奧多明尼昂貨運 (ODFL) 2004 Q4 法說會逐字稿

Good morning, and welcome to the Fourth Quarter 2004 Conference Call for Old Dominion Freight Line. Today’s call is being recorded and will be available for replay beginning today, and through February 3rd, by dialing 719-457-0820. The confirmation number for the replay is 832267. The replay may also be accessed through February 27th on the Company’s website, which is at www.odfl.com.

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 the first quarter and full-year 2005. 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 today’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 update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

At this time for opening remarks, I would like to turn the conference over the Company’s Chairman and CEO, Mr. Earl Congdon. Please go ahead, sir.

Good morning. Thank you for being with us today to discuss Old Dominion’s operating and financial results for the fourth quarter of 2004, and our guidance for 2005.

Joining me are David Congdon, President and COO, and Wes Frye, the Company’s CFO. After our remarks, we’ll open the floor for your questions.

Let me begin this morning by saying how pleased we are with Old Dominion’s performance for the fourth quarter, and for all of 2004. We have truly had a great year in the Company’s 70th year in business. And I credit everyone in the OD family for their hard work and dedication in producing these results.

Old Dominion has become increasingly recognized for its rather unique market position by customers seeking a single source solution for their domestic and international freight transport needs. In addition, our non-union workforce continues to enhance the efficiency and flexibility with which we serve our customers, and we believe drives the innovation and quality of our efforts as well.

As a result, we have continued to gain market share through our markets, with 2004 representing the third year in a row in which net earnings have increased more than 30%. And we’ve accomplished this growth without sacrificing price, demonstrating our ability to differentiate Old Dominion through quality service rather than price.

We believe we’re well positioned to continue our revenue growth in 2005, above our long-term target of 10% to 15%, especially with the recent acquisition of Wichita Southeast Kansas Transit.

In conclusion, I want to thank our shareholders for their past and future support. As your fellow shareholders, we remain dedicated to the consistent implementation of our growth strategies to drive further increases in shareholder value.

And now, let me turn the floor over to David Congdon, who will discuss our fourth quarter results in greater detail.

Thanks, Earl, and good morning everyone. With our fourth quarter results, we have now produced 13 consecutive quarters of comparable quarter improvement in our operating ratio, and growth in our net income of more than 30%. We think one of the key reasons has been the consistent implementation of our growth strategies throughout the economic cycles of the last eight or nine years. This has enabled us to enhance our services, roll out state-of-the-art technology, expand our geographic reach, and capture market share.

As we have shared with you in the past, our primary growth strategy is to increase our business and market share within our existing service center network, where we’ve experienced incremental margins to be 10% to 15%. In fact, 97% of our fourth quarter revenues came from same store sales, with only 3% coming from service centers that were opened during 2004.

Our investments in productivity enhancing technology and systems continue to contribute incremental improvements in our operating ratio. These include RFID tags on all of our rolling stock, our dock yard management systems, and the continued rollout of pickup and delivery optimization software.

In order to help us improve cube utilization, line haul load average and reduce claims, we have begun investing in 28-foot pup trailers with adjustable rack systems, and permanently installed air systems in all of our break bulk hubs and our largest outbound facilities.

The air systems allow for the efficient use of airbags for blocking and bracing freight while loading. In 2004, we purchased 600 pup trailers with the adjustable rack system, and all 2,000 of the pup trailers being purchased in 2005 will have this system.

We’re please to report that our loss and damage claim experience has improved about 15 basis points for 2004. And we anticipate continued incremental improvements in these areas based on recent trends, and as a result of our additional investments.

We opened two new service centers during the fourth quarter in Winchester, Virginia, and Modesto, California, bring our total to 12 new centers for 2004. These openings took us into two additional states, Washington and Oregon, and allowed us to launch full-state coverage of two additional states, Wisconsin and Michigan.

