奧多明尼昂貨運 (ODFL) 2010 Q1 法說會逐字稿

Good morning, andwelcome to the first quarter 2010 conference call for Old Dominion Freight Line.

Today's call is being recorded and will be available for replay beginning today and through May 7 by dialing 719-457-0820.

The confirmation number for the replay is 2338254.

The replay may also be accessed through May 28 at 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 this purpose, any statements made during the 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 these statements may be affected by 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 update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

As a final note before we begin, we have a lot of people on the call today to we ask that you limit yourself to just a couple of questions before returning to the queue.

Thank you for cooperation.

At this time, for opening remarks, I would like to turn the call over to the Company's Executive Chairman, Mr.

Earl Congdon.

Please go ahead, sir.

Good morning.

Thanks for joining us today for our first quarter conference call.

With me is David Congdon, our President and CEO; Wes Frye, our CFO; and we each have some brief remarks.

Then we will be glad to take your questions.

I will begin by saying that we are very pleased with the improved operating environment we experienced for the first quarter and with its impact on our financial results.

We had a solid increase in tons and growth in revenue, margins and net income for the first time since the third quarter of 2008.

As we did throughout the downturn, we produced these results by providing our customers outstanding service at a fair and equitable price, and we believe our performance over the past year and a half provides clear evidence that Old Dominion is well positioned to continue outperforming the industry.

Our tonnage trends for the quarter continuedthe improvement we experienced in the fourth quarter.

You may recall in our last call that we said tonnage comparisons finally turned positive during December, following five consecutive months in which tonnage had declined, but at a decreasing rate each month.

Our tonnage increased 3% year-over-year in January and 2.6% in February despite more severe winter weather than we experienced in February of 2009.

March tonnage rebounded with a strong 11% increase, some of which may have carried forward from February.

This strength has continued with a projected 10% to 11% increase in tonnage in April year-over-year.

We achieved our tonnage growth for the first quarter in a pricing environment that remained very competitive, although we continued our yield management strategies that have served us so well throughout the economic downturn.

We realized our commitment to fair and equitable pricing may have cost us some tonnage, but many of our customers tell us the reliability of our high-quality services is more important than cut rate pricing that often leads to inferior service.

Overall, our pricing was relatively consistent with the first and fourth quarters of 2009.

Revenue per hundred weight, excluding fuel surcharge, declined 1.5% for the quarter, reflecting the net effect of the 2.9% increase in length of haul, which has a positive effect on revenue per hundred weight, and the 5.7% increase in weight per shipment, which puts a downward pressure on pricing.

Ultimately, the greatest validation for our yield management strategies has come from our overall financial results compared with our industry peers.

Not only for the latest quarter, but throughout the recent recession.

As important, we believe our ability to maintain and gain market share during the weak economic environment of the last few years is a further indication of the ongoing market share migration to carriers who provide integrated comprehensive services that are high quality and low cost.

We are continuing to invest in and enhance our ability to be the country's leading LTL provider of these services.

We expect the significant investment and scale required to be truly competitive will drive further industry consolidation.

So thank you again for being with us today, and now here is David Congdon to discuss our first quarter operations.

Thank you, Earl,and good morning, everyone.

I would like to inform you that I am not at the same table with Earl and Wes today, so when it comes down to questions, if we stumble a little bit as to who should answer it, it is because we are not looking at one another.

So if you have a question directed to me, please direct it that way.

So, in addition to the topline growth Old Dominion produced for the first quarter, we were also very pleased with the strength of the Company's day-to-day operations.

For the last several quarters we told you that the Company was well positioned to drive operating leverage when market conditions improved.

With the improvement in our operating ratio for the first quarter we began to see the benefits of this leverage.

As stated in today's news release, about 70 points of the 180 basis point improvement in our operating ratio for the quarter resulted from our extending the useful lives of our revenue equipment, as Wes will discuss shortly.

A significant portion of the remaining 110 basis point improvement in OR was a function of increased tonnage driving higher service center and long haul densities and continued productivity gains.

We again did an excellent job of matching our direct labor expenditures with our freight volume.

One of our most impressive service measures is our cargo claims ratio, which has continually improved to an exceptional 0.47% of net revenue for the first quarter.

This compared with a claim ratio of 0.95% for the first quarter of last year and 0.66% for the fourth quarter.

Our ability to manage cargo loss and damage demonstrates just how well tuned our operations are, which is essential to our ability to drive on-time service standards of 99%.

I might add that in terms of our BI and PD, bodily injury and property damage, our accident frequency ratio since 2006 has improved by 30%, which is another major contributing factor to our low insurance ratio for this quarter.

These metrics, we believe, are very sustainable and not one-time flukes.

Old Dominion built a great record of maintaining or improving its service standards and increasing productivity and operating efficiency throughout the economic downturn.

