Q3 2023 Old Dominion Freight Line Inc Earnings Call

Participants

Adam N. Satterfield; Executive VP of Finance, CFO & Assistant Secretary; Old Dominion Freight Line, Inc.

Drew Andersen

Kevin M. Freeman; President & CEO; Old Dominion Freight Line, Inc.

Allison Ann Marie Poliniak-Cusic; Director & Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division

Amit Singh Mehrotra; Director and Senior Research Analyst; Deutsche Bank AG, Research Division

Bascome Majors; Research Analyst; Susquehanna Financial Group, LLLP, Research Division

Christian F. Wetherbee; MD & Lead Analyst; Citigroup Inc., Research Division

Eric Thomas Morgan; Research Analyst; Barclays Bank PLC, Research Division

Jack Lawrence Atkins; MD & Analyst; Stephens Inc., Research Division

Jizong Chan; Associate VP & Equity Research Analyst; Stifel, Nicolaus & Company, Incorporated, Research Division

Jonathan B. Chappell; Senior MD; Evercore ISI Institutional Equities, Research Division

Jordan Robert Alliger; Research Analyst; Goldman Sachs Group, Inc., Research Division

Kenneth Scott Hoexter; MD & Co-Head of Industrials and Basic Materials; BofA Securities, Research Division

Ravi Shanker; Executive Director; Morgan Stanley, Research Division

Scott H. Group; MD & Senior Analyst; Wolfe Research, LLC

Stephanie Lynn Benjamin Moore; Equity Analyst; Jefferies LLC, Research Division

Thomas Richard Wadewitz; MD and Senior Analyst; UBS Investment Bank, Research Division

Presentation

Operator

Good morning, and welcome to the Old Dominion Freight Line Third Quarter 2023 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.
I would now like to turn the conference over to Drew Andersen, Investor Relations. Please go ahead.

Drew Andersen

Thank you. Good morning, and welcome to the Third Quarter 2023 Conference Call for Old Dominion Freight Line. Today's call is being recorded and will be available for replay beginning today and through November 1, 2023 by dialing 1 (877) 344-7529, access code 8344351. 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, 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 do ask in fairness to all that you please limit yourself to just one question at a time before returning to the queue. Thank you 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. Marty Freeman. Please go ahead, sir.

Kevin M. Freeman

Good morning, and welcome to our third quarter conference call. With me today on the call is Adam Satterfield, our CFO. After some brief remarks, we will be glad to take your questions.
Old Dominion's third quarter financial results reflect continued softness in the domestic economy. As a result, our shipment levels decreased on a year-over-year basis for the fifth straight quarter. Some encouraging trends developed during the quarter as our LTL shipments per day averaged 49,670 after averaging 47,077 per day for the first 6 months of the year. While a portion of this growth can be attributed to the loss of one large competitor, we believe we are winning new business from other carriers in the industry due to the quality of our service and overall value provided to our customers.
The OD team effectively responded to this positive inflection in volumes by continuing to offer superior service at a fair price. We were pleased that our on-time performance was 99% during the quarter, while our cargo claims ratio was 0.1%.
As we have said many times before, service means much more than just picking up and delivering to our customers' freight on time and claims free. There are many other attributes that shippers consider when selecting a carrier, such as consistent transit times, carrier trustworthiness and ease of doing business. Mastio & Company conducts a comprehensive LTL study each year, and they recently measured carriers on 28 different service and value-related attributes. Mastio published their 2023 results just this week, and we are extremely proud to be named the #1 national LTL provider for the 14th straight year.
Logistic professionals ranked OD as #1 for 25 of the 28 individual attributes in the most recent survey, which was our best performance ever and demonstrates our unwavering commitment to excellence and customer satisfaction. We believe the consistency and quality of our service over many years, as validated by Mastio has differentiated Old Dominion in the marketplace and supported our ability to win market share over the long term.
Our superior service also continues to support our ongoing yield management initiatives. We focus on obtaining consistent yield increases each year to offset our cost inflation and support our ongoing investments in capacity and technology. Maintaining excess capacity during slower economic environments come to the cost, but we believe having an available capacity for customers when they need it the most is critical element for our value proposition.
As a result, we consistently invest in service center capacity, equipment, technology and most importantly, our people. Because of these investments, we are well positioned to respond to the positive inflection in volumes during the quarter. It is important to note that while other carriers may have the ability to invest in service centers, equipment and technology, it is our OD Family of employees that truly distinguishes us from our competition. We have a unique company culture that has defined who we are for a -- many years, delivering superior service at a fair price having a consistent approach to pricing and investing for growth may sound like a simple formula, but it takes a committed team to keep delivering on these fundamental elements for a long-term strategic plan.
The execution by our team and consistency in our long-term financial results gives us the continued confidence in our strategic plan. We remain committed to this plan and believe we are better positioned than any other carrier in our industry to win market share over the long term.
As we continue to deliver our unmatched value proposition to our customers over the long term, we are confident that we can create further profitable growth and increase shareholder value.
Thank you very much for joining us this morning, and now Adam will discuss our third quarter financial results in greater detail.