Our acquisition this month of WSKT has given us ten new service centers in the mid-west and south-central market regions, and has taken us into our 41st state of Nebraska. It also allowed the launch of full-state coverage in Kansas and Iowa, in addition to transit time improvements in nearly 4,000 traffic lanes. We will continue to take advantage of appropriate opportunities to expand geographically, either internally or through acquisitions.

While a significant piece of our capex budget for 2005 will be devoted to expanding capacity at existing facilities, we currently plan to add approximately seven to eight new service centers during the coming year, in addition to the ten service centers opened as a result of the WSKT acquisition. I would anticipate that most of these seven or eight service centers will be leased.

The strategies and competitive advantages that we have discussed this morning have served Old Dominion and its shareholders very well. We believe that we’ll produce continued growth opportunities going forward.

And I thank you for you attention this morning, and now ask Wes to review our fourth quarter results and earnings guidance.

Thanks, David. Old Dominion produced strong results for the quarter as revenue increased 28.8% to $224 million. For the full year of 2004, revenue increased 23.4% to $824 million. Net of fuel surcharge, revenue growth was 23.4% for the fourth quarter, and 21% for the full year of 2004.

Our revenue growth during the quarter reflects a 16.4% increase in LTL tonnage, consisting of a 12.8% growth in the number of shipments, combining that with a 3.2% increase in the weight per LTL shipment.

On the yield side, LTL revenue per hundred weight increased 10.1% to $15.19 for the quarter, compared to $13.79 for the fourth quarter of last year.

Combined, the increased weight per shipment and the increased yield resulted in a 13.6% increase in the Company’s LTL revenue per shipment. Net of fuel surcharges, however, the LTL revenue per hundred weight increased 5.5% to $13.96, compared to $13.23 for the same period last year. The revenue per shipment net of fuel surcharge increased 8.8% to $152.40 for the current quarter.

Now hopefully, you’ve noticed that we’ve changed our operating statistics presentations a bit to try to give you a better and ongoing feel for the impact of fuel surcharges. Also, historically, our detailed metrics on LTL revenue per hundred weight and per shipment were calculated based upon the original freight bill that was rated at date of pickup.

As is normal, there are subsequent adjustments to the original freight bill due to corrections in the indicated rates, freight class or description, weight and other factors. These corrections historically have not been considered in our metrics, because these adjustments are not tracked by weight brackets.

Our revised presentations include adjustments that are truly a part of our overall yield. Rather than go into a lot of detail on this discussion, I would be happy to discuss this further off-line with interested parties, and explain further the change.

The growth in revenue increased the leverage of our fixed and semi-fixed expenses, and produced an 80 basis point improvement in our operating ratio to 91.4% from 92.2% for the fourth quarter of 2003. As a result of our improved operating ratio, our net income for the quarter increased 37.2%. Our EPS rose 34.4% to $0.43 on a 3.1% increase in the weighted average shares outstanding, primarily reflecting our [follow-on] stock offering in July.

As stated in our release this morning, the results for the quarter included an unfavorable jury verdict against the Company in a personal injury case, that negatively impacted net income by $0.03 per share.

In order to offset significant increases in excess liability premiums, we have increased our self-insurance retention level over the last three years to its current level of $2 million per occurrence. While this increased level of risk can impact the Company’s results, we feel those risks are lower than the premium level it would require to maintain a lower retention level. We still maintain an average accident frequency ratio that is lower than the industry average.

As promised, I will provide now some additional details on the WSKT acquisition that we closed this month, effective January 15th. This acquisition was in the form of an asset purchased that included the company’s trade accounts receivable, all rolling stock, dock shop, and office equipment, as well as two service centers and the corporate office. In addition, there were some contingent liabilities and lease obligations assumed in the transaction.

The purchase price for the company was approximately $25 million. Of that amount, within the next 90 days, we anticipate collecting $8 to $9 million of the purchased receivables, and selling some of the rolling stock for approximately $1 million. This purchase was for cash borrowed from our current credit facility, with the anticipation of refinancing this portion with longer term fixed-rate financing during the first quarter of this year.