And we are focused on continuing these trends as the economic environment shows sustained improvement.

During the rest of 2010, our focus will be on growing business in our existing service center infrastructure, with a goal of increasing market share, expanding densities, and creating additional operating leverage.

During the first quarter we relocated and expanded four service centers, and we plan to complete selective relocations in the quarters ahead.

As always, we will evaluate real estate opportunities that meet our target market criteria for additional service centers.

We will also continue to evaluate opportunities to expand Old Dominion through strategic acquisition.

Overall, we are comfortable that we have the capacity to meet organic growth opportunities, and we can afford to expand capacity selectively.

Looking forward, we intend to contend -- excuse me, to continue providing our value proposition of superior service at a fair and equitable price.

We have heard that some of our competitors are planning to increase prices, although we saw little evidence of this during the first quarter.

However, anecdotally, we are getting a good bit of feedback recently of some recent upward movement in pricing.

While we will continue to analyze the competitive environment carefully, our business model has again produced the best results in the LTL industry, and we currently see no reason to substantially change our approach to the market.

On a final note, we would like to take the opportunity to commend the entire Old Dominion team for their continued dedication to delivering superior customer service and financial performance.

And thank you, and I will now turn it over to Wes to discuss our financial results in greater detail.

Wes?

Thank you, David,and good morning to all.

The Company's operating ratio for the first quarter improved to 94.8 from a 96.6 for the first quarter last year on net revenue that increased 7.7% to $318 million, from $295 million for the first quarter last year.

The revenue increase was primarily produced by 5.8% increase in total tons for the quarter and a 2.1% increase in revenue per hundred weight.

The increase in total tons for the quarter reflected a 5.7% increase in weight per shipment and basically a flat slight increase in shipment levels.

Approximately 3.5 percentage points of the 5.7% of the weight per shipment increase was due to mix,while the weight per shipment specifically for the LTL shipments increased 2.2%.

The increase in revenue per hundred weight reflected a higher fuel surcharge due to higher fuel cost.

Excluding fuel surcharge, revenue per hundred weight declined 1.5% for the first quarter, which was caused in part by a 5.7% increase in weight per shipment.

If we exclude the net effect of the increased length of haul and weight per shipment, we believe pricing would have been relatively consistent on both a comparable and sequential quarterly basis.

The interplay of these various factors can also be seen in revenue per shipment, which increased 8% for the quarter, and excluding fuel surcharge increased 4.1%.

Depreciation and amortization was 100 basis points lower in the first quarter of 2010 compared to the same quarter in 2009, a portion of which reflects lower depreciation expense due to our reduced capital expenditures for track and trailers since the first quarter of last year.

However, as previously mentioned, 70 basis points of this improvement resulted in our decision to extend the useful lives and reduce salvage value of most of our tractor and trailer fleet.

In particular, we extended the estimated life of tractors from nine years to seven years and the estimated life of trailers to 15 years from 12.

Due in part to a robust preventive maintenance process and our decision two years guy to extend the trading range of our equipment, the actual economic lives of tractors disposed of and taken out of service over the last couple of years were in the 10 to 12 year range, and trailers were in the 15 to 17 year range.

This change lowered depreciation expense for the first quarter by $2.1 million or $0.03 per share after tax, and we expect the impact of the change for the full year 2010 will lower depreciation by approximately $12.7 million or $0.20 per share after tax, or in other words, $0.17 for the remaining second through fourth quarters.

And I would like to add a comment to make sure that we were -- that this is clear and understood.

This is not a one-time reduction.

What we did is we benchmarked what the LTL sector did in terms of our depreciation expense and saw that it was running slightly higher.

And after benchmarking the useful -- the actual lives, or at least the write-off life policy, we were writing off our equipment faster than the LTL sector.

And especially as compared to our estimated useful life that we extended it.

This is perpetual in nature, so that our depreciation expense that we will report in the future will be lower than what it was under our previous estimated life policies.

Most of the remaining improvement in OR for the first quarter, about 110 basis points resulted from increased operating leverage and improved productivity and efficiency.

Salary, wages and benefits as a percent of revenue were 300 basis points below the first quarter last year, and as we continue to match direct labor to daily freight volumes.

The productivity gains resulted in a 3.2% increase in pounds per hour in our dock operation, a 1.3% improvement in our pickup and delivery stops per hour, and a 1% improvement in laden load average in our line haul operation.

In addition, we also produced another meaningful improvement in insurance and claims expense, with $1.5 million decline for the quarter to 1.7% of revenue from 2.3% for the first quarter of 2009, as mentioned, mostly related to the continued improvement in cargo claims experience.

Capital expenditures for the fourth -- for the first quarter totaled $27.5 million, and we continue to anticipate CapEx for 2010 to range between $90 million and $100 million, without giving consideration to any opportunistic acquisitions or purchases.