Adam N. Satterfield

Thank you, Marty, and good morning. Old Dominion's revenue decreased 5.5% in the third quarter of 2023 due to a 6.9% decrease in LTL tons per day that was partially offset by a 3.1% increase in LTL revenue per hundredweight. We also had one less operating day as compared to the third quarter of 2022. The combination of this decrease in revenue and slight deterioration in our operating ratio contributed to the 8.0% decrease in earnings per diluted share to $3.09 for the quarter.
On a sequential basis, revenue per day for the third quarter increased 8.9% when compared to the second quarter of 2023, with LTL tons per day increasing 3.6% and LTL shipments per day increasing 5.7%. For comparison, the 10-year average sequential change for these metrics includes an increase of 2.9% in revenue per day, an increase of 0.7% in tons per day and an increase of 1.8% in shipments per day.
As Marty just mentioned, a portion of this increase can be attributed to the loss of one large competitor as underlying demand has remained relatively consistent throughout the quarter. We do believe, however, that we are also winning new business from other carriers in the industry due to the quality of our service and overall value provided to our customers.
The monthly sequential changes in LTL tons per day during the third quarter were as follows: July decreased 1.5% as compared with June; August increased 4.7% versus July; and September increased 2.7% as compared to August. The 10-year average change for the respective months is a decrease of 3.1% in July, an increase of 0.1% in August and an increase of 3.6% in September.
For October, we expect our revenue per day will increase by approximately 1.5% to 2% when compared to October 2022, with a decrease of approximately 2% to 2.5% in our LTL tons per day. While our shipment levels for the month have been stronger than our normal sequential trend, we believe a portion of this outperformance is attributable to a cybersecurity incident disclosed by a competitor. We would expect some of the incremental growth in October, will return to that competitor in November. As usual, we will provide actual revenue related details for October in our third quarter Form 10-Q.
Our third quarter operating ratio increased 150 basis points to 70.6% as the increase in overhead cost as a percent of revenue more than offset the improvement in our direct cost. While the decrease in revenue had a deleveraging effect on our cost categories that are more fixed in nature, we were pleased with the increase in operating efficiencies that helped drive the improvement in our direct cost. We also continued with our best efforts to control discretionary spending to minimize the increase in overhead expenses as a percent of revenue.
We did, however, continue to execute on our 2023 capital expenditure plan to help ensure that we have the necessary capacity for anticipated growth once the domestic economy improves. This resulted in a 110 basis point increase in our depreciation expenses as a percent of revenue that, along with the increase in employee benefit costs, largely contributed to the overall increase in overhead expenses.
Old Dominion's cash flow from operations totaled $429.2 million and $1.1 billion for the third quarter and first 9 months of 2023, respectively. While capital expenditures were $172 million and $651.4 million for the same periods. We utilized $65.9 million and $368.1 million of cash for our share repurchase program during the third quarter and first 9 months of 2023, respectively, while cash dividends totaled $43.7 million and $131.5 million for the same periods. Our effective tax rate for the third quarter of 2023 was 24.0% as compared to 23.9% in the third quarter of 2022. We currently anticipate our effective tax rate to be 25.6% for the fourth quarter.
This concludes our prepared remarks this morning. Operator, we'll be happy to open the floor for questions at this time.

Question and Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) Our first question is from Allison Poliniak with Wells Fargo.

Allison Ann Marie Poliniak-Cusic

Could you talk a little bit about the density improvement that you saw in the network? And any way to quantify that? And then maybe following that, just touch on how much excess capacity you have in the system today to take on some more volumes?

Adam N. Satterfield

Sure. Our current level of excess capacity, which is in our service center network is now between 25% to 30%. We did improve density within our operations during the quarter and that was a big factor in driving the improvement in our direct operating costs, at least the improvement that we saw both sequentially and on a year-over-year basis.
But we leverage that inflection in the volumes and we always say long-term improvement in the operating ratio, it was driven by two key factors: density and yield and both generally support -- or require the support of a macro economic environment is positive, but we had good leverage there that drove some nice operating efficiencies within our pickup delivery operations on the dock as well -- had improvement. We still had a slight decrease in our line haul load factor, but that's improved from where we were earlier in the year. So all those factors contributed to the improvement in our direct cost as a percent of revenue during the quarter.

Operator

The next question is from Jack Atkins with Stephens.

Jack Lawrence Atkins

Okay. So I guess, Adam, as you think about the sequential progression into the fourth quarter, I know there are a lot of puts and takes with October and the disruption -- the further disruption of the market in October. But could you maybe talk about your expectation for -- or maybe how we should be thinking about operating ratio trends sequentially from the third quarter to the fourth quarter, all things considered?