Our balance sheet remains strong at year end, resulting from the stock option proceeds in July, 2004, and our cash flow from operations with a debt to total capitalization falling to 21.4% from 29.5% at the end of 2003.

As discussed in last quarter’s conference call, we expect to increase our capital expenditures in 2005, primarily to purchase tractors and trailers and to improve the capacity of our existing service centers. Because we anticipate continued strong cash flow from operations, we do not expect our ratio of long-term debt to total capital to rise above 30%, including the debt resulting from the WSKT acquisition. And we expect the growth enabled by the investment to increase our return on invested capital for 2005 compared to 2004.

In addition today, we established an increase in our guidance for EPS for 2005 in a new range of $2.03 to $2.08, up from the previous range of $1.95 to $2.00. This increase mainly reflects the impact of the WSKT purchase, as well as our current thinking about our momentum coming out of 2004.

We also have now established our guidance for the first quarter of this year per share in a range of $0.33 to $0.37, compared to $0.24 for the first quarter of 2004.

And this concludes our prepared remarks. Operator, we’ll be happy to open the floor for any questions at this time.

(OPERATOR INSTRUCTIONS.) [Dana Ceest] of Bear Stearns.

Just had a quick question. One, in terms of the $0.03 charge, what was that pre-tax?

The $0.03 would be after tax.

Oh, that was after tax. So that was like an after tax charge of around $800,000?

Yes.

Okay. And in terms of your volume progression, did you guys see any weakening towards the end of the quarter on a year-over-year basis? I mean, obviously, beyond the normal weakening in the last week?

I don’t recall any weakening.

No, I think that--you know, we kind of track that in terms of our weight per shipment. Our weight per shipment for the quarter did have some month to month declines, but that’s normal. Still, the weight per shipment over and above the previous year was still up.

But, our fourth quarter growth rate was higher net of fuel surcharge than the annual rate. So therefore, it was pretty strong.

Okay. And have you seen that returning through January pretty similarly, or has it been--?

It’s a little early to assess that. Plus, with all the weather related. But basically, it looks like January is very strong.

Okay. And were there 63 days in this quarter or 62?

There were 62.

Jason Seidl, Avondale Partners.

A couple quick questions. I guess one, I’ll start with WSKT. Obviously, they’re going to have some interline revenues built in there. What percentage of that $68 million was interline revenues for WSKT?

It was rough 10% was inbound, interline. And we are actively trying to resecure that business on a direct basis with the customers. And the reports we have from our salespeople is that we may get anywhere between 50% to 60% of that.

Okay. And of the base business, David, what do you think you can keep and what percentage? I mean, is it 100, is it 90?

No, we’re actually looking at approximately two-thirds. They had some business that was not priced very well, that we believe we will not be able to handle in the future. Anyway, probably about two-thirds.

David, I’ll qualify that with--that’s of the original business that was in the transaction. But with another--excluding the 43 that we take--service centers, that we’ve got 106 additional service centers, we think they can continue to pump freight into that new service area.

And also, with their 5,000 customers, I think it was only around maybe 20% to 30% of those--about 25% of those customers were duplicate customers of ours. So, we will be able to go to three-quarters of their customers and sell long-haul service on top of the regional freight that they were handling. So, we anticipate being able to build our business from that two-thirds retention.

All right. This is great information, guys. I appreciate that.

If I look at the quarter, you had very strong revenue growth. Like you said, you are taking market share. Your length of haul went up a bit as well year-over-year. Where do you guys think you’re taking the most market share? Is it more in the long-haul side than the regional?

It’s kind of across the board, I would say.

Yes, generally, we’re seeing stronger than normal growth in the regional also. So, I think it would--David’s correct. We’re taking it both places, but we are seeing some street even in the regional markets.

Good. I’ll ask one more before I get off here. Wes, I think you alluded to the fact that you plan on probably booking about $1 million in gain on equipment sale from some of the stuff you got from WSKT--.

Not a gain, proceeds. I’m sorry if I misled you. That’s proceeds from just the sale. We pretty much priced this equipment at market value, so we don’t expect any gain or loss, it’s just proceeds.