Included in these expected expenditures for the full year are approximately $25 million for equipment, $51 million for real estate, and $16 million for IT.

As we did in the first quarter, we expect to fund most of this CapEx with cash provided by operating activities.

Our long-term debt to total capitalization at the end of the quarter was unchanged from 34% ratio at the end of the previous quarter, and we had available borrowing capacity on our credit facility of approximately $100 million.

As a result, we are confident of our ability to fund our operations during 2010 while maintaining the flexibility to respond decisively to strategic growth opportunities.

Our tax rate was 40% for the quarter, and we expect this rate to remain the same for the remainder of 2010.

And this concludes our prepared remarks this morning.

And operator, we will be happy to open the floor to any questions at this time.

Thank you.

(Operator Instructions).

We will go ahead and take our first question from David Ross with Stifel Nicholaus.

Yes, good morning, gentlemen.

Good morning.

Good morning.

Good morning.

I believe, Earl, you said in your opening remarks that you expect significant investment to be required to effectively compete longer term in the LTL space, and that Old Dominion's high service low cost offering is really leading the way.

Could you I guess expound on that a little bit more?

What kind of investments are required to compete?

Is it just technology, is it dock, is it real estate?

I think it is all of that.

And, of course, vehicles are, you know what is happening there,I think a lot of the carriers are paying $115,000 for a tractor now.

I wouldn't have believed it a few years ago.

But the LTL industry has always been very capital intensive, and it appears that it is getting worse.

Dave, excluding any potential opportunity in acquisitions, just looking at the core, we do think that our -- just our replacement cycle for equipment is in the $80 million to $90 million range.

But on the real estate side, we have invested significant dollars in building and acquiring large distribution centers, which we think we are pretty much in good shape on that.

So we do expect that our real estate expenditure will decrease both in hard dollars and also as a percent of revenue.

Again, barring any acquisition or other opportunities in real estate this year over and above what we have anticipated, we do anticipate a free cash flow this year just based upon our results at this point.

That's helpful.

And then can you talk a little bit about your labor and equipment management as you went through the quarter.

Obviously going from low volume periods in January and February into March.

Did you have to add a lot of people back or equipment in March to handle the additional volume, or did that just come on at better margin margins.

We did add some people, obviously in March with 11% growth, and perhaps used a little more purchase transportation where we couldn't add people quickly enough, but obviously we had tremendous leverage on the asset side for that growth.

And we had leverage on the people side.

I believe that we are still in the neighborhood of 15% to 16% down in headcount from our peak in September of 2008.

So, we are beginning to have to add some people back due to the tonnage growth, however.

And then just last question, on the employee side as well.

You all haven't cut your wages for employees through this whole downturn as a lot of competitors have, but I think you have frozen them for a period.

Can you talk about, now that volumes are improving and pricing seems to not be getting worse, expectation for reinstating annual rate increases this year?

What the timing might be of that?

Well, that the point, Dave, we -- the economy feels good to us, and I sure hope it continues.

But, we just are -- cannot make a decision whether we will -- what we will do with wages this year because of the future is still a little bit clouded right now.

Did you ask about the rate increase?

I did not, but you're welcome to talk about it.

Well, we did a general rate increase at the first of the year, and it seems to be sticking fairly well right now.

Thank you very much.

We will take our next question from Jon Langenfeld with RW Baird.

Good morning.

Good morning.

Just building on the last point when you think about the GRI that went through.

So you are saying that is sticking pretty well.

Does that mean the rest of your business is still -- was still contracting relative to where it was in the 2009 period?

What do you mean --

Well, I guess what I'm reacting to is you talk about overall pricing was relatively flat, which makes since but then with the GRI having been introduced, you made the comment that that is sticking rather well, which means that is a positive tailwind, so the headwind is other contractual businesses still declining?

Is that the way I should think about that.

No, we've seen -- actually, we have seen the demand for rate decreases diminish significantly.

I think honestly, Jon, I think that we have been through the bottom of the poor pricing environment and pricing should get better as the year progresses.

And is it something on the GRI, I know you have the announcement and you get out your [customers], but is there is way to reintroduce that GRI now that the environment is stronger today than when it was talked about early in the first quarter?

Not only for you but for the industry?

It seems to me like it is probably a better environment to go to the customer with the GRI today than it was even 6 or 8 weeks guy.

Well, Jon, GRIs today are less important for you guys to look at because they only affect a small portion, like a third at best of our revenue.

The rest of it is more contractual in nature, and it is all about individual pricing deals and so forth.

So it just doesn't affect as much.

But if you are asking is this a good environment to take a mid-year GRI increase, I would say it is too early to tell on that, and there is certainly no -- we are not thinking about that right now.

Okay.