Adam N. Satterfield

Sure. Typically, the fourth quarter operating ratio is 200 to 250 basis points worse than the third quarter. A couple of factors drive that. Usually, revenues a little bit softer. We give our wage increase the 1st of September, so we get 3, 4 months within the quarter with that new wage rate.
But multiple factors that generally are driving that change. One thing to note, we also do actuarial assessment each year, we conduct that in the fourth quarter, and we normalize for that, just to assume it stays flat with the previous quarter, but we've seen adjustments in the past. That can be favorable, which is what we had last year as well as unfavorable. So assuming those costs stay different, I think that we can be in the 150 to 200 basis point deterioration range, so slightly better than what we would historically see.
Some of that, we're obviously starting the quarter out with a little favorability versus our normal sequential trend as we discussed. And so I think that we expect some volumes to kind of normalize, if you will, back to where they otherwise would have been for November and December. But that still gives us a little bit of a head start, and I think will help us drive a little bit of outperformance versus our normal trend there.

Operator

The next question is from Ravi Shanker with Morgan Stanley.

Ravi Shanker

So just maybe a 2024 question, if you will. It looks like yourselves and maybe a lot of the big LTLs still have a fair bit of excess capacity in their network even after absorbing the Yellow volumes. I'm wondering how you think the kind of -- how numbers will play out when the up cycle comes, do you expect to see the market has suddenly tightened up and there to be like a rising tide of pricing? Or do you just think that you get better incremental margins as the volumes come in? Kind of where do you think the 2024 upcycle looks like in a post year (inaudible) at this point?

Adam N. Satterfield

Well, I think it's yet to be determined for 2024. Certainly, there's a lot of DOEs that would suggest this could be a year of inflection. But we also believe the same thing we thought we were going to see a rebound in the spring of this year, so we're cautiously optimistic about what next year may bring.
As we've said before, with the post Yellow situation, we want to be measured with our approach and continue to believe that slow and steady wins the race. So we didn't try to go out and immediately win as much share as was out there in the market, but we're trying to do it in the right way in leveraging the capacity that we have and not just the capacity and the service in the network, there's a people capacity element as well as equipment.
And I don't know that there's as much capacity in the market, as you may have indicated with your question because we're hearing it every day. We're hearing about competitors that are missing pickups. They don't have the people part of their capacity equation solved and maybe took on too much freight and are starting to have negative implications from their overall service products. So we believe that we'll continue to win market share, but do it in the right way by giving superior service at a fair price to our customers and offering a value that's unmatched in our industry. And if we get some positive economic support, I think that you've seen in past cycles when we actually get there, 2018 and 2021 are good examples where we try to stay ahead of the growth curve with the capacity investments that we consistently make to be able to take on that volume when it's there.
And when we look at those 2 years that I just referenced, we significantly outgrew the markets in those years despite the strength in underlying demand because of that excess capacity that we had in place.

Operator

The next question is from Chris Wetherbee with Citigroup.

Christian F. Wetherbee

Maybe I could piggyback on that a little bit. As we think about 2024, I know normally you guys talk about costs. You talked about price sort of relative to cost and be able to -- need to exceed that in any sort of normal year. I guess in post Yellow, as you think about '24, do we need to see something else to be able to sort of spark a better-than-normal pricing year for you guys in 2024? I think there are expectations that next year naturally would be because of what happened with Yellow. But is a normal cyclical recovery enough to spark something that would be better than average? I just want to get your sort of general take on how sort of spring loaded or not you think the pricing environment is?

Adam N. Satterfield

Yes, sure. Well, I think the environment continues to be strong overall, especially given the supply shock that happened. But I think our approach is different from many of our competitors. We believe in a long-term consistent approach to pricing. And we try to target obtaining 100 to 150 basis points of price above cost each year. We've had some cost pressure this year, and that's evident in our numbers. But I believe that, that starts improving as we go into next year, especially if we can get a little bit of volume recovery.
We're already seeing the core inflation in our business moderating. It did in the third quarter. And I think that same trend can carry through in 4Q and -- 2024 as well. But I think the market should certainly be conducive to us being able to obtain the increases that we believe we need to justify and cover our cost inflation, but also the investments that we're making in capacity.
We're only a carrier that's really investing significantly in service center capacity. We've invested $2 billion over the last 10 years. And as a result, we've been able to increase our door capacity by 50%. And when you look at the public LTL companies at least, which are 65% to 70% of the market, overall capacity there is down close to 10%.
And so I think that customers understand that and continue to give us the increases that we need that basically support the value proposition that we're able to offer them. When you think about the supply chain challenges and whatnot that shippers have had to work through over the last couple of years, in particular, capacity hasn't necessarily been at the forefront of the conversation over the last year, but over the last 3, and it certainly has been critical. And so we feel like that's what we need to continue to focus on.
But we'll continue with our same approach like we always have, and it's produced good things for us from a financial results standpoint, but an improvement in our balance sheet to support the ongoing investments that we believe we need to continue to make.

Operator

The next question is from Scott Group with Wolfe Research.

Scott H. Group

I want to ask about your perspective on share gains. So we've pulled forward, I guess, about 10 years of share gains from Yellow into a quarter. I guess do you think post Yellow, the pace of share gain for you guys in future years will be as good as what we've seen from you historically?
And I guess I'm curious about this question in the context of this upcoming Yellow auction. I mean ultimately, I guess I want to know like how much -- what is your strategy in terms of terminal growth? And how much do you want to add? Obviously, you were involved in the stalking horse bid. What's the strategy here with this upcoming auction?