Okay, so it won’t be adding $0.02 to the quarter.

No, no, no, no.

That’s where I was a little bit confused.

I apologize if that wasn’t clear.

No, it was probably my fault. Also, just quick. I mean, it seems like with the yield up 5.5%, excluding fuel surcharge revenues, it seems like the pricing environment out there right now is very solid. Am I reading that right?

Yes.

Brannon Cook, JP Morgan.

So, obviously, you guys posted solid revenue growth in the quarter and have been expanding into new regions. But, within your existing network, are there any areas where you felt capacity constrained at all in your network?

Not terribly constrained. We just have a few end of the line service centers that we're--you know, have been tied in that we're working on trying to find some larger facilities or purchase land to build.

One example is our--Orlando is totally at capacity and we have recently acquired some land in Ocala, Florida that will take about a third of the business out of Orlando and put it into Ocala, and allow us to grow back into that. Long Island continues to be a little bit tight. Atlanta, Georgia is tight for us, and we're actively trying to find some land to build a service center in Northeast Atlanta.

Okay. Does the acquisition--does that impact your overall capital expenditures as we look into '05, or is that really just going to be supplementary?

Obviously, the acquisition will increase our overall expenditures for assets. Because, the remainder of our strategic plan--.

--Is still intact.

Our original strategic plan that dictated the $120 to $130 million of capex is still in place. So, the net capex of this transaction, which will be in the, call it a $15 million range, would be on top of that. (OPERATOR INSTRUCTIONS.) John Larkin of Legg Mason.

I had a question. You mentioned, Wes, that you've taken up your self-insured retention level to $2 million. And from time to time, you're going to have an unfavorable jury award like the one you had in the fourth quarter. Based on the last five or ten years of history, how often would you expect to see some sort of a claim that would--.

That's actually a good question.

--That would kind of nick your EPS.

Yes, that's a good question. Actually, about 95% of our cases are settled outside of court, and settled pretty much close to what we had in reserve. In this particular case, the plaintiffs, their minimum settlement was we thought was unrealistic, and so we let it go to jury, which typically we don't like to do. But in this case, we did because of their unrealistic expectations. In fact, the verdict was less than their expectations on a settlement but, unfortunately, more than what we had in reserves. And we had those reserves, I guess, reviewed by third-party attorneys and they agreed with our reserves. So, this is just one of those cases.

In fact, in my tenure here, there's not too many instances of this happening. We tend to try to be conservative in our reserve analysis on this and going forward. So, you know, I can't make a statement that this is a one time or non-recurring because these are, in fact, retention levels that you're not sure where they're ultimately be determined. But, I think this is one that was a little bit unusual.

Did this jury, is it a part of the country that is relatively new territory for you?

No. No. It was in the Southeast.

Okay. That's good to know. David talked a little bit about the root optimization software that you're rolling out for your pickup and delivery operations. Could you give us a little feel for how that works, David, and then maybe give us a sense for what kinds of economic benefits it could, you know, over the long run create?

Well, the software for P&D optimization was developed by [DeCarte] Systems Group out of Waterloo, Ontario. And what it is, is a street level route optimization. It has mapping software that allows the planner to not only do the routing and the background that routes the shipments by street and minimizes the miles, but he can display the routes on the screen and make sure that they make sense visually as well.

Another element of this software will be giving the maps to the dispatcher to where he can watch and track and see the--all of his drivers during the day as they're making their deliveries, and can actually see the path and the route that the trucks are following. That's just another part of what we're installing this year.

So, we've seen just some incremental improvement in that area. You know, anywhere from, depending on the service center, anywhere from 2% or 3% improvement in our metrics to maybe as much as 10.

Okay. That's very helpful. Also, Wes was talking about the LTL weight per LTL shipment increasing 3%, which is usually I guess indicative of the economy being pretty strong. But, isn't some of that perhaps due to the truck load industry being effectively sold out, number one? And then number two, perhaps the new focus the company has had here the last year or so on developing very large national accounts?