And then you referenced a couple of times kind of the opportunities on acquisitions being out there.

Is there anything you would consider outside of the core LTL space that you have had a look at or that fits into more the logistics type background or the distribution type background?

Because you have made some progress in those various area over the last couple of years.

We are making progress there on an organic basis right now, and acquisitions in those spaces for logistics or warehousing, maybe drayage, dedicated, things like that are definitely of interest to us.

And do you think about those -- I mean, talk to us a little bit about how you think about those acquisitions.

Are those -- do you think of those as good standalone businesses, or businesses that are more there to drive more volumes and demand into your LTL product?

A little bit of both, Jon.

They could be standalone, they could be integrated, but they certainly need to be complementary to the rest of our business.

Okay, great.

And then last question, number of the LTLs we are talking to have increased their activity on the spot quote pricing for the heavier shipments, particularly given the capacity constraints on the truckload side that are emerging.

So how do you guys play into that space, and is there -- do you do more of that spot quote pricing today, if at all, and how do you see that playing out over the next several quarters?

For the last two years, during this whole recession, our volume of spot quotes have been rather high, because shippers are basically going out and seeing if they can get a better deal than their current pricing that is in place.

So, I don't recall the exact number, but I believe we are up in spot quotes probably 30% plus, less --

That's correct, David, it was about 30% in the first quarter.

About 30% more revenue in spot quotes.

It still represents maybe 2% to 3% of our total business, but it has been rising.

Very good.

Thanks for the time.

We will take our next question from Tom Wadewitz with JP Morgan.

Good morning, it's Alex Johnson in for Tom.

Wanted to ask for some clarification on the D&A.

Wes, I think you mentioned a $12.7 million for the year, and I'm not sure -- I'm just a little confused about that relative to the $7.6 million that's (inaudible - multiple speakers) out in the press release.

The $12.7 million is before tax.

The $7.6 million is after tax.

Okay.

The $7.6 million would be related obviously to the earnings per share effect.

Okay.

Okay.

And why $1.3 million in the first quarter versus $7.6 million for the full year.

Seems like that is the first quarter number was a little bit lower run rate than --

Yes, and the reason is, is when you extend the lives you also have to decrease the salvage value.

Obviously you hold equipment longer, it is not worth as much as the end of its life.

And you have to record that salvage value in the quarter that you make the change.

So that is the reason in the first quarter took all of that reduction in salvage value as a result.

You follow that?

Yes.

So for the balance of the $7.6 million for the full year, should we just average that for the remaining three quarters?

That's correct.

You take the $7.6 million and take out the $1.3 million, then the difference you the average for the rest of the year.

Okay.

And then what -- were their costs associated with relocating to the four service centers?

There was cost.

(Inaudible - multiple speakers) to the larger facility.

It was minimal costs.

Most of them are in the same general area of where the -- but there is costs.

I can't quantify that, it is not material.

Okay.

And we have been doing service center relocations for years, so our cost is -- has constantly had to cover -- we've constantly have relocation expenses in our costs over our history.

Okay, so it is no different than it would have been perhaps in the fourth quarter?

Correct.

Okay.

Okay.

Thanks for the time.

Okay.

And we will take our next question from Ed Wolfe with Wolfe Trahan.

Good morning, guys.

Good morning.

Is it possible, Wes, to break out like you did with the tonnage by month.

Can you do the operating ratio by month?

We don't get that level of detail.

Directionally, one of the public competitors reported basically a loss for January and February, and a much better profitability in March, which seasonally makes sense.

I'm guessing you guys were profitable for all three months, is that fair to say?

Yes, but obviously as you might expect March, with a much better sequentially tonnage, did have a better ratio.

Okay, when I think second quarter seasonally to first quarter, normally you guys are 300 basis points better.

And now you have the depreciation and don't have the salvage issue in the second quarter, so maybe there is little more leverage.

Is there anything different that I'm missing this quarter that might change that?

We don't anticipate anything different than the historical trends that the point.

Okay.

David and Earl, when you think about customers and pricing, and you guys have been much more disciplined than most.

And you look at some of these guys who got tonnage up 25% or 30% and have been going for share and trying to take out competitors and other things like that.

What is it that eventually is going to lead to this pricing, and your sense is things anecdotally feel better.

What -- I think everybody expects this to happen quick, and sometimes things take longer, but what is your best guess of what are the things we should be looking for that clearly pricing is taking place and taking hold?

And what is your best guess of when we will be in that kind of 3%, 4% pricing increase on an annual basis?

That's a good --

You hear that, David?

I heard it.

That's a good question.

We have a graph in one of our slides that we show at the investor presentations that showed that 3% annualized growth in revenue per hundred weight from back in the late '90s all the way up until 2006, and everything kind of went flat and started going down a little bit after that, and especially down in 2009.