Adam N. Satterfield

Well, we don't want to get into any details on that, just given the fact that it's ongoing, and we're continuing to evaluate those options. But our long-term strategic plan didn't depend on one competitor going out of business and us being able to obtain real estate from them. Our plan will continue to be give superior service at a fair price. And service is what wins market share for us as well as having available capacity.
Again, you look at the performance that we have with our volumes and market share in 2018, 2021, 10 points outperformance versus the industry. And that wasn't just Yellow that we were comparing against. It is the industry, so we win share from others. And I believe we've been able to capture more market share for the -- when you look at the growth in the industry than anyone else as well. We've doubled our market share over the last 10 years that will require investment as we go forward. We expect that we'll continue to spend 10% to 15% of our revenues each year on capital expenditures. That will continue to be within real estate and with equipment to support our anticipated growth, but we certainly believe that we can be the biggest market share winner over the next 10 years, just like we have over the past 10 because of the value offering that we have, just validated by Mastio this week.
We've won this award 14 years in a row. We're very proud. We had better performance than we've ever had in the survey, winning 25 of the 28 attributes that they measure. And our overall gap between us and the industry widened out further than it's ever been.
So we feel good about where we are, but we're also focused on making sure that our service continuously improves as we go forward, and that's what will be key to our ability to win share.

Scott H. Group

So if I understand, Adam, you don't think that like your long-term volume growth, share gain is any different going forward post Yellow?

Adam N. Satterfield

Not at all. I don't think the formula changes just because they're not here and their 45,000, 50,000 shipments, whatever it was, is now dispersed. And that share is somewhat with us, somewhat with other carriers. I think there's probably an element of it that went into the truckload world as well that probably will, at some point, be rebalanced within LTL once the truckload world tightens up. That's yet to be seen, but trying to trace the number of shipments they had versus at least what the public carriers have disclosed, there's a missing element there that I believe may have landed in the truckload world.
But for us, the conversations that we have with customers, the long-term trends that we think will support growth in the LTL industry, be it continued improvement with e-commerce trends, that's conducing to moving freight by LTL, whether we see increased manufacturing, at least in North America, a lot of those things will be more conducive to freight moving by LTL for which there's no one in the industry that is delivering the same type of service and value that we can offer customers. And so that's what we'll remain focused on.
We've got to continue to focus on managing our cost inflation, and we focus (inaudible) on that as well. So we can continue to have that 100 to 150 basis point price versus cost spread keeping our prices relative to the industry. But certainly, when you think about the overall value equation, there's no one that we believe can match what we can offer a shipper.

Operator

Next question is from Amit Mehrotra with Deutsche Bank.

Amit Singh Mehrotra

I had two questions, if that's okay. So first question, you just did like a 70 and change OR in a broad freight environment that's pretty weak, to say the least. Does that -- that obviously informs the opportunity in a broadly -- better freight environment? I know you have the [6] and/or OR target, but I was wondering if you can update us that because I assume you're quite happy and impressed with the resiliency of the OR and what has been a weak market even including Yellow.
And then I want to push back a little bit on the Mastio (inaudible). Obviously, you guys on a headline basis, have been exceptional. And I know it's really hard to get that #1 national carrier position. But the value proposition for OD historically has been, yes, we're more expensive. But on a total cost basis, we're still better because of our claims ratio and our on-time performance. And you guys always were in the middle or below that fair value band in the Mastio survey.
Today, you're kind of at the tippy top. And it's hard to improve 99% service, 0.1% claims ratio, but your price is going up, which on the margin reduces the value that you provide to the market, which may explain some of the market share. I'm sure you disagree with this, but help me understand how you think about moving up towards the very top of the fair value band and what that means for your market share opportunity going forward?

Adam N. Satterfield

Well, there's always going to be movement there. And what we've got to go by is not necessarily that data. That data is very important, and we pay a lot of attention to it, but it's the conversations we have every day with customers. And the conversations when we go back to post pandemic when someone may have moved freight away from us because of price and trying to save a little bit, but if they were in jeopardy of losing a customer because the freight never got picked up or it never got delivered, then there's a premium there for sure.
If your product is not on the shelf available for sale, if you got a production line that shut down, waiting on a part or a piece, I think shippers are looking more strategically at value. That seems to be the outcome post pandemic world. And anytime we go through a slow environment like we've been for the last year, there can be some movement within some of those categories. But for us, trying to have a consistent approach to pricing each year, being able to sit across the table from a customer and have an open, honest conversation about being fair to us and being fair to them is what we strive for.
And to be able to make the investments that we're doing, like I said earlier, capacity may not have been at the top of mind over the last year because of the overall weakness in underlying demand. And then you had a couple of carriers earlier this year that were making some changes and doing some different things with respect to their pricing. So those are things that you always have that are -- challenges that you manage through.
But that environment changes pretty quickly. And keep reference in 2021, that was a period where competitors were increasing rates faster than us where they're more up play in the market play in -- versus having a consistent approach. And all of a sudden, we look like a lot better value, if you will, when our service is way ahead on the spectrum. But now that someone has closed that pricing gap because they've come in and taken the 10%, 15% type of rate increase, that's what drives market share to us, and it's market share that stays sticky.
We have had great continuity within our large accounts when we look at our top national accounts. We don't have turnover in that business over the past 12 months. We've not lost accounts or lost lanes just in many cases, that the demand environment has been weaker. So demand for our customers' products, if you will. They've not been able to tender as much freight to us. So it's something that we always are relevant and mindful of where our pricing is relative to others.
But we do what we need to do and what makes sense for us. That's part of our long-term strategic plan and we just make sure we communicate what our needs are going to be with customers. And it's a model that's worked. We've been able to grow our revenues 11% to 12% on average each year over the past 10 years. And that's the same formula that we want to be able to work as we move forward.
It's a consistent and it sounds like a simple plan, but there's a lot of complexities behind the scenes, if you will. And we just want to keep executing and believe we can. And I think that as we go through the next 12 months, if we see some real economic recovery, I think that we'll see our numbers continue to outperform from a growth standpoint than the industry, just like we've seen in prior cycles.

