Old Dominion Freight Line Pricing Spineometer: 4 of 5 Vertebrae
Old Dominion Freight Line, a North American less-than-truckload motor carrier, had a negative Q3 2024. Revenue fell 3% to $1.47 billion and earnings before interest and taxes fell 9.7% to $402 million over the same period last year.
A review of Old Dominion Freight Line’s 23 October 2024 earnings call and associated financial reports provided insight regarding the importance of pricing on performance.
Kevin Freeman, CEO of Old Dominion Freight Line, pointed to a challenging economic environment negatively impacting revenues. Adam Satterfield, CFO of Old Dominion Freight Line, clarified stating he is “seeing better performance with our retail related customers and continued weakness with our industrial related customers, which the industrial for us is 55% to 60% of our revenue.” These executives claim that the election year uncertainty impacted industrial shipping volumes in the US.
Mitigating these exogenous challenges, Old Dominion Freight Line has had market share stability, managed its variable costs, and continued to “maintain our long-term and disciplined approach to pricing” according to Freeman.
Yet what is that “disciplined approach”?
Weight, commodity, and distance are the general factors that impact pricing at Old Dominion. Light, bulky freight typically has higher prices than dense, heavy freight. Fuel surcharges are designed to offset fluctuations in the cost of petroleum-based products and are indexed to the diesel fuel prices provided by the U.S. Department of Energy.
With these input factors, Old Dominion Freight Line measures revenue with multiple metrics. Revenue Per Hundredweight is a standard metric for the industry, but it fails to fully describe the mix of shipments and can be misleading. They manage with measurements of Weight Per Shipment, Length of Haul, Revenue Per Shipment, Stops Per Hour, Load Factor, and Shipments Per Hour.
The key performance goal for Old Dominion Freight Line is to increase shipping density (increase tonnage and shipments within existing infrastructure) to improve asset utilization and labor productivity.
Management uses the term “yield-management” in reference to offsetting costs. While we are unsure, we suspect this to be distinct from the standard definition of yield management, as used in airlines, hotels, and by Union Pacific, in which prices increase as the time to utilization decreases by managing capacity utilization.
According to Satterfield, pricing is dynamic at the transactional level at Old Dominion Freight Line. He stated, “we’ll continue to execute on a bid-by-bid basis. I mean our philosophy is to look at each customer as their bids come due and look at what the opportunities are and the profitability of the accounts and try to ask for increases that will offset our cost inflation.”
Shortly after the earnings call, Todd Polen, VP of Pricing Services at Old Dominion Freight Line, announced a 4.9% general rate increase in November.
Industry benchmarks would suggest Old Dominion Freight Line to have 12 to 60 professionals dedicated to pricing.
- Given the impact of economic business cycles on performance, an applied economist that models demand in proportion to other economic factors would be useful for containing costs and managing price changes.
- Pricing at the structural level would benefit from continuous re-evaluation and market testing. Here, pricing analytics would be applied.
- Given that price execution is at the individual shipment level, both software and professionals would be useful for assuring consistency and accuracy. The large volume of bids to manage would imply a higher need for pricing capability.
- Other factors that impact the need for greater pricing diligence, such as industry dynamics or rapidly changing business models, are relatively benign for Old Dominion Freight Line, suggesting an expectation of pricing professionals in the middle of the industry benchmark range.
Research into the investment by Old Dominion Freight Line in pricing yielded encouraging results.
- The pricing team was at the lower end of the expected range and largely located in or near their North Carolina headquarters.
- Pricing team rolls varied from analyst, coordinator, and field pricing to director and vice president positions.
- Responsibilities are heavily transaction oriented yet price communication and price setting is clearly among the goals.
Polen, the VP of Pricing Services, is known to have three commandments:
- Thou shalt not haul labor intensive freight cheaply.
- Thou shalt not haul freight in headhaul lanes at a loss.
- Thou shalt not have long haul freight at no profit.
These would make for fine ground rules for any discussion regarding a salesperson’s desire to win business at a low price.
Given the importance and capability of pricing at Old Dominion as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of December 2024.
Old Dominion Pricing Spineometer: 4 out of 5 Vertebrae. The management thinking is sound and they appear to have a strong pricing leader, but I suspect Old Dominion Freight Line is understaffed. Some of the more taxing yet profitable intellectual challenges in pricing are likely going unaddressed as the team works to respond to a high volume of individual bid opportunities.
ODFL (Old Dominion Freight Line, Inc.) rose slightly from 199 the day prior to their earnings call to 204 one week later. FY 2023 revenue of $5.9 billion with a 28% operating margin and P/E ratio near 37.
For FY 2023, a 1% improvement in price would yield 4% improvement in operating profits holding all else constant at Old Dominion