And we would sure love to see us get back to that 3% to 4% growth per year, and it is anybody's guess as to when that is going to occur.

I still feel like we have some excess capacity.

A little less now than before, but we still have excess capacity in the industry, and it is going to take time to work it out.

The competitors who slashed rates to get tonnage did it with an awful lot of customers, and I think it's a whole lot easier to go in and cut rates than it is to get -- raise them back up.

So it is going to take some time for the others to work through that.

Also, we think that some of the pricing that these fellows had to put in, in order to get this 25% to 30% tonnage increases, they were quoting prices that produced operating ratios, according to our calculations, above 130%.

Some even higher than that.

We are expecting some of that business to come our way as those carriers have to increase prices more than just 3% or 4% or 5%.

They are going need some very high increased prices, and it is probably going to upset some customers, and hopeful we will see some fallout from that.

What is your best guess, Earl, of when that might be?Would it be if there is a peak year this year, or do you think it's a next-year kind of event at this point?

If you had 110 operating ratio, with all of that sales increase, would you want to live with it all this year?

I would think not.

I believe it's going happen from here on out.

Thanks a lot.

And this a last question on the cost side.

Historically when you were getting the rate increases in the first part of the 2000s when were you generally paying wage increases?

Was it generally the same time each year in second quarter or third quarter, or when was that?

Our major pay increase would take place in September, kind of an across-the-board increase, but then we also have pay scales that someone comes in at a start rate and by the end of two or three years they are up at the top rate.

So you're -- and that is happening at anniversary dates, and all of our management, sales, super vision, clerical basically get their raises on anniversary -- on date-of-hire anniversary date.

So the pay increases are -- have that one-time hit in September and then the rest of it is spread all the way across.

Wes, do you know how much would be spread versus how much was hitting in September?

Not off hand, David.

But obviously 80% of it would hit when you gave the increase, which historically has been September and then a few increases ratably throughout the year as they hit a different year level.

Historically, was there any incentive comp in addition to that?

On the drivers' standpoint, there are safety bonuses which were accrued throughout the year.

And other incentive comp in various jobs across the Company.

And so, yes, we have still had some incentive comp.

Okay.

Thanks for the time, guys.

I appreciate it.

And we will take our next question from Justin Yagerman with Deutsche Bank.

Hey, fellows, how are you doing?

Good morning.

Wanted to dig in on the weight per shipment a little bit.

You talked about spot quote being up 30%, but it is only 2% to 3% of your business.

How much of the increase in weight per shipment that you saw that was meaningful in the quarter was related to that spot quote business?

And is there anything to break out how much you think was actually due to underlying LTL freight that you guys --

I mentioned that in my comments, Justin than the 5.7%, a large part was due to the mix, the growth in spot quotes and in addition to other volume shipments.

In you just look at the LTL portion of our business, it was up just over 2%.

Okay.

(Inaudible - multiple speakers) per shipment.

So the underlying trend is improving.

How does that compare to the last couple of quarters when you think about the sequential progression there?

I talked a little bit about that, and the encouraging trends that we are seeing is that much of our -- since December, much of our increase in our tonnage was due to the weight per shipment.

However, beginning in March, of our 11% increase in tonnage, about 20% of it was due to number of shipments, and the rest was due to the weight per shipment.

In April, as we had mentioned in our comments, we expect tonnage to be up 10% to 11%.

And I think an encouraging sign is 6 percentage points of that 11% is due to the number of shipments, and 4% is due to the weight per shipment.

That is -- that's great color, thanks, Wes.

And that definitely is encouraging.

When you think about that, obviously that drives incremental operating leverage in your network.

You talked about expansion in a couple of your terminals, and also the investments you have made in some of the larger distribution centers that you have.

When you think about capacity in your network, where you are right now and incremental margins as we move through the year, how confident are you guys that you have got -- and I guess if you could quantify in anyway how much capacity you have to handle all the market share as competitors try to bring their prices up to a more profitable level.

David, do you want to take that?

Well, I will try.

We believe that we could take 20% to 30% more tonnage through the network from an equipment and service center capacity standpoint.

Obviously it would take more labor to do that, to gear up and bring some people back onboard to accomplish that.

But when you look across 210 service centers, you will find some that just, if you look at door pressure, pounds per door per day, you will find some that might be at 30% of capacity and some that might be 90%.

But as one of our beliefs as we have built our big break bulk service centers and as we build density across the network, the objective is to bypass breaks as you get more density across the network.

Hopefully our largest break bulk hubs are -- we can grow 20% to 30% more significantly over a period of time.

When you do planning around those scenarios, David, what kind of increase in terms of headcount do you plan -- I mean I know you guys plan freight versus labor closely, so I would imagine you have a sense of increase in terms of headcount that you would need to service, say, a surge of 20% to 30% freight in your network?