Operator

Next question is from Jon Chappell with Evercore ISI.

Jonathan B. Chappell

Adam, you're able to handle this surge of 3Q business without really changing the cost structure that much. So as we think about kind of a return to cyclical recovery at some point next year, whether it's first half or back half loaded, did this surge in volume in the third quarter and October absorb a lot of your spare capacity and a lot of the ability to have the incremental margin expansion, so as you can see the volume recovery on a more sticky basis, you can still increase the cost structure on a lesser one-for-one basis and get that historical OR improvement? Or is there going to be a bit of a catch-up where you're going to have to add more labor, more resources if the broader demand tailwind actually accelerates next year?

Adam N. Satterfield

Well, we're -- we were in a great spot coming in to this quarter from a labor standpoint, from an equipment standpoint and definitely from a service center standpoint, and we've intentionally been heavy. We've tried to protect as many driver positions in particular that we could as we've gone through this slow period. We certainly have seen some attrition within our workforce over the past year. But we've tried to keep as many people on board as we could, knowing that the inflection would individually happened.
We believe that it was going to happen earlier in the year. And obviously, we're disappointed when it didn't, but we just continue to try to manage through. And here we are. It did happen in the manner that we thought that it would, but we were well positioned to respond and our existing workforce has been able to do so. Now from here, we have restarted the hiring process in some locations. And we'll continue to run our internal truck driving schools to produce new drivers and have them available as the demand levels dictate. If our shipment volumes continue to increase, if we can see sequential improvement through next year.
We want to make sure that we've got all elements of capacity in place to be able to deal with it and not be playing from behind, if you will, and having to try to catch it or not being able to say yes to a customer if they're coming to us and asking if we can handle incremental volumes for them. So it's always a challenge to try to walk that tight rope in terms of managing the elements of capacity. But I think that we did a great job with getting through it this year and we may have carried a little extra cost in doing so.
But I think our operating ratio has performed about where we thought it would, given the decrease in volumes. We said earlier in the year that our focus would be to managing our direct cost even in a low volume environment. We've been able to do so without any sacrifice whatsoever to our service quality. In fact, some of our service metrics have actually improved as we've gone through this year. So we're pleased with where our service quality is, the performance of our team, the improving efficiencies that we're seeing. We'll continue to add to the team and continue to rebalance our fleet as well.
As we go through 2024, we've still got some deferred replacements that -- where we want to improve the average age of our fleet. But all of that will continue to be worked out as we go through the next year or so. And we want to get back to a growth environment, an improving operating ratio environment, all those things we're kind of used to seeing, we just need a little cooperation from the economy to help us along the way.

Operator

The next question is from Tom Wadewitz with UBS.

Thomas Richard Wadewitz

Yes. Adam, you've talked a bit about -- I think you said like inflation can come down somewhat next year. And then you've talked a bit about price as well, and you've seen -- that's pretty constructive view on where price is going to be next year. If we don't see improvement in the freight market activity, do you think you'd be looking at those two factors supporting margin improvement because it seems like you put those two together, you would see the margin improve. But how do you think about, I guess, lower inflation and a favorable price and what that does for margin, even if you don't see freight improve?

Adam N. Satterfield

Well, I think that we had -- for one thing, we had a pretty hefty CapEx year this year. And when you look at our operating ratio and the change that we have in the third quarter, that was a bit of a headwind, 110 basis points headwind on the depreciation side and some of the CapEx was basically related to what's happened over the last couple of years with the OEM challenges that we've had, shortages of parts that have required us to carry maybe a little bit more equipment on the books than we would sort of look at from a -- if we were optimizing the fleet standpoint.
So I think as we go through next year, if it looks like it's going to be another flattish year, we're already sort of a leg up, if you will. A lot of times, you can take September volumes for the month and kind of just use that to correlate to what the next year's volumes will be. And so we might be looking at even if it's a -- underlying demand doesn't change at all. We believe that we've got the opportunity to win some of the share that we continue to believe will be turning around over the next 6 months to a year given some of the service issues that I referenced early, we're hearing about every day.
But we're already in a position where we might see a little bit of volume growth. And then get some yield on top of that, that in a -- cost may be improving as well. Then yes, that's the environment where in the past, we've been able to produce some operating ratio improvement.

