But we do expect that all units ordered will be delivered to us and we have already had preliminary conversations with our OEMs about next year as well. And as Greg mentioned, we believe we will get all of the equipment that we need to be able to manage the growth that we are anticipating.
But that has resulted in some depreciation that's kind of come in, in different periods. that too will be something that we are only about 80% through September complete with the CapEx order on the equipment. There will be some deliveries that we are taking here in the fourth quarter that will add to that depreciation base and then that will trend up as we go into 2022.
But typically, you look at kind of the long term trends, there's a pretty consistent factor of what our CapEx is and a percent of that that kind of adds to the depreciation base. And I don't want to get into too many details until we are really ready to roll out what the full CapEx plan will be. But there will be some carryover into next year from this year's CapEx plan. And then certainly next year, we are expecting that we will be spending quite a bit more than this year on total CapEx.
Okay. Got it. Thanks for the time this morning.
The next question is from Ken Hoexter with Bank of America. Please go ahead.
Great. Good morning. So Greg and Adam, happy to join your call. Just some cleanup questions for me. You have covered a lot. The wage incentives, Greg, are they accelerating now? Or are they stabilizing? I just want to get an idea on the environment. Maybe just thoughts on how it's changed through the year?
Yes. We did some things. Ken, if you go back into earlier in the year when we were having issues, we implemented some couple of different bonus plans and incentives, whatever it took to bring the folks on that we needed. But that's moderated, to some degree. We haven't really increased those tied bonuses or incentives, whatever, of late that I am aware of. So I think that's moderated to some degree.
So that's a good sign if you are able to still get people and your incentives are moderating, I guess. The sequential OR commentary. Are there adjustments you worked on to smooth that? Adam, you noted it was a typical 200 to 250 basis points third quarter, fourth quarter. Are there seasonal surcharges you look to add to maybe smooth that out a bit?
No. There's no surcharges or anything like that. But the fourth quarter, it can be a bit unusual. There are a couple of adjustments to our insurance line. We go through an annual actuarial process in the fourth quarter that can move that insurance line. And there's some other accrual-related items within our benefits program that get looked at by an actuary each year. So there can be some adjustments in the past. We are perfect with our estimates as we move through the year and those are pretty minimal and they haven't been overly material in years past. But for example, last year, when you look at the fourth quarter, the insurance and claims line was only 0.9% and it had been at a run rate of about 1.1%. So a little bit of a favorable adjustment, if you will, there. But absent those types of things, nothing else that really comes in that's different from any other period.
Okay. And then my last one is just you talked a lot about maybe expansion in terms of service centers and adding doors. Anything you want to highlight on productivity gains in terms of turnover per door or any other room for improvement on expanding capacity with the network? Or is that just doing what you are doing to get the 15%, 20% beyond that you need the additional service centers?
I don't think really anything different to add to it, just we are building up, anticipating what our growth levels are going to be and trying to ensure that we are building up the capacity within the service center network to make sure that not only can we handle the growth that may come at us next year, but still maintain this target of 20% to 25% excess capacity that we like to have in the system. In the LTL world, it's the doors that really can control the amount of freight that can be processed through the system. And so we never want our network to be a limiting factor to our growth. And those service centers are not easy to add and the additions don't come quick either.
So you really have to have them out there and it's why it's so important for us to invest even in periods where you might see market softness. The investments that we made in 2016 and 2019, those were critical to be able to accommodate all the growth opportunities that we are seeing in the present. So we just want to make sure that we continue to build out that capacity and just have it there and ready as our customers continue to call on us and want to give us more and more of their freight.
No. I wasn't arguing the need for the additional service centers. I was just wondering if there's anything more you can do to improve productivity on existing centers to gain additional capacity.
Well, I mean that's just the density and yield breakdown. If we keep on average that 20% to 25%, just say every stick of freight that comes through an average service center is going to drive incremental improvement in the operating ratio to that one particular service center where we may have expanded it two years ago. And then certainly, the yield performance has got to be there to offset the generalized core cost inflation at that service center level as well.