I don't have any numbers or analysis right in front of me.

But through your management systems every day we track our labor to revenue and our pounds per hour and so forth and so on, and as we see business increasing, we can basically do a pounds per hour calculation and determine that hey, we need to hire two people at this terminal , or we need to bring on 10 at this one and so forth so

Maybe asked a different way, Wes, you said that you had a little bit of labor that came on in March to help service the surge in tonnage, and now we are at that sustained run rate in April.

What has hiring been looking like in April as we've moved through this past month at the higher service tonnage levels?

As David mentioned, we are substantially below the labor numbers that we have been running before.

We have added some back, but not nearly as much in terms of what the tonnage increase has.

So we are getting some leverage from those employees, but we are adding some.

Okay.

And then just last question, and I'll turn it over to someone else.

On the balance sheet, how do you -- cash flow positive this year, is what you said, free cash flow positive.

How do you think about where you are from a debt standpoint and leverage?

Where would you optimally like to be as we finish out the year?

We anticipate that our debt to cap by the end of the year -- and I have to qualify that by mentioning that we don't seize upon some opportunities, either on the real estate side or acquisition side.

But barring that, we think that our debt to cap will below -- which is 34%, could fall back to around 30% at the end of the year.

Great.

All right, thanks so much for your time, guys.

Okay.

We will take our next question from Chris Ceraso from Credit Suisse.

Thank you.

Good afternoon, or good morning.

The -- it seems like a positive sign, I think, for the economy broadly that your weight per shipment is going up and length of haul is going up.

I have two questions about that.

First, can you give us a little color about where these are coming from, whether it is customer type or product type that is driving the increase in weight and length?

And then second, have you historically seen an increase in price follow on the heels of an increase in weight and length of haul, and what kind of a lag do you expect?

Wes, you take that.

I will discuss that.

We have actually seen some good growth in our contractual business, which typically has a heavier weight per shipment, and also could have a higher length of haul.

Contractual could be across-the-board, either long haul or short haul, but probably more chances than not, it is the longer haul business that we are getting from some more penetration into the large base of customers.

Does that answer your question, Chris?

I guess as we went into the downturn, it seemed like what you were seeing from customers is they doing a similar amount of shipments, but just putting less widgets in the box so to speak.

Is it a reversal of that, or is it a change in the mix of the type of stuff that you are carrying in away way?

If you look at the LTL and combine that between contractual and tariff, which we -- in our system is 559, and we are growing faster in contractual.

However, on the 559, which can be more regional in nature, it is still very price competitive, especially against some of the regional carriers.

But we are actually able to get some price increases on the contractual basis even, in this environment, which is encouraging.

Okay.

And then the second part of the question was, in the past when you have seen a rebound in weight and length of haul, has that generally been followed at some point after that by better pricing?

I don't think there's -- we have ever seen a correlation like that.

Okay.

It may have, but I don't think -- we have never looked at it that way.

Okay.

Thank you very much.

And we will take our next question from Jack Waldo with Stephens.

Good morning, guys.

Good morning.

Hey, Jack.

Good morning.

I know somebody asked a question earlier about average improvement in operating ratio for the first to second quarter.

I think the most interesting thing I saw in your press release today was commentary about April tonnage being up -- or expected to be up 10% to 11%.

And I guess when I punch that in my model, it suggested sequential tonnage that is substantially above historical norms and could be the highest that at least I have in my model that goes back 12 years have.

I'm just wondering, I guess two questions on it.

One, where is all the incremental tonnage coming from?

A function of a few big accounts, or is it across-the-board increases?

I would say it is across-the-board increases.

And am I right to assume that this is -- this would be your biggest sequential tonnage increase for second quarter in maybe over a decade?

I wouldn't say -- yes, it is the sequential tonnage in the first quarter compared to the fourth is higher than it has been over the last five year average and even ten year average.

Wes, what I'm saying is, if tonnage on a year-over-year basis ended up 10% to 11% in the second quarter, it would mean that between the first to second quarter we are seeing the biggest sequential increase.

Oh, yes.

Well, if that is how it calculates to, you would be right.

Okay.

And Wes, do you have the -- do you know the comparisons?

What tonnage was down a year ago in the second quarter by month, April, May and June?

Down in '09 compared to '08?

Yes, sir.

In the first quarter last year, in January it was down 10%.

No, I'm sorry.

I meant the second quarter, like in April, May and June.

April, May and June, it was down in April 15%.

14% in May.

And 15% in June.

Okay.

Okay.

And then I guess the other question is on something, David, you said over time about -- and correct me if I get the wrong -- the numbers wrong, but a 1% decline in price is equal to a 7% decline in tonnage.

Is that the right ratio?

What we have been saying, and I think it has proven fairly accurate, is a 1% -- percentage point reduction in price you need 4% to 5% increase in tonnage just to break even and offset that.