Thomas Richard Wadewitz

So I mean it sounds like you feel pretty good about where you're at in '24, even if you don't see a lot of improvement in the freight market.

Adam N. Satterfield

I think so. I mean, we're certainly -- we saw the step-up basically in August. And then I was pleased with the performance that we had in September. And when we talked about post the mid-quarter update, where we were from a shipments per day standpoint, we had been at 47,000 shipments per day since December of last year. And basically, that average carried forward through July.
We saw that step up. We've talked about kind of an incremental 3,000 shipments per day, and that's where we were in August. In September, normally, it's a 2.5% to 3% increase in shipments per day would be normal seasonality. Although the last month of the first quarter and the second quarter, I saw a little bit of a pickup, but nothing close to where normal seasonality would be. That's kind of where we've been missing some of the growth over the last year, but our shipments per day were up 2.1%. So that performed a lot better than what we've been seeing at least in the last month of the quarter, and that really was no new impact. That's just some share shift and then existing customers that are giving us more freight, if you will.
So there's been a lot obviously going on over the last four months within the industry, some things obviously permanent. And then like we mentioned, I believe that we'll see some of the volume gain that we had in October that will return to a competitor. So trying to kind of figure out where the daily shipment count gets to in November and December is a little difficult. But if things kind of shake out, if we had just normalized, if you will, and we're more along normal seasonal patterns, we would have been in an environment where -- or if we get back to that from November, December, rather, to where our shipment counts are more flattish, with where we were last year in the fourth quarter and revenue is probably becoming more flattish as well versus being down 5.5% in the third quarter. It may still be down slightly, but it's getting -- everything is kind of getting back to flattish. And I think that, that's a good position to build on as we go into 2024.
Hopefully, we'll continue to see some more of those share gains, like I mentioned, just service related. And then if we can get a little bit of help from the economy, then that would build on even more volumes and then we'll just continue to execute, like I said earlier, on the volume side and managing costs. And if we can have that positive delta there, then that's a good setup even if underlying demand is not significantly changing.
If it does, and we're not going to precall it like we did last year. But if it does, then that's been -- the type of environment where I think our model shines the brightest when competitors are at capacity issues, and we believe that's happening just based on customer feedback today, then that's when we can really put on the incremental volumes that we build our network up to be prepared for. And so that possibility is out there, but a lot depends on what we may see from an overall economic standpoint.

Operator

The next question is from Jordan Alliger with Goldman Sachs.

Jordan Robert Alliger

Spoke quite a bit about price on the call today. I'm just curious on mix and the types of shipments you're getting, obviously, weight per shipment, maybe discussing that, which is basically trended down, sort of thoughts around that and shipment mix.

Adam N. Satterfield

Yes. Our weight per shipment has trended down and really it went down, I guess, in August to about 1,485 pounds, and that was some of that incremental freight that we saw that pickup of about 3,000 shipments per day. Increased a little bit in September, which you'd expect, and we're kind of hanging around that 1,485 pound range here in October as well. So that's something where I believe we're kind of at a baseline, reflecting kind of the underlying freight that's in our book right now.
And that will be a metric to watch to see are there increased orders for widgets, does that 1,485 pounds -- do we see that grow to 1,500 to 1,520 pounds getting back closer to the 1,600-pound range that we've seen in robust economies.
So it's -- like anything, the freight that you take on as long as you understand the handling characteristics and what the pricing ought to be, that decrease in weight per shipment did have a little bit of a favorable impact on our yield metrics during the quarter. And -- but that's what we have built our business on.
It's -- investing heavily in all the tools and technologies to understand the freight that we're moving to make sure that we're moving everything profitably with the right pricing in place. And I think that we've made those adjustments to the incremental freight that we've seen thus far.

Operator

The next question is from Eric Morgan with Barclays.

Eric Thomas Morgan

I just want to come back to the near term. I think for September, you said tonnage was about 1 point below average seasonality on a sequential basis. But you have confidence you're gaining market share and underlying demand was steady. So just wondering if you can clarify that and maybe if you're seeing any attrition from the initial wave of share shifts. I guess kind of along the lines of an earlier question, just wondering how any new customers you have from this are responding to your premium service but also premium price offering?