Yes to all of the above. All of that has an effect. You know, the truckload, even though we saw our truckload for the year increase about 40-some percent, it's still overall a fairly immaterial amount of our overall revenue. We still pretty much use the truckload for the most part in back haul lanes, where we have a head haul difference.

So, the growth in truckload in terms of percentages have been strong, but still overall a fairly small impact as far as our total revenue growth.

But people are not as a general breaking down smaller truckload shipments into multiple LTL shipments as far as you can tell?

No, not that we can really see any measurable impact on that.

Okay. And then just one final question regarding WSKT. Can you maybe give us a sense for how rapidly you plan to integrate that set of acquired assets into your operation? And I know you've done a lot of these acquisitions in the past, but not too many of them since you've had such great systems. And I just wanted to know whether this is a 3-month program or a 12-month program. How do you think this is going to unfold?

John, I believe it's all done.

It's all done.

It's done already?

Yes. It took us a whole weekend.

No kidding?

Well, actually, John, it was--.

--That's impressive.

You know, they had 34 physical locations, 24 of which were combined together into OD locations where we already had our computers and systems in place. And then we had 10 new locations for OD. And we got a little bit ahead of the power curve with data lines and so forth, and got those all installed in time and sent all of the equipment out between the 4th, when we made the announcement. And the Friday night, the 15th, we had all of the equipment in place, installed, up and running so that over the weekend of the 15th we were able to take those service centers over. And we had our Field Services team out there working with these service centers for the first two weeks, training them on the use of our systems.

That's a pretty good experience that I guess could be applied to your next one as well.

We think we know how to do it.

Jack Waldo, Stephens, Inc.

I wanted to talk a little bit about the acquisition and your market share in different regions. Is it fair to say that kind of the Great Plain states were kind of your lower market share regions?

Somewhat they were lower market share. One of the studies that I did prior to the acquisition, I looked at how much revenue we had between OD service centers that overlapped the WSKT. And we had about $43 million worth of I'll call it regional business within their like territory.

And stripping out the interlined traffic that they had coming to them, and their outbound long haul traffic that they were giving away to other carriers in other parts of the country, they had approximately $55 million of business within the territory.

So, what this has done--and we may not keep the whole $55 million, but it will basically double our presence in the regional next-day and two-day markets within those Plains States. Or we've been referring to it as Central States Region of the country, Central and South central.

And on the--was it 2,000 lanes that you've improved your transit times within?

It's about 4,000. We found that with their headquarters and break bulk hub in Parsons, Kansas, they were giving some next-day services and some two-day lanes, where our service was in the two and three-day lane category. And so we were able to improve the transit times because of that--primarily because of the Parsons hub.

So it's helping you in your inter-regional lanes. Would you say the majority of improvement in the transit times is in your inter-regional lanes?

No, it's more within what you would call WSKT territory.

Okay. Okay.

But we were definitely be improving transit time for the customers who were shipping into that region on a two-line haul basis, like the inbound interline business. Or the freight from the WSKT territory going out to inter-regionally, out to other carriers.

Fair enough. And then on the terminal that you're planning on--well, on adding next year, are those acquisitions of current terminals?

They're pretty much built and I'll give you the terminals if you like. Up in the Northeast, we have our eyes on two facilities up in Portland, Maine and Burlington, Vermont. And those are two states that we do not have any operations in right now. So, that will give us that. And we believe that that will also solidify our position as a regional player in the Northeast region. There are some customers--for example, I was in Boston several months ago meeting with our sales force. And they were telling me that some of the local customers don't recognize us as a regional player up there because we don't go direct into Maine and Vermont. So, we should be able to improve our presence in those markets.

I mentioned Ocala, Florida a little while ago. We need a facility in Salinas, California. We're opening Beaumont, Texas. We'll be looking for facilities probably to lease in Gary, Indiana and Rockford, Illinois, both of which will take a little bit of load off of our Chicago operations, allowing for continued growth there. And the eighth facility would be on the Eastern shore of Maryland.