From an EPS standpoint.

Yes, from an EPS standpoint in terms of the leverage.

Is it too simplistic to say you guys wouldn't be taking on all this incremental tonnage if it wasn't at a better price?

That is fair to say.

It would be at a fair and equitable price.

Our pricing philosophy has not changed.

One thing that is really interesting, Jack, and you kind of got to take this depreciation change out of the picture.

But historically,as we have been able to add tonnage across the network, we have been able to generate a, say, a 10% to 15% incremental margin.

I think that our incremental margin in the first quarter was more like 15% to 20%.

And back to all the questions about how much excess capacity do we have.

We have a lot of capacity in our network that we are paying for in terms of tractors and trailers and so forth that we can leverage -- our leverage factor going forward on tonnage growth is much better than ever before.

And I think that is kind of what I was getting at.

I mean I would expect that if you had this great sequential improvement in tonnage, that we should see some pretty good incremental profits off of it, but --

Yes, and we hope so.

We will have to add people, and when you add people back to the payroll, you have to take them through training, education, and so they are not totally productive at the first.

So we could see some decline in productivity, short-term decline in productivity as we are adding people back to the network.

But --

If we were to add, say, 20% to our revenue, first of all, we haven't got to add loading doors and equipment.

That is parked and being underutilized.

Then when you get to the answer to that personnel thing, we wouldn't have to add nearly 20% more people for a 20% growth, because a lot of that growth is going to come from existing customers, the truck is already there, and the driver is going to pick up maybe 20% more freight from the same place that he was going to be at anyway.

I would venture to say that we wouldn't have to add 10% to our drivers and warehouse in order to get a 20% -- to service a 20% increase in sales.

If you look at first quarter, you can calculate our incremental margin was 72, but that included the benefit of the depreciation.

And if you exclude that it is still about 81 incremental OR that is.

Yes.

That is almost a 19% margin on the incremental business.

That is kind of what I was trying to understand at the start.

If I am assume your tonnage and assume 300 basis points improvement in OR, it would say that your incremental margin is going to go down in the second quarter, and I don't see that.

I know you guys don't comment on EPS expectations.

And then I guess my last question is on anyway to quantify what the impact on weather?

No, we haven't, and the reason we haven't, we suspect some of that February weather problems we benefited from March, so we just don't know what the net effect is.

Got you.

Thank you guys, and I think forward to seeing how the rest of the year plays out.

All right, thank you.

And we will take our next question from Tom Albrecht from BBT.

Hi, guys, good morning.

Got a factual question and then a hypothetical.

I wanted to just double-check.

On depreciation, did you give an actual number for this year, because I mean I can subtract what you said, but with CapEx I wanted to make sure I have the right full year number.

Yes, I had already, in a previous call before we made this change, I indicated we expect our depreciation to be in the $100 million range, so now it will be more in the $80 million to $85 million anticipated range.

Yes, that's what I was looking for was the new one.

And your operating expenses went up about $4 million from the December quarter.

Let me just make sure I got that -- yes, $3.8 million.

How much of that increase was fuel, and how much was other factors?

I can't give you a quick answer on that without looking at it, Tom.

Okay.

I may circle up.

And then I guess the last question is, on some of the productivity metrics that you gave, for example P&D stops per hour, up 1.3%.

Can you drive that number a lot higher when tonnage is growing, or does it just become -- it is new business from new accounts, so it is not necessarily going to drive this -- your stops are spread out.

Can you just talk about that dynamic, because there is also P&D shipments per hour, and I'm kind of wondering how productive that metric can get in a rapidly recovering tonnage environment.

Well, for sure as we get better penetration, we should expect as one of the density measures for the stops per hour to improve further.

Our shipments per hour, which we didn't indicate in the comments, but it was up 1.1%.

And that would be where a continued improvement in tonnage and shipments would benefit is in our shipments per hour.

And that was positive, and we would expect that to increase further year-over-year as we see continued density improvements.

You have had periods where it has been up 3% or more in a more difficult environment, so I'm just trying to figure out what kind of a number to think about in a different world now than we had a year ago.

Well, maybe a range would be 1% to 3%.

Okay.

That's a good moral victory.

All right.

That's all I had.

Thank you.

And we will take our next question from Matt Brooklier from Piper Jaffray.

Good morning, guys.

That 900 -- or I'm sorry, the $90 million to $100 million in CapEx for 2010, is that a gross or a net number?

That is a net number, Matt.

That is a net number.

And looking at the cost side,you guys have posted a lower insurance and claims expense, that being the result of you guys doing a better job on the safety side.

I'm guessing that --

(Inaudible - multiple speakers) also on the cargo experience.

(Inaudible - multiple speakers) and those weren't accidental.

They're the result of a lot of training.