Adam N. Satterfield

Yes. We -- from a tonnage standpoint, the sequential increase in September from August was up 2.7%, the 10-year average change is a 3.6% increase. So -- but that compares favorably to what our performance has been in the third month of the first few quarters of the year, was the point that I was making. We've seen a little bit stronger pickup in September coming to us versus what we had seen earlier in the year and really no new events, if you will, within the industry that were driving any of that change, just a continuation of some of that freight that had to move at the end of July, we had made the point on the last call that obviously, shippers had to find an immediate home for that freight, and they likely leverage the existing carriers that they had in their networks or at least the large national accounts did.
But we believe and continue to believe that there's going to be some share shifting around. But I think that especially as we go through the fourth quarter, the first quarter of next year, two periods that are seasonally slower during the year is probably the type of environment that shippers will be looking at their overall supply chain partners and figuring out what's the right solution to have. And so I think that we'll see some churn that will be happening over the next 6 months.
I think that there are probably some customers that were at competitors previously that are taking on margin increases right now at a time when their service is probably deteriorating, but -- or also be looking at the value that OD can provide. And those are the types of accounts that we've seen in prior periods.
It's -- obviously, the situation is different, but I think it could be very similar to 2021. That environment was just all demand-driven, but demand was incredibly strong. There is tremendous opportunity there from a volume standpoint. And a lot of the competitors simply couldn't take on the incremental volumes because they didn't have all the elements of capacity in place to be able to do so.
And they're missing pickups, They're not able to get the freight that they do pick up, delivered on time. And those are the types of customers that increasingly call on Old Dominion. And we're starting to have some of those same types of conversations, maybe not at the same level at this point, but we're having those same conversations today. And we think that, that will create some incremental volume opportunity for us as we progress through the next few quarters.

Operator

The next question is from Ken Hoexter with Bank of America.

Kenneth Scott Hoexter

So the market, obviously, at 30x earnings, taking this a little bit in strides here this morning, maybe it's because the 2%, 2.5% downtick in October, maybe some of the [SDs] give back expectations. But I guess maybe the expectation was for faster growth and that you'd be able to keep the OR, yet you're talking about more measured growth.
So I just want to dig into this. There was a great discussion with Scott earlier into your outlook and your thoughts on sustained growth. But maybe thoughts about the industry and the competitive nature of it, right? So if you've got this bid process on the service centers coming up, which means the capacity just goes elsewhere, it doesn't go away. And maybe everybody thought it was going to go away and that would enable you to continue to take that share.
Maybe your thoughts on what does that lack of tightening, right, if more of that capacity spills out to the market on your ability to take that? And I know, Adam, you couldn't give your thoughts on -- but maybe just give the factual stuff, maybe the timing of the service center bids, just so we're all on top of the exact nature of the distribution of those.

Adam N. Satterfield

Yes. I think over the next few weeks, bids will be due. And so I think a lot will be determined, obviously, in the next month or so and figuring out who may end up with some of those service centers. I still believe that some of that capacity will be leaving the industry overall. But the reality is all of those shipments that were in place before, it's been several months now. They found a new home. And so -- someone on the strategic side that might be investing, you've got to look and think about how that would make sense, how much incremental capacity do you want to buy that you would have to go out and how would you use it kind of thing.
And so those are some of the thoughts that in considerations that I'm sure that we have and that others have as well. But again, from our standpoint, we believe we continue to grow. We will continue to invest in one shape or form, whether it's trying to go back after some of these properties in that bid or if it's something totally independent, which was the path that we were on before they closed their doors.
Either way, I think when we think about the long term, and that's the lens that we try to view our business through, we believe we will be the biggest market share winner over the next 10 years because of the quality of service that we offer and the value offering that we have in place. That's going to require investment. Just because you invest doesn't mean you're going to go win share. And if someone does, then it's probably increasing their cost basis. And that could be a good thing for us as well if our competitors' costs are increasing, requiring them to increase rates, even further and maybe closing some of that price gap that exists between us and others.
So I think that we tried to say on the last quarter call that our approach is going to be more slow and steady, if you will in this environment where underlying demand is -- continues to remain relatively consistent. We've not seen any type of true inflection in the economy at this point and we're prepared for it when it happens. And I think we've seen some really strong performance in the past when we get into those types of strong demand environment.
So we're ready for it from thinking about all elements of capacity. It's more than just service centers. Service centers drive what can be done over the long term, but you got to have people and equipment as well. And we feel good about where we are with all elements of capacity and our ability to respond to growth when it comes to us, and it will. It's just a matter of time before it comes. And so we'll be ready when that time does come.

Operator

The next question is from Bascome Majors with Susquehanna.

Bascome Majors

You talked earlier about starting to invest again in headcount and get ready for some of the growth that may come next year. Can you give us an update about where you are versus your capacity on facilities, people and equipment now? And any thoughts about where those constraints are showing up first, be it regionally or in functionally?