So kind of all over?

Right. Primarily it's fill in facilities that improve our coverage, improve our service to the customers, and reduce or actually create capacity at existing locations for additional growth.

These next two questions are based on the capacity issue and then also incremental margins. You guys have kind of talked about a 15% incremental margin on business kind of in your area, in your geography you're already in. Looking at '05 guidance, and based on your comments on where your revenue was driven by this quarter, are we going to see more of a mix of more margin improvement in FY ‘05 and less top line growth or how is the mix going to break down with regard to the EPS guidance?

Well we choose not to give any guidance on margins or, for the most part, any detailed guidance on the top line growth. Because, that's pretty much somewhat is a trade off between those two. So, obviously, you could make the calculations and you can indicate that probably to get that guidance, that you have to have some margin improvements. But, we're not giving guidance on how much that is.

Would it be fair to say that you're starting to hit a little bit more operating leverage in some of your existing territories than you were before?

I would say generally, yes.

Jack, we’re real excited about the synergies we're going to get out of these 24 service centers that are duplicates of their own. And some of those good margins should certainly occur on business going in and out of that of those 24 service centers

Another point to make is that, in '04, we opened 12 service centers. And I believe if you go back and look at '03, it was another 10, 12, something like that. We have opened a lot of service centers because we took advantage of the consolidated freight ways real estate that came on the market. And I see less of our growth coming from additional service centers this year than what we're predicting from internal growth. So, consequently, if we are able to grow with existing service centers, we should see some margin improvement.

There's been a lot of talk about overcapacity in your industry and the impact it could have on the pricing environment. And as we see your capex guidance I guess double--you doubled it, I guess, in the third quarter in August. You're kind of seen as one of the big culprits. Do you worry at all about overcapacity? Are you worried that the LTL pricing environment could hit some pressure in FY ‘05?

We don't believe we're creating overcapacity. What we're trying to do is feed a 20% plus growth rate. And it just requires a lot more tractors and trailers and real estate.

Fair enough. So, you don't have--well, do you have any change in your opinion on how the pricing environment should be throughout FY ‘05?

I would think it should continue to be a good pricing environment, a stable environment. I think the economy is in pretty good shape right now and continuing to grow a little bit. And so I feel like pricing will remain firm for '05.

And then, final question was--.

--Jack, let me just add on the equipment side, you know we're gearing for a certain amount of growth, but there are 60-day cancellation clauses if that that should not materialize on the equipment side. On the real estate side, you know, we're pretty much already out of capacity in much of our real estate capex this year. So, it's not if--we're adding capacity, but it's a capacity just to kind of meet the requirements that we already have, not in some cases building excess capacity, although we always choose to do that.

Fair enough. And then on the pricing issue, do you have--are you seeing any renegade pricers out there? Without naming names, are there any--anybody kind of acting irrational or do you think we have a pretty disciplined pricing environment?

It's the most disciplined it's been in several years. We don't see any real renegades out there at the moment.

Matt Gardner, CS First Boston.

Wes, you had given some information earlier that I missed. I think had given same store sales, the percentage that came from--or the percentage of your growth that came from same source sales versus new--.

In the fourth quarter, 97% of our revenues came from same store sales; 3% from service centers that were opened during the course of 2004.

Okay. And then I realize you're going to have the spike in capex in '05 as you grow and you build out. Do you have a number in mind for what sort of--given your growth objectives, what sort of your ongoing, normalized capex needs are on an ongoing basis?

We haven't given specific guidance, but probably just a maintenance level, just in equipment, not in service centers, in equipment is probably is in the $70 to $80 million range.

70-80. Okay. That's very helpful. And then just the last thing. Can you break out or tell me what portion of your business is contractual versus spot pricing?

Contractual is probably about 55%.

(OPERATOR INSTRUCTIONS.)

Well, I just thank you all again for your participation and for your very good questions. And if any of you have any further questions this afternoon, why, give us a call. Good day.

(OPERATOR INSTRUCTIONS.)