Also a lot of investment in systems that allow that to happen.

Right.

Specifically on the cargo, the investments that we have had over the years in moveable racks, and also air bagging systems that secure the freight, is all implied in those improvements, which we think is sustainable going forward.

Okay.

So that is kind of the second part of my question.

That it has ran at roughly 3%, in a range of 3 to the high 1s in terms of as a percentage of revenue.

You guys feel that you should be at the lower end of that range on an expense to revenue basis going forward?

Sure.

Seven, eight years ago that insurance expense was running 3% to 3.5% of revenue, and it was running in the mid 2s and even lower, and we think that is sustainable going forward.

It has been a long-term -- a long effort of our quality improvement processes to drive those metrics down, and we believe we have got the right tools and resources and the right attitudes with our employees to sustain these levels.

Okay.

That's great.

Thanks.

We will take our next question from David Campbell with Thompson and Davis Company.

Good morning, everybody.

I wanted to ask you what you thought of the Obama administration apparent favoring pushing more freight from trucks into railroads and the water transportation, based on their plans to spend on infrastructure?

Do you agree with that, and if so, what impact on your part of the trucking business?

I would like to take that.

I just happened to see the Secretary LaHood this morning at a conference, and there is obvious focus in Washington on what they are calling liveable communities, and this is all about the implementation of rail and light -- But they are not talking about freight rail.

They are talking about passenger rail in cities and communities to bring people into and out of the city and take cars off the roads.

They have also put a lot of emphasis on -- in the rail, freight rail side in supporting Norfolk Southern and CSX with their initiatives and so forth.

But when the clothes on your back, the food that we eat, the homes that we live in, the chairs you are sitting in, the telephone you are talking on, all move through this nation, it all moves at many stages by truck.

And you are never going see a train rolling up main street to deliver to your house or to your business.

So, customers determine how they route their freight based upon time -- the timeliness, the cost and the reliability, and you can't beat trucking for meeting those three objectives much better I think than rail.

There is a time and a place for rail.

And obviously over the years trucking and rail have come together, and intermodal has grown significantly, and I think it will also be a very viable option.

Heck, we work with customers and move freight on the rail all the time.

So we think it is a good thing, but trucking is here to stay.

And I do think that the Secretary of Transportation has got a little bit -- and the Obama administration is a little too focused on this passenger aspect of transportation and not clearly focused on the needs of the transportation -- the freight transportation industry, especially the trucking industry.

Okay.

Thanks.

And my second question regarding your policy on service centers.

It seems to be more focused on expansion of existing service centers rather than adding new service centers.

Do you have any thoughts on what you might be doing the rest of this year regarding numbers of service centers?

Well, we -- nothing real up firm.

We do other than two or three that we bought through bankruptcies that we may open up.

We've just kept them mothballed because of the weakness in the economy.

We have 30 to 40 more -- probably 30 more domestic US cities that we are interested in opening, most all of which are being served from adjacent cities on long pedal runs, and a handful of cities using some agents that work on our behalf.

But as we see opportunities for facilities in the marketplace, we may open up a handful.

I would guess that we will probably open five to 10 this year would be my guess.

Okay.

Thank you very much.

Okay.

And we will take your next question from Jason Seidl with Dahlman Rose.

Hello, Dave and Wes, how are you today?

Great, how are you?

Hanging in there.

Listen, just one question from me at this point in time.

One of your competitors was saying that they believe the pricing needs to go up another 10% from here to get everyone making the appropriate margins needed for reinvestment in the LTL network.

Where do you guys think it needs to go other than just directionally higher?

For those people that said that, [those] are probably operating at 110.

They need 20% improvement to get back to decent levels.

That is their own doing.

It is not the -- but, anyway --

I'm talking from an industry perspective, not from an OD perspective.

We think it needs to go from an industry perspective for the industry to get back to what level?

An investable level, as opposed to you can't operate like you said at 110 OR and reinvest in equipment.

Well, here is one thing.

One of our graphs that we have in our presentation shows that on an indexed basis, starting with the first quarter of 2008, that yields or revenue per hundred weight has declined nearly 15% for our industry peer group and about 8 percentage points for us.

So -- and that is from the first quarter of '08.

So 15% would be required by our industry competitors to get back to where they were in the first quarter of '08.

And we would need 7% to get back -- or 7% or 8% to get back to where we were in the first quarter of '08.

Okay.

That's great color, guys.

I appreciate the time as always.

Great, thanks.

And that does conclude the question-and-answer session today.

At this time I would like to turn the call over to Mr.

Earl Congdon for any additional or closing remarks.

Okay.

Well, listen, thanks again for your participation.

You had some really good questions, and we appreciate your support.

And if you have got any further need for information, just give us a call.

Thank you, good day.

And that does conclude today's conference.

We thank you for your participation.