Adam N. Satterfield

Yes. We're -- on the service center side, we're at about 25% to 30% excess capacity. We'll necessarily look at those other two pieces of the capacity equation in the same type of way. But our equipment, we're in really good shape with where we are, probably a little bit heavy steel even with the influx of volume that we've seen over the last few months. But like I mentioned earlier, we'll continue to go through and evaluate and optimize that as we look at what our 2024 CapEx plan might be. We've not formulated that at this point, and we'll talk about it on the next earnings call.
But what the fleet size should look like given whatever our baseline forecast for '24 might be. And then we always look at kind of a bull case scenario and a bear case scenario as well to make sure that we've got an operating plan that can meet if we were to see really strong growth or the growth, not necessarily at the levels that our baseline indicated.
On the people side, obviously, we've been able to step up and meet the incremental volumes. Our people are getting more work, which I think makes them happy per se. And we had drivers that we're working on the dock and combo type of roles. So we're able to leverage that, putting those employees right back into a truck. And so overall, I think we're in a really great spot with all elements. But it will require, as we get into next year, we do see some incremental growth from where we are now will require investment in our people.
And that's why we've restarted some of our truck driving schools, and we are hiring in certain locations as well for new drivers, employees on the platform that are moving the freight on their docks as well. So we will continue to add to the workforce, if you will, as we make our best efforts to match the capacity of our workforce with the shipment levels that we sort of see coming at us, but making sure that they're on board ahead of the curve, so they're properly trained especially on the dock that we make sure that we're maximizing our load factor. We're using our claims for winch and tools to keep that cargo claims ratio where it is at 0.1%, all those things are important. But you can't just throw a person right into an environment where -- growing double digits kind of thing. They're just not going to be as efficient or as effective as we probably otherwise want. So we try to invest ahead of the curve, if you will, for that reason, to make sure that we get appropriate training in place before we really see the growth.

Operator

Next question is from Bruce Chan with Stifel.

Jizong Chan

Adam, maybe just want to follow up on some of your comments on the commercial side. You've got a couple of competitors out there that are targeting that field accounts business. I want to ask you if you feel like you have the right mix of field national and 3PL at this point or things are kind of changing post Yellow. And then just quickly on the sales force, any additions that have happened there to maybe fill out the newer parts of the network and keep pushing on that share growth.

Adam N. Satterfield

Yes, I feel like our -- we've got a great sales team in place that national account team and local field sales that have been working hard over the last year in terms of continuing to build relationships, staying in front of our customers, letting them know that we're here when they need us, and our team work hand in hand with our pricing and costing groups as well. And I think that, that coordination and symmetry that we have there, is evident when you look at our long-term success and our financial results.
But we -- about 1/3 of our business does come by way of 3PLs. We've actually seen a little bit of improvement there. In the third quarter, we had a little bit of growth with the accounts that are within that 3PL book of business just ever so slightly, but at least it was in the green when the overall book of business, the overall revenue was down 5.5% for the quarter, so that was good to see. That was an area of weakness, in particular in the first quarter, where a few carriers, we're putting some lower transaction type pricing in place. And I think that market firmed up pretty quickly in the end of July. So some of that business is starting to come back to us and hopefully, that can be a continuing trend as well.
But we've got a great mix of our contract business and continue to grow with our small mom-and-pop accounts as well. And the 3PLs, we see opportunity within all of those categories really and our sales team will continue to leverage that and hopefully be ready for a good growth year in 2024.

Operator

The next question is from Stephanie Moore with Jefferies.

Stephanie Lynn Benjamin Moore

I'll keep it easy here and cheat and just essentially reask Amit's first question. Given the 70s and change OR you saw in the current quarter and what is immediately still a pretty weak freight environment. And also, I think you called out pretty well on this call, which is to spend your own kind of elevated expenses in 2023. Maybe just how the dynamics over the last couple of months change the timing of achieving that kind of 6 handle OR target just as -- balance the obvious major industry events as well as your own kind of moderated growth and capacity investment strategy?

Adam N. Satterfield

Sure. It's -- when we laid out the goal to have a sub-70 annual operating ratio, we didn't put a time frame per se on that because we felt like we might go through -- and a macro environment that's a little bit weaker, and we didn't want to be beholden to some artificial time line and do things that were more short-term focused versus long term.
And I think when you look at this year, in particular, to have a capital expenditure plan of $720 million in an environment where at one point, we were -- our tonnage was down double digits shows the focus that we try to take on looking out in the long term and being ready for future growth. And that comes at a cost, and we've seen that increase in the operating ratio this year as a result. And again, the depreciation is probably the biggest drag that we have right now, but that's something that when you look at it on the other hand, when volumes come back, that's where we get leverage.
And I've been pleased with the cost performance on the direct cost side. In the third quarter, our direct costs were 51% to 51.5% of overall revenue while our overhead came in at about 19.5% of revenue, and that compares to last year, our overhead was 16.5% to 17%, so deterioration there. But once we get back to the volume environment, we should be able to leverage that completely and get right back to improving our operating ratio, so we're already closed. We've done a couple of quarters with the second and third quarters of last year with 69-something operating ratio.
And typically, when we look back through prior years, when we've gone through an environment where volumes have been down, revenue was down, we've lost a little bit on the operating ratio because of that leverage opportunity, we've been able to recover any OR loss in the subsequent year when we've had revenue recovery. And I think that's certainly what we're focused on and believe can happen. So we'll see where that gets us by the time we get to the end of 2024, but we will continue to perform on the direct cost side and continue to look for areas of opportunity as we can drive efficiency within our operations.
But trying to get some leverage there on the overhead side, potentially not having to invest as much in 2024, and if we can get some revenue growth going along with that, could potentially produce a beautiful thing when you start looking at that OR.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Marty Freeman for any closing remarks.

Kevin M. Freeman

Thank you all today for your participation. We appreciate your questions, and please feel free to give us a call later if you have anything further. Hope you all have a great day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.