So you build that out and scale it across 250 facilities while we may be expanding maybe 15 facilities in any given year or so, you have got a large grouping that have already been expanded, incurred that incremental depreciation. And now we are driving profit improvement at each service center level. So that's really what's driven the overall model is to continue to invest ahead of growth and then that density and yield contribution drives the bottomline growth faster than the top line.
Great, Adam. I appreciate that. Thank you.
The next question is from Bascome Majors with Susquehanna. Please go ahead.
Yes. As you mentioned earlier, you increased your door count by 50%, while most of the industry was flat or down over the last decade. and clearly, that created a lot of value for your customers, employees and shareholders. I mean as we look over the next five to 10 years, though, it does feel like more of your competitors, though not all of them, are pursuing a growth-oriented approach to the market. I know we have had a lot of questions on capacity. But can you frame how big is big enough for OD, whether in terms of tonnage or market share or service centers, however really you want to measure it? And when do we get to the point as you look forward where that margin benefit of the growth investment starts to decline more noticeably? Thank you.
I will take a shot at the first part of your question, Bascome. I am not sure that we really look at it like that, how big is big enough. I think it's all based on where we see our needs and where are they and what do we need to make sure we can service our customers as we have committed to them to do. And I think that's the key.
Where does that take us? How big do we become? I don't know. That's not something that we have looked at or focused on. I don't know that that's extremely productive. So I wouldn't say that we have really looked at it that way. But wherever our needs are, we will continue to address them. And down the road, where it takes us? I guess we will just have to wait and see.
Thank you for the perspective.
The next question is from Bruce Chan with Stifel. Please go ahead.
Hi. Good morning everyone and thanks for squeezing me in here. Just want to come back to the labor side of things quickly and some of the headcount increases. Can you maybe give us a little color on where those new hires are coming in as far as the breakdown between drivers and dock labor? And then just as a follow-up, Adam, you touched on some of the productivity potential. But if you go through that onboarding process, how long does it typically take for you to get those new hires up to full potential? Thank you.
Yes. It's the breakdown. Obviously, we have got to have both drivers and our platform employees to move the freight. So pretty consistent balance with our line haul drivers, our pickup and delivery drivers, especially as we have added new service centers, not only just the general growth that the business has had and then the platform employees as well, mainly the productive labor employees that are responsible for moving the freight and handling freight for our customers. So that's driving the majority of that growth in the headcount. And it's been something that, to say your headcount is up 21% essentially is pretty meaningful, especially given all the conversations about labor shortages around the country. So we are certainly proud of how successful we have been, despite the fact that we said we would love to continue to hire more, if you will.
And it's just a balance on the productivity. The biggest learning curve happens on the dock for us. You can't get too overly caught up in one particular metric versus another. The most important for us is to make sure that each new employee on the dock understands that their number one priority is to use all the tools and techniques that we have in place to protect our customers' freight. And whether that's the dunnage, the airbags, utilizing the load bars that are in our line haul, trailers, everything that really drives that overall value proposition. The claims management is a big part of that. And we continue to have cargo claims ratio at 0.1% to 0.2%.
So that's something that we are really proud of and more motivated that we make sure our employees understand that, that is a part of the value equation. That's part of the piece of our yield management success over the years and a big differentiating factor between us and many of our competitors. So there may be a six-month learning curve in place for people to come on to make sure they are effectively preventing claims and also the other piece of it is maximizing our load factor to ensure that they are utilizing the entire queue. That's our biggest cost element is line haul.
And so we want to make sure that they are more focused on those key factors, if you will, versus just the number of shipments per hour that we might manage on the dock. But that gives you the opportunity as those new people are now more seasoned, certainly, that's why we are looking at seeing some of that productivity opportunity as we turn the page into 2022. And certainly, would love to see some improvement as we finish out the balance of the year. But I think that that will be a pretty good opportunity for us to drive some further cost improvement into next year.
Great. Thanks for the color.
This concludes our question-and-answer session. I would like to turn the conference back over to Greg Gantt for any closing remarks.
Well, thank you all today for your participation. We surely appreciate your questions and please feel free to give us a call if you have anything further. Thanks and hope you have a great day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.